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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21699
VIROPHARMA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2347624
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
405 Eagleview Boulevard
Exton, Pennsylvania 19341
(Address of Principal Executive Offices and Zip Code)
610-458-7300
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days: Yes X NO
--------- ------
Number of shares outstanding of the issuer's Common Stock, par value $.002 per
share, as of May 12, 1998: 11,480,820 shares.
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VIROPHARMA INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1. Financial Statements:
Balance Sheets at December 31, 1997 and March 31, 1998 3
Statements of Operations for the three months ended March 31, 1997
and 1998, and the period from December 5, 1994 (inception) to March 31, 1998 4
Statements of Cash Flows for the three months ended March 31, 1997 and 1998 and
the period from December 5, 1994 (inception) to March 31, 1998 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 7
PART II. OTHER INFORMATION
Item 2. USE OF PROCEEDS 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
2
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
VIROPHARMA INCORPORATED
(A Development Stage Company)
Balance Sheets
December 31, 1997 and March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
----------------- ----------------
ASSETS Audited Unaudited
----------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,204,330 1,624,536
Short-term investments 39,164,132 36,288,960
Notes receivable from officers - current 33,691 39,205
Other current assets 461,631 364,000
----------------- ----------------
Total current assets 43,863,784 38,316,701
Equipment and leasehold improvements, net 1,084,720 2,439,816
Construction in progress 860,975 -
Restricted investment 300,000 300,000
Notes receivable from officers - noncurrent 84,102 91,759
Other assets 81,899 81,899
----------------- ----------------
Total assets $ 46,275,480 41,230,175
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 919,970 709,710
Loan payable - current 100,000 100,000
Obligation under capital lease - current 61,487 63,340
Deferred revenue 1,000,000 1,000,000
Accrued expenses and other current liabilities 4,573,299 4,168,871
----------------- ----------------
Total current liabilities 6,654,756 6,041,921
Loan payable - non-current 416,667 391,667
Obligation under capital lease - noncurrent 53,186 36,639
----------------- ----------------
7,124,609 6,470,227
----------------- ----------------
Stockholders' equity:
Preferred stock, par value $.001 per share. Authorized 5,000,000
shares at December 31, 1997 and March 31, 1998; none issued or
outstanding - -
Common stock, par value $.002 per share. Authorized 27,000,000
shares at December 31, 1997 and March 31, 1998; issued and
outstanding 11,464,106 shares at December 31, 1997 and 11,480,565
at March 31, 1998 22,928 22,961
Additional paid-in capital 61,322,384 61,341,696
Deferred compensation (451,721) (400,565)
Unrealized gains on available for sale securities 276,126 245,046
Deficit accumulated during the development stage (22,018,846) (26,449,190)
----------------- ----------------
Total stockholders' equity 39,150,871 34,759,948
----------------- ----------------
Commitments
Total liabilities and stockholders' equity $ 46,275,480 41,230,175
================= ================
See accompanying notes to financial statements.
</TABLE>
3
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VIROPHARMA INCORPORATED
(A Development Stage Company)
Statements of Operations
(unaudited)
Three months ended March 31, 1997 and 1998 and the
period from December 5, 1994 (inception) to March 31, 1998
<TABLE>
<CAPTION>
Period
December 5, 1994
Three months ended (inception) to
March 31, March 31,
1997 1998 1998
------------------------------------------------
<S> <C> <C> <C>
Revenues:
License fee and milestone revenue $ 750,000 - 2,500,000
Grant revenue - - 526,894
------------------------------------------------
Total revenues 750,000 - 3,026,894
------------------------------------------------
Operating expenses incurred in the
development stage:
Research and development 1,908,252 3,817,846 24,447,410
General and administrative 764,569 933,273 7,030,495
------------------------------------------------
Total operating expenses 2,672,821 4,751,119 31,477,905
------------------------------------------------
Loss from operations (1,922,821) (4,751,119) (28,451,011)
Interest income, net 191,407 320,775 2,001,821
------------------------------------------------
Net loss $ (1,731,414) (4,430,344) (26,449,190)
================================================
Basic and diluted net loss per share: (0.19) (0.39)
==========================
Shares used in computing basic and diluted
net loss per share: 9,076,986 11,475,328
==========================
See accompanying notes to financial statements.
</TABLE>
4
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VIROPHARMA INCORPORATED
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
Three months ended March 31, 1997 and 1998 and the
period from December 5, 1994 (inception) to March 31, 1998
<TABLE>
<CAPTION>
Period
December 5, 1994
Three months ended (inception) to
March 31, March 31,
1997 1998 1998
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,731,414) (4,430,344) (26,449,190)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation expense 52,739 51,156 432,521
Non-cash warrant value 3,984 3,984 129,840
Non-cash consulting expense - 6,650 36,700
Depreciation and amortization expense 50,741 91,688 437,988
Changes in assets and liabilities:
Other current assets (22,873) 97,631 (364,000)
Notes receivable from officers - (13,171) (130,964)
Other assets (34,400) - (81,899)
Accounts payable (81,418) (210,260) 709,710
Accrued expenses and other current liabilities 621,698 (404,428) 4,168,871
------------------------------------------------
Net cash used in operating activities (1,140,943) (4,807,094) (21,110,423)
Cash flows from investing activities:
Purchase of equipment (284,775) (585,809) (2,877,805)
Purchase of short-term investments (4,877,179) (8,991,647) (96,454,576)
Sales of short-term investments - - 9,680,414
Maturities of short-term investments 2,620,350 11,835,739 50,430,248
------------------------------------------------
Net cash (used in) provided by investing activities (2,541,604) 2,258,283 (39,221,719)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock - - 13,931,243
Net proceeds from issuance of common stock 50 8,711 45,789,664
Proceeds from deferred revenue - - 1,000,000
Proceeds from loan payable 600,000 - 600,000
Payment of loan payable - (25,000) (108,333)
Proceeds received on notes receivable - - 1,625
Proceeds from notes payable - - 692,500
Payment of notes payable (16,667) - (50,000)
Obligation under capital lease (1,292) (14,694) 99,979
------------------------------------------------
Net cash provided by (used in) financing activities 582,091 (30,983) 61,956,678
Net increase (decrease) in cash and cash equivalents (3,100,456) (2,579,794) 1,624,536
Cash and cash equivalents at beginning of period 10,810,310 4,204,330 -
------------------------------------------------
Cash and cash equivalents at end of period $ 7,709,854 1,624,536 1,624,536
================================================
Supplemental disclosure of noncash transactions:
Conversion of Note Payable to Series A and
Series B Preferred Stock $ - - 642,500
Conversion of mandatorily redeemable convertible
preferred stock to common shares - - 16,264,199
Notes issued for 828,750 common shares - - 1,625
Deferred compensation - - 833,086
Accretion of redemption value attributable to
mandatorily redeemable convertible preferred stock - - 1,616,445
Unrealized gains (losses) on available for sale securities 39,946 (31,080) 245,046
See accompanying notes to financial statements.
</TABLE>
5
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VIROPHARMA INCORPORATED
(A Development Stage Company)
Notes to Financial Statements
March 31, 1997 and 1998
(unaudited)
(1) ORGANIZATION AND BUSINESS ACTIVITIES
ViroPharma Incorporated (a development stage company) (the "Company") commenced
operations on December 5, 1994. The Company is a development stage
pharmaceutical company engaged in the discovery and development of new antiviral
medicines.
The Company is devoting substantially all of its efforts towards conducting drug
discovery and development, raising capital, conducting clinical trials, pursuing
regulatory approval for products under development, recruiting personnel and
building infrastructure. In the course of such activities, the Company has
sustained operating losses and expects such losses to continue for the
foreseeable future. The Company has not generated any significant revenues or
product sales and has not achieved profitable operations or positive cash flow
from operations. The Company's deficit accumulated during the development stage
aggregated $26,449,190 through March 31, 1998. There is no assurance that
profitable operations, if ever achieved, could be sustained on a continuing
basis.
The Company plans to continue to finance its operations with a combination of
stock issuances, license payments, payments from strategic research and
development arrangements and, in the longer term, revenues from product sales.
There are no assurances, however, that the Company will be successful in
obtaining an adequate level of financing needed for the long-term development
and commercialization of its planned products.
BASIS OF PRESENTATION
The information at March 31, 1998 and for the three months ended March 31, 1997
and 1998, is unaudited but includes all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are necessary to
state fairly the financial information set forth therein in accordance with
generally accepted accounting principles. The interim results are not
necessarily indicative of results to be expected for the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1997 included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
(2) COMPREHENSIVE LOSS
In 1998 the Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all
items defined as comprehensive income, including changes in the amounts of
unrealized gains and losses on available for sale securities, be shown as a
component of comprehensive loss. In the Company's annual financial statements,
comprehensive loss will be required to be presented either in a separate
financial statement or as part of either the statement of operations or
statement of stockholders' equity. For interim financial statements, the
Company is permitted to disclose the information in the footnotes to the
financial statements. The disclosures are required for comparative purposes.
The only comprehensive income item the Company has is unrealized gains and
losses on available for sale securities.
The following reconciles net loss to comprehensive loss for the three-months
ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
Net loss $(1,731,414) (4,430,344)
Other comprehensive income:
Unrealized gains (losses) on
available for sale securities 39,946 (31,080)
----------- ----------
Comprehensive loss $(1,691,468) (4,461,424)
=========== ==========
</TABLE>
6
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements that are not statements
of historical facts or statements of current condition. Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "expects," "estimates," "may," "will," or "should" or the
negative thereof or other variations of such terminology, or by discussions of
strategy or intentions. These forward-looking statements, such as statements
regarding present or anticipated scientific progress, development of potential
pharmaceutical products, future revenues, capital expenditures, research and
development expenditures, collaborations and future financings involve
predictions, and are subject to risks and uncertainties. The Company's actual
results, performances or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors
contributing to such risks and uncertainties that might affect the Company's
actual results, performance or achievements include, but are not limited to,
those discussed in "Important Factors Regarding Forward-Looking Statements"
attached as Exhibit 99 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 that is filed with the Securities and Exchange
Commission. Given these risks and uncertainties, current or prospective
investors are cautioned not to place undue reliance on any such forward-looking
statements. Furthermore, the Company disclaims any obligation or intent to
update any such forward-looking statements to reflect future events or
developments.
Since inception, the Company has devoted substantially all of its resources
to its research and product development programs. ViroPharma has generated no
revenues from product sales and has been dependent upon funding primarily from
equity financing. The Company does not expect any revenues from product sales
for at least the next two-year period. The Company has not been profitable
since inception and has incurred a cumulative net loss of $26,449,190 through
March 31, 1998. Losses have resulted principally from costs incurred in research
and development activities and general and administrative expenses. The Company
expects to incur additional operating losses over at least the next several
years. The Company expects such losses to increase over historical levels,
primarily due to expected increases in the Company's research and development
expenses, further clinical trials, manufacture of bulk drug substance and
clinical development of the Company's most advanced drug candidate, pleconaril,
and milestone payments that may be payable under the terms of the Company's
Agreement with Sanofi, S.A. in respect of pleconaril. Also, the Company expects
to incur expenses related to its pre-market approval marketing and market
research activities for pleconaril, its development of a marketing and sales
staff and further research and development related to other product candidates.
The Company's ability to achieve profitability is dependent on developing and
obtaining regulatory approvals for its product candidates, successfully
commercializing such product candidates, which may include entering into
collaborative agreements for product development and commercialization, and
securing contract manufacturing services.
LIQUIDITY AND CAPITAL RESOURCES
The Company commenced operations in December 1994. The Company is a
development stage company and to date has not generated revenues from product
sales. The cash flows used in operations are primarily for research and
development activities and the supporting general and administrative expenses.
Through March 31, 1998, the Company has used approximately $21.2 million in
operating activities. The Company invests its cash in short-term investments.
Through March 31, 1998, the Company has used approximately $39.1 million in
investing activities, including $36.3 million in short-term investments and $2.8
million in equipment purchases and new construction. Through March 31, 1998,
the Company has financed its operations primarily through public offerings of
common stock, private placements of redeemable preferred stock, a bank loan,
equipment lease lines and a milestone advance totaling approximately $62.0
million. At March 31, 1998, the Company had cash and cash equivalents and short-
term investments aggregating approximately $37.9 million.
The Company leases its corporate and research and development facilities
under an operating lease expiring in 2008. The Company moved to its current
location in March 1998. The annual rent at the new location will be
approximately $400,000 higher than historical amounts. The Company also has the
right to expand the facility and, under certain circumstances, to purchase the
new facility at a purchase price based on a predetermined formula. The Company
has financed a substantial portion of its equipment under two master lease
agreements and one bank loan. The bank loan is for $600,000, is payable in
equal annual installments over 72 months and bears interest at approximately
9%. The Company is required to repay amounts outstanding under the two leases
within periods ranging
7
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from 32 to 48 months. As of March 31, 1998, outstanding borrowings under these
three arrangements are approximately $600,000. The Company is currently
negotiating with a bank for a second term loan for $1 million to finance new
equipment that has been purchased in 1998. There can be no assurance that the
Company will successfully consummate this loan transaction. The Company
anticipates that aggregate equipment purchases for the next three quarters will
be less than the amount of such purchases in the prior three quarters.
The Company is required to make a payment to Sanofi, S.A. of either $1.2
million or $2 million upon the earlier of the occurrence of a future milestone,
as defined in the Company's agreement with Sanofi, or December 1998. The actual
amount of the payment is dependent upon whether or not Sanofi elects to co-
develop pleconaril. If Sanofi elects to co-develop pleconaril, the payment will
be $2 million. If Sanofi decides not to co-develop pleconaril, the payment would
be $1.2 million. If Sanofi chooses to co-develop, Sanofi has agreed to share in
all development costs. In March 1998, the Company paid Sanofi $1.2 million. The
Company will pay Sanofi an additional $800,000 if Sanofi elects to co-develop
pleconaril. The Company expects Sanofi to make its decision regarding co-
development in 1998. In connection with the Sanofi agreement, the Company is
also required to make certain additional payments, including royalties, as
defined, should agreed-upon future milestones be attained. The milestone events
contemplate regulatory submissions of new drug applications and regulatory
approvals in various jurisdictions. The amount of such additional milestone
payments to be paid by the Company to Sanofi, if any, also are based on Sanofi's
decision regarding the co-development of pleconaril. There can be no assurance
that any such milestones will be attained.
The Company and SELOC France currently are negotiating the terms of an
Addendum to their Development Agreement for the manufacture of validation
batches of bulk drug substance and the preparation of certain documentation that
will be required in connection with the Company's new drug application for
pleconaril. The Company estimates that $1.8 million to $2.0 million may be
payable under the Addendum. There is no assurance that the Company will enter
into the Addendum. On October 9, 1997, the Company received $1,000,000 from
Boehringer Ingelheim Pharmaceuticals, Inc. ("BI") as an advance on a future
milestone in connection with a Collaborative Research Agreement (the
"Agreement"). Such amount will be creditable against the milestone, if
achieved, or would become due and payable two years after termination of the
Agreement. The advance bears interest at 8.5% and is evidenced by a convertible
promissory note. If amounts due under the note are not paid as described in the
note, BI may convert the then outstanding principal balance and accrued interest
thereon into shares of the Company's common stock based on the last sale price
of such common stock on the date immediately prior to the date on which the
Company is notified of BI's intention to convert the promissory note.
The Company has incurred losses from its operations since inception. The
Company expects to incur additional operating losses over at least the next
several years. The Company expects such losses to increase over historical
levels, primarily due to expected increases in the Company's research and
development expenses, further clinical trials, manufacture of bulk drug
substance and clinical development of the Company's most advanced drug
candidate, pleconaril, and milestone payments that may be payable under the
terms of the Company's Agreement with Sanofi, S.A. in respect of pleconaril.
Also, the Company expects to incur expenses related to its pre-approval
marketing and market research activities for pleconaril, its development of a
marketing and sales staff and further research and development related to other
product candidates. The Company will require additional financing for operations
and expansion of its facilities prior to achieving positive cash flows from its
commercial activities. The Company expects that it will need additional
financing to complete all clinical studies for pleconaril, for the development
and required testing of the Company's other product candidates, and to develop
its marketing and sales staffs. To obtain this financing, the Company expects
to access the public or private equity markets or enter into additional
arrangements with corporate collaborators. To the extent the Company raises
additional capital by issuing equity securities, ownership dilution to existing
stockholders may result. There can be no assurance, however, that additional
financing will be available on acceptable terms from any source.
RESULTS OF OPERATIONS
Quarters ended March 31, 1998 and 1997
The Company earned and received one milestone payment for $750,000 in the
quarter ended March 31, 1997 from BI and no revenues in the quarter ended March
31, 1998. Net interest income increased to $320,775 for the quarter ended March
31, 1998 from $191,407 for the quarter ended March 31, 1997, principally due to
larger invested balances provided by the proceeds of a follow-on public offering
in July 1997.
Research and development expenses increased to $3,817,846 for the quarter
ended March 31, 1998 from $1,908,252 for the quarter ended March 31, 1997. The
increase was principally due to the cost of multiple clinical trials related to
pleconaril being conducted in the quarter ended March 31, 1998 compared to one
clinical trial related to
8
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pleconaril being conducted in the quarter ended March 31, 1997. Also, a greater
number of scientists were employed by the Company in discovery research for the
Company's RSV pneumonia, influenza and hepatitis C programs during the quarter
ended March 31, 1998 when compared to the quarter ended March 31, 1997.
General and administrative expenses increased to $933,273 for the quarter
ended March 31, 1998 from $764,569 for the quarter ended March 31, 1997. The
increase was principally due to increased salary expenses and facilities costs
related to the Company's move to its current facilities in March 1998.
The net loss increased to $4,430,344 for the quarter ended March 31, 1998
from $1,731,414 for quarter ended March 31, 1997.
9
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PART II - OTHER INFORMATION
----------------------------
ITEM 2. Use of Proceeds
The Company completed its initial public offering in November 1996.
The following table sets forth the Company's reasonable estimate of
the amount of net proceeds to the Company from such offering used for
the categories indicated below through March 31, 1998. As of March 31,
1998 the Company had utilized the entire net proceeds from the initial
public offering.
<TABLE>
<S> <C>
Purchase and installation of machinery and equipment $1,445,000
- --------------------------------------------------------------------------
Repayment of indebtedness 70,000
- --------------------------------------------------------------------------
Working Capital 4,109,000
- --------------------------------------------------------------------------
Clinical Development 5,193,000
- --------------------------------------------------------------------------
Research & Development 5,435,000
- --------------------------------------------------------------------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.27 Promissory Note of Michael Kelly and Joan C. Kelly, dated
February 18, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended March
31, 1998.
10
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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.
VIROPHARMA INCORPORATED
Date: May 12, 1998 By: /s/ Claude H. Nash
--------------------------------------
Claude H. Nash
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
By: /s/ Vincent J. Milano
----------------------------------
Vincent J. Milano
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
11
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EXHIBIT INDEX
- -----------------------------------------
Exhibit Description
10.27 Promissory Note of Michael Kelly and Joan C.
Kelly, dated February 18, 1998
27 Financial Data Schedule
12
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EXHIBIT 10.27
PROMISSORY NOTE
---------------
$22,053.09 February 18, 1998
For value received, Michael Kelly (the "Executive") and Joan C. Kelly,
with an address at 110 Peregrine Lane, Downingtown, PA 19335 (each, a "Maker"
and collectively, the "Makers"), jointly and severally, hereby promise to pay to
the order of ViroPharma Incorporated, a Delaware corporation with an address at
405 Eagleview Boulevard, Exton, PA 19341 (the "Payee"), the principal sum of
Twenty Two Thousand Fifty Three Dollars and Nine Cents ($22,053.09) (the
"Original Principal Amount"), or such lesser amount as determined in accordance
with Section 3(a) below, in lawful money of the United States of America,
together with interest thereon, subject to the terms and conditions as
hereinafter provided. The principal sum outstanding from time to time hereunder
shall bear interest at an annual rate of 5.69% per annum (subject to Sections
3(d) and 6 below). The interest due hereunder shall be calculated on the basis
of a 365-day year by multiplying the interest rate in effect hereunder by a
fraction, the numerator of which is the actual number of days the principal sum
is outstanding and the denominator of which is 365.
1. Purpose; Use of Proceeds; Principal Adjustment.
----------------------------------------------
(a) This Promissory Note (this "Note") is executed by the Makers in
connection with the Makers' relocation ("Relocation") required by Executive's
employment by Payee, the reasonable costs and expenses that the Makers' have
incurred in connection therewith, and Payee's agreement, subject to the
conditions set forth below, to reimburse Payee for such reasonable costs and
expenses in an amount not to exceed the Original Principal Amount first set
forth above.
(b) The Makers shall use all of the proceeds of this Note to defray the
reasonable costs and expenses realized or incurred by the Makers in connection
with the Relocation, including but not limited to any loss on the sale of the
Makers' former residence; moving, closing and other costs incident to the
Makers' purchase of a new residence; and a down payment on such new residence,
but for no other purpose.
2. Insurance. Within a reasonable time after the date hereof, Payee may
---------
attempt to acquire an insurance policy on the life of Executive (the "Insurance
Policy") that names Payee as the loss payee. Executive shall cooperate with
Payee in obtaining the Insurance Policy, and Executive warrants that he has no
knowledge of any facts concerning his physical health or otherwise that would
discourage a reputable insurance company from insuring the life of Executive at
reasonable rates and based on generally accepted insurance underwriting
standards.
3. Principal Reduction and Payment.
-------------------------------
(a) Subject to the terms and conditions set forth below, on each one (1)
year anniversary of this date of this Note, commencing on the first anniversary
of the date of this Note and continuing through and including the fourth
anniversary of the date of this Note (such four year period, the "Forgiveness
Term"), the principal amount of this Note shall be reduced by the product of
twenty-five percent (25%) times the Original Principal Amount (each, a
"Forgiveness Installment"), and on and after each such anniversary date the
Makers shall have no further obligation to pay Payee, and Maker shall be
released from all liability to Payee with respect to, the applicable Forgiven
Installment plus all accrued and unpaid interest with respect thereto.
<PAGE>
(b) If Executive's employment by Payee is terminated prior to the
expiration of the Forgiveness Term as a result of the resignation of Executive,
then from and after the date that Executive notifies Payee of Executive's
intention to resign (the "Resignation Date"), Section 3(a) shall be of no
further force or effect, and upon the earlier of the date that Executive
commences employment with any third party or the expiration of the ninety (90)
day period after the Resignation Date, the Makers shall pay to Payee the
principal amount of this Note and all accrued and unpaid interest with respect
thereto that is then outstanding and has not been previously forgiven pursuant
to Section 3(a) (the "Outstanding Balance").
(c) If Executive's employment by Payee is terminated prior to the
expiration of the Forgiveness Term due to an event that is covered by the
Insurance Policy (if one is then in effect), then the entire Outstanding Balance
shall be deemed forgiven and the proceeds of the Policy shall be Payee's sole
recourse in respect of the Outstanding Balance.
(d) If Executive's employment by Payee is terminated prior to the
expiration of the Forgiveness Term for any reason other than that described in
Sections 3(b) or (c) above, including but not limited to the termination of
Executive's employment by Payee for any reason or no reason, then from and
after the effective date of such termination (the "Termination Date"), Section
3(a) shall be of no further force or effect, and the Makers shall thereafter be
liable for the prompt payment of the Outstanding Balance; provided that, from
and after the Termination Date, the interest rate of this Note shall be adjusted
to reflect the lowest applicable Federal rate then in effect for promissory
notes having a repayment period equal to the "Payment Term" of this Note, as
defined below. Principal and interest payments in respect of the Outstanding
Balance shall be due and payable in consecutive monthly installments in the
amounts to be set forth in the amortization schedule described in Section
3(d)(ii) below (each, a "Monthly Payment"), on the first day of each month
commencing with the month immediately following the Termination Date and
continuing until the expiration of the Payment Term, at Payee's address set
forth above or at such other address as Payee shall designate in writing to
Maker. Each Monthly Payment first shall be applied against accrued interest
amounts then outstanding, and the balance of such Monthly Payment shall then be
applied against the principal amount of this Note.
(i) The "Payment Term" shall be the number of months, commencing with
the Termination Date, listed below opposite the applicable period in which the
Termination Date occurs:
Termination Date Payment Period
---------------- --------------
Before the first anniversary of the date of this Note 72 Months
After the first anniversary of the date of this Note, but 54 Months
before the second anniversary of this Note
After the second anniversary of the date of this Note, but 36 Months
before the third anniversary of this Note
After the third anniversary of the date of this Note, but 18 Months
before the fourth anniversary of this Note
2
<PAGE>
(ii) Within a reasonable time after the Termination Date, but in any
event prior to the date that the first Monthly Payment is due and payable
hereunder, Payee shall provide Maker with an amortization schedule for the
Outstanding Balance that reflects the Monthly Payments due for the Payment Term,
and such amortization schedule shall be a supplement to this Note.
4. Prepayment; Set-Off. This Note may be prepaid in full or in part at any
-------------------
time without premium or penalty. The amounts due from the Makers hereunder
shall not be subject to set-off by the Makers.
5. Default and Acceleration. The entire principal balance that has not been
------------------------
reduced or paid pursuant to Section 3 above, and all accrued interest thereon,
shall become immediately due and payable upon demand by Payee if one or more of
the following events shall have happened at any time after the Termination Date
(each an "Event of Default") and shall be continuing at the time of such demand
(except that no demand shall be necessary in the case of Subsection (b) below):
(a) Default shall have been made in the payment of any principal or
interest when and as due hereunder;
(b) Either Maker shall: (i) file in any court pursuant a petition in
bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of either of their assets; (ii) propose a written agreement
for the composition or extension of the debts of either of them: (iii) be served
with an involuntary petition against either of them, filed in any insolvency
proceeding, and such petition shall not be dismissed within sixty (60) days
after the filing thereof; or (iv) make an assignment for the benefit of
creditors; or
(c) The entry of a material financial judgment against either Maker, or
the issuing of any attachment or garnishment against any property of either
Maker.
6. Default Rate. Notwithstanding anything to the contrary in this Note, upon
------------
an Event of Default, or if Executive resigns his employment with Payee and the
Outstanding Balance is not paid within the period required by Section 3(b)
above, interest on the unpaid balance of this Note shall be deemed to have
accrued at a rate equal to the lesser of eighteen percent (18%) per annum or the
highest rate otherwise allowed by law (the "Default Rate").
7. Presentment, Costs, Etc. The Makers hereby waives presentment, protest,
-----------------------
notice of protest, and notice of dishonor. Subject to the provisions herein,
each Maker covenants that if an Event of Default occurs, he or she will, to the
extent that he or she it may lawfully promise so to do, pay to Payee such
further amount as shall be sufficient to cover the cost and expense of
collection or any other costs incurred by Payee in the exercise of any of its
rights, remedies or powers under this Note, including reasonable compensation to
the attorneys and accountants of Payee, and any amount thereof not paid
promptly following demand therefor shall be added to the principal sum then due
hereunder and shall bear interest at the Default Rate from the date of such
demand until the date that such amounts are paid in full.
8. Remedies Cumulative. No right or remedy conferred upon or reserved to
-------------------
Payee hereunder, or now or hereafter existing at law or in equity or by statute
or other legislative enactment, is intended to be exclusive of any other right
or remedy, and each and every such right or remedy shall be cumulative and
concurrent, and shall be in addition to every other such right or remedy, and
may be pursued singly, concurrently, successively or otherwise, at the sole
discretion of Payee, and shall not be exhausted by any one exercise thereof but
may be exercised as often as occasion therefor shall occur.
3
<PAGE>
9. Waiver. Each Maker agrees that Payee may release, compromise, forbear with
------
respect to, waive, suspend, extend or renew any of the terms hereunder (and each
Maker hereby waives any notice of any of the foregoing), and any action taken by
Payee pursuant to the foregoing shall in no way be construed as a waiver or
release of any right or remedy of Payee, or of any Event of Default, or of any
liability or obligation of either Maker, under this Note.
10. Successors and Assigns. This Note may be freely assigned by Payee. The
----------------------
obligations of the Makers under this Note may not be assigned without the prior
written consent of Payee. This Note inures to the benefit of Payee and binds the
Makers, and their respective successors, heirs and permitted assigns.
11. Notices. All notices required to be given to any of the parties hereunder
-------
shall be in writing and shall be deemed to have been sufficiently given for all
purposes when presented personally to such party or sent by certified or
registered mail, or any national overnight delivery service, to such party at
its address first set forth above, or to such other address for which notice is
duly given to the other party. Such notice shall be deemed to be given when
received if delivered personally, the next business day after the date sent if
sent by national overnight delivery service, or two (2) business days after the
date mailed if mailed by certified or registered mail. Whenever the giving of
notice is required, the giving of such notice may be waived in writing by the
party entitled to receive such notice.
12. Governing Law. This Note shall be governed as to its validity,
-------------
interpretation, and effect by the laws of the Commonwealth of Pennsylvania,
notwithstanding the conflict-of-law doctrines of Pennsylvania or any other
jurisdiction. Any legal proceeding arising out of or relating to this Note shall
be heard in the Chester County, Pennsylvania Court or in the United States
District Court for the Eastern District of Pennsylvania, and each Maker hereby
consents to the personal and exclusive jurisdiction of such courts and hereby
waives any objection that such Maker may have to the laying of venue of any such
proceeding and any claim or defense of inconvenient forum.
IN WITNESS WHEREOF, the undersigned have executed this Note on the date
first above written.
/s/ Michael Kelly
--------------------------
Michael Kelly
/s/ Joan C. Kelly
--------------------------
Joan C. Kelly
4
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0
0
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