-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DxxBBCwfj5yJj4rBIjsPgO2fCcC2xRE91J0FQTn9t9t1EIJZY1TcuUFVhO+/RDqh uoVy5gIc2AXT0p+ioHYmEQ== 0001047469-98-034320.txt : 19980914 0001047469-98-034320.hdr.sgml : 19980914 ACCESSION NUMBER: 0001047469-98-034320 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980911 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000736994 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 141644018 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12950 FILM NUMBER: 98708021 BUSINESS ADDRESS: STREET 1: 3040 SCIENCE PARK RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195584300 MAIL ADDRESS: STREET 1: 3040 SCIENCE PARK ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: OTISVILLE BIOPHARM INC DATE OF NAME CHANGE: 19890310 FORMER COMPANY: FORMER CONFORMED NAME: OTISVILLE BIOTECH INC DATE OF NAME CHANGE: 19861216 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year 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 0-12950 ALLIANCE PHARMACEUTICAL CORP. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New York 14-1644018 - ---------------------------------------- -------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3040 Science Park Road, San Diego, CA 92121 - ---------------------------------------- -------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 619-558-4300 --------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED ------------------- ---------------------------- NONE - ---------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- Securities registered pursuant to Section 12(g) of the Act: common stock, par value $0.01. - -------------------------------------------------------------------------------- (TITLE OF CLASS) - -------------------------------------------------------------------------------- (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] [COVER PAGE 1 OF 2 PAGES] The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock on the Nasdaq National Market on September 4, 1998, was $83 million. The number of shares of the Registrant's common stock, $.01 par value, outstanding at September 4, 1998 was 32,042,482. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this report on Form 10-K is incorporated by reference to the definitive Proxy Statement with respect to the 1998 Annual Meeting of Shareholders, which the Registrant intends to file with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report. [COVER PAGE 2 OF 2 PAGES] PART I EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS SET FORTH IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH HEREIN. THE COMPANY REFERS YOU TO CAUTIONARY INFORMATION CONTAINED ELSEWHERE HEREIN, IN OTHER DOCUMENTS THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME, AND THOSE RISK FACTORS SET FORTH IN THE COMPANY'S RECENT REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION NUMBER 333-15905). ITEM 1. BUSINESS Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a pharmaceutical research and development company that focuses on developing scientific discoveries into medical products and licensing these products to multinational pharmaceutical companies in exchange for fixed payments and royalties. To date, the Company has developed three innovative products through initial clinical (human) trials, and is in, or is preparing to enter, pivotal clinical trials for these products. The products are OXYGENT-TM-, an intravascular oxygen carrier to temporarily augment oxygen delivery in surgical and other patients at risk of acute tissue hypoxia (oxygen deficiency); LIQUIVENT-Registered Trademark-, an intrapulmonary agent for use in reducing a patient's exposure to the harmful effects of conventional mechanical ventilation; and IMAGENT-Registered Trademark-, an intravenous contrast agent for enhancement of ultrasound images to assess cardiac function, organ lesions and to detect blood flow abnormalities, which is licensed to Schering AG, Germany. The Company's strategy is to identify potential new medical products through scientific collaborations with researchers and clinicians in universities and medical centers where many of the basic causes of disease and potential targets for new therapies are discovered. Using its experience in defining pharmaceutical formulations, designing manufacturing processes, conducting preclinical pharmacology and toxicology studies, and conducting human testing, Alliance endeavors to advance such discoveries into clinical development. The Company seeks collaborative relationships for the final stages of product development, including completing late-phase human testing, obtaining worldwide regulatory approvals, building large-scale manufacturing capacities, and marketing. The Company was incorporated in New York in 1983. Its principal executive offices are located at 3040 Science Park Road, San Diego, California 92121, and its telephone number is (619) 558-4300. PRODUCTS IN CLINICAL DEVELOPMENT Three of Alliance's products are currently in late-stage clinical development. These are OXYGENT, LIQUIVENT, and IMAGENT, which are based upon perfluorochemical ("PFC") and emulsion technologies. PFCs are biochemically inert compounds and may be employed in a variety of therapeutic and diagnostic applications. The Company's primary drug substance is perflubron, a brominated PFC that has a high solubility for respiratory gases and can be used to transport these gases safely throughout the body. The Company also has two additional products in clinical development, RODA-TM-, a device intended to measure the cardiovascular and oxygenation status of patients, and FloGel-Registered Trademark-, a thermoreversible agent for reduction of surgical adhesions. OXYGENT. OXYGENT (perflubron emulsion) is an intravascular oxygen delivery system to temporarily augment oxygen delivery in surgical and other patients at risk of acute tissue oxygen deficit. It will be used as a temporary oxygen carrier to provide oxygen to tissues during elective surgeries where substantial blood loss is anticipated. It is estimated that in excess of three million patients annually in the United States may receive one or more units of blood during elective surgeries, including, for example, cardiovascular, orthopedic, and general surgical procedures. An oxygen carrier could be used instead of blood for a portion of these patients. The OXYGENT dose for surgical applications is expected to provide the equivalent oxygen delivery of at least two units of red blood cells. OXYGENT has several potential advantages over the use of allogeneic (donor) blood: there is no risk of infectious disease transmission; it is compatible with all blood types; it has a shelf-life of approximately two years; and it can be sterilized. According to the 1995 estimates in the American Journal of Surgery, the risks per unit of blood transfused in the United States are 1:2,500 for bacterial infections, 1:5,000 for hepatitis, 1:600,000 for fatal hemolytic reactions, primarily due to clerical error, and 1:420,000 for HIV infection (AIDS). To minimize the use of allogeneic blood and to avoid these risks, certain techniques can be employed that allow use of the patient's own (autologous) blood during surgery. These techniques include (i) predonation, in which the patient donates several units of his or her blood in the six weeks preceding surgery, (ii) perioperative hemodilution, in which several units of the patient's blood are removed just prior to surgery and are replaced with a plasma expander, and (iii) blood salvage, wherein a device (cell saver) is used to collect blood lost during the surgical procedure. OXYGENT can be used with any of these autologous blood collection techniques to enhance safety, by reducing the need for allogeneic blood. When a blood transfusion is indicated during surgery, one or more doses of OXYGENT would be used in place of allogeneic blood to maintain an adequate level of oxygen delivery despite a lower red blood cell concentration. This use of OXYGENT should delay or reduce the need for the transfusion of donor blood, thereby avoiding its associated risks. OXYGENT may also be advantageous during emergency situations such as trauma, acute myocardial infarctions (heart attacks), or transient ischemia (oxygen deprivation) in specific organs where there is an immediate need to augment oxygen delivery to the tissues. In fiscal 1997, two large multicenter Phase II clinical studies of OXYGENT were completed in general surgery patients in the United States and Europe. In fiscal 1998, three additional Phase II studies were completed in which OXYGENT was administered to cardiac surgery patients undergoing cardiopulmonary bypass procedures. Phase III clinical trials in general surgery patients are expected to begin before the end of calendar 1998. In August 1994, the Company entered into a license agreement (the "Ortho License Agreement"), with Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation, both affiliates of Johnson & Johnson (collectively referred to as "Ortho"), which provided Ortho with certain development and worldwide marketing rights to the Company's injectable PFC emulsions capable of transporting oxygen for therapeutic use, including OXYGENT. In May 1998, because of disagreements as to the scope and timing of further clinical development, including whether to proceed with Phase III trials at that time and for which indications, Ortho and Alliance restructured their agreement. Under the restructured agreement, Alliance assumed responsibility for worldwide development of OXYGENT at its own cost, and Ortho has a limited right of first offer to enter into a development or marketing or license agreement for OXYGENT, which right may be repurchased by Alliance for $2 million under certain circumstances. LIQUIVENT. LIQUIVENT (neat perflubron) is an intrapulmonary agent for use in reducing a patient's exposure to the harmful effects of conventional mechanical ventilation. Each year, more than 800,000 patients in the United States are placed on mechanical gas ventilators for treatment of lung dysfunction. Many of these patients suffer from acute respiratory failure, a disorder that can result from many causes, including serious infections, traumatic shock, severe burns, or inhalation of toxic substances. Acute respiratory failure is generally characterized by an excessive inflammatory response, which leads to blockage of the small airways and collapse of alveoli, resulting in inadequate gas exchange and impairment of normal lung function. The most urgent need for these patients is to improve their blood oxygenation. However, the prolonged use of high ventilatory pressures or high continuous concentrations of inspired oxygen can further damage the patient's lungs. Some of these patients may benefit from treatment with LIQUIVENT. LIQUIVENT is intended to be used in a technique called partial liquid ventilation ("PLV"). In this procedure, the drug is administered through an endotracheal tube into the lungs of a patient being supported by a mechanical ventilator. The initial goal of LIQUIVENT/PLV therapy is to open collapsed alveoli to improve gas exchange. Once this has been accomplished, ventilator pressure and oxygen concentration may be lowered to minimize ventilator-induced lung trauma. Published results from initial clinical trials have indicated that LIQUIVENT improved lung oxygenation, without clinically significant side effects. In clinical studies, LIQUIVENT has also been observed to promote the migration of mucus and alveolar debris to the central airways, where suctioning is easier. The ability to remove such debris may reduce the excessive inflammatory response associated with acute respiratory failure and enhance the effectiveness of other therapeutic interventions, all serving potentially to reduce patient recovery time. The U.S. Food and Drug Administration ("FDA") has granted Subpart E status (expedited review) for the product. In April 1997, the Company temporarily suspended enrollment in its ongoing Phase III LIQUIVENT trial in pediatric patients to analyze an unexplained, substantial decrease in the mortality rate for the control group which occurred after a protocol amendment in December 1996. The decision was not prompted by any LIQUIVENT-related adverse events. In August 1997, the Company completed its analysis of data from the clinical trial. The Company found that after the protocol amendment, patients in the post-amendment control group were younger and had different disease etiologies compared to the pre-amendment control group. Additionally, post-amendment control group patients received additional 2 therapies such as extracorporeal membrane oxygenation, high frequency oscillatory ventilation, nitric oxide or surfactants more frequently, earlier, and for a longer duration compared to both the pre-amendment control group and the LIQUIVENT-treated patients. The study analysis also supported previous reports that PLV therapy with LIQUIVENT is a safe procedure. In December 1997, the Company started a small Phase II adult clinical trial intended to validate the protocol for a subsequent pivotal trial with adult patients. That trial has been completed and the Company intends to initiate a Phase II/III clinical study in adult patients before the end of calendar 1998. In February 1996, the Company entered into a license agreement (the "HMRI License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which provided HMRI with worldwide marketing and manufacturing rights to the intratracheal administration of liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid ventilation. The product was being developed jointly by Alliance and HMRI. In June 1997, Alliance announced that the parties agreed in principle to adjust certain milestone payments, to temporarily revise the method for reimbursing expenses of the development work and terms to repurchase clinical supplies sold, in conjunction with the April 1997 temporary interruption of the clinical development program. In December 1997, HMRI terminated the HMRI License Agreement and Alliance regained all rights to the product. In connection with the termination the Company may acquire approximately $2.3 million of inventory from HMRI. HMRI has also asserted a claim for an amount up to $7.5 million payable in 2002 in cash or common stock, at the Company's election. The Company does not believe the claim is meritorious and intends to contest such claim; however, no assurances can be given that the Company will prevail on the claim. IMAGENT. IMAGENT is an intravenous contrast agent for enhancement of ultrasound images to assess cardiac function and organ lesions, and to detect solid organ lesions and blood flow abnormalities. More than 30 million scans of the heart, vasculature, and abdominal organs are performed annually in the United States, some of which may potentially benefit from a cost-effective contrast agent. To be successful in the marketplace, ultrasound contrast agents should provide enhanced diagnostic images during several minutes of scanning, be easy to use, be stable during transportation, and have a long shelf-life. IMAGENT is being developed to meet these requirements. IMAGENT is a powder comprising hollow microspheres containing a mixture of PFC vapor and gas and water-soluble components that are known to be acceptable for parenteral use. Prior to use, IMAGENT is reconstituted with water to form microbubbles that are then injected into the patient. The gas microbubbles are highly echogenic and, when delivered intravenously, reflect signals that enhance ultrasound images. In early clinical trials with IMAGENT, gray-scale contrast enhancement of cardiac, abdominal, and vascular structures has been observed with no serious adverse events. In March 1998, the Company initiated two Phase III clinical trials to assess cardiac function. The multicenter trials are designed to demonstrate the use of IMAGENT to aid in the evaluation of cardiac function as assessed by both ejection fraction and endocardial border definition. A Phase II myocardial perfusion feasibility study is also underway for assessment of blood flow defects in the muscle of the heart. In July 1998, two Phase II prostate and breast feasibility studies were initiated. Enrollment in a Phase II clinical trial was completed in 1997 in adults undergoing diagnostic procedures for evaluation of space-occupying lesions of the liver and kidney and vascular flow abnormalities. In September 1997, the Company entered into a license agreement (the "Schering License Agreement") with Schering AG, Germany ("Schering"), which provides Schering with worldwide exclusive marketing and manufacturing rights to Alliance's drug compounds, drug compositions and medical devices and systems related to perfluorocarbon ultrasound imaging products, including IMAGENT. The product is being developed jointly by Alliance and Schering. RODA. In July 1997, the Company entered into a development agreement (the "VIA Development Agreement") with VIA Medical Corporation ("VIA") for the joint development of RODA (Real-time Oxygen Dynamics Analyzer). RODA is an EX VIVO device intended to provide on-line measurements of the cardiovascular and oxygenation status of surgical patients by minimally invasive means. The device could assist physicians in their decisions regarding transfusions and other interventions. RODA will combine oxygen dynamics software designed by the Company with VIA's EX VIVO blood gas and chemistry monitor and other VIA technology. The Company has conducted pilot clinical studies in the U.S. and Europe to assess its oxygen dynamics software. VIA is currently developing an engineering prototype of the final device to use for clinical testing and regulatory submissions. In August 1998, Alliance and VIA entered into a manufacturing, marketing and distribution agreement (the "VIA Marketing Agreement") whereby VIA will be responsible for manufacturing and marketing RODA, and the parties will share revenues from the sale of products. 3 OTHER PRODUCTS PULMOSPHERES-TM-. PULMOSPHERES are hollow, porous spheres (in powder form) suspended in perflubron or fluorochemical propellants for the purpose of pulmonary drug delivery. Drugs can be stabilized within the wall structure of these respirable particles, which are typically 1-3 microns in diameter. Laboratory and preclinical testing indicates that PULMOSPHERE formulations may provide advantages over current formulation technologies with regard to particle suspension stability and flow aerodynamics, which could enhance the efficiency of pulmonary drug delivery. Over the past year, different types of drugs have been successfully formulated in PULMOSPHERES for feasibility testing purposes. Drugs such as bronchodilators and steriodal anti-inflammatory agents could potentially be formulated in PULMOSPHERES and delivered to the lung by way of standard metered-dose inhaler (MDI) devices for the topical treatment of asthma. Alternatively, proteins or peptides intended for systemic distribution and treatment of other chronic diseases might be incorporated into PULMOSPHERES and be delivered by other commonly used devices such as nebulizers or dry powder inhalers, which tend to propel small particles deeper into the lung for improved systemic uptake. The current business strategy for PULMOSPHERES involves Alliance formulating the drugs and subsequently manufacturing bulk powders for pharmaceutical company partners. The partners would be responsible for filling the powders in delivery device(s), conducting preclinical and clinical trials, and marketing the resultant products. FLOGEL-Registered Trademark-. In November 1996, Alliance acquired all of the stock of MDV Technologies, Inc. ("MDV") for initial payments of $15.5 million over a one-year period, with additional payments and royalties to the former MDV shareholders upon the occurrence of certain clinical development, licensing, or commercialization events. The Company is developing a thermo-reversible gel, FLOGEL, intended for use as an anti-adhesion treatment for patients undergoing abdominal or pelvic surgeries. FLOGEL is applied in a cold liquid form and becomes a gel at body temperature, forming a barrier between tissues. Preliminary human safety data with a previous formulation for the product have been obtained and, during the past year, preclinical studies have been performed on additional formulations. The Company has selected a formulation for a pilot clinical trial which is expected to commence in the near future. In addition to the anti-adhesion product, MDV also has patents covering the use of gels for drug delivery and ophthalmic indications. Alliance is also supporting internal research efforts to expand the applicability of its core technologies. The Company has patented fluorinated surfactants that are potentially useful in the preparation of therapeutic or diagnostic emulsions and other formulations. In addition to PULMOSPHERES, Alliance is investigating the use of other PFC-containing reverse emulsions, microemulsions, gels, foams, and other compositions as drug delivery agents. These compositions are either aqueous or oil-based, and may be administered via oral, intravenous, intrapulmonary, or topical routes to distribute antibiotics, chemotherapy agents, gene therapies, or other medicaments systemically or to selected areas of the body. The Company has certain agreements with research institutions to develop discoveries that the Company believes may be the basis of new products. Antigenized antibodies that could potentially stimulate or down-regulate antibody production are being developed in conjunction with Mt. Sinai Medical Center in New York City. A prototype vaccine for infectious disease and a prototype tolerogen for an autoimmune disease are also under development. In addition, Alliance is working with researchers at Temple University to develop an apoptotic factor for regulating the death of certain cancer cells. Alliance has developed and is marketing SAT PAD-Registered Trademark-, a re-usable magnetic resonance ("MR") imaging accessory that improves the quality of images obtained by certain MR imaging techniques. SAT PAD is distributed by dealers specializing in radiology products. Sales of SAT PAD were approximately $100,000 for fiscal 1998. Alliance expects that the sales volume of SAT PAD will be limited and does not anticipate significant revenue from the product. The Company intends to consider other technologies that may be available for licensing and research agreements with other institutions or inventors. Alliance intends, where appropriate, to seek outside sources of funding. If new license and research agreements are added and the Company is not able to obtain outside sources of funding, the Company's losses from research and development activities are expected to increase significantly. 4 The Company's products require substantial development efforts. The Company may encounter unforeseen technical and other problems which may force delay, abandonment, or substantial change in the development of a specific product or process, or technological change, or product development by others, any of which may have a material adverse effect on the Company. The Company expends substantial amounts of money on research and development and expects to do so for the foreseeable future. In fiscal 1998, 1997, and 1996, the Company incurred research and development expenses of $50.1 million, $43.3 million, and $33.7 million, respectively. COLLABORATIVE RELATIONSHIPS SCHERING AG. In September 1997, the Company entered into the Schering License Agreement, which provides Schering with worldwide exclusive marketing and manufacturing rights to Alliance's drug compounds, drug compositions and medical devices and systems related to perfluorocarbon ultrasound imaging products, including IMAGENT. This product is being developed jointly by Alliance and Schering. Under the Schering License Agreement, Schering paid to Alliance an initial license fee of $4 million and agreed to pay further milestone payments and royalties on product sales. Schering also agreed to provide funding to Alliance for some of its development expenses. In conjunction with the Schering License Agreement, Schering Berlin Venture Corp. ("SBVC"), an affiliate of Schering, purchased 500,000 shares of the Company's convertible Series D Preferred Stock for $10 million. HOECHST MARION ROUSSEL, INC. In February 1996, the Company entered into the HMRI License Agreement, which provided HMRI with worldwide exclusive marketing and manufacturing rights to the intratracheal administration of liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid ventilation. This product was being developed jointly by Alliance and HMRI, with HMRI responsible for most of the costs of development and marketing. On June 30, 1997, HMRI paid the Company a $2.5 million milestone payment and $2.5 million for the purchase of clinical trial supplies. In June 1997, the Company also announced that the parties had agreed in principle to modify the HMRI License Agreement to (i) adjust certain milestone payments, (ii) temporarily revise the method for reimbursing the expenses for portions of the development work, and (iii) provide for the Company to repurchase any unused clinical trial supplies if the license agreement is terminated before January 1, 1998, in conjunction with the temporary interruption of the LIQUIVENT clinical development program in April 1997. In December 1997, HMRI terminated the HMRI License Agreement and Alliance regained all rights to the product. In connection with the termination the Company may acquire approximately $2.3 million of inventory from HMRI. HMRI has also asserted a claim for an amount up to $7.5 million payable in 2002 in cash or common stock, at the Company's election. The Company does not believe the claim is meritorious and intends to contest such claim, however, no assurances can be given that the Company will prevail on the claim. ORTHO BIOTECH, INC. In August 1994, the Company entered into the Ortho License Agreement which provided Ortho with worldwide exclusive marketing and manufacturing rights to injectable PFC emulsions capable of transporting oxygen for therapeutic use, including OXYGENT. The product was being developed jointly by Alliance and Ortho, with Ortho responsible for substantially all of the costs of developing and marketing the product. In May 1998, because of disagreements as to the scope and timing of further clinical development, including whether to proceed with Phase III trials at that time and for which indications, Ortho and Alliance restructured their agreement. Under the restructured agreement, Alliance assumed responsibility for worldwide development of OXYGENT at its own cost, and Ortho has a limited right of first offer to enter into a development or marketing or license agreement for OXYGENT, which right may be repurchased by Alliance for $2 million under certain circumstances. VIA MEDICAL CORPORATION. In July 1997, the Company entered into the VIA Development Agreement for the joint development of RODA, an EX VIVO device intended to measure the cardiovascular and oxygenation status of patients by minimally invasive means. Pursuant to the VIA Development Agreement, VIA will combine Alliance's oxygen dynamics software with VIA's EX VIVO blood gas and chemistry monitor and other technology. Alliance will reimburse VIA for substantially all of its development costs and will be responsible for obtaining regulatory approval of the product. In August 1998, Alliance and VIA entered the VIA Marketing Agreement whereby VIA will be responsible for manufacturing and marketing RODA, and the parties will share revenues on the sale of products. The Company intends to obtain new collaborative relationships for OXYGENT and LIQUIVENT, and to also obtain collaborative relationships for its other products. There can be no assurances that the Company will be able to enter into future collaborative relationships on acceptable terms. The termination of any collaborative relationship or failure to enter into such relationships may limit the ability of the Company to develop its technology and may have a material adverse effect on the Company's business. 5 MARKETING The Company does not have internal marketing and sales capabilities. The Company's strategy is for its collaborative partners to market and sell any products which it successfully develops for the market. The Company's only commercialized product, SAT PAD, is currently distributed through certain distributors of MR imaging equipment and supplies. Currently, Schering will be solely responsible for all activities related to marketing and sales of IMAGENT. Under the terms of the restructured Ortho agreement, Ortho has a limited right of first offer to enter into a marketing agreement for OXYGENT. The Company intends to obtain appropriate marketing relationships for its other products. To the extent that the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties, and there can be no assurance that any such efforts will be successful. Further, there can be no assurance that the Company will be able to enter into future marketing relationships on acceptable terms. The termination of any marketing relationships may limit the ability of the Company to market its products and may have a material adverse effect on the Company's business. Should the Company have to market and sell its products directly, the Company would need to develop a marketing and sales force with technical expertise and distribution capability. The creation of infrastructure to commercialize pharmaceutical products is an expensive and time-consuming process. There can be no assurance that the Company would be able to establish marketing and sales capabilities or be successful in gaining market acceptance for its products. MANUFACTURING The Company manufactures all of its products for preclinical testing and clinical trials. OXYGENT is produced at one of Alliance's San Diego facilities, which includes both a pilot plant and a production-scale manufacturing facility. The Company believes that this production facility will provide sufficient capacity for future clinical trials and market launch of OXYGENT, if and when it is approved by the FDA. However, a larger facility may be required in the future. LIQUIVENT is manufactured for clinical trials at the Company's Otisville, New York facility. LIQUIVENT is the same drug substance as IMAGENT GI, for which Alliance obtained FDA approval in August 1993 as an oral contrast agent for MR imaging. As a result, certain chemistry, manufacturing, and control requirements have been accepted by the FDA, which may benefit the Company in the regulatory review process. The Company believes the Otisville facility has sufficient capacity for market launch of LIQUIVENT, if and when it is approved by the FDA. However, a larger facility may be required in the future. IMAGENT is manufactured for clinical studies at one of the San Diego facilities, using a proprietary process to form dry, PFC vapor-containing spheres which are reconstituted with an aqueous solution to form microbubbles just prior to use. Alliance is in the process of expanding its market launch production capacity in San Diego for IMAGENT. The Schering License Agreement requires the Company to manufacture products at its San Diego facility for a period of time after market launch at a negotiated price. Schering will be responsible for establishing production capacity beyond the maximum capacity of the San Diego facility. Expansion for any of the Company's products may occur in stages, each of which would require regulatory approval, and product demand could at times exceed supply capacity. The Company has not selected a site for such expanded facilities and cannot predict the amount it will expend for the construction of such facilities. There can be no assurance as to when or whether the FDA will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of a facility will depend on regulatory approvals, product development, and capital resources, among other factors. The Company has not obtained any regulatory approvals for its production facilities for these products nor can there be any assurance that it will be able to do so. SOURCES AND AVAILABILITY OF RAW MATERIALS The Company has obtained a sufficient inventory of perflubron, the principal raw material utilized in OXYGENT and LIQUIVENT, for clinical trials. The Company is currently negotiating with a potential supplier to secure a long-term supply of perflubron. The Company also believes it has a sufficient supply of the principal raw material for IMAGENT for clinical trials and is in the process of negotiating with a potential supplier to secure long-term supply of that material. Although 6 some raw materials for its products are available from only one source, the Company attempts to acquire a substantial inventory of such materials and to negotiate long-term supply arrangements. The Company believes it will not have any raw material supply issues; however, no assurances can be given that a long-term supply will be obtained for such materials or that a long-term supply agreement for such materials can be obtained on terms acceptable to the Company. The Company's business could be materially and adversely affected if it or its collaborative partners are unable to obtain necessary raw materials on a timely basis and at a cost-effective price. PATENTS The Company seeks proprietary protection for its products, processes, technologies, and ongoing improvements. The Company is pursuing patent protection in the United States and in foreign countries that it regards as important for future endeavors. Numerous patent applications have been filed in the European Patent Office, Australia, Canada, Israel, Japan, Norway, and South Africa, and patents have been granted in many of these countries. Alliance has numerous issued U.S. patents related to or covering PFC emulsions with corresponding patents and applications in Europe and Japan. Such emulsions are the basis of the Company's OXYGENT products. The issued patents and pending patent applications cover specific details of emulsified PFCs through product-by-process claims, composition claims, and method claims describing their manufacture and use. In addition to the specific OXYGENT formulation, issued patents broadly cover concentrated PFC emulsions, as well as methods for their manufacture and use. In September 1994, Alliance received a U.S. patent for its preferred method of using blood substitutes to facilitate oxygen delivery. A related U.S. patent was issued in September 1995. Corresponding patents are pending in Europe, Japan, and other countries. The issued claims cover methods for facilitating autologous blood use in conjunction with administering oxygen-enriched gas and oxygen carriers that contain fluorochemicals, as well as those derived from human, animal, plant, or recombinant hemoglobin, in order to reduce or eliminate the need for allogeneic blood transfusions during surgery. The Company has filed U.S. and foreign patent applications on its method of using oxygen-carrying PFCs to enhance respiratory gas exchange utilizing conventional gas ventilators. In August 1995, a U.S. patent licensed to the Company issued covering methods of administering liquids, including LIQUIVENT, to patients. Other U.S. patents, covering additional methods of enhancing respiratory gas exchange by administering liquids to patients, including LIQUIVENT, have subsequently issued. The Company also has issued patents and pending patent applications which seek to cover the use of PFCs to deliver drugs to the lungs and to wash debris from, and open, collapsed lungs. In November 1995, the Company received a U.S. patent covering the use of fluorochemicals to treat localized and systemic inflammation. Additionally, the Company has issued patents and pending applications that cover apparatus for liquid ventilation using PFCs. Alliance has several issued U.S. patents and patent applications related to IMAGENT. The issued patents and pending applications contain claims directed to the manufacture and use of novel stabilized microbubble compositions based on the discovery that PFC gases, in combination with appropriate surfactants or other non-PFC gases, can stabilize microbubbles for use in ultrasonic imaging. The patents further contain claims directed to formulations and compositions that cover IMAGENT. International applications directed to the same subject matter have also been filed. In March 1998, the Company received its second U.S. patent covering the use of various contrast agents, including IMAGENT, in harmonic imaging. The Company also has issued patents and pending patent applications covering its novel fluorinated surfactants. These compounds may be useful in oxygen-carrying or drug transport compositions, and in liposomal formulations that have therapeutic and diagnostic applications. Additionally, the fluorinated compounds may be employed in cosmetics, protective creams, and lubricating agents, as well as being incorporated in emulsions, microemulsions, and gels that may be useful as drug delivery vehicles or contrast agents. The Company also has pending applications relating to various types of emulsions and microstructures (tubules, helixes, fibers) that may have uses in the fields of medicine, biomolecular engineering, microelectronics, and electro-optics. The Company, through its wholly owned subsidiary, MDV, has numerous issued U.S. patents and pending applications related to the use, manufacture and composition of FLOGEL. Corresponding patents have issued, or applications have been filed, in Europe, Japan and certain other foreign countries. MDV also has issued claims in the United States and 7 Europe covering the use of poloxamer gels for the prevention of adhesion formation, delivery of drugs and ophthalmic applications. Aside from the issued patents and allowed applications referred to above, however, no assurance can be given that any of these applications will result in issued U.S. or foreign patents. Although patents are issued with a presumption of validity and require a challenge with a high degree of proof to establish invalidity, no assurance can be given that any issued patents would survive such a challenge and would be valid and enforceable. The Company also attempts to protect its proprietary products, processes, and other information by relying on trade secret laws and non-disclosure and confidentiality agreements with its employees, consultants, and certain other persons who have access to such products, processes, and information. The agreements affirm that all inventions conceived by employees are the exclusive property of the Company, with the exception of inventions unrelated to the Company's business and developed entirely on the employee's own time. Nevertheless, there can be no assurance that these agreements will afford significant protection against or adequate compensation for misappropriation or unauthorized disclosure of the Company's trade secrets. COMPETITION Biotechnology and pharmaceutical companies are highly competitive. There are many pharmaceutical companies, biotechnology companies, public and private universities, and research organizations actively engaged in research and development of products that may be similar to Alliance's products. Many of the Company's existing or potential competitors have substantially greater financial, technical, and human resources than the Company and may be better equipped to develop, manufacture, and market products. These companies may develop and introduce products and processes competitive with or superior to those of the Company. In addition, other technologies or products may be developed that have an entirely different approach or means of accomplishing the intended purposes of the Company's products, which might render the Company's technology and products uncompetitive or obsolete. There can be no assurance that the Company will be able to compete successfully. Well-publicized side effects associated with the transfusion of human donor blood have spurred efforts to develop a blood substitute. There are two primary approaches for temporary oxygen delivery: PFC emulsions and hemoglobin solutions. Hemoglobin development efforts include chemically modified, stroma-free hemoglobin from human or bovine red blood cells, and the use of genetic engineering to produce recombinant hemoglobin. There are several companies working on hemoglobin solutions as a temporary oxygen carrier "blood substitute", two of which are in Phase III clinical trials. The Company believes that the relatively low cost and ease of production of OXYGENT provide advantages over hemoglobin-based products. Alliance is aware of two other companies developing PFC-based temporary oxygen carriers, one of which has entered Phase II clinical trials. Although liquid ventilation therapy has been in the research phase for the last two decades, the Company is unaware of any potential liquid ventilation competitor that has reached the clinical trial stage; however, other companies are evaluating compounds with the possibility of entering this field. If major manufacturers of PFCs entered the field, the Company could face competition from companies with substantially greater resources. The Company believes that its patent position and stage of research and development give it an advantage over potential competitors. Several other companies are attempting to develop alternative types of therapies for treatment of acute respiratory failure. One company has started a Phase II/III clinical trial for acute respiratory failure with a surfactant, and several others have started Phase II clinical trials with various compounds for acute respiratory failure. Competition in the development of ultrasound imaging contrast agents is intense and is expected to increase. There are currently only two available ultrasound contrast agents for certain cardiology applications in the U.S. There are currently five (including the two U.S. approved contrast agents) that have been approved in Europe, three of which are currently being sold. In addition, certain companies are in advanced clinical trials for the use of ultrasound contrast agents for assessing certain organs and vascular structures. The Company expects that competition in the ultrasound contrast imaging agent field will be based primarily on each product's safety profile, efficacy, stability, ease of administration, breadth of approved indications, and physician, healthcare payor and patient acceptance. The Company believes if and when IMAGENT is approved for commercial sale, it will be well positioned to compete successfully, although there can be no assurance that the product will be able to do so. 8 PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS The sale or use of the Company's present products and any other products or processes that may be developed or sold by the Company may expose the Company to potential liability from claims by end-users of such products or by manufacturers or others selling such products, either directly or as a component of other products. While the Company has product liability insurance, there can be no assurance that the Company will continue to maintain such insurance or that it will provide adequate coverage. If the Company is held responsible for damages in a product liability suit, the Company's financial condition could be materially and adversely affected. GOVERNMENT REGULATION The Company's products require governmental approval before production and marketing can commence. The regulatory approval process is administered by the FDA in the United States and by similar agencies in foreign countries. The process of obtaining regulatory clearances or approvals is costly and time consuming. The Company cannot predict how long the necessary clearances or approvals will take or whether it will be successful in obtaining them. Generally, all potential pharmaceutical products must successfully complete two major stages of development (preclinical and clinical testing) prior to receiving marketing approval by the governing regulatory agency. In preclinical testing, potential compounds are tested both IN VITRO and in animals to gain safety information prior to administration in humans. Knowledge is obtained regarding the effects of the compound on bodily functions as well as its absorption, distribution, metabolism, and elimination. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. In Phase I, which frequently begins with the initial introduction of the drug into healthy human subjects prior to introduction into patients, the compound will be tested for safety and dosage tolerance. Phase II typically involves studies in a larger patient population to identify possible adverse effects and safety risks, to begin gathering preliminary efficacy data, and to investigate potential dose sizes and schedules. Phase III trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety, and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the investigational new drug application. Further, each clinical study must be evaluated by an independent review board at the institution at which the study will be conducted. The review board will consider, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution. Following completion of these studies, a new drug application ("NDA") must be submitted to and approved by the FDA in order to market the product in the United States. Similar applications are required in foreign countries. There can be no assurance that, upon completion of the foregoing trials, the results will be considered adequate for government approval. If and when approval is obtained to market a product, the FDA's (or applicable foreign agency's) regulations will govern manufacturing and marketing activities. The FDA has established a designation to speed the availability of new therapies for life-threatening or severely debilitating diseases. This designation, defined in Subpart E of the FDA's investigational new drug regulations, may expedite clinical evaluation and regulatory review of some new drugs, such as LIQUIVENT, which has been so designated. Perflubron is an eight-carbon halogenated fluorocarbon liquid. Certain halogenated fluorocarbons (primarily the gaseous chlorofluorocarbons) have been implicated in stratospheric ozone depletion. The FDA issued a Finding of No Significant Impact under the National Environmental Protection Act in connection with the approval for marketing of IMAGENT GI, a perflubron-based drug previously developed by the Company. However, all materials contained in the Company's products remain subject to regulation by governmental agencies. In addition to FDA regulation, the Company is subject to regulation by various governmental agencies including, without limitation, the Drug Enforcement Administration, the U.S. Department of Agriculture, the Environmental Protection Agency, the Occupational Safety and Health Administration, and the California State Department of Health Services, Food and Drug Branch. Such regulation, by governmental authorities in the United States and other countries, may impede or limit the Company's ability to develop and market its products. 9 EMPLOYEES As of September 4, 1998, the Company had 284 full-time employees, of whom 247 were engaged in research and development, production and associated support, six in business development and market research, and 31 in general administration. There can be no assurance that the Company will be able to continue attracting and retaining sufficient qualified personnel in order to meet its needs. None of the Company's employees is represented by a labor union. The Company believes that its employee relations are satisfactory. EXECUTIVE OFFICERS OF THE REGISTRANT The following are the executive officers of the Company: DUANE J. ROTH. Mr. Roth, who is 48, has been Chief Executive Officer since 1985 and Chairman since October 1989. Prior to joining Alliance, Mr. Roth served as President of Analytab Products, Inc., an American Home Products company involved in manufacturing and marketing medical diagnostics, pharmaceuticals and devices. For the previous ten years, he was employed in various sales, marketing, and general management capacities by Ortho Diagnostic Systems, Inc., a Johnson & Johnson company, which is a manufacturer of diagnostic and pharmaceutical products. Mr. Roth's brother, Theodore D. Roth, is President and Chief Operating Officer of the Company. THEODORE D. ROTH. Mr. Roth, who is 47, was Executive Vice President and Chief Financial Officer of the Company since November 1987, and was appointed President and Chief Operating Officer in May 1998. For more than ten years prior to joining the Company, he was General Counsel of SAI Corporation, a company in the business of operating manufacturing concerns, and General Manager of Holland Industries, Inc., a manufacturing company. Mr. Roth received his J.D. from Washburn University and an LL.M. in Corporate and Commercial Law from the University of Missouri in Kansas City. He is the brother of Duane J. Roth, the Chairman and Chief Executive Officer of the Company. HAROLD W. DELONG. Mr. DeLong, who is 50, has been Executive Vice President, Business Development for the Company since February 1989. Mr. DeLong has been employed for more than 25 years in the medical diagnostics and pharmaceutical industry in various sales, marketing, and management positions. Prior to joining Alliance, Mr. DeLong was Vice President, Sales and Marketing for Murex Corporation, a company participating in the infectious disease diagnostics market. He previously served as Director, Sales and Marketing for Becton Dickinson's Immunocytometry Systems division. Mr. DeLong was also employed previously by Ortho Diagnostic Systems, Inc. for over ten years, where his last position was Director of the Hemostasis and Chemistry Products business units. KEITH W. CHAPMAN. Mr. Chapman, who is 48, was appointed Vice President, Operations in July 1997, having joined the Company in 1992 as Director, Transfer Operations. For 14 years prior to joining Alliance, he was responsible for scale-up development and production of modified hemoglobins for the Army's Blood Substitute Program. He received training as a research associate in dermatology, tropical medicine, and blood cell preservation at the Letterman Army Institute of Research, Presidio of San Francisco, California. B. JACK DEFRANCO. Mr. DeFranco, who is 53, has been Vice President, Market Development for Alliance since January 1991. He has more than 25 years experience in sales and marketing in the medical products industry. He was President of Orthoconcept Inc., a private firm marketing orthopedic and urological devices from 1986 through 1990. Prior to 1986, he was Director of Marketing and New Business Development for Smith and Nephew Inc., which markets orthopedic and general wound-care products, and he served in various sales and marketing positions with Ortho Diagnostic Systems, Inc. Mr. DeFranco received his M.B.A. from Fairleigh Dickinson University. N. SIMON FAITHFULL, M.D., PH.D. Dr. Faithfull, who is 58, has been Vice President, Medical Affairs Development for the Company since September 1990. Dr. Faithfull joined Alliance after serving as Director of Medical Research for Delta Biotechnology Ltd. from 1989 to 1990. He has also served as Senior Lecturer in Anesthesia at the University of Manchester (UK), and has held various academic appointments and clinical anesthesia positions at Erasmus University (Netherlands), Tulane University and the University of Alabama (Birmingham) for more than 15 years. He has served as Secretary of the International Society on Oxygen Transport to Tissue. He received his Ph.D. from Erasmus University, Rotterdam and his M.D. from London University. 10 KATHRYN E. FLAIM, PH.D. Dr. Flaim, who is 48, was appointed Vice President, Clinical Research in August 1998, having joined Alliance in 1990 as Director of Clinical Research. Dr. Flaim has over 15 years of experience in clinical trial design and regulatory submissions. For nine years before joining Alliance, she was Associate Director of the Division of Clinical Research and Development at SmithKline Beecham. Previously, she was an Assistant Professor at the Milton S. Hershey Medical Center at Pennsylvania State University. Dr. Flaim received her Ph.D. at the University of California at Davis. HENRY A. GRAHAM, PH.D. Dr. Graham, who is 55, is Vice President, Quality. Prior to joining Alliance in January 1990, he worked for Johnson & Johnson for 17 years on a broad range of projects including injectable human biologicals, immunohematology reagents, immunoassay reagents and instrument systems. Dr. Graham was Director of Product Development for Ortho Diagnostic Systems, Inc. for over five years prior to 1990. During his tenure at Johnson & Johnson, he was the recipient of several awards, including the Corporate Medal for Outstanding Research. Dr. Graham received his Ph.D. in immunology from Rutgers University. JOERG LIMMER, DVM. Dr. Limmer, who is 57, was appointed Vice President, Clinical Operations and New Technology Assessment in September 1996. Prior to joining Alliance, Dr. Limmer worked six years for Boehringer Ingelheim Pharma as Regional Director and Vice President where he was responsible for medical and marketing affairs for Eastern European countries. For the previous 20 years he was Director of Clinical Research at Dr. Karl Thomae GmbH, a subsidiary of Boehringer Ingelheim GmbH in Germany. His primary focus was in the area of diabetes mellitus, fat metabolism, atherosclerosis, and intensive care products. Dr. Limmer received his DVM from the Freie Universitaet of Berlin, Germany. TIMOTHY J. PELURA, PH.D. Dr. Pelura, who is 44, was appointed Vice President, Pharmaceutical Research & Development in July 1997, having joined Alliance in 1988 as Director, Product Research. For over 22 years he has worked extensively in the field of emulsion research and parenteral product development. Prior to joining Alliance, he spent 12 years at Pharmacia and KabiVitrum Inc. working in various areas including quality control, formulation and process development, project management, and basic research. Dr. Pelura received a M.S. and Ph.D. in Chemistry from Rutgers University. GWEN ROSENBERG. Ms. Rosenberg, who is 43, was appointed Vice President, Corporate Communications in May 1998. Ms. Rosenberg joined the Company in 1990 and has served in various capacities, most recently as Director of Corporate Communications. For the previous eleven years, she was a research scientist at the University of California, San Diego and at Scripps Clinic and Research Foundation, and was concurrently a science reporter for the San Diego Daily Transcript. Ms. Rosenberg has also taught high school chemistry and biology in New York. She received her B.A. and M.A. degrees from Adelphi University and The State University of New York at Stony Brook, respectively. GORDON L. SCHOOLEY, PH.D. Dr. Schooley, who is 51, has been Vice President, Clinical and Regulatory Development since January 1989. Dr. Schooley has been employed for over 25 years in research and development in the pharmaceutical industry. Prior to joining Alliance in 1989, Dr. Schooley was Vice President of Clinical Research and Regulatory Affairs for Newport Pharmaceuticals, a company developing antiviral drugs. For the previous eight years, he was Director of Clinical Research and Biostatistics for Allergan Pharmaceuticals, a division of SmithKline Beecham, developing ophthalmologic and dermatologic drugs and devices. He was also employed by McGaw Laboratories as Manager of Biostatistics for parenteral products, and by The Upjohn Company as a senior biostatistician for analgesic and CNS drugs. Dr. Schooley received his Ph.D. from the University of Michigan School of Public Health. MARK SEEFELD, PH.D., D.A.B.T. Dr. Seefeld, who is 45, was appointed Vice President, Drug Safety in August 1998, having joined Alliance in 1993 as Director, Toxicology. For more than ten years prior to joining the Company, he held positions in both general and reproductive toxicology at Parke-Davis, Pharmaceutical Research Division of the Warner-Lambert Company, and 3M Pharmaceuticals. Dr. Seefeld received his Ph.D. from the University of Wisconsin-Madison and is board certified by the American Board of Toxicology. TIM T. HART, CPA. Mr. Hart, who is 41, was appointed Chief Financial Officer in August 1998. He joined the Company in 1991 as Controller and has also served as Treasurer since 1994. Prior to joining Alliance in 1991, he was Group Controller of the Cubic Revenue Collection Group, a group of nine domestic and international Cubic Corporation companies that design, manufacture and service automatic fare-collection systems. Mr. Hart was employed in various financial management positions at Cubic for over eight years. He was also employed by Ernst & Whinney in San Diego, California as a C.P.A. Mr. Hart received a B.S. from San Diego State University. LLOYD A. ROWLAND, JR. Mr. Rowland, who is 42, was appointed Secretary of the Company in May 1998, having served as General Counsel and Assistant Secretary since 1993. Prior to joining Alliance, Mr. Rowland served as Vice President and Senior Counsel, Finance and Securities, at Imperial Savings Association for four years. For the previous eight years, he was engaged in the private practice of corporate law with the San Diego, California law firm of Gray Cary Ames & Fry, and the Houston, Texas law firm of Bracewell & Patterson. He received a J.D. from Emory University. 11 ITEM 2. PROPERTIES FACILITIES The Company has principal facilities in two locations: San Diego, California and Otisville, New York. In San Diego, California, where the Company has approximately 159,000 square feet in four leased facilities, the Company maintains its principal executive offices, performs research and development on its PFC-based products, and has its emulsion products manufacturing facility. The fourth San Diego facility was leased in 1997 and consists of manufacturing and development space. The Otisville site, where the Company has established the LIQUIVENT and SAT PAD production facility, also includes laboratories and administrative offices. The Company purchased the Otisville site from the New York City Public Development Corporation ("PDC") in June 1983. In connection with the acquisition, the Company entered into a land use agreement (the "Land Use Agreement") with New York City and the PDC. The Company estimates that the cost of complying with the Land Use Agreement for fiscal 1998 was approximately $140,000. The provisions of the Land Use Agreement are "covenants running with the land," which may bind the Company and subsequent owners of the Otisville site for a substantial period of time. While the Company believes that it can produce materials for clinical trials and initial market launch for OXYGENT and IMAGENT at its existing San Diego facilities and for LIQUIVENT at its Otisville, New York facility, it may need to expand its commercial manufacturing capabilities for its products in the future. Any expansion for any of its products may occur in stages, each of which would require regulatory approval, and product demand could at times exceed supply capacity. The Company has not selected a site for such expanded facilities and cannot predict the amount it will expend for the construction of such facilities. There can be no assurance as to when or whether the FDA will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of such facilities will depend on regulatory approvals, product development, and capital resources, among other factors. The Company has not obtained any regulatory approvals for its production facilities for these products nor can there be any assurance that it will be able to do so. The Schering License Agreement requires the Company to manufacture products at its San Diego facility for a period of time after market launch at a negotiated price. Schering will be responsible for establishing production capacity beyond the maximum capacity of the San Diego facility. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the last quarter of Alliance's fiscal year ended June 30, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock is traded in the over-the-counter market, and prices therefor are quoted on the Nasdaq National Market under the symbol ALLP. 12 The following table sets forth, for the periods indicated, the high and low sale prices of the common stock as reported on Nasdaq, without retail mark-up, markdown or commission.
HIGH LOW ---- --- Fiscal 1998 Quarter ended September 30, 1997 $ 13.25 $ 8.125 Quarter ended December 31, 1997 $ 12.875 $ 6.625 Quarter ended March 31, 1998 $ 11.375 $ 6.75 Quarter ended June 30, 1998 $ 8.938 $ 3.625 HIGH LOW ---- --- Fiscal 1997 Quarter ended September 30, 1996 $ 18.125 $ 12.25 Quarter ended December 31, 1996 $ 17.375 $ 10.50 Quarter ended March 31, 1997 $ 15.75 $ 11.875 Quarter ended June 30, 1997 $ 12.00 $ 5.875
On September 4, 1998, the closing price of the Company's common stock was $3.313. The Company has not paid dividends on its common stock and the Board of Directors does not anticipate paying cash dividends in the foreseeable future. On September 4, 1998, the approximate number of record holders of the Company's common stock was 1,420. The Company believes that, in addition, there are in excess of 14,000 beneficial owners of its common stock whose shares are held in street name and, consequently, the Company is unable to determine the actual number of beneficial holders thereof. On September 23, 1997 the Company sold 500,000 shares of its convertible Series D Preferred Stock for an aggregate purchase price of $10 million to SBVC in connection with the licensing of IMAGENT to Schering. The shares were sold in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The Series D Preferred Stock is convertible on the earlier of (i) receipt of written notice from the holders of 50% or more of the Series D Preferred Stock, (ii) termination of the Schering License Agreement by Schering or, if such agreement is terminated by the Company, at Schering's election, or (iii) such time as a twenty-day average of the last reported selling price of Company common stock equals or exceeds $20 per share. 13 ITEM 6. SELECTED FINANCIAL DATA The following information has been summarized from the financial statements included elsewhere herein and should be read in conjunction with such financial statements and the related notes thereto (in thousands except per share amounts):
Years ended June 30, 1998 1997 1996 1995 1994 Statement of Operations Data: Total revenues $ 21,209 $ 44,580 $ 17,323 $ 11,816 $ 409 Net loss $ (33,003) $ (19,016) $ (23,172) $ (29,717) $ (36,946) Net loss per common Basic and diluted $ (1.04) $ (.63) $ (.91) $ (1.35) $ (1.83) June 30, 1998 1997 1996 1995 1994 Balance Sheet Data: Working capital $ 48,730 $ 62,995 $ 73,244 $ 22,346 $ 19,446 Total assets $ 93,677 $ 112,013 $ 108,343 $ 56,030 $ 53,132 Long-term debt and other $ 8,921 $ 2,871 $ 1,166 $ 843 $ 348 Stockholders' equity $ 76,090 $ 91,331 $ 101,467 $ 50,077 $ 49,825
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (References to years are to the Company's fiscal years ended June 30.) Alliance has devoted substantial resources to research and development related to its medical products. The Company has been unprofitable since inception and expects to incur operating losses for at least the next several years due to substantial spending on research and development, preclinical testing, clinical trials, regulatory activities, and commercial manufacturing start-up. The Company has collaborative research and development agreements with companies for IMAGENT and RODA. Under the arrangement for IMAGENT, Schering has agreed to reimburse the Company for some of its development expenses. Schering will also make milestone payments to the Company upon the achievement of certain product development events, followed by royalties on sales at commercialization. With respect to RODA, the Company has agreed to reimburse VIA for substantially all of its development expenses and to share revenues from the sale of products. Due to the termination of the HMRI License Agreement in December 1997, and the restructuring of the Ortho License Agreement in May 1998, Alliance expects to incur a substantial increase in development expenses related to LIQUIVENT and OXYGENT and a substantial decrease in related research revenue relative to prior years. There can be no assurance that the Company will be able to achieve profitability at all or on a sustained basis. 14 LIQUIDITY AND CAPITAL RESOURCES Through June 1998, the Company financed its activities primarily from public and private sales of equity and funding from collaborations with corporate partners. To date, the Company's revenue from the sale of products has not been significant. In August 1998, the Company sold 100,000 shares of Series E-1 Preferred Stock ("E-1 Stock") to certain investors pursuant to a preferred stock purchase agreement (the "Stock Purchase Agreement") for an aggregate amount equal to $6 million. Pursuant to the Stock Purchase Agreement, the Company has the option to sell preferred shares on substantially similar terms to the investors from time to time through early 1999 in an amount not to exceed an additional $14 million, subject to certain limitations. The 100,000 shares of E-1 Stock are convertible into common stock at $6 per share through January 3, 1999, and thereafter certain adjustments may apply based on the market price. The Company has the right to redeem the preferred shares under certain circumstances. No dividends will accrue to the holders. In connection with the sale of preferred stock, the investors obtained a right to receive a royalty on future sales of one of the Company's products under development, provided that such product is approved by the FDA by December 2003. The royalty amount will be between 0.4% and 1.6%, subject to adjustments downward, of net sales of the product for a period of three years. The Company has certain rights to repurchase the royalty right. In January 1997, the Company entered into a loan and security agreement with a bank under which the Company received $3.5 million and in December 1997, the amount available under the loan was increased to $15.2 million. In June 1998, the Company restructured the loan to provide for up to $15 million. Amounts borrowed are secured by certain fixed assets and are to be repaid over 4.5 years. If certain financial covenants are not satisfied, the outstanding balance may become due and payable. On June 30, 1998, the balance outstanding on this loan was $10 million. The Company also has a $1.5 million line of credit available with another bank. The Company has financed substantially all of its office and research facilities and related leasehold improvements under operating lease arrangements and loan and security agreements. In November 1996, the Company acquired MDV by a merger (the "MDV Merger") of a wholly owned subsidiary of the Company into MDV. MDV is engaged in the development of a thermoreversible gel, FLOGEL, intended for use as an anti-adhesion treatment for persons undergoing abdominal or pelvic surgeries. The consideration in the MDV Merger consisted of $15.5 million, of which $8 million was paid through the delivery of 703,093 shares of common stock during 1997, and $7.5 million was paid through the delivery of 706,100 shares of common stock during 1998. Additionally, the Company will pay up to $20 million if advanced clinical development or licensing milestones are achieved in connection with MDV's technology. The Company will also make certain royalty payments on the sales of products, if any, developed from such technology. The Company may buy out its royalty obligation for $10 million at any time prior to the first anniversary of the approval by U.S. regulatory authorities of any products based upon the MDV technology (the amount increasing thereafter over time). All of such payments to the former MDV shareholders may be made in cash or, at the Company's option, shares of the Company's common stock, except for the royalty obligations which will be payable only in cash. The Company has not determined whether subsequent payments (other than royalties) will be made in cash or in common stock or, if made in cash, the source of such payments. There can be no assurance that any of the contingent payments will be made because they are dependent on future developments that are inherently uncertain. The Company has accounted for the MDV Merger as a purchase, and recorded a one-time charge in fiscal 1997 of $16.5 million, including the $15.5 million payments described above and related transaction costs. From September 1994 until May 1998, under the Ortho License Agreement, Ortho was responsible for substantially all the costs of developing and marketing OXYGENT. In June 1996, the convertible Series A Preferred Stock held by J&JDC and accrued dividends thereon were converted into 815,625 shares of common stock of the Company. In June 1996, J&JDC also exercised its warrant for 300,000 shares, resulting in proceeds to the Company of $4.5 million. In December 1996, Ortho paid to Alliance a $15 million milestone payment. In May 1998, Ortho and the Company restructured the Ortho License Agreement and Alliance assumed responsibility for worldwide development of OXYGENT at its expense. Under the restructured agreement, Ortho retained certain rights to be the exclusive marketing agent for the product. In 1998, Ortho reimbursed the Company $10.2 million for research and development expenses. As a result of the restructuring, Alliance expects to incur a substantial increase in development expenses related to OXYGENT and a substantial decrease in related research revenue over prior years. 15 From February 1996 through June 1997, HMRI was responsible for most of the costs of development and marketing of LIQUIVENT. In conjunction with the HMRI License Agreement, HMRI purchased shares of convertible Series B Preferred Stock and shares of convertible Series C Preferred Stock for an aggregate of $22 million. In addition, HMRI paid Alliance an initial license fee of $5 million and agreed to pay milestone payments and royalties on product sales. HMRI also received a five-year warrant to acquire 300,000 shares of common stock at $20 per share. On June 6, 1996, the Series B Preferred Stock and accrued dividends thereon were converted into 759,375 shares of common stock of the Company. On June 30, 1997, the Series C Preferred Stock was converted into 345,327 shares of common stock of the Company. On June 30, 1997, HMRI paid the Company a $2.5 million milestone payment and $2.5 million for the purchase of clinical trial supplies. The Company also announced in June 1997 that the parties agreed in principle to modify the HMRI License Agreement to (i) adjust certain milestone payments, (ii) temporarily revise the method for reimbursing the expenses for portions of the development work, and (iii) provide for the Company to repurchase any unused clinical trial supplies if the license agreement is terminated before January 1, 1998. The Company recorded the $2.5 million in clinical trial supplies as deferred revenue and at June 30, 1998, the unused supplies were approximately $2.3 million. In December 1997, the HMRI License Agreement was terminated. Therefore, Alliance has not been reimbursed for its LIQUIVENT development expenses since July 1, 1997, and it will be responsible for all future LIQUIVENT development expenses worldwide. HMRI has no continuing rights to the development or marketing of LIQUIVENT. The parties are considering a repurchase by Alliance of clinical trial supplies from HMRI. In May 1998, HMRI asserted a claim for an amount up to $7.5 million, payable in 2002 in cash or common stock, at the Company's election. The Company does not believe that the claim is meritorious and intends to vigorously contest such claim. In September 1997, the Company entered into the Schering License Agreement, which provides Schering with worldwide exclusive marketing and manufacturing rights to Alliance's drug compounds, drug compositions, and medical devices and systems related to perfluorocarbon ultrasound imaging products, including IMAGENT. The product is being developed jointly by Alliance and Schering. Under the Schering License Agreement, Schering paid to Alliance in 1998 an initial license fee of $4 million, and agreed to pay further milestone payments and royalties on product sales. Schering is also providing funding to Alliance for some of its development expenses related to IMAGENT. In conjunction with the Schering License Agreement, SBVC purchased 500,000 shares of the Company's convertible Series D Preferred Stock for $10 million. The Company had net working capital of $48.7 million at June 30, 1998, compared to $63 million at June 30, 1997. The Company's cash, cash equivalents, and short-term investments decreased to $49.9 million at June 30, 1998 from $72.4 million at June 30, 1997. The decrease resulted primarily from cash used in operations of $28.1 million and property, plant, and equipment additions of $10.1 million, partially offset by proceeds from a loan and security agreement of $6.8 million and by net proceeds from the sale to SBVC of convertible Series D Preferred Stock in the amount of $9.6 million in conjunction with the Schering License Agreement. The Company's operations to date have consumed substantial amounts of cash, and are expected to continue to do so for the foreseeable future. The Company continually reviews its product development activities in an effort to allocate its resources to those product candidates that the Company believes have the greatest commercial potential. Factors considered by the Company in determining the products to pursue include projected markets and need, potential for regulatory approval and reimbursement under the existing healthcare system, status of its proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring the product to market. Based on these and other factors, the Company may from time to time reallocate its resources among its product development activities. Additions to products under development or changes in products being pursued can substantially and rapidly change the Company's funding requirements. The Company expects to incur substantial additional expenditures associated with product development, particularly for LIQUIVENT and OXYGENT as they move into pivotal clinical trials. The Company will seek additional collaborative research and development relationships with suitable corporate partners for its non-licensed products. There can be no assurance that such relationships, if any, will successfully reduce the Company's funding requirements. Additional equity or debt financing may be required, and there can be no assurance that such financing will be available on reasonable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back, or eliminate one or more of its product development programs, or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish. 16 Alliance anticipates that its current capital resources, including proceeds from the sale of the E-1 Stock in August 1998, expected revenue from the Schering License Agreement and investments, and future proceeds from the sale of additional preferred stock under the August 1998 Stock Purchase Agreement, will be adequate to satisfy its capital requirements for at least the next 12 months. The Company's future capital requirements will depend on many factors, including, but not limited to, continued scientific progress in its research and development programs, progress with preclinical testing and clinical trials, the time and cost involved in obtaining regulatory approvals, patent costs, competing technological and market developments, changes in existing collaborative relationships, the ability of the Company to establish additional collaborative relationships, and the cost of manufacturing scale-up. While the Company believes that it can produce materials for clinical trials and the initial market launch for OXYGENT and IMAGENT at its existing San Diego facilities and for LIQUIVENT at its Otisville, New York facility, it may need to expand its commercial manufacturing capabilities for its products in the future. Any expansion for any of its products may occur in stages, each of which would require regulatory approval, and product demand could at times exceed supply capacity. The Company has not selected a site for such expanded facilities and cannot predict the amount it will expend for the construction of such facilities. There can be no assurance as to when or whether the FDA will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of such facilities will depend on regulatory approvals, product development, and capital resources, among other factors. The Company has not obtained any regulatory approvals for its production facilities for these products, nor can there be any assurance that it will be able to do so. The Schering License Agreement requires the Company to manufacture products at its San Diego facility for a period of time after market launch at a negotiated price. Schering will be responsible for establishing production capacity beyond the maximum capacity of the San Diego facility. YEAR 2000 Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish the 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Management has initiated its Year 2000 program, which has already identified several systems that are not yet Year 2000 compliant. The Company expects to complete its initial assessment by the end of the year. The assessment will include third-party confirmations with respect to their computers, software and systems, and a listing of all equipment subject to Year 2000 concerns. The Company has already initiated the removal and exchange of some non-compliant systems and expects to continue such replacement or other remedial programs to assure that its computers, software, and other systems will continue to operate in the Year 2000. While the Company has begun evaluating potential strategies for resolving its Year 2000 problems, the dollar amount the Company will spend to remediate such issues remains uncertain. The Company believes such costs will not have a material effect on the Company's consolidated financial position or results of operations. There can be no assurance, however, that the Company's computer systems and applications of other companies on which the Company's operations rely, will be timely converted, or that any such failure to convert by another company will not have a material adverse effect on the Company systems. Moreover, a failure of (i) Company scientific, manufacturing and other equipment to operate at all or operate accurately, (ii) clinical trial site medical equipment to perform properly, (iii) necessary materials or supplies to be available to the Company when needed, or (iv) other equipment, software, or systems as a result of Year 2000 problems could have a material adverse effect on the Company's business or financial condition. Except for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and that the Company's business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for 1999, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks include the inability to enter into collaborative relationships to further develop and commercialize the Company's products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products; the uncertainties associated with the lengthy regulatory approval process; obtaining and enforcing patents important to the Company's business; possible competition from other products; and Year 2000 issues. Furthermore, even if the Company's products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the possibilities that the potential 17 products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain market acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development, and market introduction of new products will require the application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the ability to obtain necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing. RESULTS OF OPERATIONS 1998 COMPARED TO 1997 - --------------------- The Company's license and research revenue was $21.2 million for 1998, compared to $44.6 million for 1997. Research revenue in 1997 included a $15 million milestone payment from Ortho under the Ortho License Agreement. The decrease in revenue is primarily due to decreased milestone payments and the decreased development expense reimbursement from HMRI, due to the restructuring and eventual termination of the HMRI License Agreement. The Company expects research revenue to significantly decrease in 1999 compared to 1998, due to the lack of revenue from the Ortho License Agreement. Research and development expenses increased by 16% to $50.1 million for 1998, compared to $43.3 million for 1997. The increase in expenses was primarily due to a $4.1 million increase in staffing costs for employees primarily engaged in research and development activities, a $791,000 increase in rent and lease expense, an $833,000 increase in depreciation expense, a $487,000 increase in payments to outside researchers for preclinical and clinical trials and other product development work, as well as other increases related to the Company's research and development activities. General and administrative expenses were $7.9 million for 1998, compared to $7.9 million for 1997. The Company accounted for the acquisition of MDV as a purchase and recorded a one-time charge in 1997 of $16.5 million, including payments to former MDV shareholders of $15.5 million and related transaction costs. Investment income and other was $3.8 million for 1998, compared to $4.1 million for 1997. The decrease was primarily a result of lower average cash and short-term investment balances. 1997 COMPARED TO 1996 - --------------------- The Company's license and research revenue was $44.6 million for 1997, compared to $17.3 million for 1996. The increase was primarily a result of the $15 million milestone payment from Ortho under the Ortho License Agreement, and the $2.5 million milestone payment and increased research revenue from HMRI under the HMRI License Agreement. Research and development expenses increased by 28% to $43.3 million for 1997, compared to $33.7 million for 1996. The increase in expenses was primarily due to a $4.7 million increase in payments to universities and outside consultants for preclinical and clinical trials and other product development work, a $2.3 million increase in staffing costs, a $1 million increase in depreciation expense, a $414,000 increase in rent and lease expense, and a $369,000 increase in repairs and maintenance expense, as well as other increases related to the Company's research and development activities. The expenses for 1996 included a $757,000 charge arising from the acquisition of certain PFC patents, patent rights, and related documents. General and administrative expenses increased by 10% to $7.9 million for 1997, compared to $7.2 million for 1996. The increase in general and administrative expenses was primarily due to increased professional fees. Investment income and other was $4.1 million for 1997, compared to $1.4 million for 1996. The increase was primarily a result of higher average cash balances as a result of the Ortho milestone payment received in December 1996, the February 1996 HMRI transaction, and the receipt of approximately $44 million from the April 1996 public offering by the Company of 2.9 million shares of common stock. 18 Alliance expects to continue to incur substantial and increasing expenses associated with its research and development programs. Operating results may fluctuate from quarter to quarter as a result of the differences in the timing of revenues earned and expenses incurred and such fluctuations may be substantial. The Company's historical results are not necessarily indicative of future results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Table of Contents to Consolidated Financial Statements on page F-1 below for a list of the Financial Statements being filed herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the executive officers of the Company is contained in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant." Information concerning the directors of the Company is incorporated by reference to the section entitled "Election of Directors" that the Company intends to include in its definitive proxy statement for Alliance's November 1998 Annual Meeting of Shareholders (the "Proxy Statement"). Copies of the Proxy Statement will be duly filed with the commission pursuant to Rule 14a-6(c) promulgated under the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by its Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The sections labeled "Executive Compensation" and "Election of Directors" to appear in the Company's Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section labeled "Ownership of Voting Securities by Certain Beneficial Owners and Management" to appear in the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections labeled "Election of Directors" and "Executive Compensation" to appear in the Company's Proxy Statement are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of the Report. 19 1. See Table of Contents to Consolidated Financial Statements on Page F-1 for a list of Financial Statements being filed herein. 2. See Page F-2 for the Report of Ernst & Young LLP, Independent Auditors, being filed herein. 3. See Exhibits below for a list of all Exhibits being filed or incorporated by reference herein. (b) A report on Form 8-K was filed with the Commission on June 1, 1998. The Company reported that on May 14, 1998, the Company and Ortho Biotech, Inc. and The R. W. Johnson Pharmaceutical Research Institute, both subsidiaries of Johnson & Johnson, entered into an agreement to restructure their collaboration with respect to the development of the Company's OXYGENT product. (c) Exhibits. (3) (a) Restated Certificate of Incorporation of the Company, as amended through August 31, 1994. (Incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 (the "1994 10-K").) (b) Certificate of Amendment to the Certificate of Incorporation of the Company filed on March 25, 1996. (Incorporated by reference to Exhibit 3 to Amendment No. 1 of the S-3 Registration Statement of the Company filed on March 28, 1996 (the "1996 S-3")). (c) Certificate of Amendment to the Certificate of Incorporation of the Company filed on September 22, 1997. (Incorporated by reference to Exhibit 3(c) of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997.) (d) Certificate of Amendment to the Certificate of Incorporation filed on August 14, 1998. (e) By-Laws of the Company, as amended. (Incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 (the "1989 10-K").) (10) (a) Lease Agreement, as amended, between the Company and Hartford Accident and Indemnity Company relating to certain research and manufacturing facilities in San Diego, California . (Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993.) (b) Loan Modification Agreement between the Company and Theodore Roth, dated May 24, 1994 - Management contract or compensatory plan or arrangement required to be filed. (Incorporated by reference to Exhibit 10(d) to the 1994 10-K.) (c) Formula Award of Stock Options for Non-employee Members of the Board of Directors as approved by shareholders of the Company - Management contract or compensatory plan or arrangement required to be filed. (Incorporated by reference to Exhibit 10(e) to the 1994 10-K.) (d) Stock and Warrant Purchase Agreement dated August 16, 1994 between the Company and Johnson & Johnson Development Corporation. (Incorporated by reference to Exhibit 10(g) to the 1994 10-K.) (e) Stock and Warrant Purchase Agreement dated February 28, 1996 between the Company and Hoechst Marion Roussel, Inc. (Incorporated by reference to Exhibit 10 (b) to the 1996 S-3). (f) Agreement and Plan of Merger by and among the Company, MDV Acquisition Corp. and MDV Technologies, Inc. dated October 8, 1996. (Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K filed on November 20, 1996) (g) License Agreement dated September 23, 1997, between the Company and Schering AG, Germany. (Incorporated by reference to Exhibit 2(a) to the Current Report on Form 8-K/A filed on February 27, 1998 (the "1997 8_K/A")(1) 20 (h) Preferred Stock Purchase Agreement dated September 23, 1997, between the Company and Schering Berlin Venture Corp. (Incorporated by reference to Exhibit 2(b) to the 1997 8-K/A.) (i) Agreement dated May 14, 1998, between the Company and Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute with respect to the restructuring of the relationship between the Company and such companies. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 14, 1998.) (j) Convertible Preferred Stock Purchase Agreement dated as of August 13, 1998 between the Company and certain investors ("E-1 Investors") pertaining to the sale of Series E-1 Preferred Stock. (k) Royalty Rights Agreement dated as of August 13, 1998 between the Company and the E-1 Investors. (l) Registration Rights Agreement dated as of August 13, 1998 between the Company and the E-1 Investors. (m) Credit Agreement dated as of June 17, 1998 between the Company and Imperial Bank. (n) Promissory Note in the amount $15 million dated June 17, 1998 executed by the Company in favor of Imperial Bank. (o) Security Agreement dated June 17, 1998 executed by the Company in favor of Imperial Bank. (p) Lease Agreement dated November 7, 1998 between the Company and WHAMC Real Estate Limited Partnership, a Delaware limited partnership, relating to certain manufacturing and development facilities in San Diego, California. (23.1) Consent of Ernst & Young LLP, Independent Auditors (1) Certain confidential portions of this exhibit have been deleted pursuant to an order granted by the Securities and Exchange Commission under the Securities Exchange Act of 1934. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. ALLIANCE PHARMACEUTICAL CORP. (Registrant) Date: September 7, 1998 By: /s/ Theodore D. Roth ------------------------------------- Theodore D. Roth President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Duane J. Roth Chairman and September 7, 1998 - ----------------------------------- Chief Executive Officer Duane J. Roth /s/ Theodore D. Roth Director, President, and September 7, 1998 - ----------------------------------- Chief Operating Officer Theodore D. Roth /s/ Tim T. Hart Chief Financial Officer, Treasurer, September 7, 1998 - ----------------------------------- and Chief Accounting Officer Tim T. Hart /s/ Pedro Cuatrecasas, M.D. Director September 7, 1998 - ----------------------------------- Pedro Cuatrecasas, M.D. /s/ Carroll O. Johnson Director September 7, 1998 - ----------------------------------- Carroll O. Johnson /s/ Stephen M. McGrath Director September 7, 1998 - ----------------------------------- Stephen M. McGrath /s/ Helen M. Ranney, M.D. Director September 7, 1998 - ----------------------------------- Helen M. Ranney, M.D. /s/ Donald E. O'Neill Director September 7, 1998 - ----------------------------------- Donald E. O'Neill /s/ Jean Riess, PH.D. Director September 7, 1998 - ----------------------------------- Jean Riess, Ph.D. /s/ Thomas F. Zuck, M.D. Director September 7, 1998 - ----------------------------------- Thomas F. Zuck, M.D.
22 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. -------- Report of Ernst & Young LLP, Independent Auditors F-2 Consolidated Balance Sheets at June 30, 1998 and 1997 F-3 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 - F-14
No consolidated financial statement schedules are filed herewith because they are not required or are not applicable, or because the required information is included in the consolidated financial statements or notes thereto. F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Alliance Pharmaceutical Corp. We have audited the accompanying consolidated balance sheets of Alliance Pharmaceutical Corp. and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alliance Pharmaceutical Corp. and subsidiaries at June 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California July 31, 1998, except for Note 8, as to which the date is August 14, 1998 F-2 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
JUNE 30, 1998 1997 -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,809,000 $ 15,368,000 Short-term investments 38,046,000 57,041,000 Research revenue receivable 6,847,000 7,250,000 Other current assets 694,000 1,147,000 -------------- -------------- Total current assets 57,396,000 80,806,000 PROPERTY, PLANT AND EQUIPMENT - NET 23,087,000 16,574,000 PURCHASED TECHNOLOGY - NET 12,880,000 14,400,000 OTHER ASSETS - NET 314,000 233,000 -------------- -------------- $ 93,677,000 $ 112,013,000 -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,191,000 $ 2,807,000 Accrued expenses 3,121,000 3,439,000 Deferred revenue 2,286,000 2,500,000 Payable for acquired in-process technology - 7,557,000 Current portion of long-term debt 1,068,000 1,508,000 -------------- -------------- Total current liabilities 8,666,000 17,811,000 LONG-TERM DEBT 8,882,000 2,742,000 OTHER 39,000 129,000 COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock - $.01 par value; 5,000,000 shares authorized; 500,000 and 0 shares of Series D issued and outstanding at June 30, 1998 and 1997, respectively; liquidation preference of $10,000,000 and $0 at June 30, 1998 and 1997, respectively 5,000 - Common stock - $.01 par value; 50,000,000 shares authorized; 31,994,338 and 31,164,935 shares issued and outstanding at June 30, 1998 and 1997, respectively 320,000 311,000 Additional paid-in capital 340,016,000 322,268,000 Accumulated deficit (264,251,000) (231,248,000) -------------- -------------- Total stockholders' equity 76,090,000 91,331,000 -------------- -------------- $ 93,677,000 $ 112,013,000 -------------- -------------- -------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Years ended June 30, 1998 1997 1996 -------------- -------------- -------------- REVENUES: License and research revenue $ 21,209,000 $ 44,580,000 $ 17,323,000 OPERATING EXPENSES: Research and development 50,084,000 43,278,000 33,730,000 General and administrative 7,886,000 7,932,000 7,214,000 Acquired in-process technology - 16,450,000 - -------------- -------------- -------------- 57,970,000 67,660,000 40,944,000 -------------- -------------- -------------- LOSS FROM OPERATIONS (36,761,000) (23,080,000) (23,621,000) INVESTMENT INCOME AND OTHER - NET 3,758,000 4,064,000 1,355,000 -------------- -------------- -------------- NET LOSS (33,003,000) (19,016,000) (22,266,000) DIVIDENDS ON PREFERRED STOCK - - (906,000) -------------- -------------- -------------- NET LOSS APPLICABLE TO COMMON SHARES $ (33,003,000) $ (19,016,000) $ (23,172,000) -------------- -------------- -------------- -------------- -------------- -------------- NET LOSS PER COMMON SHARE: Basic and diluted $ (1.04) $ (0.63) $ (0.91) -------------- -------------- -------------- -------------- -------------- -------------- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic and diluted 31,749,000 30,302,000 25,504,000 -------------- -------------- -------------- -------------- -------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- ---------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ---------- ---------- ---------- ---------- ------------ ------------- BALANCES AT JUNE 30, 1995 1,500,000 $ 15,000 24,759,000 $ 248,000 $238,874,000 $(189,060,000) Sale of convertible Series B and Series C Preferred Stock 950,000 9,500 21,530,000 Sale of common stock 2,865,000 29,000 43,925,000 Exercise of stock options and warrants 745,000 7,000 6,548,000 Conversion of convertible Series A Preferred Stock to common shares (1,500,000) (15,000) 750,000 7,500 8,000 Conversion of convertible Series B Preferred Stock to common shares (750,000) (7,500) 750,000 7,500 Conversion of convertible preferred stock dividend to common shares 75,000 1,000 1,499,000 Payment related to acquisition of technology rights 50,000 757,000 Issuance of stock in satisfaction of employer matching contribution to 401(k) savings plan 8,000 114,000 Net unrealized gain on available-for-sale securities 142,000 Dividends on preferred stock (906,000) Net loss (22,266,000) ---------- ---------- ---------- ---------- ------------ ------------- BALANCES AT JUNE 30, 1996 200,000 2,000 30,002,000 300,000 313,397,000 (212,232,000) Exercise of stock options and warrants 105,000 1,000 654,000 Conversion of convertible Series C Preferred Stock to common shares (200,000) (2,000) 345,000 3,000 (1,000) Payment related to acquired in-process technology 703,000 7,000 7,840,000 Issuance of stock in satisfaction of employer matching contribution to 401(k) savings plan 10,000 133,000 Net unrealized gain on available-for-sale securities 245,000 Net loss (19,016,000) ---------- ---------- ---------- ---------- ------------ ------------- BALANCES AT JUNE 30, 1997 - - 31,165,000 311,000 322,268,000 (231,248,000) Exercise of stock options and warrants 104,000 1,000 741,000 Sale of convertible Series D Preferred Stock 500,000 5,000 9,595,000 Payment related to acquired in-process technology 706,000 8,000 7,492,000 Issuance of stock in satisfaction of employer matching contribution to 401(k) savings plan 19,000 141,000 Net unrealized loss on available-for-sale securities (221,000) Net loss (33,003,000) ---------- ---------- ---------- ---------- ------------ ------------- BALANCES AT JUNE 30, 1998 500,000 $ 5,000 31,994,000 $ 320,000 $340,016,000 $(264,251,000) ---------- ---------- ---------- ---------- ------------ ------------- ---------- ---------- ---------- ---------- ------------ -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Years ended June 30, 1998 1997 1996 --------------- --------------- --------------- OPERATING ACTIVITIES: Net loss $ (33,003,000) $ (19,016,000) $ (22,266,000) Adjustments to reconcile net loss to net cash provided by (used in) operations: Depreciation and amortization 5,064,000 3,997,000 3,086,000 Charge for acquired in-process technology - 16,450,000 757,000 Non-cash compensation - net 320,000 133,000 277,000 Changes in operating assets and liabilities: Research revenue receivable 403,000 (1,500,000) (3,690,000) Other assets 372,000 888,000 219,000 Accounts payable and accrued expenses and other (1,024,000) 1,162,000 (263,000) Deferred revenue (214,000) 2,500,000 - --------------- --------------- --------------- Net cash provided by (used in) operating activities (28,082,000) 4,614,000 (21,880,000) --------------- --------------- --------------- INVESTING ACTIVITIES: Short-term investments 18,775,000 5,183,000 (50,815,000) Property, plant and equipment (10,057,000) (6,823,000) (4,010,000) Payment for acquired in-process technology (57,000) (1,046,000) - --------------- --------------- --------------- Net cash provided by (used in) investing activities 8,661,000 (2,686,000) (54,825,000) --------------- --------------- --------------- FINANCING ACTIVITIES: Issuance of common stock and warrants 562,000 597,000 50,461,000 Issuance of convertible preferred stock - net 9,600,000 - 21,540,000 Proceeds from long-term debt 6,800,000 3,493,000 2,208,000 Principal payments on long-term debt (1,100,000) (908,000) (543,000) --------------- --------------- --------------- Net cash provided by financing activities 15,862,000 3,182,000 73,666,000 --------------- --------------- --------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,559,000) 5,110,000 (3,039,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,368,000 10,258,000 13,297,000 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,809,000 $ 15,368,000 $ 10,258,000 --------------- --------------- --------------- --------------- --------------- --------------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Payable for acquired in-process technology $ 7,557,000 Issuance of common stock in connection with acquired in-process technology $ 7,500,000 $ 7,847,000 Issuance of common stock and warrants in connection with acquisition of patent rights and related documents $ 757,000 Preferred stock dividends $ 906,000
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the "Company" or "Alliance") are engaged in identifying, designing, and developing novel medical products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiary Astral, Inc., its wholly owned subsidiary MDV Technologies, Inc. ("MDV") from the acquisition date of November 1996, and its majority-owned subsidiaries, Talco Pharmaceutical, Inc. and Applications et Transferts de Technologies Avancees ("ATTA"). ATTA was dissolved in 1997. All significant intercompany accounts and transactions have been eliminated. Certain amounts in 1997 and 1996 have been reclassified to conform to the current year's presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Short-term investments consist of highly liquid debt instruments. Management has classified the Company's short-term investments as available-for-sale securities in the accompanying financial statements. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The Company considers instruments purchased with an original maturity of three months or less to be cash equivalents. CONCENTRATION OF CREDIT RISK Cash, cash equivalents, and short-term investments are financial instruments which potentially subject the Company to concentration of credit risk. The Company invests its excess cash primarily in U.S. government securities and debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and modified to take advantage of trends in yields and interest rates. The Company has not experienced any material losses on its short-term investments. PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS Buildings, furniture, and equipment are stated at cost and depreciation is computed using the straight-line method over the estimated useful lives of 3 to 25 years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. Technology and patent rights are amortized using the straight-line method over 5 to 20 years. PURCHASED TECHNOLOGY The purchased technology was primarily acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in 1989. The technology acquired is the Company's core perfluorochemical ("PFC") technology and was valued based on an analysis of the present value of future earnings anticipated from this technology at that time. The Company identified alternative future uses for the PFC technology, including the OXYGENT-TM-(temporary blood substitute) and LIQUIVENT-Registered Trademark- (intrapulmonary oxygen carrier) products. Purchased technology also includes $2 million for technology capitalized as a result of the acquisition of BioPulmonics, Inc. ("BioPulmonics") in December 1991. Since the acquisition, an alternative future use of the acquired technology has been pursued by the Company. An intrapulmonary drug delivery system using the PFC-based liquid as a carrier (or dispersing agent) is being developed by Alliance from the liquid ventilation technology. F-7 The PFC technology is the basis for the Company's main drug development programs and is being amortized over a 20-year life. The PFC technology has a book value of $12.4 million and $13.5 million net of accumulated amortization of $10.8 million and $9.7 million at June 30, 1998 and 1997, respectively. The technology acquired from BioPulmonics has a book value of approximately $480,000 and $850,000 and is being amortized over five to seven years and is net of accumulated amortization of $1.5 million and $1.2 million at June 30, 1998 and 1997, respectively. The carrying value of purchased technology is reviewed periodically based on the projected cash flows to be received from license fees, milestone payments, royalties and other product revenues. If such cash flows are less than the carrying value of the purchased technology, the difference will be charged to expense. ACQUIRED IN-PROCESS TECHNOLOGY In November 1996, the Company acquired MDV by a merger (the "MDV Merger") of a wholly owned subsidiary of the Company into MDV. MDV is engaged in the development of a thermoreversible gel, FLOGEL-Registered Trademark-, intended for use as an anti-adhesion treatment for persons undergoing abdominal or pelvic surgeries. The consideration payable in the MDV Merger consisted of $15.5 million, payable in common stock or cash, of which $8 million was paid through the delivery of 703,093 shares of common stock during fiscal 1997, and $7.5 million was paid through the delivery of 706,100 shares of common stock during fiscal 1998. Additionally, the Company will pay up to $20 million if advanced clinical development or licensing milestones are achieved in connection with MDV's technology. The Company will also make certain royalty payments on the sales of products, if any, developed from such technology. The Company may buy out its royalty obligation for $10 million at any time prior to the first anniversary of the approval by U.S. regulatory authorities of any products based upon the MDV technology (the amount increasing thereafter over time). All of such payments to the former MDV shareholders may be made in cash or, at the Company's option, shares of the Company's common stock, except for the royalty obligations which will be payable only in cash. The Company has not determined whether subsequent payments (other than royalties) will be made in cash or in common stock or, if made in cash, the source of such payments. There can be no assurance that any of the contingent payments will be made because they are dependent on future developments which are inherently uncertain. The Company has accounted for the MDV Merger as a purchase, and recorded a one-time charge in fiscal 1997 of $16.5 million, including the $15.5 million payments described above and related transaction costs. LONG-TERM DEBT The Company entered into a loan and security agreement in August 1995 under which the Company received $2.2 million at an interest rate of 10.84%. The loan was paid in full during fiscal 1998. In January 1997, the Company entered into a loan and security agreement with a bank under which the Company received $3.5 million and in December 1997, the amount available under the loan was increased to $15.2 million. In June 1998, the Company restructured the loan to provide for up to $15 million at the bank's prime rate plus .5% (9% at June 30, 1998). Amounts borrowed are secured by certain fixed assets and are to be repaid over 4.5 years. If certain financial covenants are not satisfied, the outstanding balance may become due and payable. On June 30, 1998, the balance outstanding on this loan was approximately $10 million. The Company's principal payments for the long-term debt for the years ending June 30, 1999, 2000, 2001, 2002 and 2003 are $1.1 million, $1.4 million, $1.4 million, $1.4 million and $4.6 million, respectively. REVENUE RECOGNITION Revenue under collaborative research agreements is recognized as services are provided and milestone payments are recognized upon the completion of the milestone event or requirement under such agreements. Revenue from product sales is recognized as products are shipped. Non-refundable contract fees that reimburse the Company for previously incurred research and development are recorded as revenue upon contract "execution." F-8 RESEARCH AND DEVELOPMENT EXPENSES Research and development expenditures are charged to expense as incurred. ACCOUNTING FOR STOCK-BASED COMPENSATION As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has elected to retain its current intrinsic value-based method and will disclose the pro forma effect of using the fair value-based method to account for its stock-based compensation in its financial statements. NET INCOME (LOSS) PER SHARE The Company computes net loss per common share in accordance with Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 requires the presentation of basic and diluted earnings per share amounts. Basic earnings per share is calculated based upon the weighted average number of common shares outstanding during the period while diluted earnings per share also gives effect to all potential dilutive common shares outstanding during the period such as options, warrants, convertible securities, and contingently issuable shares. All potential dilutive common shares have been excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both of these standards are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. The Company believes that comprehensive income or loss will not be materially different than net income or loss. SFAS No. 131 amends the requirements for public enterprises to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in SFAS No. 131, are components of an enterprise for which separate financial information is available regularly by the Company in deciding how to allocate resources in assessing performance. The financial information is required to be reported on the basis that is used internally for evaluating the segment performance. The Company is in the process of evaluating the effect and believes that adoption of these standards will not have a material impact on the Company's financial statements. 2. FINANCIAL STATEMENT DETAILS PROPERTY, PLANT AND EQUIPMENT - NET Property, plant and equipment consist of the following:
June 30, 1998 1997 ------------ ------------ Land $ 225,000 $ 225,000 Buildings 300,000 300,000 Building improvements 2,193,000 1,657,000 Furniture, fixtures, and equipment 18,825,000 15,446,000 Leasehold improvements 15,542,000 9,402,000 ------------ ------------ 37,085,000 27,030,000 Less accumulated depreciation and amortization (13,998,000) (10,456,000) ------------ ------------ $ 23,087,000 $ 16,574,000 ------------ ------------ ------------ ------------
F-9 ACCRUED EXPENSES Accrued expenses consist of the following:
June 30, 1998 1997 ------------ ------------ Payroll and related expenses $ 2,786,000 $ 2,569,000 Rent and related operating expenses 205,000 206,000 Other 130,000 664,000 ------------ ------------ $ 3,121,000 $ 3,439,000 ------------ ------------ ------------ ------------
3. INVESTMENTS The Company classifies its investment securities as available-for-sale and records holding gains or losses in stockholders' equity. The following is a summary of available-for-sale securities:
June 30, 1998 June 30, 1997 -------------------------------------------- -------------------------------------------- Gross Unrealized Estimated Gross Unrealized Estimated Cost Gains (Losses) Fair Value Cost Gains (Losses) Fair Value -------------------------------------------- -------------------------------------------- U.S. Government Securities $ 12,785,000 $ 10,000 $ 12,795,000 $ 32,700,000 $ 242,000 $ 32,942,000 Corporate Securities 25,240,000 11,000 25,251,000 24,099,000 -- 24,099,000 -------------------------------------------- -------------------------------------------- $ 38,025,000 $ 21,000 $ 38,046,000 $ 56,799,000 $ 242,000 $ 57,041,000 -------------------------------------------- -------------------------------------------- -------------------------------------------- --------------------------------------------
The gross realized gains on sales of available-for-sale securities totaled $357,000 and $65,000, in 1998 and 1997, respectively. The gross unrealized gains of $21,000 and $242,000, in 1998 and 1997, respectively, are recorded as components of additional paid-in capital. The unrealized gains had no cash effect and therefore are not reflected in the consolidated statements of cash flows. The amortized cost and estimated fair value of available-for-sale debt securities at June 30, 1998 and 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations.
June 30, 1998 June 30, 1997 -------------------------------- ------------------------------ Estimated Estimated Cost Fair Value Cost Fair Value -------------- -------------- -------------- -------------- Due in one year or less $ 23,885,000 $ 23,885,000 $ 34,517,000 $ 34,759,000 Due after one year through three years 12,221,000 12,227,000 22,282,000 22,282,000 Due after three years 1,919,000 1,934,000 - - -------------- -------------- -------------- -------------- $ 38,025,000 $ 38,046,000 $ 56,799,000 $ 57,041,000 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
4. STOCKHOLDERS' EQUITY STOCK OPTION PLANS The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a 1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991 Stock Option Plan which provides for both incentive and non-qualified stock options (the "1991 Plan"). These plans provide for the granting of options to purchase shares of the Company's common stock (up to an aggregate of 500,000, 2,500,000, and 6,200,000 shares under the 1983 Plan, 1983 Program, and 1991 Plan, respectively) to directors, officers, employees, and consultants. The optionees, date of grant, option price (which cannot be less than 100% and 80% of the fair market value of the common stock on the date of grant for incentive stock options and non-qualified stock options, respectively), vesting schedule, and term of options, which cannot exceed ten years (five years under the 1983 Plan), are determined by the Compensation Committee of the Board of Directors. The 1983 Plan has expired and no additional options may be granted under such plan. F-10 The following table summarizes stock option activity through June 30, 1998:
Weighted Shares Average Price ----------------------------------- Balance at June 30, 1995 3,043,988 $ 9.02 Granted 288,600 $ 13.62 Exercised (469,078) $ 7.73 Terminated/Expired (122,937) $ 13.47 -------------- Balance at June 30, 1996 2,740,573 $ 9.53 Granted 1,403,100 $ 13.07 Exercised (108,830) $ 6.67 Terminated/Expired (236,239) $ 13.65 -------------- Balance at June 30, 1997 3,798,604 $ 10.66 Granted 1,814,750 $ 8.89 Exercised (135,660) $ 5.44 Terminated/Expired (391,771) $ 11.47 -------------- Balance at June 30, 1998 5,085,923 $ 10.11 -------------- -------------- Available for future grant under the 1983 Program 37,185 -------------- -------------- Available for future grant under the 1991 Plan 1,375,520 -------------- --------------
The following table summarizes information concerning outstanding and exercisable stock options at June 30, 1998:
Weighted Weighted Average Weighted Range of Exercise Number Average Remaining Number Average Prices Outstanding Exercise Contractual Exercisable Exercise Price Life Price --------------------------------------------------------------------------------------- $0.01 129,918 $0.01 0.4 years 129,918 $0.01 $ 3.25-$6.94 976,270 $5.28 6.4 years 680,920 $5.34 $ 7.00-$9.25 818,340 $8.40 5.5 years 535,630 $8.47 $ 9.38-$9.88 1,389,725 $9.41 9.1 years 151,975 $9.60 $10.00-$13.63 1,180,620 $12.70 7.6 years 437,575 $12.37 $14.00-$28.00 591,050 $19.13 5.2 years 455,375 $20.14 ------------- ------------- 5,085,923 $10.11 7.0 years 2,391,393 $10.13 ------------- ------------- ------------- -------------
F-11 The Company has adopted the disclosure-only provisions of SFAS No. 123. In accordance with its provisions, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans, and accordingly, no compensation cost has been recognized for stock options in 1998, 1997 or 1996. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date amortized to expense over their vesting period as prescribed by SFAS No. 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below for the years ended June 30:
1998 1997 1996 ------------- ------------- ------------- Net loss As reported $(33,003,000) $(19,016,000) $(23,172,000) Pro forma (34,708,000) (21,453,000) (23,958,000) Net loss per share As reported $ (1.04) $ (.63) $ (.91) Pro forma (1.09) (.71) (.94)
The impact of outstanding non-vested stock options granted prior to 1996 has been excluded from the pro forma calculations; accordingly, the 1998, 1997 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments when the calculation will reflect all applicable stock options. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions for 1998, 1997 and 1996, respectively: risk-free interest rate range of 5.63% to 6.63%, 5.25% to 6.5%, and 5.25% to 6.5%; dividend yield of 0% (for all years); volatility factor of 66%, 63%, and 63%; and a weighted-average expected term of 6 years, 4 years, and 4 years. The estimated weighted average fair value at grant date for the options granted during 1998, 1997 and 1996 was $5.85, $6.90 and $7.02 per option, respectively. WARRANTS At June 30, 1998, the Company had warrants outstanding to purchase 573,835 shares of common stock at prices ranging from $6.67 to $20 per share. The warrants expire on various dates from August 1998 through February 2001. PREFERRED STOCK In fiscal 1996, in conjunction with a license agreement, Hoechst Marion Roussel, Inc. ("HMRI") purchased 750,000 shares of the Company's convertible Series B Preferred Stock and 200,000 shares of its convertible Series C Preferred Stock for an aggregate of $22 million. In June 1996, all outstanding shares of convertible Series A Preferred Stock (issued to Johnson & Johnson Development Corp. ("J&JDC") in 1995) and Series B Preferred Stock and accrued dividends thereon were converted into 815,625 and 759,375 shares of Alliance common stock, respectively. In June 1997, all outstanding shares of Series C Preferred Stock were converted into 345,327 shares of Alliance common stock (see Note 5). In September 1997, in conjunction with a license agreement, Schering Berlin Venture Corp. ("SBVC"), an affiliate of Schering AG, Germany ("Schering"), purchased 500,000 shares of the Company's convertible Series D Preferred Stock for $10 million. The Series D Preferred Stock is convertible into Alliance common stock upon certain events at a rate based upon a 20 day average of the closing market prices of the common stock at the time of conversion. The Series D Preferred Stock is entitled to one vote per share and has no annual dividend. The Series A Preferred Stock carried a cumulative annual dividend of $0.50 per share. The Series B Preferred Stock carried a cumulative annual dividend of $1.00 per share. The dividends were payable in cash or common stock. In June 1996, these dividends were paid by issuing 75,000 shares of Alliance common stock. 5. LICENSE AGREEMENTS In August 1994, the Company executed a license agreement (the "Ortho License Agreement") with Ortho Biotech Inc. and The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation (collectively referred to as "Ortho"), which provided Ortho with worldwide marketing and, at its election, manufacturing rights to the Company's injectable perfluorochemical emulsions capable of transporting oxygen for therapeutic use, including OXYGENT. Ortho agreed to pay to Alliance a royalty based upon sales of products after commercialization. In addition, Ortho paid to Alliance an initial license fee of $4 million and agreed to make other payments upon the achievement of certain milestones. Under the agreement, Ortho was responsible for substantially all of the costs of developing and marketing the products. In December 1996, Ortho paid the Company a $15 million milestone payment. In conjunction with the Ortho License Agreement, J&JDC purchased 1.5 million shares of Alliance Series A Preferred Stock for $15 million and obtained a three-year warrant to purchase 300,000 shares of Alliance common stock at $15 per share. In June 1996, the preferred stock and warrant were converted into common stock (see Note 4). In May 1998, Ortho and the Company restructured the agreement. F-12 Under the restructured agreement, Alliance assumed responsibility for worldwide development of OXYGENT at its own cost, and Ortho retained certain rights to be the exclusive marketing agent for the product. In February 1996, the Company entered into a license agreement (the "HMRI License Agreement") with HMRI, which provided HMRI with worldwide marketing and manufacturing rights to the intratracheal administration of liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid ventilation. Under the agreement, HMRI was responsible for most of the costs of development and marketing of LIQUIVENT. On June 30, 1997, HMRI paid the Company a $2.5 million milestone payment and $2.5 million for the purchase of clinical trial supplies. The Company also announced in June 1997 that the parties agreed in principle to modify the HMRI License Agreement to (i) adjust certain milestone payments, (ii) temporarily revise the method for reimbursing the expenses for portions of the development work and (iii) provide for the Company to repurchase any unused clinical trial supplies if the license agreement is terminated before January 1, 1998. The Company recorded the $2.5 million in clinical trial supplies as deferred revenue and at June 30, 1998 the unused supplies were approximately $2.3 million. In December 1997, the HMRI License Agreement was terminated. Therefore, Alliance has not been reimbursed for its LIQUIVENT development expenses since July 1, 1997, and it will be responsible for all future LIQUIVENT development expenses worldwide. HMRI has no continuing rights to the development or marketing of LIQUIVENT. The parties are considering a repurchase by Alliance of clinical trial supplies from HMRI. In May 1998, HMRI asserted a claim for an amount up to $7.5 million, payable in 2002 in cash or common stock, at the Company's election. The Company does not believe that the claim is meritorious and intends to vigorously contest such claim. In September 1997, the Company entered into a license agreement (the "Schering License Agreement") with Schering, which provides Schering with worldwide exclusive marketing and manufacturing rights to Alliance's drug compounds, drug compositions, and medical devices and systems related to perfluorocarbon ultrasound imaging products, including IMAGENTS. The product will be developed jointly by Alliance and Schering. Under the Schering License Agreement, Schering paid to Alliance an up-front, non-refundable initial license fee of $4 million and agreed to pay further milestone payments and royalties on product sales. Schering also agreed to provide funding to Alliance for some of its development expenses. In conjunction with the Schering License Agreement, SBVC purchased 500,000 shares of the Company's convertible Series D Preferred stock for $10 million. 6. INCOME TAXES Significant components of the Company's deferred tax assets as of June 30, 1998 are shown below. A valuation allowance of $96,202,000, of which $9,111,000 is related to 1998, has been recognized to offset the deferred tax assets as realization of such assets is uncertain. Deferred tax assets consist of the following:
June 30, 1998 1997 ------------- ------------- Net operating loss carryforwards $ 74,481,000 $ 69,360,000 Research and development credits 8,571,000 8,220,000 Capitalized research expense 10,744,000 7,286,000 Other - net 2,406,000 2,225,000 ------------- ------------- Total deferred tax assets 96,202,000 87,091,000 Valuation allowance for deferred tax assets (96,202,000) (87,091,000) ------------- ------------- Net deferred tax assets $ -- $ -- ------------- ------------- ------------- -------------
Approximately $3,580,000 of the valuation allowance for deferred tax assets relates to stock option deductions which, when recognized, will be allocated to contributed capital. At June 30, 1998, the Company had federal and various state net operating loss carryforwards of approximately $206,015,000 and $41,320,000, respectively. The difference between the federal and state tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards. The federal tax loss carryforwards will begin expiring in fiscal 1999, unless previously utilized. The California tax loss carryforwards will continue to expire in fiscal 1999 unless previously utilized. The Company also has federal and state research and development tax credit carryforwards of $8,879,000 and $2,868,000, respectively, which will begin expiring in fiscal 1999 unless previously utilized. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited because of cumulative changes in ownership of more than 50% which have F-13 occurred; however, the Company does not believe such limitation will have a material impact upon the utilization of these carryforwards. 7. COMMITMENTS The Company leases certain office and research facilities in San Diego and certain equipment under operating leases. Provisions of the facilities lease provide for abatement of rent during certain periods and escalating rent payments during the lease terms based on changes in the Consumer Price Index. Rent expense is recognized on a straight-line basis over the term of the leases. Minimum annual commitments related to operating lease payments at June 30, 1998 are as follows:
Years ending June 30, --------------------- 1999 $ 3,389,000 2000 2,406,000 2001 2,262,000 2002 2,331,000 2003 1,617,000 Thereafter 4,306,000 ------------ Total $ 16,311,000 ------------ ------------
Rent expense for fiscal 1998, 1997, and 1996 was $3.4 million, $2.6 million, and $2.1 million, respectively. 8. SUBSEQUENT EVENT In August 1998, the Company sold 100,000 shares of its convertible Series E-1 Preferred Stock to certain investors for $6 million and retained the right to sell similar preferred stock periodically through early 1999 in an amount not to exceed an additional $14 million. The preferred shares are convertible at the option of the holder into common stock at $6 per share through January 3, 1999, and thereafter certain adjustments may apply based on the market price. These adjustments to the market price could potentially result in a conversion price below the then trading market price of the stock. In recognition of this beneficial conversion feature, the Company will recognize an imputed dividend of approximately $450,000 on these preferred shares. At the option of the Company, beginning in 2003, the Company can either force the conversion of any remaining unconverted shares into common stock, or can redeem the stock at the then prevailing conversion price. The Company may be liable for penalties if certain conditions are not met. The Series E-1 Preferred Stock has the same voting rights as common stock and has a liquidation preference of $60 per share. No dividends will accrue to the holders of the preferred stock, however, the investors obtained a right to receive a royalty on future sales of one of the Company's products under development, provided that the product is approved by the U.S. Food and Drug Administration by December 2003. The royalty amount will be between 0.4% and 1.6%, subject to adjustments downward, of net sales of the product for a period of three years. The Company has certain rights to repurchase the royalty right. F-14 EXHIBIT INDEX Certain exhibits to this Report on Form 10-K have been incorporated by reference. For a list of exhibits, see Item 14 hereof. The following exhibits are being filed herewith:
Number Document - ------ -------- 3(c) Certificate of Amendment to the Certificate of Incorporation of the Company filed August 14, 1998. 10(j) Convertible Preferred Stock Purchase Agreement dated as of August 13, 1998 between the Company and certain investors ("E-1 Investors"). 10(k) Royalty Rights Agreement dated as of August 13, 1998 between the Company and the E-1 Investors. 10(l) Registration Rights Agreement dated as of August 13, 1998 between the Company and the E-1 Investors. 10(m) Credit Agreement dated as of June 17, 1998 between the Company and Imperial Bank. 10(n) Promissory Note in the amount $15 million dated June 17, 1998 executed by the Company in favor of Imperial Bank. 10(o) Security Agreement dated June 17, 1998 executed by the Company in favor of Imperial Bank. 10(p) Lease Agreement dated November 7, 1997 between the Company and WHAMC Real Estate Limited Partnership, a Delaware limited partnership, relating to certain manufacturing and development facilities in San Diego, California. (23.1) Consent of Ernst & Young LLP, Independent Auditors
EX-3.C 2 EXHIBIT 3(C) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF ALLIANCE PHARMACEUTICAL CORP. Under Section 805 of the Business Corporation Law We, the undersigned, Theodore D. Roth and Lloyd A. Rowland, being respectively the President and the Secretary of Alliance Pharmaceutical Corp., hereby certify: 1. The name of the corporation is Alliance Pharmaceutical Corp. (hereinafter called the "COMPANY"). The name under which the Company was formed is Otisville Biologics, Inc. 2. The Certificate of Incorporation was filed in the office of the Secretary of State on the 23rd day of February, 1983. 3. The Certificate of Incorporation of the Company was first restated and the Restated Certificate was filed on November 10, 1993. 4. The Certificate of Incorporation of the Company, as amended heretofore, is further amended by the addition of the following provisions that designate the relative rights, preferences, and limitations of 100,000 shares of the authorized 5,000,000 shares of preferred stock, $0.01 par value, which provisions establish an additional series of preferred stock of the Company designated as "SERIES E-1 PREFERRED STOCK." 5. A new Section (f) is added to Article 4 thereof, which Section (f) reads in its entirety as follows: "(f) Convertible Preferred Stock, Series E-1. Section 1. DESIGNATION, AMOUNT, PAR VALUE, STATED VALUE AND RANK. The series of preferred stock shall be designated as Convertible Preferred Stock, Series E-1 (the "SERIES E-1 PREFERRED STOCK"), and the number of shares so designated shall be 100,000 (which shall not be subject to increase without the consent of the holders of the Series E-1 Preferred Stock ("HOLDERS")). Each share of Series E-1 Preferred Stock shall have a par value of $0.01 per share and a stated value of $60.00 per share (the "STATED VALUE"). The Series E-1 Preferred Stock shall rank senior to the Junior Securities (as defined below) and pari passu with all other series of preferred stock of the Company issued and outstanding as to distributions and upon liquidation, dissolution or winding up. 1 Section 2. JUNIOR SECURITIES. So long as any Series E-1 Preferred Stock shall remain outstanding, except pursuant to existing agreements of the Company, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire otherwise than upon conversion or exchange directly or indirectly any Junior Securities (as defined in Section 7), nor shall the Company directly or indirectly pay or declare any dividend or make any distribution (other than a dividend or distribution described in Section 5) upon, nor shall any distribution be made in respect of, any Junior Securities, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities. Section 3. VOTING RIGHTS. The holders of Series E-1 Preferred Stock shall have the right to vote, together with the holders of all the outstanding shares of Common Stock (and the holders of every other class or series entitled to vote together with such holders) and not by class, except as otherwise required by New York law, on all matters on which holders of Common Stock shall have the right to vote. Each holder of Series E-1 Preferred Stock shall have the right to cast ten (10) votes for each share of Preferred Stock held by such holder. In addition, so long as any shares of Series E-1 Preferred Stock are outstanding, the Company shall not and shall cause its subsidiaries not to, without the affirmative vote of the holders of 66.66% of the shares of the Series E-1 Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Series E-1 Preferred Stock, (b) alter or amend this Article 4(f), other than to renumber this Article 4(f), (c) authorize or create any class of stock ranking as to distribution of assets upon a Liquidation (as defined in Section 4) or otherwise senior to the Series E-1 Preferred Stock, (d) amend its Certificate of Incorporation, bylaws or other charter documents so as to affect adversely any rights of any Holders, (e) increase the authorized number of shares of Series E-1 Preferred Stock, and (f) enter into any agreement with respect to the foregoing. Section 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a "LIQUIDATION"), subject to the provisions of Section 502 of the New York Business Corporation Law, if applicable, the Holders shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series E-1 Preferred Stock an amount equal to the Stated Value before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders of Series E-1 Preferred Stock shall be distributed among the holders of Series E-1 Preferred Stock and the holders of all securities ranking pari passu to the Series E-1 Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 5. The Company shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record holder of Series E-1 Preferred Stock. 2 Section 5. CONVERSION. (a) (i) Each share of Series E-1 Preferred Stock shall be convertible into shares of Common Stock (subject to Section 5(a)(iii) and Section 5(a)(iv)) at the Conversion Ratio (as defined in Section 7) at the option of the Holder in whole or in part at any time after the Original Issue Date. The Holders shall effect conversions by surrendering the certificate or certificates representing the shares of Series E-1 Preferred Stock to be converted to the Company, together with the form of conversion notice attached hereto as EXHIBIT A (the "HOLDER CONVERSION NOTICE"). Each Holder Conversion Notice shall specify the number of shares of Series E-1 Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the holder delivers such Holder Conversion Notice by facsimile (the "HOLDER CONVERSION DATE"). If no Holder Conversion Date is specified in a Holder Conversion Notice, the Holder Conversion Date shall be the date that the Holder Conversion Notice is deemed delivered pursuant to Section 5(i). Subject to Sections 5(a)(iii) and 5(b) hereof, each Holder Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all shares of Series E-1 Preferred Stock represented by the certificate or certificates tendered by the Holder with the Holder Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall promptly deliver to such Holder (in the manner and within the time set forth in Section 5(b)) a certificate for such number of shares as have not been converted. (ii) On the fifth anniversary of the Original Issue Date, the Company may require the conversion of all of the then outstanding and unconverted shares of Series E-1 Preferred Stock at the Conversion Ratio (subject to reduction pursuant to Section 5(a)(iii)) by delivering to the Holder of such shares to be converted a notice in the form attached hereto as EXHIBIT B (the "COMPANY CONVERSION NOTICE"), PROVIDED, HOWEVER, that no such conversion shall be permitted unless at the time of the delivery of the Company Conversion Notice and on the Company Conversion Date (as defined below), (a) the shares of Common Stock issuable upon such conversion are listed for trading on the Nasdaq National Market, the Nasdaq Small Cap Market or are otherwise publicly traded and (b) the Company is in material compliance with all of its obligations under this Article 4(f), the Purchase Agreement, the Royalty Agreement and the Registration Rights Agreement. In the event that the shares are not listed on the Nasdaq National Market or a registered national exchange at the time of conversion under this paragraph then the Company shall pay to each Holder 3.5% of the aggregate Stated Value of the shares of Series E-1 Preferred Stock then held by such Holder, in cash, as liquidated damages and not as a penalty, concurrently with the delivery of shares of Common Stock to the Holders in connection with such conversion. Each Company Conversion Notice shall specify the number of shares of Series E-1 Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the day after the Company delivers such Company Conversion Notice by facsimile (the "COMPANY CONVERSION DATE"). If no Company Conversion Date is specified in a Company Conversion Notice, the Company Conversion Date shall be the date that the Company Conversion Notice is deemed delivered pursuant to Section 5(i). A Holder Conversion Date and a Company Conversion Date are sometimes referred to herein as the "CONVERSION DATE" and a Holder Conversion Notice and a Company Conversion Notice are sometimes referred to as a "CONVERSION NOTICE." Any conversion pursuant to this Section 5(a)(ii) shall be subject to Section 5(b) with respect to consequences of the 3 Company's failure to deliver shares of Common Stock in respect of a conversion under this Section. If the Company is converting less than all shares of Series E-1 Preferred Stock represented by the certificate or certificates tendered by the Holder in response to a Company Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall promptly deliver to such tendering Holder (in the manner and within the time set forth in Section 5(b)) a certificate for such number of shares as have not been converted. In the absence of receipt by the Company of Holder's election not to receive new certificates, the Company shall deliver such certificate(s) as provided herein. (iii) If on the Conversion Date applicable to any conversion, (A) the Common Stock is then listed for trading on the Nasdaq National Market, the New York Stock Exchange, the American Stock Exchange or the Nasdaq Small Cap Market, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion of all outstanding shares of Series E-1 Preferred Stock, together with any shares of Common Stock previously issued upon conversion of Series E-1 Preferred Stock, would equal or exceed 20% of the number of shares of Common Stock outstanding on the Original Issue Date (the "ISSUABLE MAXIMUM"), and (C) the Company has not previously obtained (or attempted pursuant to clause (1) of this subsection to obtain) Shareholder Approval (as defined below), then the Company shall issue to any Holder so requesting conversion of Series E-1 Preferred Stock its pro rata portion of the Issuable Maximum in the same ratio that the number of shares of Series E-1 Preferred Stock held by any such Holder bears to all shares of Series E-1 Preferred Stock then outstanding and, with respect to any shares of Common Stock that otherwise would have been issuable to such Holder in respect of the Holder Conversion Notice at issue in excess of the Issuable Maximum, the Company shall, as promptly as possible, but in no event later than 75 days after such Conversion Date, at the Company's option, either, (1) convene a meeting of the holders of the Common Stock and use its best efforts to obtain the Shareholder Approval or a waiver of such approval from the Nasdaq National Market, the Nasdaq Small Cap Market or the appropriate exchange, or (2) redeem all or a portion of the shares of Series E-1 Preferred Stock to which such Holder Conversion Notice applies as would cause the number of shares of Common Stock issuable upon such conversion to exceed the Issuable Maximum, for an amount, paid in cash, equal to the greater of (A) the Stated Value of such shares multiplied by 120%, or (B) the applicable Conversion Ratio as of the Conversion Date multiplied by the average Per Share Market Value for the five Trading Days immediately preceding the Conversion Date or the date of payment, whichever is greater. If the Company elects to seek Shareholder Approval pursuant to clause (1) of the preceding sentence and fails for any reason to obtain such Shareholder Approval within 75 days after the Conversion Date, then the Company shall be obligated to either (x) redeem the Preferred Stock not converted as a result of the provisions of this Section in accordance with the provisions of clause (2) of the preceding sentence as promptly as possible but in any event within seven days after such failure or (y) convert the shares of Series E-1 Preferred Stock into Common Stock as requested in such Holder Conversion Notice. "SHAREHOLDER APPROVAL" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the shareholders of the Company held in accordance with the Company's Certificate of Incorporation and bylaws, of the issuance by the Company of shares of Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Series E-1 Preferred Stock into Common Stock at a 4 price less than the greater of the book or market value on the Original Issue Date as and to the extent required pursuant to Rule 4460(i) of the Nasdaq National Market (or any successor or replacement provision thereof). (iv) In no event shall a Holder be permitted to convert any shares of Series E-1 Preferred Stock in excess of the number of such shares upon the conversion of which, (x) the number of shares of Common Stock beneficially owned by such Holder (other than shares of Common Stock issuable upon conversion of shares of Series E-1 Preferred Stock) plus (y) the number of shares of Common Stock issuable upon the conversion of such shares of Series E-1 Preferred Stock, would be equal to or exceed (z) 4.999% of the number of shares of Common Stock then issued and outstanding, including shares issuable on conversion of the Series E-1 Preferred Stock held by such Holder after application of this Section 5(a)(iv). As used herein, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder. To the extent that the limitation contained in this paragraph 5(a)(iv) applies, the determination of whether shares of Series E-1 Preferred Stock are convertible (in relation to other securities owned by a Holder) and of which shares of Series E-1 Preferred Stock are convertible shall be in the sole discretion of such Holder, and the submission of shares of Series E-1 Preferred Stock for conversion shall be deemed to be such Holder's determination of whether such shares of Series E-1 Preferred Stock are convertible (in relation to other securities owned by a Holder) and of which shares of Series E-1 Preferred Stock are convertible, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Nothing contained herein shall be deemed to restrict the right of a Holder to convert such shares of Series E-1 Preferred Stock at such time as such conversion will not violate the provisions of this paragraph. The provisions of this Section 5(a)(iv) may be waived by a Holder of Series E-1 Preferred Stock as to itself (and solely as to itself) upon not less than 75 days prior notice to the Company, and the provisions of this Section 5(a)(iv) shall continue to apply until such 75th day (or later, if stated in the notice of waiver). The limitations of this Section 5(a)(iv) shall not apply to any conversion pursuant to Section 5(a)(ii). Each conversion by a Holder shall be deemed to be accompanied by the representation that such conversion is in accordance with the provisions of this paragraph. No conversion in violation of this paragraph but otherwise in accordance with this Article 4(f) shall affect the status of the securities issued upon such conversion as validly issued, fully-paid and nonassessable. (b) (i) Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the holder (A) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by SECTION 3. l(b) of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Series E-1 Preferred Stock (subject to reduction pursuant to Section 5(a)(iii) and Section 5(a)(iv)), and (B) one or more certificates representing the number of shares of Series E-1 Preferred Stock not converted; PROVIDED, HOWEVER, that the Company shall not be obligated to issue the certificates set forth in (A) and (B) above until two Trading Days after certificates evidencing such shares of Series E-1 Preferred Stock are either delivered for conversion to the Company or the holder of such Series E-1 Preferred Stock notifies the Company that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in 5 connection therewith. Failure of a Holder to deliver such Series E-1 Preferred Stock certificate or affidavit of loss and indemnity to the Company within ten (10) Trading Days of the Conversion Date shall enable the Company, upon written notice to the Holder, to rescind the conversion. Upon request of the holder, any certificate or certificates required to be delivered under this Section shall be electronically delivered through a direct or indirect participant of the Depository Trust Company or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable holder by the third Trading Day after the Conversion Date, the holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Series E-1 Preferred Stock tendered for conversion. (ii) If the Company fails to deliver to the Holder such certificate or certificates pursuant to this Section hereunder by the later of the third Trading Day after the Conversion Date or the second Trading Day after the Company receives the certificate representing the shares of Series E-1 Preferred Stock to be converted or an affidavit of loss and indemnity, the Company shall pay to such Holder, in cash, $5,000 per Trading Day for each Trading Day until such certificates are delivered. If the Company fails to deliver to the Holder such certificate or certificates pursuant to this Section prior to the 15th Trading Day after the Conversion Date, the Company shall, at the Holder's option redeem, from funds legally available therefor at the time of such redemption, such number of shares of Series E-1 Preferred Stock then held by such Holder, as requested by such Holder, in cash. The redemption price shall be equal to the number of shares of Series E-1 Preferred Stock then held by such Holder multiplied by the average Per Share Market Value for the five Trading Days immediately preceding (A) the Conversion Date or (B) the date of payment in full by the Company of such prepayment price, whichever is greater, multiplied by the Conversion Ratio calculated on the Conversion Date. If the Holder has requested that the Company redeem shares of Series E-1 Preferred Stock pursuant to this Section and the Company fails for any reason to pay the redemption price, as calculated pursuant to the immediately preceding sentence, within seven days after such notice is deemed delivered pursuant to Section 5(i), the Company will pay interest on the redemption price at a rate of 15% per annum, in cash to such Holder, accruing from such seventh day until the redemption price and any accrued interest thereon is paid in full. Nothing herein shall limit a Holder's right to pursue actual damages for the Company's failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein (including, without limitation, damages relating to any purchase of shares of Common Stock by such Holder to make delivery on a sale effected in anticipation of receiving certificates representing shares of Common Stock upon conversion, such damages to be in an amount equal to (A) the aggregate amount paid by such holder for the shares of Common Stock so purchased minus (B) the aggregate amount of net proceeds, if any, received by such Holder from the sale of the shares of Common Stock issued by the Company pursuant to such conversion), and such Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief). 6 (iii) In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 5(b)(i), by the later of the third Trading Day after the Conversion Date or the second Trading Day after the Company receives the certificate or certificates representing the shares of Series E-1 Preferred Stock to be converted or an affidavit of loss and indemnity, and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (A) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate Stated Value of the shares of Preferred Stock for which such conversion was not timely honored. For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 aggregate stated value of the shares of Preferred Stock, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. (c) (i) The conversion price for each share of Series E-1 Preferred Stock (the "CONVERSION PRICE") in effect on any Conversion Date shall be (A) at all times prior to January 4, 1999, a fixed amount (the "INITIAL CONVERSION PRICE") equal to 120% of the Per Share Market Value on the Trading Day immediately prior to the Series E-1 Closing Date (as defined in the Purchase Agreement), PROVIDED, that if the Per Share Market Value on such date is at least $4.50 and no more than $5.50 on such date, then the Initial Conversion Price shall be $6.00, and (B) on or after January 4, 1999, the lesser of (1) the Initial Conversion Price or (2) 100% of the lowest average Per Share Market Value for fifteen (15) consecutive Trading Days during the sixty-four (64) Trading Days (the "LOOK-BACK PERIOD") prior to the Conversion Date (the "VARIABLE CONVERSION PRICE"), except that any Trading Day on which a Holder shall have consummated a short sale or sales of the Common Stock in an amount equal to at least 5% of the aggregate pro rata amount of the Series E-1 Purchase Price, Series E-2 Purchase Price and Series E-3 Purchase Price (as such terms are defined in the Purchase Agreement) paid by such Holder shall not be included in such fifteen-day or sixty-four day period with respect to such Holder, and such fifteen-day period shall be extended by adding a number of days immediately prior thereto or thereafter, as appropriate, and the sixty-four day period shall be extended by adding a number of days immediately prior thereto, equal to the total number of days excluded for short sales in order to achieve a full fifteen-day period average at the lowest price average, and similarly, if during any period (a "BLACK-OUT PERIOD"), a Holder is unable to trade any Common Stock issued or issuable upon conversion of Preferred Stock immediately due to the postponement of filing or delay or suspension of effectiveness of a registration statement or because the Company has otherwise informed such Holder that an existing prospectus cannot be used at that time in the sale or transfer of such Common Stock, such Holder shall have the option but not the 7 obligation on any Conversion Date within ten Trading Days following the expiration of the Black-out Period of using the Conversion Price applicable on such Conversion Date or any Conversion Price selected by such Holder that would have been applicable had such Conversion Date been at any earlier time during the Black-out Period or within the ten Trading Days thereafter. If, during the period after the later of (i) January 4, 1999, or (ii) January 4, 1999 plus the length of any Black-out Period that occurred prior to such date, or (iii) if a Black-out Period is still in effect on January 4, 1999, the expiration of a ten day period following such Black-out Period plus the number of days in any Black-out Period occurring before January 4, 1999, the Per Share Market Value has exceeded 150% of the Initial Conversion Price for at least twenty (20) of thirty (30) consecutive Trading Days, then provided the Company has given notice to the Holders no later than ten (10) Trading Days after such thirty (30) consecutive Trading Day period, the Initial Conversion Price shall be applied to any remaining conversion of the Series E-1 Preferred Stock. Notwithstanding the foregoing, if (a) the Underlying Shares Registration Statement is not filed on or prior to the 30th day after the Original Issue Date, or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Exchange Act within five (5) Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Shares Registration Statement will not be "reviewed," or not subject to further review, or (c) the Underlying Shares Registration Statement is not declared effective by the Commission on or prior to the 90th day after the Original Issue Date, or (d) such Underlying Shares Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities (as such term is defined in the Registration Rights Agreement) at any time prior to the expiration of the "EFFECTIVENESS PERIOD" (as such term as defined in the Registration Rights Agreement), without being succeeded within fifteen Trading Days by a subsequent Underlying Shares Registration Statement filed with and declared effective by the Commission, or (e) trading in the Common Stock shall be suspended or if the Common Stock is delisted for any reason for more than three Trading Days in the aggregate, or (f) the conversion rights of the Holders are suspended for any reason except as a result of Section 5(a)(iv) hereof, or (g) the Company breaches in a material respect any covenant or other material term or condition to this Article 4(f), the Purchase Agreement (other than a representation or warranty contained therein), the Registration Rights Agreement or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated thereby, and such breach continues for a period of thirty days after written notice thereof to the Company, or (h) the Company elects to convene a shareholders meeting pursuant to Section 5(a)(iii) and fails to convene a meeting of shareholders within the time periods specified in Section 5(a)(iii) or does so convene a meeting of shareholders within such time period but fails to obtain Shareholder Approval at such meeting, or (i) the Company has breached Section 3(p) of the Registration Rights Agreement (any such failure or breach being referred to as an "EVENT," and for purposes of clauses (a), (c) and (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five day period is exceeded, or for purposes of clause (d) the date which such fifteen Trading Day-period is exceeded, or for purposes of clause (e) the date on which such three Trading Day period is 8 exceeded, or for clause (g) the date on which such thirty day period is exceeded, being referred to as "EVENT DATE"), then the Conversion Price shall be decreased by 2% as of the Event Date and shall be decreased an additional 2% as of each monthly anniversary of the Event Date until the earlier to occur of the second month anniversary after the Event Date and such time as the applicable Event is cured. Commencing the second month anniversary after the Event Date, the Company shall pay to the Holders $70,000 per month until the applicable Event is cured (each holder being entitled to receive such portion of such amount as equals its pro rata portion of the Series E-1 Preferred Stock). Any decrease in the Conversion Price pursuant to this Section shall continue notwithstanding the fact that the Event causing such decrease has been subsequently cured. Additionally, if the Company has failed to file a registration statement as required by the Registration Rights Agreement within 30 days after the date (the "FILING DATE") it was required to file such registration statement pursuant to the Registration Rights Agreement or if any registration statement required to be filed by the Company pursuant to the Registration Rights Agreement has not been declared effective by the Commission within 120 days of the date it was required to be filed pursuant to the Registration Rights Agreement, or if the Company has allowed any registration statement required to be filed pursuant to the Registration Rights Agreement to lapse for a period of 60 consecutive days, then the Conversion Price shall, immediately after such 30th, 120th or 60th day, as applicable, be decreased by an additional 2% and shall be further decreased by an additional .07% for each subsequent day thereafter until such time as such registration statement is filed, declared effective or had its effectiveness reinstated, as applicable; PROVIDED, that if any such registration statement is not effective within 180 days after the Filing Date, then the Conversion Price shall be decreased by an additional 1.25% for each seven calendar days following such 180th day and continuing until any such registration statement is effective. The Company shall have the option, exercisable at any time after the 30th day but prior to the 60th day following such 30th, 120th or 60th day, as applicable, upon notice to all Holders to redeem all outstanding Series E-1 Preferred Stock, in cash, at a redemption price equal to the number of shares of Series E-1 Preferred Stock then outstanding and held by such holder multiplied by the average Per Share Market Value for the five Trading Days immediately preceding (x) the date of the redemption notice or (y) the date of payment in full by the Company of such prepayment price, whichever is greater, multiplied by the Conversion Ratio calculated on the date of the payment in full by the Company of the redemption price. Any such redemption shall take place within fifteen days after the giving of such notice of redemption by the Company. For each day after the 90th day from the Filing Date that such registration statement is not effective, a day will be added to the Look-Back Period. If the Company elects to redeem shares of Series E-1 Preferred Stock pursuant to this Section and the Company fails for any reason to pay the redemption price as calculated above within five days after such notice is given, the Company will pay interest on the redemption price at a rate of 15% per annum, in cash, accruing from such fifth day until the redemption price and any accrued interest thereon is paid in full. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Registration Rights Agreement. 9 (ii) If the Company, at any time while any shares of Series E-1 Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities (other than with respect to the Subsequent Preferred) payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the applicable Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any shares of Series E-1 Preferred Stock are outstanding, shall sell or issue additional shares of Common Stock or rights or warrants to acquire shares of Common Stock at a price per share less than the Per Share Market Value of Common Stock at the record date mentioned below, excluding any rights of the holder of the Series D Preferred Stock to acquire Common Stock, the applicable Conversion Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such shares, rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such shares, rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value. Such adjustment shall be made whenever such shares, rights or warrants are issued, and shall become effective immediately after the issuance of such shares, rights or warrants or, if such rights or warrants are issued to stockholders of the Company, the record date for the determination of shareholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the applicable Conversion Price pursuant to this Section 5(c)(iii), if any such right or warrant shall expire and shall not have been exercised, the applicable Conversion Price shall immediately upon such expiration be re-computed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the applicable Conversion Price made pursuant to the provisions of this Section 5 after the issuance of such rights or warrants) had the adjustment of the applicable Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while shares of Series E-1 Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to holders of Series E-1 Preferred Stock) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 5(c)(ii) and (iii) above), then in each such case the applicable Conversion Price at which each share of 10 Series E-1 Preferred Stock shall thereafter be convertible shall be determined by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of shareholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; PROVIDED, HOWEVER, that in the event of a distribution exceeding ten percent of the net assets of the Company, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "APPRAISER") selected in good faith by the holders of a majority in interest of the shares of Series E-1 Preferred Stock then outstanding; and PROVIDED, FURTHER, that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the holders of Series E-1 Preferred Stock of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (v) All calculations under this Section 5 shall be made to the nearest cent or the nearest l/l00th of a share, as the case may be. (vi) Whenever the applicable Conversion Price is adjusted pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly mail to each holder of Series E-1 Preferred Stock, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (vii) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, which reclassification, consolidation or merger has been properly approved by the Board of Directors of the Company and pursuant to which (i) a majority of the Board of Directors will not constitute a majority of the board of directors of the surviving entity or (ii) less than 50% of the outstanding shares of the capital stock of the surviving entity will be held by the same shareholders of the Company prior to such reclassification, consolidation or merger, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the holders of the Series E-1 Preferred Stock then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the holders of the Series E-1 Preferred Stock shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which such shares of Series E-1 Preferred Stock could have been converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange would have been entitled; provided, however, that each Holder shall 11 have the option to require the Company to redeem, from funds legally available therefor at the time of such redemption, its shares of Series E-1 Preferred Stock at a price per share equal to the product of (i) the average Per Share Market Value for the five Trading Days immediately preceding (1) the effective date, the date of the closing or the date of the announcement, as the case may be, of the reclassification, consolidation, merger, sale, transfer or share exchange the triggering such redemption right or (2) the date of payment in full by the Company of the redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio calculated on the date of the closing or the effective date, as the case may be, of the reclassification, consolidation, merger, sale, transfer or share exchange triggering such redemption right, as the case may be. The entire redemption price shall be paid in cash, and the terms of payment of such redemption price shall be subject to the provisions set forth in Section 6(b). The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the holder of Series E-1 Preferred Stock the right to receive the securities, cash or property set forth in this Section 5(c)(vii) upon any conversion or redemption following such consolidation, merger, sale, transfer or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. (viii) If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock; or B. the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or D. the approval of any shareholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Series E-1 Preferred Stock, and shall cause to be mailed to the Holders of Series E-1 Preferred Stock at their last addresses as they shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a 12 record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert shares of Series E-1 Preferred Stock during the 30-day period commencing the date of such notice to the effective date of the event triggering such notice. (ix) If the Company (A) makes a public announcement that it intends to enter into a Change of Control Transaction or (B) any person, group or entity (including the Company, but excluding a Holder or any affiliate of a Holder) publicly announces a bona fide tender offer, exchange offer or other transaction to purchase 50% or more of the Common Stock (such announcement being referred to herein as a "MAJOR ANNOUNCEMENT" and the date on which a Major Announcement is made, the "ANNOUNCEMENT DATE"), then, in the event that a Holder seeks to convert shares of Series E-1 Preferred Stock on or following the Announcement Date, the Conversion Price shall, effective upon the Announcement Date and continuing through the earlier to occur of the consummation of the proposed transaction or tender offer, exchange offer or other transaction and the Abandonment Date (as defined below), be equal to the lower of (1) the average Per Share Market Value on the five (5) Trading Days immediately preceding (but not including) the Announcement Date and (2) the Conversion Price in effect on the Conversion Date for such Series E-1 Preferred Stock. "ABANDONMENT DATE" means with respect to any proposed transaction or tender offer, exchange offer or other transaction for which a public announcement as contemplated by this paragraph has been made, the date upon which the Company (in the case of clause (A) above) or the person, group or entity (in the case of clause (B) above) publicly announces the termination or abandonment of the proposed transaction or tender offer, exchange offer or another transaction which caused this paragraph to become operative. (d) If at any time conditions shall arise by reason of action taken by the Company which in the opinion of the Board of Directors are not adequately covered by the other provisions hereof and which might materially and adversely affect the rights of the holders of Series E-1 Preferred Stock (different than or distinguished from the effect generally on rights of holders of any class of the Company's capital stock) or if at any time any such conditions are expected to arise by reason of any action contemplated by the Company, the Company shall mail a written notice briefly describing the action contemplated and the material adverse effects of such action on the rights of the holders of Series E-1 Preferred Stock at least 10 calendar days prior to the effective date of such action, and an Appraiser selected by the holders of majority in interest of the Series E-1 Preferred Stock shall give its opinion as to the adjustment, if any (not inconsistent with the standards established in this Section 5), of the Conversion Price (including, if necessary, any adjustment as to the securities into which shares of Series E-1 Preferred Stock may thereafter be convertible) and any distribution which is or would be required to preserve without diluting the rights of the holders of shares of Series E-1 Preferred Stock; PROVIDED, HOWEVER, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an 13 additional Appraiser, in good faith, in which case the adjustment shall be equal to the average of the adjustments recommended by each such Appraiser. The Board of Directors shall make the adjustment recommended forthwith upon the receipt of such opinion or opinions or the taking of any such action contemplated, as the case may be; provided, however, that no such adjustment of the Conversion Price shall be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or opinions would result in an increase of the Conversion Price to more than the Conversion Price then in effect. (e) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Series E-1 Preferred Stock free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of Series E-1 Preferred Stock, not less than such number of shares of Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5(c)) upon the conversion of all outstanding shares of Series E-1 Preferred Stock. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradable. (f) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the holder of a share of Series E-1 Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (g) The issuance of certificates for shares of Common Stock on conversion of Series E-1 Preferred Stock shall be made without charge to the holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate. (h) Shares of Series E-1 Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of undesignated preferred stock. (i) Any and all notices or other communications or deliveries to be provided by the holders of the Series E-1 Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the attention of the President and to the Secretary of the Company at the facsimile telephone number or address of the principal place of business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to each Holder of Series E-1 Preferred Stock at the facsimile telephone number or address of such holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earlier of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 7:00 p.m. (Eastern Time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at 14 the facsimile telephone number specified in this Section later than 7:00 p.m. (New York Time) on any date and earlier than 11:59 p.m. (Eastern Time) on such date, (iii) receipt, if sent by a nationally recognized overnight courier service, or (iv) actual receipt by the party to whom such notice is required to be given. Section 6. REDEMPTIONS. (a) At the Company's option, all outstanding and unconverted shares of Series E-1 Preferred Stock on the fifth anniversary of the Original Issue Date not converted pursuant to Section 5(a)(ii) shall be redeemed by the Company pursuant to this Section 6(a), from funds legally available therefor at a price per share equal to the product of (i) the average Per Share Market Value for the five Trading Days immediately preceding (1) the fifth anniversary of the Original Issue Date or (2) the date of payment in full by the Company of the redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio calculated on the fifth anniversary of the Original Issue Date. Thereafter, all shares of Series E-1 Preferred Stock shall cease to be outstanding and shall have the status of authorized but undesignated preferred stock. The entire redemption price shall be paid in cash within five (5) business days after the fifth anniversary of the Original Issue Date. (b) If any portion of the applicable redemption price under Section 6(a) shall not be paid by the Company within five calendar days after the date due, interest shall accrue thereon at the rate of 15% per annum until the redemption price plus all such interest is paid in full (which amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of such redemption price remains unpaid for more than ten (10) calendar days after the date due, the holder of the Series E-1 Preferred Stock subject to such redemption may elect, by written notice to the Company given within 30 days after the date due, to either (i) demand conversion in accordance with the formula and the time frame therefor set forth in Section 5 of all of the shares of Series E-1 Preferred Stock for which such redemption price, plus accrued liquidated damages thereof, has not been paid in full (the "UNPAID REDEMPTION SHARES"), in which event the Conversion Ratio for such shares shall be the higher of the Conversion Ratio calculated on the date such redemption price was originally due and the Conversion Ratio as of the holder's written demand for conversion, or (ii) invalidate AB INITIO such redemption, notwithstanding anything herein contained to the contrary. If the holder elects option (i) above, the Company shall within five Trading Days of its receipt of such election deliver to the holder the shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares subject to such holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (ii) above, the Company shall promptly, and in any event not later than five Trading Days from receipt of holder's notice of such election, return to the holder all of the Unpaid Redemption Shares. Section 7. DEFINITIONS. For the purposes hereof, the following terms shall have the following meanings: "CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Section 13(d)(3) of the Exchange Act) of in excess of 50% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company's board of directors which is not approved by those individuals who are members of the board of directors on the date hereof, or their duly elected successors who are directors immediately prior to such transaction, in one or a series of 15 related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction, the holders of the Company's securities continue to hold at least 50% of such securities following such transaction, or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii). "COMMON STOCK" means the common stock, $0.01 par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "CONVERSION RATIO" means, at any time, a fraction, of which the numerator is Stated Value and of which the denominator is the Conversion Price at such time. "JUNIOR SECURITIES" means the Common Stock and all other equity securities of the Company which are junior in rights and liquidation preference to the Series E-1 Preferred Stock. "NASDAQ" means the National Association of Securities Dealers Automated Quotation System. "ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any shares of the Series E-1 Preferred Stock regardless of the number of transfers of any particular shares of Series E-1 Preferred Stock and regardless of the number of certificates which may be issued to evidence such Series E-1 Preferred Stock. "PER SHARE MARKET VALUE" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the Nasdaq National Market or other registered national stock exchange on which the Common Stock is then listed or if there is no such price on such date, then the closing bid price on such exchange or quotation system on the date nearest preceding such date, or (b) if the Common Stock is not listed then on the Nasdaq National Market or any registered national stock exchange, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the Nasdaq National Market or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the holders of a majority in interest of the shares of the Series E-1 Preferred Stock; PROVIDED, HOWEVER, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser; and PROVIDED, FURTHER that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during such period. "PERSON" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. 16 "PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase Agreement, dated as of the Original Issue Date, among the Company and the original holders of the Series E-1 Preferred Stock. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, dated as of the Original Issue Date, by and among the Company and the original Holders. "ROYALTY AGREEMENT" means the Royalty Rights Agreement dated as of the Original Issue Date by and among the Company and the original Holders. "TRADING DAY" means (a) a day on which the Common Stock is traded on the Nasdaq National Market or other registered national stock exchange on which the Common Stock has been listed, or (b) if the Common Stock is not listed on the Nasdaq National Market or any registered national stock exchange, a day or which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "UNDERLYING SHARES" means the number of shares of Common Stock into which the Shares are convertible in accordance with the terms hereof and the Purchase Agreement." [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] 17 The manner in which the foregoing Amendment of the Certificate of Incorporation was authorized is as follows: The Board of Directors of the Corporation authorized the Amendment under the authority vested in said Board of Directors under the provisions of the Certificate of Incorporation and of Section 502 of the Business Corporation Law. IN WITNESS WHEREOF, we have subscribed this document on the date set opposite each of our names below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: , 1998 ---------------- ----------------------------------------------- Name: Theodore D. Roth Title: President and Chief Operating Officer ----------------------------------------------- Name: Lloyd A. Rowland Title: General Counsel and Secretary 18 EXHIBIT A NOTICE OF CONVERSION AT THE ELECTION OF HOLDER (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF SERIES E-1 PREFERRED STOCK) The undersigned hereby elects to convert the number of shares of Series E-1 Convertible Preferred Stock indicated below, into shares of common stock, par value $0.01 per share, of Alliance Pharmaceutical Corp. (the "COMPANY") according to the conditions hereof, as of the date written below. The undersigned hereby represents and warrants that it has not consummated any short sales of the Common Stock on any of the days used for calculation of the Conversion Price. A calculation of the fifteen-day period used to determine the Conversion Price is attached hereto as SCHEDULE I. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ---------------------------------------- Date to Effect Conversion ---------------------------------------- Number of shares of Series E-1 Preferred Stock to be Converted ---------------------------------------- Number of shares of Common Stock to be Issued ---------------------------------------- Applicable Conversion Price ---------------------------------------- Signature ---------------------------------------- Name ---------------------------------------- Address EXHIBIT B NOTICE OF CONVERSION AT THE ELECTION OF THE COMPANY The undersigned in the name and on behalf of Alliance Pharmaceutical Corp. (the "COMPANY") hereby notifies the addressee hereof that the Company hereby elects to exercise its right to convert ____ shares of its Series E-1 Convertible Preferred Stock held by the Holder into shares of the Company's common stock, par value $0.01 per share, according to the terms hereof, as of the date written below. No fee will be charged to the Holder for any conversion hereunder, except for such transfer taxes, if any which may be incurred by the Company if shares are to be issued in the name of a person other than the person to whom this notice is addressed. Conversion calculations: ---------------------------------------- Date to Effect Conversion ---------------------------------------- Number of shares of Series E-1 Preferred Stock to be Converted ---------------------------------------- Number of shares of Common Stock to be Issued ---------------------------------------- Applicable Conversion Price ---------------------------------------- Name of Holder ---------------------------------------- Address of Holder EX-10.J 3 EXHIBIT 10.J - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT Between ALLIANCE PHARMACEUTICAL CORP., BROWN SIMPSON STRATEGIC GROWTH FUND, LTD., BROWN SIMPSON STRATEGIC GROWTH FUND, L.P., WESTOVER INVESTMENTS L.P., MONTROSE INVESTMENTS LTD. and BAY HARBOR INVESTMENTS, INC. Dated as of August 13, 1998 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
ARTICLE I PURCHASE AND SALE OF PREFERRED SHARES . . . . . . . . . . . . . . . . . .1 1.1 Purchase and Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2 Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.3 The Closings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 ARTICLE II REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . .5 2.1 Representations, Warranties and Agreements of the Company. . . . . . . . . .5 2.2 Representations and Warranties of the Purchasers. . . . . . . . . . . . . 12 ARTICLE III OTHER AGREEMENTS OF THE PARTIES . . . . . . . . . . . . . . . . . . . 13 3.1 Transfer Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.2 Stop Transfer Instruction. . . . . . . . . . . . . . . . . . . . . . . . . 14 3.3 Furnishing of Information. . . . . . . . . . . . . . . . . . . . . . . . . 14 3.4 Blue Sky Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.5 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.6 Certain Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.7 Listing and Reservation of Underlying Shares.. . . . . . . . . . . . . . . 15 3.8 No Violation of Applicable Law. . . . . . . . . . . . . . . . . . . . . . 15 3.9 Notice of Breaches.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.10 Conversion Obligations of the Company. . . . . . . . . . . . . . . . . . . 16 3.11 Subsequent Registrations. . . . . . . . . . . . . . . . . . . . . . . . . 16 3.12 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.13 Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.14 Right of First Refusal; Subsequent Registrations. . . . . . . . . . . . . 18 3.15 Short Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE IV CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.1 Conditions Precedent to the Obligation of the Company to Sell the Series E-1 Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase the Series E-2 Shares and the Series E-3 Shares. . . . . . . . . . . . . . 22 ARTICLE V MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.1 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.2 Entire Agreement; Amendments. . . . . . . . . . . . . . . . . . . . . . . 25 5.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.4 Amendments; Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.5 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.7 No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . . . . . . . 26 5.8 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.9 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.10 Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.11 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.12 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.13 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.14 Independent Nature of Purchasers' Obligations and Rights. . . . . . . . . 27
SCHEDULES AND EXHIBITS Schedule 1 - Purchasers of Series E-1 Shares Schedule 2.1(a) - Organization and Qualification; Subsidiaries Schedule 2.1(c) - Capitalization; Rights to Acquire Capital Stock Schedule 2.1(f) - Consents and Approvals Schedule 2.1(g) - Litigation; Proceedings Schedule 2.1(u) - Registration Rights, Rights of Participation Schedule 2.1(v) - Title Exhibit A - Certificate of Amendment Exhibit B - Registration Rights Agreement Exhibit C1 - Legal Opinion of Lloyd A. Rowland, General Counsel of the Company Exhibit C2 - Legal Opinion of Stroock & Stroock & Lavan LLP Exhibit D - Transfer Agent Instructions Exhibit E - Royalty Rights Agreement CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT"), dated as of August 13, 1998, between Alliance Pharmaceutical Corp., a New York corporation (the "COMPANY"), Brown Simpson Strategic Growth Fund, Ltd., a Cayman Islands exempt company ("BROWN SIMPSON LTD."), and Brown Simpson Strategic Growth Fund, L.P., a New York limited partnership ("BROWN SIMPSON L.P."), Westover Investments L.P., a Delaware limited partnership ("WESTOVER"), Montrose Investments Ltd., a Cayman Islands exempt company ("MONTROSE") and Bay Harbor Investments, Inc., a corporation organized and existing under the laws of the British Virgin Islands ("BAY HARBOR"). Brown Simpson Ltd., Brown Simpson L.P., Westover, Montrose and Bay Harbor are each referred to herein as a "PURCHASER" and are collectively referred to herein as the "PURCHASERS." WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires to issue and sell to the Purchasers, and the Purchasers desire to acquire from the Company, shares of the Company's Series E-1 Convertible Preferred Stock, par value $0.01 per share (the "SERIES E-1 PREFERRED"), the Company's Series E-2 Convertible Preferred Stock, par value $0.01 per share (the "SERIES E-2 PREFERRED") and the Company's Series E-3 Convertible Preferred Stock, par value $0.01 per share (the "SERIES E-3 PREFERRED" and together with the Series E-1 Preferred and the Series E-2 Preferred, the "PREFERRED STOCK"). IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and each Purchaser agree as follows: ARTICLE I PURCHASE AND SALE OF PREFERRED SHARES 1.1 PURCHASE AND SALE. (a) Subject to the terms and conditions set forth herein, the Company shall issue and sell to the Purchasers, and the Purchasers, severally and not jointly, shall purchase from the Company: (i) 100,000 shares of Series E-1 Preferred (the "SERIES E-1 SHARES"); (ii) up to 100,000 shares of Series E-2 Preferred (the "SERIES E-2 SHARES"); and (iii) up to 100,000 shares of Series E-3 Preferred (the "SERIES E-3 SHARES" and together with the Series E-1 Shares and the Series E-2 Shares, the "SHARES"). Notwithstanding anything to the contrary set forth in this Agreement, the aggregate number of Shares to be sold hereunder shall not exceed 300,000. (b) The Series E-1 Preferred shall have the respective rights, preferences and privileges (the "SERIES E-1 TERMS") set forth in the Certificate of Amendment to the Certificate of Incorporation of the Company (the "SERIES E-1 DESIGNATION") the form of which is attached hereto as EXHIBIT A attached hereto, which shall be approved by the Purchasers and the Company's Board of Directors (the "BOARD OF DIRECTORS") and filed on or prior to the Series E-1 Closing (as defined below) by the Company with the Secretary of State of the State of New York. The Series E-2 Preferred and Series E-3 Preferred shall have respective rights, preferences and privileges identical to the Series E-1 Terms, mutatis mutandis, and shall rank pari passu with the Series E-1 Preferred with regard to dividends, liquidation, voting rights and any other preferential rights designated therein, except that the Initial Conversion Price (as defined in the Series E-1 Designation) for conversion of the Series E-2 Shares and Series E-3 Shares shall equal 120% of the Per Share Market Value on the Trading Day immediately prior to the Series E-2 Closing Date (as defined below) or the Series E-3 Closing Date (as defined below), as applicable. The Series E-2 Preferred and Series E-3 Preferred shall be authorized pursuant to certificates of amendment identical, except with respect to the calculation of the Initial Conversion Price, to the Series E-1 Designation, MUTATIS MUTANDIS, prepared by the Company, subject to the approval of the Purchasers, and filed at or prior to the Series E-2 Closing Date (as defined below) and Series E-3 Closing Date (as defined below), as applicable, by the Company with the Secretary of State of the State of New York (such certificates of amendment, together with the Series E-1 Designation, are referred to as the "CERTIFICATES OF DESIGNATION"). For purposes of this Agreement, "CONVERSION PRICE," "ORIGINAL ISSUE DATE," "CONVERSION DATE" "TRADING DAY" and "PER SHARE MARKET VALUE" shall have the meanings set forth in the Certificates of Designation; and "MARKET PRICE" at any date shall mean the average Per Share Market Value for the five (5) Trading Days immediately preceding such date. 1.2 PURCHASE PRICE. The purchase price per Share shall be $60.00. 1.3 THE CLOSINGS. (a) The Series E-1 Closing. (i) The closing of the purchase and sale of the Series E-1 Shares (the "SERIES E-1 CLOSING") shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P. ("AKIN, GUMP"), 590 Madison Avenue, New York, New York 10022, immediately following the execution hereof or such later date or different location as the parties shall agree, but not prior to the date that the conditions set forth in Section 4.1 have been satisfied or waived by the appropriate party. The date of the Series E-1 Closing is hereinafter referred to as the "SERIES E-1 CLOSING DATE." At the Series E-1 Closing, the Company shall sell and issue to the Purchasers, and the Purchasers shall, severally and not jointly, purchase from the Company, 100,000 Series E-1 Shares for an aggregate purchase price of $6 million (the "SERIES E-1 PURCHASE PRICE"). (ii) At the Series E-1 Closing (a) the Company shall deliver to each Purchaser stock certificates representing the Series E-1 Shares purchased by such Purchaser as set forth next to such Purchaser's name on SCHEDULE 1 attached 2 hereto, each registered in the name of such Purchaser, and all other documents, instruments and writings required to have been delivered at or prior to the Series E-1 Closing by the Company pursuant to this Agreement and the Registration Rights Agreement, dated the date hereof, by and between the Company and the Purchasers, in the form of EXHIBIT B hereto (the "REGISTRATION RIGHTS AGREEMENT"), and (b) each Purchaser shall deliver to the Company the portion of the Series E-1 Purchase Price set forth next to its name on SCHEDULE 1, in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose on or prior to the Series E-1 Closing Date, and all documents, instruments and writings required to have been delivered at or prior to the Series E-1 Closing by such Purchaser pursuant to this Agreement and the Registration Rights Agreement. (b) THE SERIES E-2 CLOSING. (i) Subject to the terms and conditions set forth in Section 4.2 and elsewhere in this Agreement, the Company shall, if the Per Share Market Value has not been less than $3.00 for any ten consecutive Trading Days since the Series E-1 Closing Date, have the right to deliver a written notice to the Purchasers (a "SERIES E-2 SUBSEQUENT FINANCING NOTICE") requiring the Purchasers to purchase Series E-2 Shares. The Company may deliver a Series E-2 Subsequent Financing Notice no earlier than the date on which the Registration Statement on Form S-3 filed with the Securities and Exchange Commission (the "COMMISSION") with respect to the Series E-1 Shares has been declared effective by the Commission and no later than 60 days after such effective date. Such Series E-2 Subsequent Financing Notice shall set forth the dollar amount of Series E-2 Shares that the Company intends to sell to the Purchasers, PROVIDED, HOWEVER, that the minimum amount of such sale and purchase shall be $5,000,000 and the maximum amount of such sale and purchase shall be equal to $15,000,000 minus the Series E-1 Purchase Price. At the Series E-2 Closing each Purchaser shall be obligated (subject to the terms and conditions herein) to purchase such portion of such Series E-2 Shares as equals such Purchaser's pro rata portion of the purchase price for the Series E-1 Shares issued and sold at the Series E-1 Closing. The closing of the purchase and sale of the Series E-2 Shares (the "SERIES E-2 CLOSING") shall take place in the same manner as the Series E-1 Closing, on such date indicated in the Series E-2 Subsequent Financing Notice (which may not be prior to the 20th day after receipt by the Purchasers of the Series E-2 Subsequent Financing Notice or as otherwise agreed to by the parties); PROVIDED, HOWEVER, that in no case shall the Series E-2 Closing take place unless and until the conditions listed in Section 4.2 have been satisfied or waived by the appropriate party. The date of the Series E-2 Closing is hereinafter referred to as the "SERIES E-2 CLOSING DATE" and the purchase price paid for the Series E-2 Shares is hereinafter referred to as the "SERIES E-2 PURCHASE PRICE.") 3 (ii) At the Series E-2 Closing, (a) the Company shall deliver (A) to each Purchaser (1) a pro rata portion of the Series E-2 Shares (determined by reference to the amount of Series E-1 Shares issued and sold at the Series E-1 Closing) to be issued and sold thereat (or such other amount upon which the parties may agree), registered in the name of the appropriate Purchaser, (2) the legal opinions referenced in Section 4.2(l), substantially in the forms attached hereto as EXHIBIT C1 and EXHIBIT C2, and (3) all other documents, instruments and writings required to have been delivered at or prior to the Series E-2 Closing by the Company to the Purchasers pursuant to this Agreement, and (b) each Purchaser shall deliver to the Company (1) the purchase price for the Series E-2 Shares being purchased by it at the Series E-2 Closing in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose on or prior to the Series E-2 Closing Date and (2) all documents, instruments and writings required to have been delivered at or prior to the Series E-2 Closing by such Purchaser pursuant to this Agreement. (c) THE SERIES E-3 CLOSING. (i) Subject to the terms and conditions set forth in Section 4.2 and elsewhere in this Agreement, the Company shall, if the Per Share Market Value has not been less than $3.00 for any ten consecutive Trading Days since the Series E-1 Closing Date, have the right to deliver a written notice to the Purchasers (a "SERIES E-3 SUBSEQUENT FINANCING NOTICE") requiring the Purchasers to purchase Series E-3 Shares. The Company may deliver a Series E-3 Subsequent Financing Notice no earlier than the date on which the Registration Statement on Form S-3 filed with the Commission with respect to the Series E-2 Shares has been declared effective by the Commission and no later than 60 days after such effective date. Such Series E-3 Subsequent Financing Notice shall set forth the dollar amount of Series E-3 Shares that the Company intends to sell to the Purchasers, PROVIDED, HOWEVER, that the amount of such sale and purchase shall not exceed $5,000,000. At the Series E-3 Closing each Purchaser shall be obligated (subject to the terms and conditions herein) to purchase such portion of such Series E-3 Shares as equals such Purchaser's pro rata portion of the purchase price for the Series E-1 Shares issued and sold at the Series E-1 Closing. The closing of the purchase and sale of the Series E-3 Shares (the "SERIES E-3 CLOSING") shall take place in the same manner as the Series E-1 Closing on such date indicated in the Series E-3 Subsequent Financing Notice (which may not be prior to the 20th day after receipt by the Purchasers of the Series E-3 Subsequent Financing Notice or as otherwise agreed to by the parties); PROVIDED that in no case shall the Series E-3 Closing take place unless and until the conditions listed in Section 4.2 have been satisfied or waived by the appropriate party. The date of the Series E-3 Closing is hereinafter referred to as the "SERIES E-3 CLOSING DATE." (ii) At the Series E-3 Closing, (a) the Company shall deliver (A) to each Purchaser (1) a pro rata portion of the Series E-3 Shares (determined by 4 reference to the amount of Series E-1 Shares issued and sold at the Series E-1 Closing) to be issued and sold thereat (or such other amount upon which the parties may agree), registered in the name of the appropriate Purchaser, (2) the legal opinions referenced in Section 4.2(l), substantially in the forms attached hereto as EXHIBIT C1 and EXHIBIT C2, and (3) all other documents, instruments and writings required to have been delivered at or prior to the Series E-3 Closing by the Company to the Purchasers pursuant to this Agreement, and (b) each Purchaser shall deliver to the Company (1) the purchase price for the Series E-3 Shares being purchased by it at the Series E-3 Closing in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose on or prior to the Series E-3 Closing Date and (2) all documents, instruments and writings required to have been delivered at or prior to the Series E-3 Closing by such Purchaser pursuant to this Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company hereby makes the following representations and warranties to the Purchasers: (a) ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of New York, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in SCHEDULE 2.1(a) (collectively the "SUBSIDIARIES"). Each of the Subsidiaries is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the full corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of the Preferred Stock or any of the Transaction Documents (as defined below), (y) have or result in a material adverse effect on the results of operations, assets, prospects, or financial condition of the Company and the Subsidiaries, taken as a whole or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any Transaction Document (any of (x), (y) or (z), being a "MATERIAL ADVERSE EFFECT"). (b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and the other Transaction Documents, and otherwise to carry out its obligations hereunder and thereunder. This Agreement, the Certificates of Designation 5 the Royalty Rights Agreement between the Company and the Purchasers (the "ROYALTY AGREEMENT") and the Registration Rights Agreement are collectively referred to as the "TRANSACTION DOCUMENTS." The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. Each of the Transaction Documents has been duly executed by the Company and when delivered in accordance with the terms hereof will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter documents. Prior to each of the closing dates the respective Certificate of Designation has been filed with the Secretary of State of the State of New York and will be in full force and effect, enforceable against the Company in accordance with the terms thereof. (c) CAPITALIZATION; RIGHTS TO ACQUIRE CAPITAL STOCK. The authorized, issued and outstanding capital stock of the Company as of August 12, 1998, is set forth in SCHEDULE 2.1(c). Except as disclosed in SCHEDULE 2.1(c), no shares of the capital stock of the Company are entitled to preemptive or similar rights, nor is any holder of the capital stock of the Company entitled to preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Transaction Documents. Except as disclosed in SCHEDULE 2.1(c), as of August 12, 1998, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Shares, securities, rights or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Except as specifically disclosed in the SEC Documents (as defined below) or SCHEDULE 2.1(c), and, to the best knowledge of the Company, no Person or group of related Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) or has the right to acquire by agreement with or by obligation binding upon the Company beneficial ownership of in excess of 5% of the Common Stock. A "PERSON" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. (d) ISSUANCE OF SHARES. The Shares are duly authorized, and when issued and paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable, free and clear of all liens, encumbrances and rights of first refusal of any 6 kind (collectively, "LIENS"). The Company has and, at the Series E-1 Closing Date, the Series E-2 Closing Date and the Series E-3 Closing Date (each a "CLOSING DATE"), as the case may be, will have and at all times while the Shares are outstanding will maintain an adequate reserve of duly authorized shares of Common Stock to enable it to perform its obligations under this Agreement and the Certificates of Designation with respect to the number of Shares issued and outstanding at such Closing Date and in no circumstances shall such reserved and available shares of Common Stock be less than 175% of the maximum number of shares of Common Stock which would be issuable upon conversion of the Shares issued pursuant to the terms hereof with respect to the number of Shares issued and outstanding at such Closing Date were such conversion effected on the Original Issue Date for such Shares. The shares of Common Stock issuable upon conversion of the Shares are referred to herein as the "UNDERLYING SHARES." When issued in accordance with the Certificates of Designation, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. (e) NO CONFLICTS. The execution, delivery and performance of this Agreement and the other Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of its certificate of incorporation, bylaws or other charter documents (each as amended through the date hereof) or (ii) subject to obtaining the consents referred to in Section 2.1(f), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument (evidencing a Company debt or otherwise) to which the Company is a party or by which any property or asset of the Company is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulations), or by which any material property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority except for any such violation as would not, individually or in the aggregate, have or result in a Material Adverse Effect. (f) CONSENTS AND APPROVALS. Except as specifically set forth in SCHEDULE 2.1(f), neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the approval of the Board of Directors and the filings of the Certificates of Designation with respect to the Preferred Stock with the Secretary of State of the State of New York, which filings and approvals with respect to each of the Series E-1 Shares, the Series E-2 Shares and the Series E-3 Shares shall be 7 effected prior to the Series E-1 Closing Date, the Series E-2 Closing Date and the Series E-3 Closing Date, as appropriate, (ii) the filing of Underlying Shares Registration Statements with the Commission, which shall be filed in accordance with and in the time periods set forth in the Registration Rights Agreement, (iii) the application(s) or any letter(s) acceptable to the Nasdaq National Market for the listing of the Underlying Shares with the Nasdaq National Market (and with any other national securities exchange or market on which the Common Stock is then listed), and (iv) any filings, notices or registrations under applicable federal and state securities laws (together with the consents, waivers, authorizations, orders, notices and filings referred to in SCHEDULE 2.1(f), the "REQUIRED APPROVALS"). (g) LITIGATION; PROCEEDINGS. Except as specifically set forth in SCHEDULE 2.1(g) or as disclosed in the Disclosure Materials (as hereinafter defined) there is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Preferred Stock or (ii) could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. (h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary (i) is in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound which could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect, (ii) is in violation of any order of any court, arbitrator or governmental body applicable to it, or (iii) is in violation of any statute, rule or regulation of any governmental authority to which it is subject, which violation could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. (i) SCHEDULES. The Schedules to this Agreement furnished by or on behalf of the Company do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (j) PRIVATE OFFERING. The Company and all Persons acting on its behalf have not made, and will not make, offers or sales of the Preferred Stock, and any securities that might be integrated with offers and sales of the Preferred Stock, except to Accredited Investors (as defined in Regulation D ("REGULATION D") under the Securities Act of 1933, as amended (the "SECURITIES ACT")) without any general solicitation or advertising and otherwise in compliance with the conditions of Regulation D. The offer and sale by the Company to the Purchasers of the Preferred Stock and the Underlying Shares into which the Preferred Stock is convertible is exempt from the registration requirements of the Securities Act. 8 (k) SEC DOCUMENTS; FINANCIAL STATEMENTS; NO ADVERSE CHANGE. The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the date hereof (the foregoing materials being collectively referred to herein as the "SEC DOCUMENTS" and, together with the Schedules to this Agreement and the Private Placement Memorandum dated August 6, 1998, the "DISCLOSURE MATERIALS") on a timely-basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. All material agreements to which the Company is a party or to which the property or assets of the Company are subject have been filed as exhibits to the SEC Documents as required; neither the Company nor any of its subsidiaries is in breach of any agreement where such breach could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q for the period ended March 31, 1998, there has been no event, occurrence or development that has had a Material Adverse Effect which has not been specifically disclosed to the Purchasers by the Company. The Company last filed audited financial statements with the Commission on September 25, 1997, and has not received any comments from the Commission in respect thereof. (l) SENIORITY. No class of equity securities of the Company is senior to the Preferred Stock in right of payment, whether upon liquidation, dissolution or otherwise. (m) INVESTMENT COMPANY. The Company is not, and is not controlled by or under common control with an affiliate (an "AFFILIATE") of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (n) CERTAIN FEES. Except for fees payable to Brown Simpson Asset Management, LLC ("BROWN SIMPSON") pursuant to the section entitled "Fees and Expenses" of the letter agreement (the "TERM LETTER") dated July 16, 1998 between the Company and Brown Simpson, and fees payable to the Company's placement agent, and 9 such placement agent's co-advisor, in connection with this transaction, no fees or commissions will be payable by the Company to any broker, financial advisor, finder, investment banker, or bank with respect to the transactions contemplated by this Agreement. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section 2.1(n) that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless each of the Purchasers, its employees, officers, directors, agents, and partners, and their respective Affiliates (as such term is defined under Rule 405 promulgated under the Securities Act), from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees. (o) SOLICITATION MATERIALS. The Company has not distributed any offering materials in connection with the offering and sale of the Shares or the Underlying Shares other than the Disclosure Materials and any amendments and supplements thereto. The Disclosure Materials do not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Company confirms that it has not provided the Purchasers or their agents or counsel with any information that constitutes or might constitute material non-public information. The Company understands and confirms that the Purchasers shall be relying on the foregoing representations in effecting transactions in securities of the Company. (p) FORM S-3 ELIGIBILITY. The Company is, and at each Closing Date will be, eligible to register securities (including the Underlying Shares) for resale with the Commission under Form S-3 promulgated under the Securities Act. (q) EXCLUSIVITY. The Company shall not issue and sell the Preferred Stock to any Person other than the Purchasers pursuant to this Agreement other than with the specific prior written consent of each of the Purchasers. (r) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. The Company has not in the three years preceding the date hereof received notice (written or oral) from any stock exchange, market or trading facility on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange or market. After giving effect to the transactions contemplated in this Agreement, the Company believes that it is in compliance with all such maintenance requirements. (s) PATENTS AND TRADEMARKS. To the best knowledge of the Company, the Company has, or has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and rights (collectively, the "INTELLECTUAL PROPERTY RIGHTS") which are necessary for use in connection with its 10 business, as currently conducted and as described in the SEC Documents, and which the failure to so have would have a Material Adverse Effect. (t) ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the issuance of the Underlying Shares upon conversion of the Shares in accordance with the Certificates of Designation may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligation to issue Underlying Shares upon conversion of the Shares in accordance with the Certificates of Designation is unconditional and absolute regardless of the effect of any such dilution. (u) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as described on SCHEDULE 2.1(u) hereto, (A) the Company has not granted or agreed to grant to any Person any rights (including "piggy-back" registration rights) to have any securities of the Company registered with the Commission or any other governmental authority which has not been satisfied and (B) except as set forth on SCHEDULE 2.1(c) hereto, no Person, including, but not limited to, current or former shareholders of the Company, underwriters, brokers or agents, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by this Agreement or any other Transaction Document. (v) TITLE. Except as disclosed in SCHEDULE 2.1(v), the Company and the Subsidiaries have good and marketable title in fee simple to all real property and personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all Liens, except for liens, claims or encumbrances as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. (w) REGULATORY PERMITS. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Documents except where the failure to possess such permits would not, individually or in the aggregate, have a Material Adverse Effect ("MATERIAL PERMITS"), and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. (x) CLINICAL STATUS. The clinical status for the Company's products that are the subject of the Royalty Agreement (as defined below) are as follows: (i) Phase II studies for Oxygent have been completed and Phase III clinical trials are scheduled to commence in the fourth quarter of 1998 and (ii) a Phase II/III study for LiquiVent is scheduled to commence in the fourth quarter of 1998. 11 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of the Purchasers, severally and not jointly, hereby represents and warrants to the Company as follows: (a) ORGANIZATION; AUTHORITY. Such Purchaser is a corporation duly incorporated or a limited liability company or limited partnership duly formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with the requisite power and authority, corporate or otherwise, to enter into and to consummate the transactions contemplated hereby and by the Registration Rights Agreement and otherwise to carry out its obligations hereunder and thereunder. The purchase by such Purchaser of the Shares hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and legally binding obligation of such Purchaser, enforceable against such Purchaser, in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. (b) INVESTMENT INTENT. Such Purchaser is acquiring the Shares and the Underlying Shares for its own account for investment purposes only and not with a view to or for distributing or reselling such Shares or Underlying Shares or any part thereof or interest therein, without prejudice, however, to such Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Shares or Underlying Shares pursuant to an effective registration statement under the Securities Act and in compliance with applicable State securities laws or under an exemption from such registration. (c) PURCHASER STATUS. At the time such Purchaser was offered the Shares, and at each Closing Date, (i) it was and will be, an "accredited investor" as defined in Rule 501 under the Securities Act, or (ii) such Purchaser either alone or together with its representatives, had and will have such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Shares and the Underlying Shares, and had and will have so evaluated the merits and risks of such investment. (d) ABILITY OF PURCHASER TO BEAR RISK OF INVESTMENT. Such Purchaser is able to bear the economic risk of an investment in the Shares and the Underlying Shares and, at the present time, is able to afford a complete loss of such investment. (e) RELIANCE. Each Purchaser understands and acknowledges that (I) the Shares are being offered and sold to the Purchaser without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act under Section 4(2) of the Securities Act or Regulation D promulgated thereunder and (ii) the availability of such exemption, depends in part on, and the 12 Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchasers make no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 2.2. ARTICLE III OTHER AGREEMENTS OF THE PARTIES 3.1 TRANSFER RESTRICTIONS. (a) If any Purchaser should decide to dispose of Shares (and upon conversion thereof any of the Underlying Shares) held by it, each Purchaser understands and agrees that it may do so only pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from the registration requirements of the Securities Act. In connection with any transfer of any Shares or any Underlying Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company a written opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. Notwithstanding the foregoing, the Company hereby consents to and agrees to register (i) any transfer of Shares by one Purchaser to another Purchaser, and agrees that no documentation other than executed transfer documents shall be required for any such transfer, and (ii) any transfer by any Purchaser to an Affiliate of such Purchaser or to an Affiliate of another Purchaser, or any transfer among any such Affiliates, provided that transferee certifies in writing to the Company that it is an "accredited investor" as defined in Rule 501(a) under the Securities Act. Any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement. (b) Each Purchaser agrees to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Shares: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION 13 NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. The Underlying Shares issuable upon conversion of Shares shall not contain the legend set forth above if the conversion of such Shares occurs at any time while the Underlying Shares Registration Statement is effective under the Securities Act or in the event there is not an effective Underlying Shares Registration Statement at such time, if in the written opinion of counsel experienced in the area of United States securities laws such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company agrees that it will provide each Purchaser, upon request, with a certificate or certificates representing Underlying Shares, free from such legend at such time as such legend is no longer required hereunder. 3.2 STOP TRANSFER INSTRUCTION. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in Section 3.1. 3.3 FURNISHING OF INFORMATION. As long as any Purchaser owns Shares or Underlying Shares, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Purchasers with true and complete copies of all such filings. As long as any Purchaser owns Shares or Underlying Shares, if the Company is not required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act. The Company further covenants that it will take such further action as any holder of Shares may reasonably request, all to the extent required from time to time to enable such Person to sell Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion referenced above in Section 3.1. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with such requirements. 3.4 BLUE SKY LAWS. In accordance with the Registration Rights Agreement, the Company shall qualify the Underlying Shares under the securities or Blue Sky laws of such jurisdictions as the Purchasers may request and shall continue such qualification at all times through the third anniversary of the last Closing Date. 3.5 INTEGRATION. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Shares or the Underlying Shares in a manner that 14 would require the registration under the Securities Act of the sale of the Shares or the Underlying Shares to any Purchaser. 3.6 CERTAIN AGREEMENTS. As long as any Purchaser owns Shares, the Company shall not and shall cause the Subsidiaries not to, without the consent of the holders of all of the Shares then outstanding, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of any Purchaser; (ii) declare, authorize, set aside or pay any dividend or other distribution with respect to the Common Stock except as permitted under the Certificates of Designation and as would not adversely affect the rights of any Purchaser hereunder or under the Certificates of Designation; (iii) repay, repurchase or offer to repay, repurchase or otherwise acquire shares of its Common Stock in any manner; (iv) issue any series of preferred stock or other securities with rights senior (in respect of liquidations, dividends, preferences and similar rights) to those of the Shares, or (v) enter into any agreement with respect to any of the foregoing. 3.7 LISTING AND RESERVATION OF UNDERLYING SHARES. (a) The Company shall (i) not later than the fifth Business Day following the applicable Closing Date prepare and file with the Nasdaq National Market (as well as any other national securities exchange or market on which the Common Stock is then listed) an additional shares listing application or a letter acceptable to the Nasdaq National Market covering and listing a number of shares of Common Stock which is at least equal to 175% of the maximum number of Underlying Shares then issuable, (ii) take all steps necessary to cause the Underlying Shares to be approved for listing in the Nasdaq National Market (as well as on any other national securities exchange or market on which the Common Stock is then listed) as soon as possible thereafter, and (iii) provide to the Purchasers evidence of such listing, and the Company shall maintain the listing of its Common Stock on such exchange. (b) The Company shall reserve for issuance upon conversion of the Shares pursuant to the terms of the Certificates of Designation the number of shares to be listed on the Nasdaq National Market (and such other national securities exchange or market on which the Common Stock is then listed or traded) as set forth in Section 3.7(a). Shares of Common Stock reserved for issuance upon the conversion of the Shares as set forth in Section 3.7(a) shall be allocated pro rata to each of the Purchasers in accordance with the amount of Shares issued and delivered to such Purchaser at each Closing, as applicable. 3.8 NO VIOLATION OF APPLICABLE LAW. Notwithstanding any provision of this Agreement to the contrary, if the redemption of Shares under this Agreement, any applicable Certificate of Designation or the Registration Rights Agreement would be prohibited by the relevant provisions of the New York Business Corporation Law, such redemption shall be effected as soon as it is permitted under such law; provided, however, that from the 5th day after any redemption notice until such redemption price is paid in full, interest on any such unpaid amount shall accrue and be payable at the rate of 15% per annum in accordance with the applicable Certificate of Designation. 15 3.9 NOTICE OF BREACHES. (a) Each of the Company and each Purchaser shall give prompt written notice to the other of any breach of any representation, warranty or other agreement contained in this Agreement or in the Registration Rights Agreement, as well as any events or occurrences arising after the date hereof and prior to, with respect to the Series E-2 Closing, the Series E-2 Closing Date and with respect to the Series E-3 Closing, the Series E-3 Closing Date, which would reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained herein to be incorrect or breached as of such Closing Date. However, no disclosure by either party pursuant to this Section 3.9 shall be deemed to cure any breach of any representation, warranty or other agreement contained herein or in the Registration Rights Agreement. (b) Notwithstanding the generality of Section 3.9(a) the Company shall promptly notify each Purchaser of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contemplated hereby and by the Registration Rights Agreement violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to the holders of the Shares a copy of any written statement in support of or relating to such claim or notice. (c) The default by any Purchaser of any of its obligations, representations or warranties under any Transaction Document shall not be imputed to, and shall have no effect upon, any other Purchaser or affect the Company's obligations under the Transaction Documents to any non-defaulting Purchaser. 3.10 CONVERSION OBLIGATIONS OF THE COMPANY. The Company covenants to convert Shares and to deliver Underlying Shares in accordance with the terms and conditions and time period set forth in the respective Certificates of Designation. 3.11 SUBSEQUENT REGISTRATIONS. Other than Underlying Shares and other "REGISTRABLE SECURITIES" (as defined in the Registration Rights Agreement) to be registered in accordance with the Registration Rights Agreement, the Company shall not, for a period of not less than 90 Trading Days after the respective dates that the Underlying Shares Registration Statements relating to the securities issued on the Series E-1 Closing Date, the Series E-2 Closing Date and the Series E-3 Closing Date are declared effective by the Commission, without the prior written consent of the Purchasers, (i) register for resale any securities of the Company, except for the securities set forth on SCHEDULE 2.1(u) under paragraphs (1), (2) and (3) thereof, and those held by any Strategic Partner or (ii) issue or sell any of its or any of its Affiliates' equity or equity-equivalent securities except for (A) securities sold to any established biotechnology or pharmaceutical company with whom the Company executes or has executed a written agreement providing that the Company and such entity will be "partnered" in the development or distribution of one or more of the Company's chemical compounds (a "STRATEGIC PARTNER"), (B) securities issued upon the exercise or conversion of the securities set forth on SCHEDULE 2.1(c) or 16 (C) securities sold pursuant to the Company's employee benefit plans. Any days that any Purchaser is unable to sell Underlying Shares under an Underlying Shares Registration Statement shall be added to such 90 Trading Day period for the purposes of (i) and (ii) above. Notwithstanding the foregoing, the Company may, after a period of not less than 30 Trading Days after the respective dates that the Underlying Shares Registration Statements relating to the securities issued on the Series E-1 Closing Date, the Series E-2 Closing Date and the Series E-3 Closing Date are declared effective, sell its or its Affiliates' equity securities in an underwritten public offering, PROVIDED, that written notice of such an offering be provided to the Purchasers ten (10) Trading Days in advance of the commencement of such an offering. 3.12 USE OF PROCEEDS. The Company shall use all of the proceeds from the sale of the Shares for working capital and general corporate purposes and not for the satisfaction of any portion of Company borrowings outside the normal course of business or to redeem Company equity or equity-equivalent securities. Pending application of the proceeds of this placement in the manner permitted hereby, the Company will invest such proceeds in interest bearing accounts and/or short-term, investment grade interest bearing securities. 3.13 REIMBURSEMENT. In the event that any Purchaser or Brown Simpson becomes involved in any capacity in any action, proceeding or investigation brought by or against any person, including shareholders of the Company, in connection with or as a result of either Brown Simpson's engagement or any matter referred to in this Agreement, the Company will reimburse such Purchaser or Brown Simpson for its legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, except to the extent that such action, proceeding, or investigation results from the gross negligence or bad faith of, or knowing breach of this Agreement by, such Purchaser or Brown Simpson. The Company also will indemnify and hold the Purchasers and Brown Simpson harmless against any and all losses, claims, damages or liabilities to any such person in connection with or as a result of either Brown Simpson's engagement or any matter referred to in this Agreement, except to the extent that any such loss, claim, damage or liability results from the gross negligence or bad faith of, or knowing breach of this Agreement by, such Purchaser or Brown Simpson. If for any reason the foregoing indemnification is unavailable to such Purchaser or to Brown Simpson or is insufficient to hold such person harmless, then the Company shall contribute to the amount paid or payable by such Purchaser or Brown Simpson as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative economic interests of the Company and its shareholders on the one hand and the Purchasers and Brown Simpson on the other hand in the matters contemplated by this Agreement as well as the relative fault of the Company, the Purchasers and Brown Simpson with respect to such loss, claim, damage or liability and any other relevant equitable considerations. The reimbursement, indemnity and contribution obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliate of the Purchasers and Brown Simpson and the partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and Brown Simpson and any such affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers, Brown Simpson, any such affiliate and any such person. The Company also agrees that neither the Purchasers nor Brown Simpson 17 nor any of such affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any person asserting claims on behalf of or in right of the Company in connection with or as a result of either Brown Simpson's engagement or any matter referred to in this Agreement except to the extent that any losses, claims, damages, liabilities or expenses incurred by the Company result from the gross negligence or bad faith of, or knowing breach of this Agreement by, the Purchasers or Brown Simpson. Promptly after receipt by the Purchasers or Brown Simpson or any affiliate, partners, directors, agents, employees and controlling persons, as the case may be, of notice of any claim or other commencement of any action in respect of which indemnity may be sought, such party will notify the Company in writing of the receipt or commencement thereof and the Company shall have the right to assume the defense of such claim or action (including the employment of counsel reasonably satisfactory to the indemnified parties and the payment of fees and expenses of such counsel). The indemnified party shall cooperate with the Company and the Company's counsel in the defense of such claim or action. The Purchasers and Brown Simpson understand that the Company shall not in connection with any one such claim or action or separate but substantially similar related claims or actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for all of the indemnified parties unless the defense of one indemnified party is unique or separate from that of another indemnified party or one or more legal defenses are available to an indemnified party but not to other indemnified parties subject to the same claim or action. In the event the Company does not promptly assume the defense of a claim or action, the indemnified parties shall have the right to employ counsel reasonably satisfactory to the Company, at the Company's expense, to defend such claim or action. The indemnified party shall not admit any liability with respect to the claim or action or settle, compromise, pay or discharge the same without the prior written consent of the Company so long as the Company is reasonably contesting or defending the same in good faith. The Company shall not compromise, settle or discharge any claim or action without the Purchasers' or Brown Simpson's consent, as applicable, which consent will not be unreasonably withheld, unless there is no finding or admission of any violation of any law against the indemnified party and the sole relief is monetary damages paid in full by the Company. Any right to trial by jury with respect to any action or proceeding arising in connection with or as a result of either our engagement or any matter referred to in this Agreement is hereby waived by the parties hereto. The provisions of this Section 3.13 shall survive any termination or completion of this Agreement. 3.14 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS. The Company shall not, directly or indirectly, without the prior written consent of the Purchasers, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any of its or its Affiliates' equity or equity-equivalent securities or any instrument that permits the holder thereof to acquire Common Stock at any time over the life of the security or investment at a price that is less than the market price of the Common Stock at the time of issuance of such security or investment (a "SUBSEQUENT PLACEMENT") for a period of 180 days after any Closing Date, except (i) the granting of options or warrants to employees, officers and directors, and the issuance of shares upon exercise of options granted, under any stock option plan heretofore or hereinafter duly adopted by the Company, (ii) shares issued upon exercise of any currently outstanding warrants and upon conversion of any currently outstanding 18 convertible preferred stock in each case disclosed in SCHEDULE 2.1(c), and (iii) shares of Common Stock issued upon conversion of Preferred Shares, unless (A) the Company delivers to each Purchaser a written notice (the "SUBSEQUENT PLACEMENT NOTICE") of its intention to effect such Subsequent Placement, which Subsequent Placement Notice shall describe in reasonable detail the proposed terms of such Subsequent Placement, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Placement shall be effected, and attached to which shall be a term sheet or similar document relating thereto and (B) no Purchaser shall have notified the Company by 5:00 p.m. (New York time) on the fifth (5th) Trading Day after its receipt of the Subsequent Placement Notice of its willingness to provide (or to cause its sole designee to provide), subject to completion of mutually acceptable documentation, financing to the Company on substantially the terms set forth in the Subsequent Placement Notice. If no Purchaser shall notify the Company of its intention to provide the financing as proposed in the Subsequent Placement Notice within such time period, the Company may effect the Subsequent Placement substantially upon the terms and to the Person (or Affiliates of such Persons) set forth in the Subsequent Placement Notice; PROVIDED, that the Company shall provide each Purchaser with a second Subsequent Placement Notice, and the Purchasers shall again have the right of first refusal set forth above in this paragraph (a), if the Subsequent Placement subject to the initial Subsequent Placement Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Placement Notice within thirty (30) Trading Days after the date of the initial Subsequent Placement Notice with the Person (or an Affiliate of such Person) identified in the Subsequent Placement Notice. If the Purchasers shall indicate a willingness to provide financing in excess of the amount set forth in the Subsequent Placement Notice, then each Purchaser shall be entitled to provide financing pursuant to such Subsequent Placement Notice up to an amount equal to such Purchaser's pro rata portion of the Preferred Stock purchased by the Purchasers under this Agreement at the Series E-1 Closing. Notwithstanding the foregoing, the Company may, after a period of not less than 30 Trading Days after the respective dates that the Underlying Shares Registration Statements relating to the securities issued on the Series E-1 Closing Date, the Series E-2 Closing Date and the Series E-3 Closing Date are declared effective, sell its or its Affiliates' equity securities in an underwritten public offering, PROVIDED, that written notice of such an offering be provided to the Purchasers ten (10) Trading Days in advance of the commencement of such an offering. 3.15 SHORT SALES. No Purchaser shall engage in a short selling transaction in which the number of shares of Common Stock shorted exceeds the number of shares of Common Stock held by such Purchaser plus the number of shares of Common Stock into which the shares of Preferred Stock held by such Purchaser are then convertible. 19 ARTICLE IV CONDITIONS 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL THE SERIES E-1 SHARES. (a) The obligation of the Company to sell the Series E-1 Shares hereunder is subject to the satisfaction or waiver by the Company, at or before the Series E-1 Closing, of each of the following conditions: (i) ACCURACY OF THE PURCHASERS' REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser shall be true and correct in all material respects as of the date when made and as of the Series E-1 Closing Date, as though made on and as of such date; (ii) PERFORMANCE BY THE PURCHASERS. Each Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Purchaser at or prior to the Series E-1 Closing; and (iii) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement. (b) CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE SERIES E-1 SHARES. The obligation of each Purchaser hereunder to acquire and pay for the Series E-1 Shares is subject to the satisfaction or waiver by such Purchaser, at or before the Series E-1 Closing, of each of the following conditions: (i) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company set forth in this Agreement and in the Registration Rights Agreement shall be true and correct in all material respects as of the date when made and as of the Series E-1 Closing Date as though made on and as of such date; (ii) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied with in all material respects all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Series E-1 Closing; (iii) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by 20 any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement; (iv) ADVERSE CHANGES. Since the date of the financial statements included in the Company's Quarterly Report on Form 10-Q or Annual Report on Form 10-K, whichever is more recent, last filed prior to the date of this Agreement, no event which had a Material Adverse Effect and no material adverse change in the financial condition of the Company shall have occurred (for purposes hereof changes in the market price of the Common Stock may be considered as a factor in determining whether there has occurred an event which has had a Material Adverse Effect or whether a material adverse change has occurred); (v) NO SUSPENSIONS OF TRADING IN COMMON STOCK. The trading in the Common Stock shall not have been suspended by the Commission or on the Nasdaq National Market which suspension shall remain in effect; (vi) LISTING OF COMMON STOCK. The Company shall have filed a listing application to list the Underlying Shares for trading on the Nasdaq National Market; (vii) LEGAL OPINIONS. The Company shall have delivered to the Purchasers the opinions of Lloyd A. Rowland, the Company's general counsel, and of Stroock & Stroock & Lavan LLP, outside counsel to the Company, in substantially the forms attached hereto as EXHIBIT C1 and EXHIBIT C2; (viii) REQUIRED APPROVALS. All Required Approvals shall have been obtained; (ix) SHARES OF COMMON STOCK. On or prior to the Series E-1 Closing Date, the Company shall have duly reserved the number of Underlying Shares required by the Transaction Documents to be reserved for issuance upon conversion of Series E-1 Shares; (x) DELIVERY OF STOCK CERTIFICATES. The Company shall have delivered to each Purchaser or such Purchaser's designee, the stock certificate(s) representing the Series E-1 Shares, registered in the name of such Purchaser, each in form satisfactory to the Purchaser; (xi) REGISTRATION RIGHTS AGREEMENT. The Company shall have executed and delivered the Registration Rights Agreement; (xii) CERTIFICATES OF DESIGNATION. The Series E-1 Designation shall have been duly approved by the Board of Directors and filed with the Secretary of State 21 of the State of New York, and the Company shall have delivered a copy thereof to the Purchaser certified as filed by the office of the Secretary of State of the State of New York; (xiii) CHANGE OF CONTROL. No Change of Control (as hereafter defined) shall have occurred between the date hereof and the Series E-1 Closing Date; and (xiv) TRANSFER AGENT INSTRUCTIONS. The Irrevocable Transfer Agent Instructions, in the form of EXHIBIT D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent. (xv) ROYALTY RIGHTS AGREEMENT. The Company and the Purchasers shall have entered into the Royalty Agreement in the form attached hereto as EXHIBIT E. 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE SERIES E-2 SHARES AND THE SERIES E-3 SHARES. The obligation of each Purchaser hereunder to acquire and pay for the Series E-2 Shares and the Series E-3 Shares is subject to the satisfaction or waiver by each Purchaser, at or before the Series E-2 Closing or the Series E-3 Closing, as applicable, of each of the following conditions: (a) SERIES E-1 CLOSING. The Series E-1 Closing shall have occurred. (b) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained herein and in the Registration Rights Agreement shall be true and correct as of the date when made and as of the Series E-2 Closing Date and the Series E-3 Closing Date, as applicable, as though made on and as of such date, except where the event causing such representation or warranty to be untrue or incorrect would not result in a Material Adverse Effect. (c) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement, the Registration Rights Agreement and the Royalty Agreement to be performed, satisfied or complied with by the Company at or prior to the Series E-2 Closing Date and the Series E-3 Closing Date, as applicable. (d) UNDERLYING SHARES REGISTRATION STATEMENTS. With respect to the Series E-2 Closing, the Underlying Shares Registration Statement with respect to the Underlying Shares issuable on conversion of all outstanding Series E-1 Shares shall have been declared effective under the Securities Act by the Commission; and with respect to the Series E-3 Closing, the Underlying Shares Registration Statement with respect to the Underlying Shares issuable on conversion of all outstanding Series E-2 Shares shall have been declared effective under the Securities Act by the Commission; and on each such Closing Date such Underlying Shares Registration Statement shall be effective, not subject to any stop order and not be subject to any suspension pursuant to Section 3(p) of 22 the Registration Rights Agreement, and shall have been effective and shall not have been subject to any stop order for the 30 business days prior to such Closing Date and no stop order shall be pending or threatened as of such Closing Date. (e) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court of governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement relating to the issuance or conversion of any of the Shares. (f) ADVERSE CHANGES. During the period which is ten Trading Days prior to the date of the delivery of either a Series E-2 Subsequent Financing Notice or a Series E-3 Subsequent Financing Notice and the date of the Series E-2 Closing and the Series E-3 Closing, respectively, the Per Share Market Value of the Common Stock shall not have decreased by more than 50% from the highest Per Share Market Value during such period; provided, however, that if the Per Share Market Value shall have so decreased by more than 50%, but shall have subsequently increased so that on the applicable Closing Date it has been, for the three consecutive Trading Days immediately prior to such Closing Date, no more than 25% below the highest Per Share Market Value during such period, then this condition shall be satisfied. (g) LITIGATION. No litigation shall have been instituted or threatened against the Company which could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. (h) MANAGEMENT. In the reasonable judgment of each Purchaser, there have been no substantial changes in the senior management of the Company, except for the acquisition of a Chief Scientific Officer, and for changes which could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. (i) NO SUSPENSIONS OF TRADING IN COMMON STOCK. The trading in the Common Stock shall not have been suspended by the Commission or on the Nasdaq National Market (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company). (j) LISTING OF COMMON STOCK. The Common Stock shall have been at all times since the Series E-1 Closing Date, and on the Series E-2 Closing Date and the Series E-3 Closing Date be listed for trading on the Nasdaq National Market. (k) CHANGE OF CONTROL. No Change of Control in the Company shall have occurred. "CHANGE OF CONTROL" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d5(b)(1) promulgated under the Exchange Act) of in excess of 50% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Board of Directors which is not approved by those individuals who are members of the Board of 23 Directors on the date hereof in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii). (l) LEGAL OPINIONS. The Company shall have delivered to the Purchasers the opinions of the Company's legal counsel, in substantially the forms attached hereto as EXHIBIT C1 and EXHIBIT C2, dated the applicable Closing Date. (m) REQUIRED APPROVALS. All Required Approvals shall have been obtained. (n) SHARES OF COMMON STOCK. On each of the Series E-2 Closing Date and the Series E-3 Closing Date the Company shall have duly reserved the number of Underlying Shares required by this Agreement to be reserved for issuance upon conversion of Series E-2 Shares and Series E-3 Shares, respectively. (o) DELIVERY OF STOCK CERTIFICATES. The Company shall have delivered to each Purchaser or such Purchaser's designee the stock certificate(s) representing the Shares being purchased at such Closing, registered in the name of such Purchaser, each in form satisfactory to such Purchaser. (p) PERFORMANCE OF CONVERSION/EXERCISE OBLIGATIONS. The Company shall have delivered Underlying Shares upon conversion of Shares and otherwise performed its obligations in accordance with the terms, conditions and timing requirements of each Certificate of Designation. (q) COMMON STOCK PRICE. The Per Share Market Value shall not have been less than $3.00 per share for any ten consecutive Trading Days since the Series E-1 Closing Date. (r) TRANSFER AGENT INSTRUCTIONS. The Irrevocable Transfer Agent Instructions, in the form of EXHIBIT D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent. (s) OFFICER'S CERTIFICATE. On each Closing Date the Company shall deliver to the Purchasers an Officer's Certificate dated the Closing Date and signed by an executive officer of the Company confirming the accuracy of the Company's representations, warranties and covenants as of such Closing Date and confirming the compliance by the Company with the conditions precedent set forth in this Section 4.2 as of such Closing Date. (t) INTERIM FINANCINGS. The Purchasers shall have no obligation to purchase the Series E-2 Preferred or the Series E-3 Preferred if, after the Series E-1 Closing or after the Series E-2 Closing, respectively, the Company has sold or issued, in a private 24 placement transaction or series of such transactions to a single entity or a group of entities under common control or which are related such that they could be considered a single entity, equity or equity equivalent securities in an amount exceeding $500,000, unless such entity is a Strategic Partner. ARTICLE V MISCELLANEOUS 5.1 FEES AND EXPENSES. Except (i) as set forth in the Term Letter under the caption "Fees and Expenses," (ii) as set forth in the Registration Rights Agreement and (iii) as otherwise set forth in this Agreement, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Shares pursuant hereto. 5.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Exhibits and Schedules hereto, the Registration Rights Agreement and each Certificate of Designation (each when filed) contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. 5.3 NOTICES. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed to have been received (a) upon hand delivery (receipt acknowledged) or delivery by telex (with correct answer back received), telecopy or facsimile (with transmission confirmation report) at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered on a business day after normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be as set forth below each parties' name on SCHEDULE 1, and if to any Purchaser with copies to Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201, Attn: Diane B. Muse, Esq., fax: (214) 969-4343, or such other address as may be designated in writing hereafter, in the same manner, by such person. Copies of notices to the Company shall be sent to Stroock & Stroock & Lavan LLP, 1800 Maiden Lane, New York, New York 10038, Attn: Mel Epstein, Esq., fax: (212) 806-6006, or such other address as may be designated in writing hereafter, in the same manner, by such person. 5.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Purchasers; or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition 25 or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Notwithstanding the foregoing, no such amendment shall be effective to the extent that it applies to less than all of the holders of the Shares outstanding. The Company shall not offer or pay any consideration to a Purchaser for consenting to such an amendment or waiver unless the same consideration is offered to each Purchaser and the same consideration is paid to each Purchaser which consents to such amendment or waiver. 5.5 HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 5.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each of the Purchasers. The Purchasers may assign this Agreement or any rights or obligations hereunder without the prior written consent of the Company, except that any assignee must make the representations and warranties set forth in Section 2.2 and otherwise comply with the terms of this Agreement otherwise applicable to its assignor. This provision shall not limit a Purchaser's right to transfer securities or transfer or assign rights under the Registration Rights Agreement. 5.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 5.8 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. Each party hereby irrevocably submits to the nonexclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. 5.9 SURVIVAL. The agreements, covenants, representations, warranties and provisions contained in this Agreement shall survive the delivery of the Shares pursuant to this Agreement and each Closing hereunder and any conversion of Shares. 5.10 EXECUTION. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding 26 obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. 5.11 PUBLICITY. The Company and each Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement. The Company shall not publicly or otherwise disclose the names of any of the Purchasers without each such Purchaser's prior written consent unless otherwise required by law, in which case the Company shall inform such Purchaser of such disclosure in writing prior to making such disclosure. 5.12 SEVERABILITY. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affecting or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 5.13 REMEDIES. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Purchasers will be entitled to specific performance of the obligations of the Company under the Transaction Documents. Each of the Company and the Purchasers (severally and not jointly) agree that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 5.14 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The obligations of each Purchaser hereunder is several and not joint with the obligations of the other Purchasers hereunder, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser hereunder. Nothing contained herein or in any other agreement or document delivered at any Closing, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Purchaser shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] 27 IN WITNESS WHEREOF, the parties hereto have caused this Convertible Preferred Stock Purchase Agreement to be duly executed by their respective authorized persons as of the date first indicated above. ALLIANCE PHARMACEUTICAL CORP. By: -------------------------------------------- Name: Theodore D. Roth Title: President and Chief Operating Officer BROWN SIMPSON STRATEGIC GROWTH FUND, LTD. By: -------------------------------------------- Name: Title: BROWN SIMPSON STRATEGIC GROWTH FUND, L.P. By: -------------------------------------------- Name: Title: WESTOVER INVESTMENTS L.P. By: -------------------------------------------- Name: Title: MONTROSE INVESTMENTS LTD. By: -------------------------------------------- Name: Title: 28 BAY HARBOR INVESTMENTS, INC. By: -------------------------------------------- Name: Title: 29 EXHIBIT II SCHEDULE I COMPANY: ALLIANCE PHARMACEUTICAL CORP. 3040 Science Park Road San Diego, CA 92121 Attn: Theodore D. Roth Fax: (619) 558-5306 PURCHASERS: BROWN SIMPSON STRATEGIC GROWTH FUND, LTD. 152 West 57th Street, 40th Floor New York, New York 10019 Attn: Mitchell D. Kaye Fax: (212) 247-1329 Portion of Series E-1 Purchase Price - $1,700,040 Series E-1 Shares - 28,334 BROWN SIMPSON STRATEGIC GROWTH FUND, L.P. 152 West 57th Street, 40th Floor New York, New York 10019 Attn: Mitchell D. Kaye Fax: (212) 247-1329 Portion of Series E-1 Purchase Price - $799,980 Series E-1 Shares - 13,333 WESTOVER INVESTMENTS L.P. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attn: Will Rose Fax: (214) 758-1221 Portion of Series E-1 Purchase Price - $679,980 Series E-1 Shares - 11,333 MONTROSE INVESTMENTS LTD. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attn: Will Rose Fax: (214) 758-1221 Portion of Series E-1 Purchase Price - $1,320,000 Series E-1 Shares - 22,000 EXHIBIT II BAY HARBOR INVESTMENTS, INC. c/o Trippoak Advisors, Inc. 630 Fifth Avenue, Suite 2000 New York, New York 10111 Attn: Robert Miller Fax: (212) 332-3256 With copies to: Robinson Silverman Pearce Aronson & Berman, LLP 1290 Avenue of the Americas New York, New York 10104 Attn: Kenneth L. Henderson Fax: (212) 541-4630 Portion of Series E-1 Purchase Price - $1,500,000 Series E-1 Shares - 25,000 SCHEDULE 2.1(a) SUBSIDIARY LIST ASTRAL, INC., A DELAWARE CORPORATION MDV TECHNOLOGIES, INC., A DELAWARE CORPORATION TALCO PHARMACEUTICAL, INC., A DELAWARE CORPORATION SCHEDULE 2.1(c) CAPITAL STOCK, RIGHTS TO ACQUIRE CAPITAL STOCK & 5% SHAREHOLDERS AUTHORIZED CAPITAL STOCK Authorized Common Stock, $.01 par value 50,000,000 Authorized Preferred Stock, $.01 par value 5,000,000 1.5 million shares of Series A Preferred Stock 500,000 shares of Series D Preferred Stock OUTSTANDING SECURITIES AS OF JULY 31, 1998 Common Stock 32,014,005 Series D Preferred Stock 500,000 Outstanding Options 4,881,221 Outstanding Warrants 565,523
RIGHTS TO ACQUIRE CAPITAL STOCK Pursuant to Section 7.1 of a preferred stock purchase agreement, the holder of all 500,000 shares of Series D Preferred Stock, Schering Berlin Venture Corp. ("SBVC"), has the right to acquire additional shares of Common Stock if the Company issues (an "Issuance") additional shares of Common Stock in a public or private offering (including upon the conversion of warrants or other convertible securities). The purchase price is to be equal to the price per share of Common Stock paid in such Issuance. The number of shares SBVC may purchase is equal to 1.59% of the Common Stock issued in the Issuance. In November 1996, the Company acquired MDV Technologies, Inc. ("MDV") by a merger (the "MDV Merger") of a wholly owned subsidiary of the Company into MDV. The Company may pay up to $20 million to former shareholders of MDV if advanced clinical development or licensing milestones are achieved in connection with MDV's technology. The Company will also make certain royalty payments on the sales of products, if any, developed from such technology. The Company may buy out its royalty obligation for $10 million at any time prior to the first anniversary of the approval by U.S. regulatory authorities of any products based upon the MDV technology (the amount increasing thereafter over time). All of such payments to the former MDV shareholders may be made in cash or, at the Company's option, shares of the Company's common stock, except for the royalty obligations which will be payable only in cash. The Company has not determined whether subsequent payments (other than royalties) will be made in cash or in common stock. 5% SHAREHOLDERS Wellington Management Company, LLP FMR Corp. and related entities and funds / Edward C. Johnson, III / Abigail P. Johnson SCHEDULE 2.1(f) NOTICES, CONSENTS AND WAIVERS 1. SBVC owns 500,000 shares of Series D Preferred Stock which must consent to the issuance of additional preferred stock with rights that are senior to or on a parity with the Series D Preferred Stock with respect to dividends, redemptions or upon liquidation or dissolution of the Company. 2. The Company is required to give notice to the holders of outstanding warrants listed on Schedule 2.1(u) of registration with the Securities and Exchange Commission of the shares of common stock receivable on conversion of Series E Preferred Stock (and to offer the opportunity to register common stock upon exercise of the warrants with respect to warrants with piggyback registration rights). SCHEDULE 2.1(g) LITIGATION; PROCEEDINGS None. SCHEDULE 2.1(u) REGISTRATION RIGHTS REGISTRATION RIGHTS 1) The holders of outstanding warrants for 465,523 shares of Common Stock issuable at prices ranging from $6.67 to $20 per share have demand and/or piggyback registration rights. 2) Hoechst Marion Roussel, Inc. ("HMRI") received 345,327 shares of common stock upon conversion in June 1997 of preferred stock of Alliance. HMRI has demand registration rights for such shares. 3) SBVC owns 500,000 shares of Series D Preferred Stock which converts into a number of shares of Common Stock, such number to be determined by a formula. The Company has an obligation to register the Common Stock to be received upon conversion and other shares of Common Stock received by SBVC pursuant to a right to participate in Issuances (see Schedule 2.1(c)) or Common Stock issued pursuant to stock dividends, stock splits or similar distributions. 4) In connection with the MDV Merger (see Schedule 2.1(c)), the Company registered the estimated number of shares to potentially be received by the former MDV shareholders. Under certain circumstances the Company could be required to issue and register additional shares of Common Stock which would be required to be registered. SCHEDULE 2.1(v) TITLE AND LIENS In connection with the purchase of the Otisville, New York facility in 1983, the Company entered into a land use agreement with the New York City Development Corporation, the provisions of which require the Company to care for retired police horses. The provisions are "covenants running with the land" binding upon the Company and subsequent owners. The Company has a line of credit for up to $1.5 million with Wells Fargo Bank. The loan is secured by certain cash and securities accounts. In June 1998, Imperial Bank entered into a credit agreement providing for a loan of up to $15 million to the Company. As security for the loan the Company granted a security interest in all then existing or thereafter acquired personal property of the Company, excluding certain specific equipment and all intangible assets (including intellectual property, patents and patent applications). EX-10.K 4 EXHIBIT 10.K ROYALTY RIGHTS AGREEMENT THIS ROYALTY RIGHTS AGREEMENT (this "AGREEMENT") is made and entered into as of the August 13, 1998, among Alliance Pharmaceutical Corp., a New York corporation (the "COMPANY"), Brown Simpson Strategic Growth Fund, L.P., a New York limited partnership ("BROWN SIMPSON LP"), Brown Simpson Strategic Growth Fund, Ltd., a Cayman Islands exempt company ("BROWN SIMPSON LTD."), Westover Investments L.P., a Delaware limited partnership ("WESTOVER"), Montrose Investments Ltd., a Cayman Islands exempt company ("MONTROSE"), and Bay Harbor Investments, Inc., a corporation organized and existing under the laws of the British Virgin Islands ("BAY HARBOR"). Brown Simpson LP, Brown Simpson Ltd., Westover, Montrose and Bay Harbor are each referred to herein as a Purchaser and are collectively referred to herein as the Purchasers. RECITALS WHEREAS, this Agreement is made pursuant to the Convertible Preferred Stock Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "PURCHASE AGREEMENT"); WHEREAS, the Company has developed certain technology concerning an intravascular oxygen carrier ("blood substitute") designed to temporarily augment oxygen delivery in patients (the "OXYGENT TECHNOLOGY"); WHEREAS, the Company has developed certain technology concerning an intrapulmonary agent to reduce a patient's exposure to the harmful effects of conventional mechanical ventilation (the "LIQUIVENT TECHNOLOGY"); WHEREAS, the Company has developed certain technology concerning pharmaceutically active suspension compositions used as a drug delivery platform for the administration of drugs to the lungs (the "PULMOSPHERES TECHNOLOGY"); WHEREAS the Company owns or has licensed the entire right, title and interest in, to and under United States Patents Nos. 5,628,930, 5,634,461, 5,344,393 and 5,451,205 and all associated foreign counter-parts (if any) which relate to the Oxygent Technology; WHEREAS the Company owns or has licensed the entire right, title and interest in, to and under United States Patents Nos. 5,655,521, 5,590,651, 5,490,498 and 5,437,272 and all associated foreign counter-parts (if any) which relate to the Liquivent Technology; WHEREAS the Company owns or has licensed the entire right, title and interest in, to and under United States Provisional Patent Application Serial No. 60/060,337 and all associated nonprovisional and foreign counter-parts (if any) which relate to the Pulmospheres Technology; WHEREAS, the Purchase Agreement provides, as a condition to the Series E-1 Closing (as defined in the Purchase Agreement), that the Company and the Purchasers shall enter into and execute this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual promises, covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.01. OXYGENT TECHNOLOGY means that certain technology developed by the Company concerning an intravascular oxygen carrier ("blood substitute") designed to temporarily augment oxygen delivery in patients, including, but not limited to, the subject matter disclosed and claimed in United States Patents Nos. 5,628,930, 5,634,461, 5,344,393 and 5,451,205 and all associated foreign counter-parts (if any) which relate thereto as well as any later filed amendments, continuations, continuations-in-part, divisions, reissues, reexaminations, extensions or improvements thereof. Section 1.02. LIQUIVENT TECHNOLOGY means that certain technology developed by the Company concerning an intrapulmonary agent to reduce a patient's exposure to the harmful effects of conventional mechanical ventilation, including but not limited to the subject matter disclosed and claimed in United States Patents Nos. 5,655,521, 5,590,651, 5,490,498 and 5,437,272 and all associated foreign counter-parts (if any) which relate thereto as well as any later filed amendments, continuations, continuations-in-part, divisions, reissues, reexaminations, extensions or improvements thereof. Section 1.03. PULMOSPHERES TECHNOLOGY means that certain technology developed by the Company concerning pharmaceutically active suspension compositions used as a drug delivery platform for the administration of drugs to the lungs, including but not limited to the subject matter disclosed and claimed in United States Provisional Patent Application No. 60/060,337 and all associated nonprovisional and foreign counter-parts (if any) which relate thereto as well as any later filed amendments, continuations, continuations-in-part, divisions, reissues, reexaminations, extensions or improvements thereof. Section 1.04. "ROYALTY-BEARING PRODUCT" means the first drug compound arising out of (i) the OXYGENT TECHNOLOGY, (ii) the LIQUIVENT TECHNOLOGY, or (iii) the PULMOSPHERES TECHNOLOGY to gain FDA approval for sale in the United States for administration to humans. Section 1.05. "FDA" means the U.S. Food and Drug Administration. Section 1.06. "Net Sales" with respect to the Royalty Bearing Product means the amount agreed upon by the Company and its licensee or sublicensee of the Royalty Bearing Product for purposes of calculating the royalties to be paid by the sublicensee to the Company or, if there is 2 no licensee or sublicensee of the Royalty Bearing Product, the invoice price of the Royalty Bearing Product in finished packaged form sold by the Company or, where applicable, its sublicensees and distributors, to unaffiliated third parties on a worldwide basis, less (i) all normal and customary trade and quantity discounts, allowances and rebates, including government rebates such as Medicaid, given to such third parties; (ii) product returns; (iii) any freight charges paid by the Company for delivery; and (iv) excise, value added and other taxes applicable to sales of products which the Company or its distributors have to pay or absorb on such sales. In the event that a Royalty Bearing Product is sold in combination with another product, Net Sales shall be calculated by multiplying the invoice price of such combination product by the fraction A/(A+B) where A is the invoice price of the Royalty Bearing Product and B is the invoice price of the other product. ARTICLE II ROYALTIES Section 2.01. ROYALTY. The Company shall pay to the Purchasers a royalty on Net Sales. Each Purchaser shall receive its pro rata portion of each royalty payment pursuant to Section 2.05 of this Agreement. Section 2.02. RATE. (a) Royalties shall be equal to a percentage of Net Sales determined as follows: (i) The royalty rate shall be .2% per $5,000,000 of Preferred Stock collectively purchased by the Purchasers on the Series E-1 Closing Date, Series E-2 Closing Date and Series E-3 Closing Date, pro rated for any amounts purchased that are not in even $5 million increments. (For example, if an aggregate of $7,500,000 of Preferred Stock is sold at all closings, then the royalty rate computed pursuant to this clause (i) would be .3% in the aggregate.) Notwithstanding the foregoing, if on the Royalty Commencement Date (as defined below) the aggregate amount of Preferred Stock issued and sold to all Purchasers is not more than $5 million, then the royalty rate shall be .25% per $5 million of Preferred Stock purchased at all closings, pro rated if the amount purchased is not in even $5 million increments. The Royalty Rate computed pursuant to this clause (i) is referred to as the "BASE ROYALTY RATE." (ii) For Purchasers who hold Preferred Stock (or to the extent their transferees hold such Preferred Stock) on the first anniversary of the Series E-1 Closing Date, the royalty rate shall be retroactively increased by .2% per $5,000,000 of Preferred Stock that is outstanding on the first anniversary of the Series E-1 Closing Date, pro rated if the amount purchased and held is not in even $5 million increments. Notwithstanding the foregoing, if on the Royalty Commencement Date the aggregate amount of Preferred Stock issued and sold to all Purchasers is not more than $5 million, then for Purchasers who hold Preferred Stock (or to the extent their transferees hold such Preferred Stock) on the first anniversary of the Series E-1 Closing Date the Royalty Rate shall be retroactively increased by .25% per $5,000,000 of Preferred Stock that is outstanding on 3 the first anniversary of the Series E-1 Closing Date, pro rated if the amount outstanding on such first anniversary is not in even $5 million increments. The increase in the Royalty Rate pursuant to this clause (ii) is referred to as the "INCREMENTAL ROYALTY RATE." (b) Royalties computed and payable based on the Base Royalty Rate shall be payable to the Purchasers pro rata in accordance with their relative amounts of Preferred Stock purchased at all closings. Royalties computed and payable based on the Incremental Royalty Rate shall be payable to the Purchasers pro rata in accordance with their relative amounts of Preferred Stock held on the first anniversary of the Series E-1 Closing. For purposes of the foregoing, shares originally purchased by a Purchaser that are held by the Purchaser or by any other party on such first anniversary shall be deemed to be held by such Purchaser. Section 2.03. TERM. Royalties shall be payable for a period of three (3) years from the date of first commercial sale of the ROYALTY-BEARING PRODUCT in the United States following FDA approval of the ROYALTY-BEARING PRODUCT (the "ROYALTY COMMENCEMENT DATE"). Section 2.04. REPURCHASE OF ROYALTY OBLIGATION. The Company shall have the right, exercisable at any time after all funding permitted or required to be provided under the Purchase Agreement has been provided, to purchase the Purchasers' collective rights to receive the royalties specified in this Article II for an amount computed as follows: (a) The aggregate purchase price for all royalties computed at the Base Royalty Rate shall be, for each $5 million of Preferred Stock purchased at all closings (pro rated if the aggregate amount purchased at all closings is not in even $5 million increments), (A) $1.5 million if the repurchase is on or prior to the third anniversary of the Series E-1 Closing, (B) $2 million if the repurchase is after the third anniversary and on or prior to the fourth anniversary of the Series E-1 Closing, and (C) $2.5 million if the repurchase is after the fourth anniversary of the Series E-1 Closing. The purchase price computed and payable pursuant to this subsection (a) shall be payable to the Purchasers pro rata based on the relative amounts of Preferred Stock purchased at all closings. (b) The aggregate purchase price for all royalties computed at the Incremental Royalty Rate shall be, for each $5 million of Preferred Stock outstanding on the first anniversary of the Series E-1 Closing (pro rated if the aggregate amount so outstanding is not in even $5 million increments), (A) $1.5 million if the repurchase is on or prior to the third anniversary of the Series E-1 Closing, (B) $2 million if the repurchase is after the third anniversary and on or prior to the fourth anniversary of the Series E-1 Closing, and (C) $2.5 million if the repurchase is after the fourth anniversary of the Series E-1 Closing. The purchase price computed and payable pursuant to this subsection (b) shall be payable to the Purchasers pro rata in accordance with their relative amounts of Preferred Stock, held on the first anniversary of the Series E-1 Closing. For purposes of the foregoing, shares originally purchased by a Purchaser that are held by the Purchaser or by any other party on such first anniversary shall be deemed to be held by such Purchaser. 4 (c) Payment of the repurchase price shall be made within thirty days of notice by the Company to the Purchasers of its election to repurchase all royalty rights. Any amounts not paid when due shall bear interest at the rate of 12% per annum until paid in full. Section 2.05. PAYMENTS. Payments shall be made to Purchasers within ninety (90) days after the end of the applicable fiscal year of the Company, beginning with the first fiscal year ending after the first commercial sale of a Royalty Bearing Product. All dollar amounts referred to in this Agreement are expressed in United States dollars. All payments to Purchasers under this Agreement shall be made in United States dollars by check. If the Company receives royalties based on Net Sales in currency other than United States dollars, Net Sales shall be converted into United States dollars at the conversion rate for the foreign currency which the Company's sublicensee or distributor, if any, uses to pay royalties based on Net Sales to the Company, or as published in the eastern edition of THE WALL STREET JOURNAL as of the last business day of the applicable fiscal year. Section 2.06. ROYALTY CALCULATION REPORTS; AUDITS. Royalty payments shall be accompanied by a schedule detailing the calculation of the royalty including the amount of Net Sales upon which the royalty was calculated and all expenses deducted. The Purchasers shall have the right, within six months after a royalty payment has been made, to have an audit of the books and records of the Company conducted on their behalf by an independent accounting firm in order to confirm the calculation of such royalty payment. The accounting firm shall hold all information provided to it by the Company confidential and provide to the Purchasers only the information necessary to confirm the calculation of the royalty payment. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants solely for the benefit of the Purchasers that as of the effective date of this Agreement: (a) The Company possesses full power and authority to enter into this Agreement and to fulfill its obligations hereunder; (b) This Agreement and each of its terms do not conflict with any other agreement to which the Company is a party or by which it is bound; (c) The Company owns or has licensed the entire right, title and interest in and to the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY; (d) To the best of the Company's knowledge, the practice of the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY does not infringe upon or conflict with the rights of any third parties; 5 (e) To the best of the Company's knowledge, the Company owns or has the right to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and rights (collectively, the "INTELLECTUAL PROPERTY RIGHTS") which are necessary for use in connection with its business, as currently conducted; and (f) No litigation is pending or, to the best of the Company's knowledge following diligent inquiry, threatened which contains allegations respecting the validity, enforceability, infringement, misappropriation or ownership of any of the Intellectual Property Rights, the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY. Section 3.02. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. The Purchasers represent and warrant solely for the benefit of the Company that as of the effective date of this Agreement: (a) the Purchasers possess full power to enter into this Agreement and to fulfill their obligations hereunder; and (b) This Agreement and each of its terms do not conflict with any other agreement to which the Purchasers or any of them are a party or by which they or any of them are bound. ARTICLE IV INDEMNIFICATION Section 4.01. THE COMPANY'S AGREEMENT TO INDEMNIFY. The Company agrees that it is wholly responsible for all goods and services offered or sold by it and that the Purchasers shall have no liability for or in connection with the Company's exploitation of the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY including, without limitation, any goods and/or services offered, sold or otherwise provided by the Company. Subject to the terms and conditions of this Agreement, the Company shall indemnify, defend and hold harmless the Purchasers and each of them, their subsidiaries and their officers, directors, shareholders, employees and agents (collectively, the "INDEMNIFIED PARTIES" or individually an "INDEMNIFIED PARTY"), from and against any and all claims, demands, losses, assessments, fines, penalties, liabilities, damages, reasonable expenses of investigations, reasonable experts' fees, reasonable disbursements and other reasonable costs (including reasonable attorneys' fees) (all of the foregoing hereinafter referred to collectively as "DAMAGES") asserted against, resulting to, imposed upon or incurred by the Purchasers and each of them in connection with the Company's exploitation of the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY. The Indemnified Parties shall promptly notify the Company of any claim or action giving rise to Damages. The Company shall have the right to defend any such claim or action, at its cost and expense. If the Company fails or declines to assume the defense of any such claim or action within thirty (30) days after notice thereof, the Indemnified Parties may assume the defense of such claim or action for the account and at the expense of the Company, and any Damages related thereto shall be conclusively deemed a liability of the Company. The Company shall pay promptly to the 6 Indemnified Parties any Damages to which the foregoing indemnity relates, as incurred. Notwithstanding anything to the contrary in this Agreement, the Company may use one law firm to defend the interest of the Company and all Indemnified Parties unless it is determined by the law firm defending the Company, that a conflict of interest actually exists between the Company and any one or all of the Indemnified Parties. In such event, the Company shall pay for counsel to defend the Indemnified Parties as a group, or individually if a conflict of interest actually exists between any one or more of the Indemnified Parties. Any Indemnified Party may retain its own counsel at its own expense. Section 4.02. LIMITATION ON DAMAGES. NEITHER PARTY SHALL BE LIABLE FOR ANY CONTINGENT, INCIDENTAL, CONSEQUENTIAL, INDIRECT OR SPECIAL, DAMAGE OR EXPENSE ASSOCIATED WITH THE OXYGENT TECHNOLOGY, THE LIQUIVENT TECHNOLOGY AND THE PULMOSPHERES TECHNOLOGY PURSUANT TO THIS AGREEMENT FOR ANY REASON WHATSOEVER. ARTICLE V PATENT PROSECUTION AND MAINTENANCE Section 5.01. PATENT PROSECUTION. During the term of this Agreement, the Company shall pay any and all fees and expenses associated with the filing and prosecution of all United States and all corresponding foreign patent applications (if any) it deems appropriate in the exercise of its business judgment associated with or relating to the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY. Section 5.02. MAINTENANCE OF PATENTS. During the term of this Agreement, the Company shall pay any and all maintenance fees it deems appropriate in the exercise of its business judgment to maintain the enforceability of any and all patents associated with or relating to the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY. ARTICLE VI TERM Section 6.01. This Agreement shall terminate on December 31, 2003 if there is no Royalty Bearing Product in existence or upon the expiration of the Company's obligation to pay any royalties to Purchasers hereunder. ARTICLE VII MISCELLANEOUS Section 7.01. ASSIGNMENT. The Company may not assign, transfer, delegate or divest itself of its rights and obligations hereunder, without prior written approval by each of the Purchasers. 7 Section 7.02. BINDING AGREEMENT. This Agreement shall be binding upon all parties hereto, their heirs, legal representatives, successors and permitted assigns. Section 7.03. ENTIRE AGREEMENT. This Agreement together with the Purchase Agreement and the Registration Rights Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except by a writing duly executed by all parties hereto. Section 7.04. SEVERABILITY. If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. Section 7.05. HEADINGS. The paragraph headings contained herein are for the purpose of convenience only and are not intended to define or limit the contents of said paragraphs. Section 7.06. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. Section 7.07. NOTICES. All notices or demands of any kind which may be required to be served under the terms of this Agreement shall be in writing and shall be deemed served when personally delivered or when received by mail, postage prepaid priority, registered, certified mail, or by recognized courier service, addressed as follows: TO THE COMPANY: Alliance Pharmaceutical Corp. 3040 Science Park Road San Diego, CA 92121 Attn.: Theodore D. Roth Fax.: (619) 558-5306 Alliance Pharmaceutical Corp. 3040 Science Park Road San Diego, CA 92121 Attn.: Lloyd A. Rowland Fax.: (619) 678-4133 TO PURCHASERS: Brown Simpson Strategic Growth Fund, L.P. 152 West 57th Street, 40th Floor New York, New York 10019 Attn.: Mitchell D. Kaye Fax: (212) 247-1329 Brown Simpson Strategic Growth Fund, Ltd. 8 152 West 57th Street, 40th Floor New York, New York 10019 Attn.: Mitchell D. Kaye Fax: (212) 247-1329 Westover Investments L.P. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attn.: Will Rose Fax: (214) 758-1221 Montrose Investments Ltd. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attn.: Will Rose Fax: (214) 758-1221 Bay Harbor Investments, Inc. C/o Trippoak Advisors, Inc. 630 Fifth Avenue, Suite 2000 New York, NY 10111 Attn.: Robert Miller Fax: (212) 332-3256 With copies to: Robinson Silverman Pearce Aronson & Berman, LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Kenneth L. Henderson Fax: (212) 541-4630 Any party may change the address set forth herein by giving written notice of said change to all other parties. Section 7.08. NO AGENCY. Nothing contained in this Agreement shall create a joint venture, partnership or agency relationship between the parties hereto. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.] 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. ALLIANCE PHARMACEUTICAL CORP. By: -------------------------------------------- Name: Theodore D. Roth Title: President and Chief Operating Officer BROWN SIMPSON STRATEGIC GROWTH FUND, L.P. By: -------------------------------------------- Name: Title: BROWN SIMPSON STRATEGIC GROWTH FUND, LTD. By: -------------------------------------------- Name: Title: WESTOVER INVESTMENTS L.P. By: -------------------------------------------- Name: Title: MONTROSE INVESTMENTS LTD. By: -------------------------------------------- Name: Title: BAY HARBOR INVESTMENTS, INC. By: -------------------------------------------- Name: Title: 10 EX-10.L 5 EXHIBIT 10.L REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of August 13, 1998, among Alliance Pharmaceutical Corp., a New York corporation (the "COMPANY"), Brown Simpson Strategic Growth Fund, L.P., a New York limited partnership ("BROWN SIMPSON LP"), Brown Simpson Strategic Growth Fund, Ltd., a Cayman Islands exempt company ("BROWN SIMPSON LTD."), Westover Investments L.P., a Delaware limited partnership ("WESTOVER"), Montrose Investments Ltd., a Cayman Islands exempt company ("MONTROSE"), and Bay Harbor Investments, Inc., a corporation organized and existing under the laws of the British Virgin Islands ("BAY HARBOR"). Brown Simpson LP, Brown Simpson Ltd., Westover, Montrose and Bay Harbor are each referred to herein as a "PURCHASER" and are collectively referred to herein as the "PURCHASERS." This Agreement is made pursuant to the Convertible Preferred Stock Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "PURCHASE AGREEMENT"). The Company and the Purchasers hereby agree as follows: 1. DEFINITIONS. Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "ADVICE" shall have meaning set forth in Section 3(o). "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "CONTROL," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "AFFILIATED," CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close. "CLOSING DATE" shall have the meaning set forth in the Purchase Agreement. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's Common Stock, par value $0.01 per share. "EFFECTIVENESS DATE" means (i) with respect to the Registration Statement to be filed with respect to the Series E-1 Shares, the 90th day following the Series E-1 Closing Date, (ii) with respect to the Registration Statement to be filed with respect to the Series E-2 Shares, the 90th day following the Series E-2 Closing Date and (iii) with respect to the Registration Statement to be filed with respect to the Series E-3 Shares, the 90th day following the Series E-3 Closing Date; PROVIDED, HOWEVER, that, if the Company is required by the SEC to file a new Registration Statement with respect to any of such securities, then the time periods set forth above shall be increased by 30 days. "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FILING DATE" means (i) with respect to the shares of Common Stock issuable upon conversion of the Series E-1 Shares, the 30th day following the Series E-1 Closing Date, (ii) with respect to the shares of Common Stock issuable upon conversion of the Series E-2 Shares, the 30th day following the Series E-2 Closing Date and (iii) with respect to the shares of Common Stock issuable upon conversion of the Series E-3 Shares, the 30th day following the Series E-3 Closing Date. "HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c). "LOSSES" shall have the meaning set forth in Section 5(a). "PERSON" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PREFERRED STOCK" means the shares of Series E-1, Series E-2 and Series E-3 Preferred, par value $0.01 per share, of the Company issued to the Purchasers pursuant to the Purchase Agreement. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. 2 "PROSPECTUS" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means (a) with respect to the Registration Statement to be filed within 30 days after the Series E-1 Closing, the shares of Common Stock issuable upon conversion of the Series E-1 Shares, (b) with respect to the Registration Statement to be filed within 30 days after the Series E-2 Closing, the shares of Common Stock issuable upon conversion of the Series E-2 Shares, and (c) with respect to the Registration Statement to be filed within 30 days after the Series E-3 Closing, the shares of Common Stock issuable upon conversion of the Series E-3 Shares; PROVIDED, HOWEVER, that in order to account for the fact that the number of shares of Common Stock that are issuable upon conversion of shares of Preferred Stock is determined in part upon the market price of the Common Stock at the time of conversion Registrable Securities shall include (but not be limited to) a number of shares of Common Stock equal to no less than 175% of the maximum number of shares of Common Stock into which the applicable series of Preferred Stock are convertible, assuming such conversion occurred on the particular Closing Date for such series of Preferred Stock. Such registered shares of Common Stock shall be allocated among the Holders pro rata based on the total number of Registrable Securities issued or issuable as of each date that a Registration Statement, as amended, relating to the resale of the Registrable Securities is declared effective by the Commission. Notwithstanding anything herein contained to the contrary, if the actual number of shares of Common Stock into which the shares of Preferred Stock are convertible exceeds 175% of the number of shares of Common Stock into which the particular series of Preferred Stock are convertible based upon a computation as at a particular Closing Date, the term "Registrable Securities" shall be deemed to include such additional shares of Common Stock. "REGISTRATION STATEMENT" means the registration statements and any additional registration statements contemplated by Section 2(a), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference in such registration statement. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 158" means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. 3 "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SPECIAL COUNSEL" means any special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section 4. "STRATEGIC PARTNER" means any established biotechnology or pharmaceutical company with whom the Company executes a written agreement providing that the Company and such entity will be "partnered" in the development or distribution of one or more of the Company's chemical compounds. "UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a registration in connection with which securities of the Company are sold to an underwriter for reoffering to the public pursuant to an effective registration statement. 2. SHELF REGISTRATION. (a) On or prior to each applicable Filing Date the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall (i) not permit any securities other than the Registrable Securities and those securities listed in Schedule 2.1(u) of the Purchase Agreement to be included in the Registration Statement and (ii) use its commercially reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until the date which is five years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent to such effect (the "EFFECTIVENESS PERIOD"). If an additional Registration Statement is required to be filed because the actual number of shares of Common Stock into which the Preferred Stock is convertible exceeds the number of shares of Common Stock initially registered in respect of any particular series of Preferred Stock based upon the computation on a particular Closing Date, the Company shall have 15 Business Days to file such additional Registration Statement, and the Company shall use its commercially reasonable efforts to cause such additional Registration Statement to be declared effective by the Commission as soon as possible. 4 (b) If the Holders of a majority of the Registrable Securities so elect, an offering of Registrable Securities pursuant to the Registration Statement may be effected in the form of an Underwritten Offering. In such event, and if the managing underwriters advise the Company and such Holders in writing that in their opinion the amount of Registrable Securities proposed to be sold in such Underwritten Offering exceeds the amount of Registrable Securities which can be sold in such Underwritten Offering, there shall be included in such Underwritten Offering the amount of such Registrable Securities which in the opinion of such managing underwriters can be sold, and such amount shall be allocated PRO RATA among the Holders proposing to sell Registrable Securities in such Underwritten Offering. (c) If any of the Registrable Securities are to be sold in an Underwritten Offering, the investment banker in interest that will administer the offering will be selected by the Holders of a majority of the Registrable Securities included in such offering provided that the Company shall consent to the inclusion of such investment banker, which shall be a nationally recognized, full service investment banking firm, which consent shall not be unreasonably withheld. No Holder may participate in any Underwritten Offering hereunder unless such Holder (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. 3. REGISTRATION PROCEDURES. In connection with the Company's registration obligations hereunder, the Company shall: (a) Prepare and file with the Commission on or prior to each applicable Filing Date, a Registration Statement on Form S-3 (or if the Company is not then eligible to register for resale the Registrable Securities on Form S-3 such registration shall be on another appropriate form in accordance herewith, or, in connection with an Underwritten Offering hereunder, such other form agreed to by the Company and by a majority-in-interest of Holders of Registrable Securities) in accordance with the method or methods of distribution thereof as specified by the Holders (except if otherwise directed by the Holders), and cause the Registration Statement to become effective and remain effective as provided herein; PROVIDED, HOWEVER, that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated therein by reference), the Company shall, if reasonably practicable (i) furnish to the Holders, their Special Counsel and any managing underwriters, copies of all such documents proposed to be filed, which documents (other than those incorporated by reference) will be subject to the review of such Holders, their Special Counsel and such managing underwriters, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to such Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable 5 Securities, their Special Counsel, or any managing underwriters, shall reasonably object in writing within three (3) Business Days of their receipt thereof. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as possible to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold, their Special Counsel and any managing underwriters as promptly as possible (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 6 (d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of, (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) If requested by any managing underwriter or the Holders of a majority in interest of the Registrable Securities to be sold in connection with an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the Company reasonably agrees should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that the Company shall not be required to take any action pursuant to this Section 3(e) that would, in the opinion of counsel for the Company, violate applicable law or be materially detrimental to the business prospects of the Company. (f) Furnish to each Holder, their Special Counsel and any managing underwriters, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (g) Promptly deliver to each Holder, their Special Counsel, and any underwriters, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders and any underwriters in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders, any underwriters and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder or underwriter requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; PROVIDED, HOWEVER, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. 7 (i) Cooperate with the Holders and any managing underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by applicable law, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such managing underwriters or Holders may request at least two Business Days prior to any sale of Registrable Securities. (j) Upon the occurrence of any event contemplated by Section 3(c)(vi), as promptly as possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (k) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on the Nasdaq Stock Market and any other securities exchange, quotation system, market or over-the-counter bulletin board, if any, on which similar securities issued by the Company are then listed as and when required pursuant to the Purchase Agreement. (l) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in Underwritten Offerings) and take all such other actions in connection therewith (including those reasonably requested by any managing underwriters and the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and whether or not an underwriting agreement is entered into, (i) make such representations and warranties to such Holders and such underwriters as are customarily made by issuers to underwriters in underwritten public offerings, and confirm the same if and when requested; (ii) in the case of an Underwritten Offering obtain and deliver copies thereof to the managing underwriters, if any, of opinions of counsel to the Company and updates thereof addressed to each such underwriter, in form, scope and substance reasonably satisfactory to any such managing underwriters and Special Counsel to the selling Holders covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such Special Counsel and underwriters; (iii) immediately prior to the effectiveness of the Registration Statement, and, in the case of an Underwritten Offering, at the time of delivery of any Registrable Securities sold pursuant thereto, obtain and deliver copies to the Holders and the managing underwriters, if any, of "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each selling Holder and each of the underwriters, if any, in form and substance as are customary in connection with Underwritten Offerings; (iv) if an underwriting agreement is 8 entered into, the same shall contain indemnification provisions and procedures no less favorable to the selling Holders and the underwriters, if any, than those set forth in Section 6 (or such other provisions and procedures acceptable to the managing underwriters, if any, and holders of a majority of Registrable Securities participating in such Underwritten Offering; and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their Special Counsel and any managing underwriters to evidence the continued validity of the representations and warranties made pursuant to clause 3(1)(i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. (m) Make available for inspection by the selling Holders, any representative of such Holders, any underwriter participating in any disposition of Registrable Securities, and any attorney or accountant retained by such selling Holders or underwriters, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors, agents and employees of the Company and its subsidiaries to supply all information in each case reasonably requested by any such Holder, representative, underwriter, attorney or accountant in connection with the Registration Statement; provided, however, that any information that is determined in good faith by the Company in writing to be of a confidential nature at the time of delivery of such information shall be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities; (ii) disclosure of such information, in the opinion of counsel to such Person, is required by law; (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person; or (iv) such information becomes available to such Person from a source other than the Company and such source is not known by such Person to be bound by a confidentiality agreement with the Company. (n) Comply in all material respects with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts Underwritten Offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall conform to the requirements of Rule 158. (o) The Company may require each selling Holder to furnish to the Company information regarding such Holder and the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement, and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. 9 If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal statute then in force) the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. Each Holder covenants and agrees that (i) it will not sell any Registrable Securities under the Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in Section 3(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(j), or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. (p) If (a) there is material non-public information regarding the Company which the Company's Board of Directors (the "BOARD") reasonably determines not to be in the Company's best interest to disclose and which the Company is not otherwise required to disclose, or (b) there is a significant business opportunity (including but not limited to the acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other similar transaction) available to the Company which the Board reasonably determines not to be in the Company's best interest to disclose, then the Company may postpone or suspend filing or effectiveness of a registration statement for a period not to exceed 20 consecutive days, provided that the Company may not postpone or suspend its obligation under this Section 3(p) for more than 45 days in the aggregate during any 12 month period; provided, however, that no such postponement or suspension shall be permitted for consecutive 20 day periods, arising out of the same set of facts, circumstances or transactions. 4. REGISTRATION EXPENSES. (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company, except as and to the extent specified in Section 4(b), shall be borne by the Company whether or not pursuant to an Underwritten Offering and whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in 10 the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Nasdaq Stock Market and each other securities exchange or market on which Registrable Securities are required hereunder to be listed and (B) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the managing underwriters, if any, or the Holders of a majority of Registrable Securities may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the managing underwriters, if any, or by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for the Holders, in the case of the Special Counsel, to a maximum amount of [$20,000], (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. (b) If the Holders require an Underwritten Offering pursuant to the terms hereof, the Company shall be responsible for all reasonable costs, fees and expenses in connection therewith, except for the fees and disbursements of the Underwriters (including any underwriting commissions and discounts) and their legal counsel and accountants (which shall be borne by the Holders). Therefore, in such circumstances the Holder shall bear the expenses of the fees and disbursements of any legal counsel or accounting firm retained by the underwriters in connection with such Underwritten Offering and the costs of any determination (but not filing) by the underwriters of the eligibility of the Registrable Securities for investment under the applicable state securities laws. By way of illustration which is not intended to diminish from the provisions of Section 4(a), the Holders shall not be responsible for, and the Company shall be required to pay the fees or disbursements incurred by the Company (including by its legal counsel and accountants) in connection with, the preparation and filing of a Registration Statement and related Prospectus for such offering, the maintenance of such Registration Statement in accordance with the terms hereof, the listing of the Registrable Securities in accordance with the requirements hereof, and printing expenses incurred to comply with the requirements hereof. 5. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents (including any underwriters retained by such Holder in connection with the 11 offer and sale of Registrable Securities), brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading (in the case of any Prospectus or form of Prospectus or supplement thereto, in light of the circumstances under which they were made), except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, which information was reasonably relied on by the Company for use therein or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, the directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus and that such information was reasonably relied upon by the Company for use in the Registration Statement, such Prospectus or such form of prospectus or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), 12 such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within 10 Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) CONTRIBUTION. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and 13 Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. RULE 144. As long as any Holder owns Shares or Underlying Shares, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or l5(d) of the Exchange Act and to promptly furnish the Holders with true and complete copies of all such filings. As long as any Holder owns Shares or Underlying Shares, if the Company is not required to file reports pursuant to Section 13(a) or l5(d) of the Exchange Act, it will prepare and furnish to the Holders and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act. The Company further covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Person to sell Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including providing any legal opinions referred to in the Purchase Agreement. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements. 14 7. MISCELLANEOUS. (a) REMEDIES. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of its subsidiaries has, as of the date hereof entered into and currently in effect, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as disclosed in SCHEDULE 2.1(u) of the Purchase Agreement, neither the Company nor any of its subsidiaries has previously entered into any agreement currently in effect granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict with the provisions of this Agreement; notwithstanding the foregoing, the Company may grant such rights to a Strategic Partner except that in no case shall the registration of securities of such a Strategic Partner cause any of the Registrable Securities to fail to be registered pursuant to the terms of this Agreement. (c) NO PIGGYBACK ON REGISTRATIONS. Neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto or as disclosed in SCHEDULE 2.L(u) of the Purchase Agreement) may include securities of the Company in the Registration Statement other than the Registrable Securities or as disclosed in SCHEDULE 2. L(u) of the Purchase Agreement, and the Company shall not after the date hereof enter into any agreement providing such right to any of its securityholders, unless the right so granted is subject in all respects to the prior rights in full of the Holders set forth herein, and is not otherwise in conflict with the provisions of this Agreement; notwithstanding the foregoing, the Company may grant such rights to a Strategic Partner except that in no case shall the registration of securities of such a Strategic Partner cause any of the Registrable Securities to fail to be registered pursuant to the terms of this Agreement. (d) PIGGY-BACK REGISTRATIONS. If at any time when there is not an effective Registration Statement covering Underlying Shares for any outstanding shares of Preferred Stock, the Company shall determine to prepare and file with the Commission a registration 15 statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to each holder of Registrable Securities written notice of such determination and, if within fifteen (15) days after receipt of such notice, any such holder shall so request in writing, (which request shall specify the Registrable Securities intended to be disposed of by the Purchasers), the Company will use reasonable efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holder, to the extent requisite to permit the disposition of the Registrable Securities so to be registered, provided that if at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to such holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay expenses in accordance with Section 4 hereof), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities being registered pursuant to this Section 7(d) for the same period as the delay in registering such other securities. The Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered; provided, however, that the Company shall not be required to register any Registrable Securities pursuant to this Section 7(d) that are eligible for sale pursuant to Rule 144(k) of the Securities Act. In the case of an underwritten public offering, if the managing underwriter(s) or underwriter(s) should reasonably object to the inclusion of the Registrable Securities in such registration statement, then if the Company after consultation with the Underwriter's Representative should reasonably determine that the inclusion of such Registrable Securities, would materially adversely affect the offering contemplated in such registration statement, and based on such determination recommends inclusion in such registration statement of fewer or none of the Registrable Securities of the Holders, then (x) the number of Registrable Securities of the Holders included in such registration statement shall be reduced pro-rata among such Holders (based upon the number of Registrable Securities requested to be included in the registration), if the Company after consultation with the underwriter(s) recommends the inclusion of fewer Registrable Securities, or (y) none of the Registrable Securities of the Holders shall be included in such registration statement, if the Company after consultation with the underwriter(s) recommends the inclusion of none of such Registrable Securities; PROVIDED, however, that if Securities are being offered for the account of other persons or entities as well as the Company, such reduction shall not represent a greater fraction of the number of Registrable Securities intended to be offered by the Holders than the fraction of similar reductions imposed on such other persons or entities (other than the Company). (e) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in 16 writing and signed by the Company and the Holders of at least two-thirds of the then outstanding Registrable Securities; PROVIDED, HOWEVER, that, for the purposes of this sentence, Registrable Securities that are owned, directly or indirectly, by the Company, or an Affiliate of the Company are not deemed outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (f) NOTICES. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earlier of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 7:00 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 7:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service or (iv) actual receipt by the party to whom such notice is required to be given to each Holder at its address set forth under its name on SCHEDULE 1 attached hereto or such other address as may be designated in writing hereafter, in the same manner, by such Person. Copies of notices to any Holder shall be sent to Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201, Attn: Diane B. Muse, Esq., fax: (214) 969-4343. Copies of notices to the Company shall be sent to Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, Attn: Mel Epstein, Esq., fax: (212) 806-6006. (g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Purchaser may assign its rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (h) ASSIGNMENT OF REGISTRATION RIGHTS. The rights of each Holder hereunder, including the right to have the Company register for resale Registrable Securities in accordance with the terms of this Agreement, shall be automatically assignable by each Holder to any Affiliate of such Holder, any other Holder or Affiliate of any other Holder and up to four other assignees of all or a portion of the shares of Preferred Stock or the Registrable Securities if: (i) the Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignees is restricted under the Securities Act and applicable state securities laws, (iv) at or 17 before the time the Company receives the written notice contemplated by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement, and (v) such transfer shall have been made in accordance with the applicable requirements of the Purchase Agreement. The rights to assignment shall apply to the Holders (and to subsequent) successors and assigns. (i) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. (k) CUMULATIVE REMEDIES. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (n) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than any Holder or transferees or successors or assigns thereof if such Holder is deemed to be an Affiliate solely by reason of its holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE TO FOLLOW] 18 IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed by their respective authorized persons as of the date first indicated above. ALLIANCE PHARMACEUTICAL CORP. By: -------------------------------------------- Name: Theodore D. Roth Title: President and Chief Operating Officer BROWN SIMPSON STRATEGIC GROWTH FUND, LTD. By: -------------------------------------------- Name: Title: BROWN SIMPSON STRATEGIC GROWTH FUND, L.P. By: -------------------------------------------- Name: Title: WESTOVER INVESTMENTS L.P. By: -------------------------------------------- Name: Title: 19 MONTROSE INVESTMENTS LTD. By: -------------------------------------------- Name: Title: BAY HARBOR INVESTMENTS, INC. By: -------------------------------------------- Name: Title: 20 SCHEDULE I COMPANY: ALLIANCE PHARMACEUTICAL CORP. 3040 Science Park Road San Diego, CA 92121 Attn: Theodore D. Roth Fax: (619) 558-5306 PURCHASERS: BROWN SIMPSON STRATEGIC GROWTH FUND, LTD. 152 West 57th Street, 40th Floor New York, New York 10019 Attn: Mitchell D. Kaye Fax: (212) 247-1329 Portion of Series E-1 Purchase Price - $1,700,040 Series E-1 Shares - 28,334 BROWN SIMPSON STRATEGIC GROWTH FUND, L.P. 152 West 57th Street, 40th Floor New York, New York 10019 Attn: Mitchell D. Kaye Fax: (212) 247-1329 Portion of Series E-1 Purchase Price - $799,980 Series E-1 Shares - 13,333 WESTOVER INVESTMENTS L.P. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attn: Will Rose Fax: (214) 758-1221 Portion of Series E-1 Purchase Price - $679,980 Series E-1 Shares - 11,333 MONTROSE INVESTMENTS LTD. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attn: Will Rose Fax: (214) 758-1221 Portion of Series E-1 Purchase Price - $1,320,000 Series E-1 Shares - 22,000 BAY HARBOR INVESTMENTS, INC. c/o Trippoak Advisors, Inc. 630 Fifth Avenue, Suite 2000 New York, New York 10111 Attn: Robert Miller Fax: (212) 332-3256 With copies to: Robinson Silverman Pearce Aronson & Berman, LLP 1290 Avenue of the Americas New York, New York 10104 Attn: Kenneth L. Henderson Fax: (212) 541-4630 Portion of Series E-1 Purchase Price - $1,500,000 Series E-1 Shares - 25,000 2 EX-10.M 6 EXHIBIT 10.M [LOGO] CREDIT AGREEMENT This Agreement is made by and between Alliance Pharmaceutical, Corp. ("Borrower") and Imperial Bank, a California banking corporation, ("Bank"). In consideration of mutual covenants and conditions hereof, the parties hereto agree as follows: 1. REPRESENTATIONS OF BORROWER Borrower represents and warrants that: 1.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and existing and in good standing under the laws of New York, without limit as to the duration of its existence and is authorized and in good standing to do business in the State of California; Borrower has corporate powers and adequate authority, rights and franchises to own its property and to carry on its business as now conducted, and is duly qualified and in good standing in each State in which the character of the properties owned by it therein or the conduct of its business makes such qualification necessary; and Borrower has the power and adequate authority to make and carry out this Agreement 1.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this Agreement are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of or in conflict with any law or regulation or any term or provision of Borrower's articles of incorporation, by-laws, as the case may be, and this Agreement is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms; subject only to bankruptcy, insolvency or similar laws affecting creditors rights generally. 1.03 NO CONFLICT. The execution, delivery and performance of this Agreement are not in contravention of or in conflict with any agreement, indenture or undertaking to which Borrower is a party or by which it or any of its property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 1.04 LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrower which if determined adversely to Borrower or its interest would have a material adverse effect on the financial condition of Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. 1.05 FINANCIAL CONDITION. The balance sheet of Borrower as of March 31, 1998, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with this request for credit are true and correct, and said balance sheet truly presents the financial condition of Borrower as of the date thereof, and has been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no material adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and CREDIT AGREEMENT JUNE 17, 1998 normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. 1.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are not subject to any liens or encumbrances other than those permitted by Section 3.03 hereof. 1.07 TAX STATUS. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. 1.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 1.09 REGULATION U. None of the proceeds of any loan from the Bank to Borrower shall be used to purchase or carry margin stock (as defined within Regulation U of the Board of Governors of the Federal Reserve system). 2. AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, under borrowings, or other indebtedness, it will, unless Bank shall otherwise consent in writing: 2.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. 2.02 INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses and/or in the exercise of good business judgment. 2.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing, except to the extent and so long as: a. The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and b. It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto. 2 CREDIT AGREEMENT JUNE 17, 1998 All financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principals applied on a basis consistent with previous years. 2.04 FINANCIAL COVENANTS. Borrower to maintain "Liquid Assets" of not less than $25,000,000 at all times. "Liquid Assets" will be defined as cash, cash equivalents, short term investments, and corporate partner receivables (within 45 days of receipt) up to a maximum of $8,000,000. 2.05 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times and upon reasonable notice during normal business hours; and furnish Bank: a. MONTHLY COMPLIANCE REPORT. Borrower to submit monthly compliance report attesting to "Liquid Asset" position and certified by an Officer of Borrower within 15 days of each month end. b. QUARTERLY FINANCIAL STATEMENT. Within forty five (45) days after the close of each quarter of each fiscal year of Borrower, commencing with the quarter next ending, Borrower to submit 1O-Q as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; c. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event within one hundred twenty (120) days after the close of each fiscal year of Borrower, a 10-K report of Company as of the close of and for each fiscal year, all in reasonable detail, prepared on a audited basis, together with an unqualified opinion on such financial statements by an independent certified public accountant selected by Borrower and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; d. OTHER INFORMATION. Such other information relating to the affairs of Borrower as the Bank reasonably may request from time to time; e. MANAGEMENT LETTER. In connection with each fiscal year end financial statement furnished to Bank hereunder, any management letter of Borrower's independent certified public accountant. 2.06 NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence of any Event of Default hereunder or any event which upon notice and lapse of time would be an Event of Default. 3 CREDIT AGREEMENT JUNE 17, 1998 2.07 OPERATING ACCOUNTS. Maintain most operating accounts with Bank during the term of any loans from Bank to Borrower. Borrower shall maintain, or cause to be maintained, on deposit with Imperial Bank, non-interest bearing demand deposit balances sufficient to compensate Bank for all services provided by Bank. Balances shall be calculated after reduction for the reserve requirement of the Federal Reserve Board and uncollected funds. Any deficiencies shall be charged directly to the Borrower on a monthly basis. 2.08 ATTORNEY'S FEES. Pay promptly to Bank without demand after notice, with interest thereon from the date of expenditure at the rate applicable to any loans from Bank to Borrower, reasonable attorneys' fees and all costs and expenses paid or incurred by Bank in collecting or compromising any such loan after the occurrence of an Event of Default, whether or not suit is filed. If suit is brought to enforce any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and court costs in addition to any other remedy or recovery awarded by the court. 2.09 DOCUMENTATION FEE. Pay to the Bank a $250.00 documentation fee per facility at the time of execution of documents. 3. NEGATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, it will not, without Bank's written consent: 3.01 TYPE OF BUSINESS. Make any substantial change in the character of its business. 3.02 OUTSIDE INDEBTEDNESS. Other than in the ordinary course of business and consistent with past practices, create, incur, assume or permit to exist any indebtedness for borrowed moneys, other than loans from the Bank, except obligations now existing as shown in the financial statement dated March 31, 1998, excluding those obligations being refinanced by Bank. 3.03 LIENS AND ENCUMBRANCES. Other than in the ordinary course of business which includes obtaining collaboration agreements with corporate partners, and consistent with past practices, create, incur, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned and given as security in connection with this agreement, other than liens for taxes not delinquent and liens in Bank's favor, except for those already existing as of March 31, 1998. 3.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the ordinary and normal course of its business and consistent with past practices or make any investment in the securities of any person or other entity inconsistent with company investment guidelines; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business and consistent with past practices. The foregoing will not restrict the Borrower from issuing guarantees or otherwise becoming obligated to its landlords for security deposits. 4 CREDIT AGREEMENT JUNE 17, 1998 3.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any material assets except in the ordinary course of its business consistent with past practices; or except in the ordinary course of business, sell, lease assign or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any dividends, property or other asset accompanied by the leasing back of the same. 4. EVENTS OF DEFAULT The occurrence of any of the following events (each an "Event of Default") shall, at Bank's option, terminate Bank's commitment to lend and make all sums of principal and interest then remaining unpaid on all Borrower's indebtedness to Bank immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived: 4.01 FAILURE TO PAY. Failure to pay any installment of principal or interest on any indebtedness of Borrower to Bank within 10 days of due date. 4.02 BREACH OF COVENANT. Failure to perform any other term or condition of this Agreement binding upon Borrower within 20 days of notice from Bank. 4.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any respect. 4.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business. 4.05 JUDGMENTS, ATTACHMENTS. Any money judgment greater than $100,000, writ or warrant of attachment, or similar process shall be entered or filed against Borrower or any of its assets and shall remain unvacated, unbonded or unstayed for a period later than five days prior to the date of any proposed sale thereunder. 4.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors, if not terminated within 60 days, shall be instituted by or against Borrower and, if instituted against it, shall be consented to. 5. MISCELLANEOUS PROVISIONS 5.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank or any holder of any note issued by Borrower to Bank, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. 5 CREDIT AGREEMENT JUNE 17, 1998 All rights and remedies existing under this Agreement or any note issued in connection with a loan that Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. 5.02 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 5.03 INUREMENT. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assigns of Borrower. 5.04 APPLICABLE LAW. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby agree to submit. 5.05 OFFSET. In addition to and not in limitation of all rights of offset that Bank or other holder of any note issued by Borrower in favor of Bank may have under applicable law, Bank or other holder of such notes shall, upon the occurrence of any Event of Default or any event which with the passage of time or notice would constitute such an Event of Default, have the right to appropriate and apply to the payment of the outstanding under any such note any and all balances, credits, deposits, accounts or monies of Borrower then or thereafter with Bank or other holder, within ten (10) days after the Event of Default, and notice of the occurrence of any Event of Default by Bank to Borrower. 5.06 SEVERABILITY. Should any one or more provisions of the Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. 5.07 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this Agreement and of every part hereof. 5.08 ACCOUNTING. All accounting terms shall have the meanings applied under generally accepted accounting principles unless otherwise specified. 5.10 MODIFICATION. This Agreement may be modified only by a writing signed by both parties hereto. 5.11 JUDICIAL REFERENCE. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Credit Agreement, any General Security Agreement executed by Borrower in favor of Bank or any Note executed by Borrower in favor of Bank (collectively, in this Section 5.11, the "Agreement") which controversy, dispute or claim is not settled in writing within thirty (30) days after the "CLAIM DATE" (defined as the date on which 6 CREDIT AGREEMENT JUNE 17, 1998 a party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 ET SEQ of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or San Diego County if none (the "COURT"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Section 5.11 shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. (b) Except as expressly set forth in this Section 5.11, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the 7 CREDIT AGREEMENT JUNE 17, 1998 subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. This Agreement is executed on behalf of the parties by duly authorized representatives as of June 17, 1998. IMPERIAL BANK ("BANK") BY: /s/ Tim Bubnack ------------------------------ Tim Bubnack, Vice President Date: ALLIANCE PHARMACEUTICAL, CORP. ("BORROWER") BY: /s/ Theodore D. Roth ------------------------------ Theodore D. Roth, President Date: BY: /s/ Tim T. Hart ------------------------------ Tim T. Hart, Treasurer Date: 8 EX-10.N 7 EXHIBIT 10.N [LOGO] NOTE $ 15,000,000 SAN DIEGO, California, JUNE 17,1998 On DECEMBER 2, 2002 and as hereinafter provided, for value received, the undersigned promises to pay to IMPERIAL BANK ("Bank") a California banking corporation, or order, at its SOUTHERN CALIFORNIA EMERGING GROWTH INDUSTRIES GROUP office, the principal sum of $ 15,000,000 or such sums up to the maximum if so stated, as the Bank may now or hereafter advance to or for the benefit of the undersigned in accordance with the terms hereof, together with interest from date of disbursement or N/A, whichever is later, on the unpaid principal balance / / at the rate of % per year /X/ at the rate of .50% per year in excess of the rate of interest which Bank has announced as its prime lending rate (the "Prime Rate"), which shall vary concurrently with any change in such Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance is outstanding, divided by 360, which shall, for interest computation purposes, be considered one year. Interest shall be payable /X/ monthly / / quarterly / / included with principal /X/ in addition to principal / / beginning JULY 15,1998, and if not so paid shall become a part of the principal. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. /X/ (If checked), Principal shall be payable in installments of $ * or more, each installment on the 15TH day of each MONTH, beginning AUGUST 15, 1998. Advances not to exceed any unpaid balance owing at any one time equal to the maximum amount specified above, may be made at the option of Bank. Any partial prepayment shall be applied to the installments, if any, in inverse order of maturity. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this note, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. Defaults shall include, but not be limited to, the failure of the maker(s) to pay principal or interest when due; the filing as to each person obligated hereon, whether as maker, co-maker, endorser or guarantor (individually or collectively referred to as the "Obligor") of a voluntary or involuntary petition** under the provisions of the Federal Bankruptcy Act; the issuance of any attachment or execution against any asset of any Obligor; the death of any Obligor** if not terminated within 60 days. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent ten or more days, Obligor agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the holder of this note to accept payment of any payment past due or less than the total unpaid principal balance after maturity. If this note is not paid when due, each Obligor promises to pay all costs and expenses of collection and reasonable attorneys fees incurred by the holder hereof on account of such collection, plus interest at the rate applicable to principal, whether or not suit is filed hereon. Each Obligor shall be jointly and severally liable hereon and consents to renewals, replacements and extensions of time for payment hereof, before, at, or after maturity; consents to the acceptance, release or substitution of security for this note; and waives demand and protest and the right to assert any statute of limitations. Any married person who signs this note agrees that recourse may be had against separate property for any obligations hereunder. The indebtedness evidenced hereby shall be payable in lawful money of the United States. In any action brought under or arising out of this note, each Obligor, including successor(s) or assign(s) hereby consents to the application of California law, to the jurisdiction of any competent court within the State of California, and to service of process by any means authorized by California law. No single or partial exercise of any power hereunder, or under any deed of trust, security agreement or other agreement in connection herewith shall preclude other or further exercises thereof or the exercise of any other such power. The holder hereof shall at all times have the right to proceed against any portion of the security for this note in such order and in such manner as such holder may consider appropriate, without waiving any rights with respect to any of the security. Any delay or omission on the part of the holder hereof in exercising any right hereunder, or under any deed of trust, security agreement or other agreement, shall not operate as a waiver of such right, or of any other right, under this note or any deed of trust, security agreement or other agreement in connection herewith. * See Addendum attached hereto and made a part hereof by this reference Subject to the terms and limitations contained in the Credit Agreement ALLIANCE PHARMACEUTICALS CORP. dated June 17, 1998 a New York Corporation - ------------------------------------ -------------------------------------- BY: /s/ Theodore D. Roth - ------------------------------------ -------------------------------------- Theodore D. Roth, President BY: /s/ Tim T. Hart - ------------------------------------ -------------------------------------- Tim T. Hart, Treasurer ADDENDUM ATTACHED TO THAT CERTAIN NOTE IN THE AMOUNT OF $15,000,000.00 DATED JUNE 17,1998 EXECUTED BY ALLIANCE PHARMACEUTICAL CORP., A NEW YORK CORPORATION: ADDENDUM On July 7, 1998 $6,000,000 of the total outstanding principal under the Note shall be converted to an amortizing loan payable in 48 equal monthly payments of principal plus accrued interest commencing August 15, 1998 based on a 7 year amortization period. Interest only payments shall be due on the remaining outstanding balance, including any additional funds advanced under the Note through December 15, 1998, beginning July 15, 1998, and continuing on the 15th day of each calendar month until December 15, 1998. Thereafter, the outstanding principal balance under the Note shall be converted to an amortizing loan payable in 48 equal monthly payments of principal plus accrued interest commencing January 15, 1999 based on a 7 year amortization period. All principal and accrued but unpaid interest shall in any event be due and payable on December 2, 2002. EX-10.O 8 EXHIBIT 10.O GENERAL SECURITY AGREEMENT (TANGIBLE AND INTANGIBLE PERSONAL PROPERTY) IMPERIAL BANK Member FDIC This Agreement is executed on June 17, 1998, by ALLIANCE PHARMACEUTICAL CORP. a New York corporation (hereinafter called "Obligor"). In consideration of financial accommodations given, to be given or continued, the Obligor grants to IMPERIAL BANK (hereinafter called "Bank") a security interest in (a) all property (i) delivered to Bank by Obligor, (ii) which shall be in Bank's possession or control in any matter or for any purpose, (iii) described below, (iv) now owned or hereafter acquired by Obligor of the type or class described below and/or in any supplementary schedule hereto, or in any financing statement filed by Bank and executed by or on behalf of Obligor; (b) all deposits accounts of Obligor at Bank and (c) the proceeds, increase and products of such property, all accessions thereto, and all property which Obligor may receive on account of such collateral which Obligor will immediately deliver to Bank (collectively referred to as "Collateral") to secure payment and performance of all of Obligor's present or future debts or obligations to Bank, whether absolute or contingent (hereafter referred to as "Debt"). Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. Collateral:
A. VEHICLE, VESSEL, AIRCRAFT: - --------------------------------------------------------------------------------------------- Identification License or Year Make/Manufacturer Model and Serial No. Registration No. New or Used - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
Engine or other equipment: ------------------------------------------------- (FOR AIRCRAFT - ORIGINAL INK SIGNATURE ON COPY TO FAA) B. DEPOSIT ACCOUNTS: Type Account Number Amount $ ----------- ---------------- ----------------- In name of Depository ------------------ ---------------------------------- AND ALL EXTENSIONS OR RENEWALS THEREOF. C. ACCOUNTS, INTANGIBLES AND OTHER: (DESCRIBE) All personal property, excluding equipment subject to a prior security interest in favor of the CIT Group/Equipment Financing Inc. and excluding intangible assets (including intellectual property and patents or patents applications), whether presently existing or hereafter created or acquired, including but not limited to: All accounts, chattel paper, documents, instruments, money, and deposit accounts including returns, repossessions, books and records relating thereto, and equipment containing said books and records. All investment property including securities and securities entitlements. All goods including equipment and inventory. All proceeds including, without limitation, insurance proceeds. All guarantees and other security therefor. The collateral not in Bank's possession will be located at: 9333 GENESEE AVE. SAN DIEGO, CA 92121 & 3040 SCIENCE PARK ROAD SAN DIEGO, CA 92121 & 6175 LUSK BLVD. SAN DIEGO, CA 92121 & 229 OLD MOUNTAIN RD. OTISVILLE, NEW YORK, 10963 / / If checked, the Obligor is executing this Agreement as an Accommodation Debtor only and the Obligor's liability is limited to the security interest granted in the Collateral described herein. The party being accommodated is ____________________________ (Borrower). All the terms and provisions on page 2 hereof are incorporated herein as though set forth in full, and constitute a part of this Agreement.
Signature Name: (indicate title, if applicable) Address ALLIANCE PHARMACEUTICAL CORP. BY: /s/ THEODORE D. ROTH 3040 SCIENCE PARK - ------------------------------ -------------------------------- ---------------------- A NEW YORK CORPORATION THEODORE D. ROTH, PRESIDENT SAN DIEGO, CA 92121 BY: /s/ TIM T. HART - ------------------------------ -------------------------------- ---------------------- TIM T. HART, TREASURER - ------------------------------ -------------------------------- ----------------------
SECURITY AGREEMENT (CONTINUED) Obligor represents, warrants and agrees: 1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of collecting the Debt, of protecting, insuring or realizing on Collateral, and any expenditure of Bank pursuant hereto, including attorneys' fees and expenses, with interest at the rate of 24% per year, or the rate applicable to the Debt, whichever is less, from the date of expenditure, and (c) any deficiency after realization of Collateral. 2. Obligor will use the proceeds of any loan that becomes Debt hereunder for the purpose indicated on the application therefore, and will promptly contract to purchase and pay the purchase price of any property which becomes Collateral hereunder from the proceeds of any loan made for that purpose. 3. As to all Collateral in Obligor's possession (unless specifically otherwise agreed to by Bank in writing), Obligor will: (a) Have, or has, possession of the Collateral at the location disclosed to Bank and will not remove the Collateral from the location. (b) Keep the Collateral separate and identifiable. (c) Maintain the Collateral in good and saleable condition, repair it if necessary, clean, feed, shelter, water, medicate, fertilize, cultivate, irrigate, prune and otherwise deal with the Collateral in all such ways as are considered good practice by owners of like property, use it lawfully and only as permitted by insurance policies, and permit Bank to inspect the Collateral at any reasonable time. (d) Not sell, contract to sell, lease, encumber or transfer the Collateral (other than inventory Collateral or collateral less than $20,000.00 in unit value). until the Debt has been paid, even though Bank has a security interest in proceeds of such Collateral. 4. As to Collateral which is inventory and accounts, Obligor: (a) May, until notice from Bank, sell, lease or otherwise dispose of inventory Collateral in the ordinary course of business only, and collect the cash proceeds thereof. (b) Will, upon notice from Bank, deposit all cash proceeds as received in a demand deposit account with Bank, containing only such proceeds and deliver statements identifying units of inventory disposed of, accounts which gave rise to proceeds, and all acquisitions and returns of inventory as required by Bank. c) Will receive in trust, schedule on forms satisfactory to the Bank and deliver to Bank all non-cash proceeds other than inventory received in trade. d) If not in default, may obtain release of Bank's interest in individual units of inventory upon request, therefore, payment to Bank of the release price of such units shown on any Collateral schedule supplementary hereto, and compliance herewith as to proceeds thereof. 5. As to Collateral which are accounts, chattel paper, general intangibles and proceeds described in 4(c) above, Obligor warrants, represents and agrees: (a) All such Collateral is genuine, enforceable in accordance with its terms, free from default, prepayment, defense and conditions precedent (except as disclosed to and accepted by Bank in writing), and is supported by consecutively numbered invoices to, or rights against, the debtors thereon. Obligor will supply Bank with duplicate invoices or other evidence of Obligor's rights on Bank's request; (b) All persons appearing to be obligated on such Collateral have authority and capacity to contract; (c) All chattel paper is in compliance with law as to form, content and manner of preparation and execution and has been properly registered, recorded, and/or filed to protect Obligor's interest thereunder; (d) If an account debtor shall also be indebted to Obligor on another obligation, any payment made by him not specifically designated to be applied on any particular obligation shall be considered to be a payment on the account in which Bank has a security interest. Should any remittance include a payment not on an account, it shall be delivered to Bank and, if no event of default has occurred, Bank shall pay Obligor the amount of such payment; (e) Obligor agrees not to compromise, settle or adjust any account or renew or extend the time of payment thereof without Bank's prior written consent. 6. Obligor owns all Collateral absolutely, and no other person has or claims any interest in any Collateral, except as disclosed to and accepted by Bank in writing. Obligor will defend any proceeding which may affect title to or Bank's security interest in any Collateral, and will indemnify and hold Bank free and harmless from all costs and expenses of Bank's defense. 7. Obligor will pay when due all existing or future charges, liens or encumbrances on and all taxes and assessments now or hereafter imposed on or affecting the Collateral and, if the Collateral is in Obligor's possession, the realty on which the Collateral is located. 8. Obligor will insure the Collateral with Bank as loss payee in form and amounts with companies, and against risks and liability satisfactory to Bank, and hereby assigns such policies to Bank, agrees to deliver them to Bank at Bank's request, and authorizes Bank to make any claim thereunder, to cancel the insurance on Obligor's default, and to receive payment of and endorse any instrument in payment of any loss or return premium. If Obligor should fail to deliver the required policy or policies to the Bank, Bank may, at Obligor's cost and expense, without any duty to do so, get and pay for insurance naming as the insured, at Bank's option, either both Obligor and Bank, or only Bank, and the cost thereof shall be secured by this Security Agreement, and shall be repayable as provided in Paragraph 1 above. 9. Obligor will give Bank any reasonable information it requires. All information at any time supplied to Bank by Obligor (including, but not limited to, the value and condition of Collateral, financial statements, financing statements, and statements made in documentary Collateral) is correct and complete, and Obligor will notify Bank of any adverse change in such information. Obligor will promptly notify Bank of any change of Obligor's residence, chief executive office or mailing address. 10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act which Obligor is obligated hereby to do, to exercise such rights as Obligor may exercise, to use such equipment as Obligor might use, to enter Obligor's premises to give notice of Bank's security interest, and to collect Collateral and proceeds and to execute and file in Obligor's name any financing statements and amendments thereto required to perfect Bank's security interest hereunder, all to protect and preserve the Collateral and Bank's rights hereunder. Bank may: (a) Endorse, collect and receive delivery or payment of instruments and documents constituting Collateral; (b) make extension agreements with respect to or affecting Collateral, exchange it for other Collateral, release persons liable thereon or take security for the payment thereof, and compromise disputes in connection therewith; (c) Use or operate Collateral for the purpose of preserving Collateral or its value and for preserving or liquidating Collateral. 11. If more than one Obligor signs this Agreement, their liability is joint and several. Any Obligor who is married agrees that recourse may be had against separate property for the Debt. Discharge of any Obligor except for full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of Collateral or any impairment or suspension of Bank's rights against an Obligor, or any transfer of an Obligor's interest to another shall not affect the liability of any other Obligor. Until the Debt shall have been paid or performed in full, Bank's rights shall continue even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank to proceed against any Obligor before any other, or to pursue any other remedy; (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale, and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until the Debt shall have been paid; (d) and any right of subrogation to Bank until Debt shall have been paid or performed in full. 12. Upon default, at Bank's option, without demand or notice, all or any part of the Debt shall immediately become due. Bank shall have all rights given by law, and may sell, in one or more sales, Collateral in any county where Bank has an office. Bank may purchase at such sale. Sales for cash or on credit to a wholesaler, retailer or user of the Collateral, or at public or private auction, are all to be considered commercially reasonable. Bank may require Obligor to assemble the Collateral and make it available to Bank at the entrance to the location of the Collateral, or a place designated by Bank. Defaults shall include: (a) Obligor's failure to pay or perform this or any agreement with Bank or breach of any warranty herein, or Borrower's failure to pay or perform any agreement with Bank. (b) deleted XXXXXXXXXXXXXXXXX (c) Any actual deterioration of the Collateral or in the market price thereof which causes it, to become unsatisfactory as security. (d) Any levy or seizure against Borrower or any of the Collateral. (e) Death, termination of business, assignment for creditors, insolvency, appointment of receiver, or the filing of any petition under bankruptcy or debtor's relief laws of, by or against Obligor or Borrower or any guarantor of the Debt, if not terminated within 60 days with respect to filings against borrower or obligor. (f) Any warranty or representation which is false or is believed in good faith by Bank to be false. 13. Bank's acceptance of partial or delinquent payments or the failure of Bank to exercise any right or remedy shall not waive any obligation of Obligor or Borrower or right of Bank to modify this Agreement, or waive any other similar default. 14. On transfer of all or any part of the Debt, Bank may transfer all or any part of the Collateral. Bank may deliver all or any part of the Collateral to any Obligor at any time. Any such transfer or delivery shall discharge Bank from all liability and responsibility with respect to such Collateral transferred or delivered. This Agreement benefits Bank's successors and assigns and binds Obligor's heirs, legatees, personal representatives, successors and assigns. Obligor agrees not to assert against any assignee of Bank any claim or defense that may exist against Bank. Time is of the essence. This Agreement and supplementary schedules hereto contain the entire security agreement between Bank and Obligor. Obligor will execute any additional agreements, assignments or documents reasonably required by Bank to carry this Agreement into effect. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of California, to the jurisdiction of whose courts the Obligor hereby agrees to submit. Obligor agrees that service of process may be accomplished by any means authorized by California law. All words used herein in the singular shall be considered to have been used in the plural where the context and construction so require. EX-10.P 9 EXHIBIT 10.P SINGLE-TENANT INDUSTRIAL LEASE ------------------------------ (TRIPLE NET) LANDLORD: WHAMC REAL ESTATE LIMITED PARTNERSHIP, A DELAWARE LIMITED PARTNERSHIP TENANT: ALLIANCE PHARMACEUTICAL CORP., A NEW YORK CORPORATION STANDARD FORM SINGLE-TENANT INDUSTRIAL LEASE TABLE OF CONTENTS
SECTION TITLE PAGE - ------- ----- ---- SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS...............iii 1. Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 4. Common Area; Operating Expenses. . . . . . . . . . . . . . . . . .3 5. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . .5 6. Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 7. Payments and Notices . . . . . . . . . . . . . . . . . . . . . . .8 8. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 9. Surrender; Holding Over. . . . . . . . . . . . . . . . . . . . . .8 10. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 11. Repairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 12. Alterations. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 13. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 14. Assignment and Subletting. . . . . . . . . . . . . . . . . . . . 11 15. Entry by Landlord. . . . . . . . . . . . . . . . . . . . . . . . 12 16. Utilities and Services . . . . . . . . . . . . . . . . . . . . . 12 17. Indemnification and Exculpation. . . . . . . . . . . . . . . . . 13 18. Damage or Destruction. . . . . . . . . . . . . . . . . . . . . . 13 19. Eminent Domain . . . . . . . . . . . . . . . . . . . . . . . . . 14 20. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 21. Waiver of Subrogation. . . . . . . . . . . . . . . . . . . . . . 16 22. Tenant's Default and Landlord's Remedies . . . . . . . . . . . . 16 23. Landlord's Default . . . . . . . . . . . . . . . . . . . . . . . 18 24. Subordination. . . . . . . . . . . . . . . . . . . . . . . . . . 18 25. Estoppel Certificate . . . . . . . . . . . . . . . . . . . . . . 18 26. Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . . 19 27. Modification and Cure Rights of Landlord's Mortgagees and Lessors19 28. Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . . . . 19 29. Transfer of Landlord's Interest. . . . . . . . . . . . . . . . . 19 30. Limitation on Landlord's Liability . . . . . . . . . . . . . . . 19 31. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 19 32. Lease Execution. . . . . . . . . . . . . . . . . . . . . . . . . 21 33. Cancellation Option. . . . . . . . . . . . . . . . . . . . . . . 21 34. Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
EXHIBITS EXHIBIT "A-1" Project Site Plan EXHIBIT "A-2" Project Legal Description EXHIBIT "B" Description of Premises EXHIBIT "C" Work Letter Agreement EXHIBIT "D" Sample Form of Notice of Lease Term Dates EXHIBIT "E" Environmental Questionnaire EXHIBIT "F" Sample Form of Tenant Estoppel Certificate EXHIBIT "G" Special Improvements -i- STANDARD FORM SINGLE-TENANT INDUSTRIAL LEASE INDEX OF DEFINED TERMS Abandonment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Actual Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 ADA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Additional Landlord's Work . . . . . . . . . . . . . . . . . . . .EXHIBIT C Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Audit Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 BOMA Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Building's Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Cancellation Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Cancellation Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Cancellation Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Cancellation Option. . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Cancellation Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Cap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Common Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Declaration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Early Occupancy Date . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Election Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Estimate Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Existing Tenant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Extension Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Fair Market Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Force Majeure Delays . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Hazardous Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Indemnified Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Landlord Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . .6 Landlord's Cost Cap. . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C Landlord's Work. . . . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Occupied Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Option Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Other Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Outside Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 PCBs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Permitted Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Pre-Approved Change. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Preliminary Plans. . . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C Real Property Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 rentable area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 rentable square footage. . . . . . . . . . . . . . . . . . . . . . . . . .1 Special Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Special Transferee . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Tenant Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Tenant Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Tenant Improvements. . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C Tenant Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . . 13 Tenant's Monthly Operating Expense Charge. . . . . . . . . . . . . . . . .4 Tenant's Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Tenant's Security System . . . . . . . . . . . . . . . . . . . . . . . . 12 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Transfer Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Transfer Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Transferee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 usable area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 usable square footage. . . . . . . . . . . . . . . . . . . . . . . . . . .1 Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Work Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
-ii- SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("SUMMARY") is hereby incorporated into and made a part of the attached Single-Tenant Industrial Lease which pertains to the Premises described in Section 1.4 below. All references in the Lease to the "Lease" shall include this Summary. All references in the Lease to any term defined in this Summary shall have the meaning set forth in this Summary for such term. Any initially capitalized terms used in this Summary and any initially capitalized terms in the Lease which are not otherwise defined in this Summary shall have the meaning given to such terms in the Lease. 1.1 LANDLORD'S ADDRESS: WHAMC REAL ESTATE LIMITED PARTNERSHIP c/o WCB Properties 450 Newport Center Drive, Suite 304 Newport Beach, California 92660 Attn: Mr. Ronald Lack Telephone: (714) 640-6900 Facsimile: (714) 640-8399 1.2 TENANT'S ADDRESS: ALLIANCE PHARMACEUTICAL CORP. 3040 Science Park Road San Diego, California 92121 Attn: Mr. Duane Roth Telephone: (619) 558-4300 Facsimile: (619) 558-3625 1.3 PROJECT: The industrial development known as Pacific Corporate Plaza in the City of San Diego, County of San Diego, State of California, as shown on the project site plan attached hereto as EXHIBIT "A-1" and the legal description of which is attached hereto as EXHIBIT "A-2". The Project includes all buildings, improvements and facilities now or subsequently located within such development, including, without limitation, the Building constituting the Premises. 1.4 PREMISES: That certain 56,799 rentable square foot building ("Building") located within the Project known as 6175 Lusk Boulevard, San Diego, California and more particularly described in EXHIBIT "A-1" and EXHIBIT "B" attached hereto. 1.5 TERM: Ten (10) years. 1.6 COMMENCEMENT DATE: The earlier of (i) that date which is one hundred twenty (120) days after the date of the full execution and delivery of this Lease by Landlord and Tenant, (ii) the date Tenant commences business operations from the Premises, or (iii) March 1, 1998. 1.7 LEASE EXPIRATION DATE: The last day of the tenth (10th) annual anniversary of the Commencement Date, subject to two (2) extension options of three (3) years pursuant to Section 2.4 of the Lease. 1.8 RENT
PERIOD ANNUAL RENT MONTHLY RENT ------ ----------- ------------ 1-12 $647,508.60 $53,959.05 13-24 $670,171.39 $55,847.61 25-36 $693,627.31 $57,802.28 37-48 $717,904.26 $59,825.35 49-60 $743,030.84 $61,919.24 61-72 $769,036.91 $64,086.41 73-84 $795,953.20 $66,329.43 85-96 $823,811.52 $68,650.96 97-108 $852,644.92 $71,053.74 109-120 $882,487.45 $73,540.62
1.9 SECURITY DEPOSIT: $297,330.00 subject to the terms of Section 5 below. 1.10 PERMITTED USE: The Premises may be used only for general office and biomedical manufacturing and any other legally permitted use consistent with the character of the Project and approved by Landlord in Landlord's reasonable discretion. 1.11 BROKERS: CB Commercial Real Estate Group, Inc. representing Landlord and The Irving Hughes Group, Inc. representing Tenant. -iii- 1.12 INTEREST RATE: The lesser of: (a) the rate announced from time to time by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or ceases to publish such rate, then the rate announced from time to time by the largest (as measured by deposits) chartered operating bank operating in California, as its "prime rate" or "reference rate", plus three percent (3%); or (b) the maximum rate permitted by law. 1.13 TENANT IMPROVEMENTS: The tenant improvements installed or to be installed in the Premises by Tenant, as described in the Work Letter Agreement attached hereto as EXHIBIT "C". 1.14 PARKING PASSES: One hundred sixty eight (168) parking privileges consisting of (i) one hundred and sixty (160) unreserved, uncovered parking privileges, and (ii) eight (8) unreserved, uncovered guest parking privileges (which guest parking shall be identified as such and located in front of the main entrance to the Building). -iv- SINGLE-TENANT INDUSTRIAL LEASE This LEASE ("LEASE"), which includes the preceding Summary of Basic Lease Information and Definitions ("SUMMARY") attached hereto and incorporated herein by this reference, is made as of the 7th day of November, 1997, by and between WHAMC REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership ("LANDLORD"), and ALLIANCE PHARMACEUTICAL CORP., a New York corporation ("TENANT"). 1. PREMISES. 1.1 LEASE OF PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises upon and subject to the terms, covenants and conditions contained in this Lease to be performed by each party. Throughout the Term of this Lease, Tenant shall have the right to the exclusive use of that portion of that certain building in the Project commonly known as 6173 Lusk Boulevard, San Diego, California (the "OTHER BUILDING") where the existing HVAC system serving the Premises is situated only so long as such Other Building contains the HVAC system servicing the Premises; provided, however, that Tenant's exclusive use is limited to such portion of the Other Building (where the existing HVAC system servicing the Premises is situated) and Tenant's use is further limited for the express purposes of Tenant's access, maintenance and repair of such HVAC system and for no other purpose. Such Other Building shall be deemed to be part of the Premises for all purposes under this Lease except that Tenant will not be obligated to pay Monthly Rent for such Other Building. 1.2 MEASUREMENT OF PREMISES AND/OR PROJECT. At Landlord's discretion, the number of rentable square feet of the Premises and/or the Project shall be subject to verification from time to time by Landlord's space measurement consultant, and such verification shall be made in accordance with the provisions of this Section 1.2. Tenant's architect may consult with Landlord's space measurement consultant regarding verification of the number of rentable square feet of the Premises; however, the reasonable determination of Landlord's space measurement consultant shall be conclusive and binding upon the parties. In the event that Landlord's space measurement consultant determines that the amounts thereof shall be different from those set forth in this Lease, Landlord shall modify all amounts, percentages and figures appearing or referred to in this Lease to conform to such corrected rentable square footage (including, without limitation, the amount of the "Rent," as that term is defined in Section 3 of this Lease). If such modification is made, it will be confirmed in writing by Landlord to Tenant. As used in this Lease, the following terms have the meanings indicated: (a) The term "USABLE AREA" or "USABLE SQUARE FOOTAGE" means the usable area as determined in accordance with the Standard Method for Measuring Floor Area in Office Buildings, ANSI/BOMA Z65.1 - 1996 (the "BOMA STANDARD"); and (b) The term "RENTABLE AREA" or "RENTABLE SQUARE FOOTAGE" means the rentable area measured in accordance with the BOMA Standard. 2. TERM. 2.1 TERM; NOTICE OF LEASE DATES. This Lease shall be effective upon the date first above written (the "EFFECTIVE DATE"). Subject to Section 2.4 below, the term of this Lease (the "TERM") shall commence upon the Commencement Date and shall expire on the Lease Expiration Date, unless sooner terminated or extended as permitted herein, and if extended, the "Term" will include the applicable Option Period. 2.2 EARLY OCCUPANCY. Subject to Section 2.4 below, Landlord shall deliver possession of the Premises but not the Occupied Portion (as such term is defined in Section 2.4 below) within three (3) days following the full execution and delivery of this Lease (the "EARLY OCCUPANCY DATE") for purposes of construction of improvements to the Premises (but not the Occupied Portion) in accordance with the Work Letter attached hereto as EXHIBIT "C" ("WORK LETTER"). Such early occupancy shall be subject to all of the terms and conditions of this Lease, including, without limitation, those provisions requiring that Tenant shall be responsible for all costs, expenses and obligations relating to the Premises (including, without limitation, Sections 3.2, 3.3, 4, 6, 10, 11, 17, 20 and 22) except that Tenant will not be obligated to pay Monthly Rent during the period of such early occupancy and Tenant will not, unless and until Tenant enters or occupies such Occupied Portion, be subject to any of the terms and conditions of this Lease for the Occupied Portion until Landlord delivers possession of the Occupied Portion to Tenant, which delivery date is anticipated to occur on or about January 1, 1998, subject to the surrender of such Occupied Portion by the existing tenant thereof. 2.3 OPTIONS TO EXTEND. Tenant shall have two (2) options (each, an "EXTENSION OPTION") to extend the Term (for the entire Premises only) for a period (each, an "OPTION PERIOD") of three (3) years, commencing upon the Lease Expiration Date or, as applicable, the second Option Period, upon the same terms and conditions previously applicable, except for the grant of any exercised Extension Option and Annual Rent (which shall be determined as set forth below). Each Extension Option may be validly exercised only by notice in writing received by Landlord not later than three hundred sixty (360) calendar days prior to commencement of the applicable Option Period; provided, however, that each such Extension Option may be validly exercised only if no uncured material Tenant default exists as of the date of exercise and, at Landlord's option, as of the commencement of the applicable Option Period. If Tenant does not exercise the applicable Extension Option during the exercise period set forth above in strict accordance with the provisions hereof, the Extension Option and any unexercised Extension Option (if any) shall forever terminate and be of no further force or effect. Each such Extension Option is personal to the original Tenant, may not be exercised by any person or entity other than the original Tenant and shall become null and void if the original Tenant assigns its interest in this Lease unless such assignment is to an Affiliate of Tenant (as that term is defined in Section 14.5) or to a Transferee who is a Permitted Business (as defined in Section 14.1) but only to the extent such Transferee is conducting the biomedical manufacturing portion of Tenant's Permitted Use ("SPECIAL TRANSFEREE"). For purposes of this Section 2.3 and Section 33, the term "material" relative to a Tenant default shall mean any monetary default and any material non-monetary default. Annual Rent during the applicable Option Period shall be equal to ninety-five percent (95%) of the Fair Market Rental as of the commencement of the applicable Option Period, but in no event less than Annual Rent payable immediately prior to the applicable Option Period. For purposes hereof, "FAIR MARKET RENTAL" shall mean the base rent then being charged to renewal tenants by Landlord in the Project (or, if not enough comparable transactions exist in the Project, then the base rent payable during the applicable Option Period to a willing landlord by a willing renewal tenant for comparable space in comparable buildings in the vicinity of the Building) with tenants having a similar financial responsibility, credit rating and capitalization as Tenant then has, taking into account all other relevant factors for like and comparable space, improved with tenant improvements of like and comparable quality to those then existing in the Premises. At least four (4) months prior to the applicable Option Period, Landlord shall notify Tenant of the Fair Market Rental as determined by Landlord. Any dispute between the parties hereto with respect to the amount so determined shall be resolved by arbitration, as set forth below; provided, however, that there shall be deemed not to be such a dispute unless Tenant notifies Landlord thereof in writing within one (1) month after Landlord so notifies Tenant of the Fair Market Rental and Tenant sets forth in such notice Tenant's determination of Fair Market Rental. If, in the event of a dispute, the arbitrators have not determined the Fair Market Rental by commencement of the applicable Option Period, Tenant shall pay as Annual Rent the amount determined by Landlord until such time as the Fair Market Rental has been determined by arbitration, whereupon Tenant shall pay any additional amount due to Landlord based upon such subsequent determination of Fair Market Rental. If the Annual Rent so paid by Tenant is higher than that ultimately determined by the arbitration process, then Landlord shall reimburse such difference to Tenant. If Tenant timely notifies Landlord in writing of Tenant's dispute regarding Landlord's determination of the Fair Market Rental, then Fair Market Rental shall be determined as follows. Landlord and Tenant shall each appoint one arbitrator who shall by profession be a real estate appraiser active over the five (5) year period ending on the date of such appointment in the appraisal of commercial properties in San Diego County and who shall not have been employed or engaged by either party during said five (5) year period. Each such arbitrator shall be appointed within fifteen (15) days after Tenant notifies Landlord of Tenant's dispute of Landlord's determination of Fair Market Rental. The two arbitrators so appointed shall within fifteen (15) days of the date of the appointment of the last appointed arbitrator agree upon and appoint a third arbitrator who shall be qualified under the same criteria set forth above. The three arbitrators shall, within thirty (30) days of the appointment of the third arbitrator, reach a decision as to whether the parties shall use Landlord's or Tenant's submitted Fair Market Rental for the Premises, and shall notify Landlord and Tenant thereof. Such decision shall be based upon the criteria and variables set forth above. The new Annual Rent shall thereafter be equal to the Fair Market Rental of the Premises so selected by the arbitrators. The decision of the majority of the three arbitrators shall be binding upon Landlord and Tenant. If either Landlord or Tenant fails to appoint an arbitrator within the time period specified hereinabove, the arbitrator appointed by one of them shall reach a decision, notify Landlord and Tenant thereof, and such arbitrator's decision shall be binding upon Landlord and Tenant. If the two arbitrators fail to agree upon and appoint a third arbitrator, both arbitrators shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association in accordance with the method described above. The cost of arbitration shall be paid by Landlord and Tenant equally. 2.4 CONDITIONS PRECEDENT. Landlord will not be obligated to deliver possession of the Premises to Tenant (but Tenant will be liable, subject to Section 2.2 hereof and the occurrence of the Commencement Date, for Rent if Landlord can otherwise deliver the Premises, or the applicable portion thereof, to Tenant as required hereunder) until (A) Landlord has received from Tenant all of the following: (i) a copy of this Lease fully executed by Tenant; (ii) evidence satisfactory to Landlord of the deposit of the Security Deposit in accordance with Section 5 below, and the first installment of Monthly Rent in accordance with Section 3.1 below; and (iii) copies of policies of insurance or certificates thereof as required under Section 21 of this Lease and (B) NextLevel Systems, Inc., the existing tenant ("EXISTING TENANT") in a portion (the "OCCUPIED PORTION") of the Premises as of the date hereof has vacated the Premises; provided, however, that Landlord and Tenant acknowledge and agree that, subject to the other condition precedents set forth in this Section 2.4, Landlord shall deliver possession of the Premises (but not the Occupied Portion) to Tenant in accordance with Section 2.2 and Tenant shall accept possession of such portion of the Premises on the date of Landlord's delivery thereof. Notwithstanding anything above to the contrary, the Commencement Date of this Lease shall occur in the event that Landlord is unable to deliver possession of the Occupied Portion to Tenant by the Commencement Date of the Lease with respect to the other portion of the Premises (not including the Occupied Portion); provided, however, that (i) Tenant's obligation to pay Monthly Rent with respect to the Occupied Portion of the Premises will, on a per diem basis, be waived by Landlord (in the proportion that the rentable square feet of the Occupied Portion bears to the total rentable square feet of the Premises), for each day past March 1, 1998 ("OUTSIDE DATE") that Landlord so fails to deliver possession of the Occupied Portion of the Premises to Tenant and (ii) in accordance with, and subject to, Section 2.2 of this Lease, Tenant will not be subject to any of the other terms and conditions of this Lease until Landlord delivers possession of the Occupied Portion to Tenant (unless Tenant enters or occupies such Occupied Portion). 3. RENT. 3.1 ANNUAL RENT. Tenant agrees to pay Landlord, as rent for the Premises, the Annual Rent designated in Section 1.8 of the Summary. The Annual Rent shall be paid by Tenant in twelve (12) equal monthly installments of Monthly Rent in the amounts designated in Section 1.8 of the Summary in advance on the first day of each and every calendar month commencing upon the Commencement Date, except that the first full month's Monthly Rent for the Premises shall be paid upon execution of this Lease by Tenant. Monthly Rent for any partial month shall be prorated in the proportion that the number of days this Lease is in effect during such month bears to the actual number of days in such month. -2- 3.2 ADDITIONAL RENT. All amounts and charges payable by Tenant under this Lease in addition to the Annual Rent described in Section 3.1 above shall be considered additional rent for the purposes of this Lease, and the word "RENT" in this Lease shall include such additional rent unless the context specifically or clearly implies that only the Annual Rent is referenced. The Annual Rent and additional rent shall be paid to Landlord as provided in Section 7, without any prior demand therefor and without any deduction or offset except as specified elsewhere in the Lease, in lawful money of the United States of America. 3.3 LATE PAYMENTS. Late payments of Monthly Rent and/or any item of additional rent will be subject to interest and a late charge as provided in Sections 22.6 and 22.7 below. 3.4 TENANT'S OBLIGATIONS. Except as otherwise provided herein, all Rent shall be absolutely net to Landlord so that this Lease shall yield net to Landlord, the Rent to be paid each month during the Term of this Lease. Nothing herein contained shall be deemed to require Tenant to pay or discharge any liens or mortgages of any character whatsoever which may exist or hereafter be placed upon the Premises by an affirmative act or omission of Landlord. 4. COMMON AREA; OPERATING EXPENSES. 4.1 DEFINITION OF COMMON AREA. The term "COMMON AREA," as used in this Lease means all areas and the improvements thereon within the exterior boundaries of the Project now or later made available for the general use of Landlord, Tenant and other persons entitled to occupy floor area in the Project and their customers, including, without limitation, the parking facilities of the Project, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, and similar areas and facilities situated within the Project which are not reserved for the exclusive use of any Project occupants and the exterior surfaces and roofs of all buildings (including the Building) located within the Project. Without limiting this definition, Landlord may include in the Common Area those portions of the Project presently or later sold or leased to purchasers or tenants, as the case may be, until the commencement of construction of the building(s) thereon, at which time there shall be withdrawn from the Common Area those areas not provided by such owner or lessee for common use. Common Area shall not include (i) the entryway to a tenant's premises, (ii) any improvements installed by a tenant outside of its premises, whether with or without Landlord's knowledge or consent, or (iii) any areas or facilities that are included in the description of premises leased to a tenant. 4.2 MAINTENANCE AND USE OF COMMON AREA. The manner in which the Common Area shall be maintained shall be solely determined by Landlord in Landlord's reasonable discretion. If any owner or tenant of any portion of the Project maintains Common Area located upon its parcel or demised premises (Landlord shall have the right in its sole discretion to allow any purchaser or tenant to so maintain Common Area located upon its parcel or demised premises and to be excluded from participation in the payment of Common Area Expenses as provided below), Landlord shall not have any responsibility for the maintenance of that portion of the Common Area and Tenant shall have no claims against Landlord arising out of any failure of such owner or tenant to so maintain its portion of the Common Area. The use and occupancy by Tenant of the Premises shall include the right to use the Common Area (except areas used in the maintenance or operation of the Project), in common with Landlord and other tenants of the Project and their customers and invitees, subject to (i) any covenants, conditions and restrictions now or hereafter of record (the "DECLARATION"), and (ii) such reasonable, non-discriminatory rules and regulations concerning the Project as may be established by Landlord from time to time. Tenant agrees to promptly comply with all such rules and regulations and any reasonable, non-discriminatory amendments thereto upon receipt of written notice from Landlord. 4.3 CONTROL OF AND CHANGES TO COMMON AREA. Landlord shall have the sole and exclusive control of the Common Area, as well as the right to make reasonable changes to the Common Area. Provided Landlord does not materially interfere with Tenant's use of and access to the Premises, Landlord's rights shall include, but not be limited to, the right to (a) restrain the use of the Common Area by unauthorized persons; (b) cause Tenant to remove or restrain persons from any unauthorized use of the Common Area if they are using the Common Area by reason of Tenant's presence in the Project; (c) utilize from time to time any portion of the Common Area for promotional, entertainment, and related matters; (d) temporarily close any portion of the Common Area for repairs, improvements or alterations, to discourage non-customer use, to prevent public dedication or an easement by prescription from arising, or for any other reason deemed appropriate in Landlord's judgment; and (e) reasonably change the shape and size of the Common Area, add, eliminate or change the location of improvements to the Common Area, including, without limitation, buildings, lighting, parking areas, landscaped areas, roadways, walkways, drive aisles and curb cuts. 4.4 OPERATING EXPENSES. As used in this Section 4.4, the term "BUILDING'S SHARE" shall mean a fraction, the numerator of which is the rentable square footage of the Building, and the denominator of which is the rentable square footage of the Project. Throughout the Term of this Lease, commencing on the Commencement Date, and in addition to Tenant's obligations set forth in Section 3.4 hereof, Tenant agrees to pay Landlord, as additional rent in accordance with the terms of this Section 4, the Building's Share of Operating Expenses for the operation, maintenance, repair, and replacement of the Project and the Common Area including, without limitation: (i) any form of real property tax, assessment (including, without limitation, change in ownership taxes and assessments), license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond or similar imposition of any kind or nature imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof; (ii) any and all assessments under any covenants, conditions and restrictions affecting the Project; (iii) water, sewer and other utility charges for the Common Area; (iv) costs of commercially reasonable insurance obtained by Landlord; (v) waste disposal and janitorial services; (vi) security (if any); (vii) labor; (viii) commercially reasonable management costs including, without limitation: (A) wages and salaries (and payroll taxes and similar charges ) of property management employees for the Common Area, (B) management office rental, supplies, equipment and related operating expenses for the Common Area; (C) commercially reasonable management/administrative fees; and (D) association fees and assessments; (ix) supplies, materials, equipment and tools including rental of personal property; (x) repair and maintenance of the structural portions of the buildings within the Project, including the plumbing, heating, ventilating, air-conditioning and electrical systems -3- installed or furnished by Landlord; (xi) maintenance, sweeping, repairs, resurfacing, and upkeep of all parking and other Common Areas; (xii) amortization on a straight line basis over the useful life together with interest at the Interest Rate on the unamortized balance of all capitalized expenditures to the Project; (xiii) gardening and landscaping; (xiv) maintenance of signs (other than signs of tenants of the Project); (xv) personal property taxes levied on or attributable to personal property used in connection with the Common Areas; (xvi) reasonable accounting, audit, verification, legal and other consulting fees; and (xvii) any other costs and expenses of repairs, maintenance, painting, lighting, cleaning, and similar items, including commercially reasonable reserves. Notwithstanding anything above to the contrary, the term "Operating Expenses" shall not include costs to correct latent defects in the base, shell and core of the Premises to the extent not caused by Tenant or Tenant's improvements to the Premises. 4.5 TENANT'S MONTHLY OPERATING EXPENSE CHARGE. From and after the Commencement Date, Tenant shall pay to Landlord, on the first day of each calendar month during the Term of this Lease, the Building's Share of an amount estimated by Landlord to be the Monthly Operating Expenses for the Project for that month ("TENANT'S MONTHLY OPERATING EXPENSE CHARGE"). Notwithstanding anything in this Section 4 to the contrary, in no event will Tenant be liable, in any calendar year of this Lease, for Operating Expense increases in excess of ten percent (10%) over the Operating Expenses for the immediately preceding calendar year (the "CAP"); provided, however, that for purposes of the Cap, costs of commercially reasonable insurance maintained by Landlord, Real Property Taxes and the costs of capital expenditures, shall not be deemed to be part of Operating Expenses. 4.6 ESTIMATE STATEMENT. Prior to the Commencement Date and on or about May 1st of each subsequent calendar year during the Term of this Lease, Landlord will endeavor to deliver to Tenant a statement ("ESTIMATE STATEMENT") wherein Landlord will estimate Tenant's Monthly Operating Expense Charge for the then current calendar year. Tenant agrees to pay Landlord, as additional rent, Tenant's estimated Monthly Operating Expense Charge each month thereafter, beginning with the next installment of rent due, until such time as Landlord issues a revised Estimate Statement or the Estimate Statement for the succeeding calendar year; except that, concurrently with the regular monthly rent payment next due following the receipt of each such Estimate Statement, Tenant agrees to pay Landlord an amount equal to one monthly installment of Tenant's estimated Monthly Operating Expense Charge (less any applicable Operating Expenses already paid) multiplied by the number of months from January, in the current calendar year, to the month of such rent payment next due, all months inclusive. If at any time during the Term of this Lease, but not more often than quarterly, Landlord reasonably determines that the Building's Share of Operating Expenses for the current calendar year will be greater than the amount set forth in the then current Estimate Statement, Landlord may issue a revised Estimate Statement and Tenant agrees to pay Landlord, within thirty (30) days of receipt of the revised Estimate Statement, the difference between the amount owed by Tenant under such revised Estimate Statement and the amount owed by Tenant under the original Estimate Statement for the portion of the then current calendar year which has expired. Thereafter Tenant agrees to pay Tenant's Monthly Operating Expense Charge based on such revised Estimate Statement until Tenant receives the next calendar year's Estimate Statement or a new revised Estimate Statement for the current calendar year. 4.7 ACTUAL STATEMENT. By May 1st of each calendar year during the Term of this Lease, Landlord will also endeavor to deliver to Tenant a statement ("ACTUAL STATEMENT") which states the Building's Share of the actual Operating Expenses for the preceding calendar year. If the Actual Statement reveals that the Building's Share of the actual Operating Expenses is more than the total Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Tenant agrees to pay Landlord the difference in a lump sum within thirty (30) days of receipt of the Actual Statement. If the Actual Statement reveals that the Building's Share of the actual Operating Expenses is less than the Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Landlord will credit any overpayment toward the next monthly installment(s) of the Building's Share of the Operating Expenses due under this Lease. Such obligation will be a continuing one which will survive the expiration or earlier termination of this Lease. Prior to the expiration or sooner termination of the Lease Term and Landlord's acceptance of Tenant's surrender of the Premises, Landlord will have the right to estimate the actual Operating Expenses for the then current Lease Year and to collect from Tenant prior to Tenant's surrender of the Premises, the Building's Share of any excess of such actual Operating Expenses over the estimated Operating Expenses paid by Tenant in such Lease Year. 4.8 MISCELLANEOUS. Any delay or failure by Landlord in delivering any Estimate Statement or Actual Statement pursuant to this Section 4 will not constitute a waiver of its right to require an increase in additional rent for Operating Expenses nor will it relieve Tenant of its obligations pursuant to this Section 4, except that Tenant will not be obligated to make any payments based on such Estimate Statement or Actual Statement until thirty (30) days after receipt of such Estimate Statement or Actual Statement. If Tenant does not object to any Estimate Statement or Actual Statement within ninety (90) days after Tenant receives any such statement, such statement will be deemed final and binding on Tenant. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of the Building's Share of the actual Operating Expenses for the year in which this Lease terminates, Tenant agrees to promptly pay any increase due over the estimated expenses paid and, conversely, any overpayment made in the event said expenses decrease shall promptly be rebated by Landlord to Tenant. Such obligation will be a continuing one which will survive the expiration or termination of this Lease. 4.9 BOOKS AND RECORDS. Landlord shall maintain books and records in accordance with sound accounting and management practices, reflecting the Operating Expenses. If Tenant wishes to review or audit the amount of the Building's Share of Operating Expenses, Tenant must deliver to Landlord a written notice of Tenant's desire to review or audit Landlord's books and records ("AUDIT NOTICE") within three (3) months following Tenant's receipt of Landlord's first annual reconciliation. Thereafter, if Tenant wishes to review or audit the Building's Share of Operating Expenses as to any subsequent Lease Year, Tenant and its duly authorized representatives (which representatives (including Tenant's auditors, if any) shall be subject to Landlord's approval) shall have the right to do so with respect to any calendar year within six (6) months following receipt of the applicable Actual Statement for such calendar year, upon thirty (30) days' prior delivery of an Audit Notice. Such audit will be conducted (i) during normal business hours at Landlord's California business offices or at the management office of the Building; (ii) on consecutive business days until completed; and -4- (iii) in an expeditious manner so as to minimize interference with Landlord's operations. Landlord agrees that Tenant or its auditors shall have the right to photocopy Landlord's books and records at Tenant's sole cost and expense. Tenant shall pay in a timely manner as required by this Lease any amounts stated as due on the Actual Statement, provided that such payment shall not waive any right to audit and/or dispute by Tenant as set forth herein. In no event will Landlord or its property manager be required to (i) photocopy any accounting records or other items or contracts (provided however, that Tenant or its auditors shall have the right to photocopy Landlord's books and records at Tenant's sole cost and expense as provided above), (ii) create any ledgers or schedules not already in existence, (iii) incur any costs or expenses relative to such inspection, or (iv) perform any other tasks other than making available such accounting records as are described in this paragraph. Tenant agrees to deliver to Landlord the results of any such audit within thirty (30) days of completion of the audit. If Tenant does not deliver an Audit Notice as to any annual reconciliation within the time frames set forth hereinabove, then Tenant acknowledges and agrees that such annual reconciliation, and the Actual Statement and/or any Estimate Statement for such Lease Year, will be conclusively binding on Tenant. If Tenant's audit or review reveals that Landlord has overcharged Tenant and Landlord agrees with the results of such audit or the results of such audit are confirmed in an arbitration between the parties pursuant to Section 34, then within thirty (30) days after the results of such audit are made available to Landlord, Landlord agrees to reimburse Tenant the amount of such overcharge plus interest at the Interest Rate stated in Section 1.12 of the Summary. If the audit reveals that Tenant was undercharged, then within thirty (30) days after the results of the audit are made available to Tenant, Tenant agrees to reimburse Landlord the amount of such undercharge plus interest thereon at the Interest Rate stated in Section 1.12 of the Summary within thirty (30) days of demand by Landlord. Tenant agrees to pay the cost of such audit, provided that if the audit reveals that Landlord's determination of the Building's Share of Operating Expenses as set forth in a certified statement sent to Tenant was in error in Landlord's favor by more than six percent (6%) of the amount paid by Tenant prior to delivering the Audit Notice and Landlord agrees with the results of such audit or the results of such audit are confirmed in an arbitration between the parties pursuant to Section 34, then Landlord agrees to pay the reasonable, third-party cost of such audit incurred by Tenant within thirty (30) days of demand by Tenant. To the extent Landlord must pay the cost of such audit, such cost shall not exceed a reasonable hourly charge for a reasonable amount of hours spent by such third-party in connection with the audit. Landlord shall not be liable for any contingency fee payments to any auditors or consultants of Tenant. Tenant agrees to keep the results of the audit (and any settlement, if any, resulting therefrom) confidential and will cause its agents, employees and contractors to keep such results (and any settlement, if any, resulting therefrom) confidential. If Landlord disputes the results of Tenant's audit of Operating Expenses, Landlord shall have the right to initiate an arbitration of the dispute as provided in Section 34. 5. SECURITY DEPOSIT. 5.1 DELIVERY OF LETTER OF CREDIT. On or before December 10, 1997, Tenant shall deliver to Landlord the Security Deposit in the form of an unconditional, irrevocable and renewable letter of credit ("Letter of Credit") in favor of Landlord in form and issued by a bank with an office (capable of honoring a demand on the Letter of Credit) located in San Diego County, California, reasonably satisfactory to Landlord, in the initial principal amount specified in Section 1.9 of the Summary, as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this Lease. The Letter of Credit shall state that an authorized officer or other representative of Landlord may make demand on Landlord's behalf for the amount owed by Tenant to Landlord, and that the issuing bank must immediately honor such demand, without qualification or satisfaction of any conditions, except the proper identification of the party making such demand and a certification that Tenant is in default under this Lease, which default is continuing after notice and expiration of any applicable notice and cure period required by this Lease. In addition, the Letter of Credit shall indicate that it is transferable in its entirety by Landlord as beneficiary and that upon receiving written notice of transfer, and upon presentation to the issuer of the original Letter of Credit, the issuer will reissue the Letter of Credit naming such transferee as the beneficiary. If the term of the Letter of Credit held by Landlord will expire prior to thirty (30) days following the last day of the Term and it is not extended, or a new Letter of Credit for an extended period of time is not substituted, within thirty (30) days prior to the expiration of the Letter of Credit, then Landlord may deliver written notice of such fact to Tenant and if Tenant does not extend the Letter of Credit or substitute a new Letter of Credit within ten (10) business days after Tenant's receipt of such notice from Landlord, Landlord shall be entitled to make demand for the principal amount of said Letter of Credit and, thereafter, to hold such funds in accordance with Section 5.3 below. In the event Tenant fails to deliver such Letter of Credit to Landlord on or before December 10, 1997 then Landlord, in addition to any of its other rights and remedies, shall have the right to immediately terminate this Lease or cause Tenant to cease construction of its Tenant Improvements until such Letter of Credit is furnished to Landlord. 5.2 PRINCIPAL AMOUNT OF LETTER OF CREDIT. The principal amount of the Letter of Credit shall be as follows:
REQUIRED MONTHS OF TERM PRINCIPAL AMOUNT -------------- ---------------- 1-60 $297,330.00 61-120 To be equal to the Monthly Rent due and payable by Tenant for the sixty- first (61st) month of the Lease Term.
Notwithstanding the foregoing, if as of the applicable reduction date set forth above, (i) Tenant is in default under this Lease, or (ii) circumstances exist that would, with notice or lapse of time, or both, constitute a default, then the principal amount shall not be reduced, unless and until such default or circumstances shall have been fully cured, at which time the principal amount may be reduced as hereinabove described. Further notwithstanding the foregoing, the reduction of the Security Deposit after the sixtieth (60th) month shall also be conditioned upon (i) Landlord's not having given Tenant written notice of a failure to pay Rent pursuant to Section 22.1(b) more than three (3) times during the preceding sixty (60) month period and (ii) Tenant not exercising its Termination Option (as defined in Section 33 hereof). -5- 5.3 APPLICATION OF LETTER OF CREDIT. The Letter of Credit shall be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants and conditions of this Lease. If Tenant commits a default with respect to any provision of this Lease, Landlord may (but shall not be required to) draw upon the Letter of Credit and use, apply or retain all or any part of the proceeds for the payment of any sum which is in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Letter of Credit is so used or applied, Tenant shall, within ten (10) business days after demand therefor, post an additional Letter of Credit in an amount sufficient to restore the Letter of Credit to the principal amount required under Section 5.2 above. Landlord shall not be required to keep any proceeds from the Letter of Credit separate from its general funds and Tenant shall not be entitled to any interest on such proceeds. Should Landlord sell its interest in the Premises during the Term and if Landlord deposits with the purchaser thereof the Letter of Credit or any proceeds of the Letter of Credit, thereupon Landlord shall be discharged from any further liability with respect to the Letter of Credit and said proceeds. 6. USE. 6.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use specified in Section 1.10 of the Summary, and shall not use or permit the Premises to be used for any other use or purpose whatsoever. Except for Landlord's obligations under Section 11.2 of this Lease, Tenant shall, at its sole cost and expense, observe and comply with all requirements of any board of fire underwriters or similar body relating to the Premises, and all laws, statutes, codes, rules and regulations now or hereafter in force relating to or affecting the use, occupancy, alteration or improvement (whether structural or non-structural, including unforeseen and/or extraordinary alterations or improvements, and regardless of the period of time remaining in the Term) of the Premises, including, without limitation, the provisions of the Americans with Disabilities Act ("ADA") as it pertains to Tenant's use, occupancy, improvement and alteration (whether structural or non-structural, including unforeseen and/or extraordinary alterations or improvements, and regardless of the period of time remaining in the Term) of the Premises. Tenant shall not use or allow the Premises to be used (a) in violation of any recorded covenants, conditions and restrictions affecting the Premises or of any law or governmental rule or regulation, or of any certificate of occupancy issued for the Premises, or (b) for any improper, immoral, unlawful or reasonably objectionable purpose. Tenant shall not cause, maintain or permit any nuisance in, on or about the Premises, nor commit or suffer to be committed any waste in, on or about the Premises. 6.2 SIGNS, AWNINGS AND CANOPIES. Tenant shall have the right, at Tenant's sole cost and expense to install a sign on the Building constituting the Premises, provided Tenant complies with any covenants of record and obtains approval from all governmental authorities having jurisdiction over the Premises and from Landlord, which approval shall not be unreasonably withheld. To the extent Landlord installs a signage monument adjacent to the Premises, Tenant shall have the right, at Tenant's sole cost and expense, to install its name on such signage monument if and when such signage monument is installed by Landlord. The exact location, dimensions, color, illumination and other features of all of Tenant's signage shall be subject to Landlord's prior written approval and otherwise in accordance with the Project's signage program. All of Tenant's exterior sign rights are personal to the original Tenant executing this Lease, to any Affiliate of the original Tenant, and to any Special Transferee, only so long as the original Tenant and/or any Affiliate of the original Tenant and/or any Special Transferee is occupying at least seventy-five percent (75%) of the total rental square feet comprising the Premises. Tenant agrees, at Tenant's sole cost and expense, to maintain any such sign, awning, canopy, decoration, lettering or advertising matter as may be approved by Landlord in good condition and repair at all times. At the expiration or earlier termination of this Lease, at Landlord's election, Tenant shall remove all signs, awnings, canopies, decorations, lettering and advertising installed by or at the direction of Tenant and shall repair any damage to the Premises resulting therefrom all at Tenant's sole cost and expense. If Tenant fails to maintain any such approved sign, awning, decoration, lettering, or advertising, Landlord may do so and Tenant shall reimburse Landlord for such cost plus a twenty percent (20%) overhead fee. If, without Landlord's prior written consent, Tenant installs any sign, awning, decoration, lettering or advertising, or fails to remove any such item(s) at the expiration or earlier termination of this Lease, Landlord may have such item(s) removed and stored and may repair any damage to the Premises at Tenant's expense. The removal, repair and/or storage costs shall bear interest until paid at the Interest Rate specified in Section 1.12 of the Summary. 6.3 HAZARDOUS MATERIALS. Except for ordinary and general office supplies, such as copier toner, liquid paper, glue, ink and common household cleaning materials and, to the extent approved in writing by Landlord (which shall not be unreasonably withheld), materials reasonably necessary for the conduct of Tenant's business that are used and stored in compliance with all applicable laws (some or all of which may constitute "Hazardous Materials" as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, "TENANT'S PARTIES"), without the prior written consent of Landlord, which consent Landlord may, except as otherwise expressly provided above (with respect to materials reasonably necessary for the conduct of Tenant's business that are used and stored in compliance with all applicable laws), withhold in its sole and absolute discretion. Concurrently with the execution of this Lease, Tenant agrees to complete and deliver to Landlord an Environmental Questionnaire in the form of EXHIBIT "E" attached hereto. Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises by Tenant or any of Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises and which are caused or permitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities. In the -6- event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant's Parties or any other persons or entities, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord's mortgagee(s). At all times during the Term of this Lease and in accordance with Section 15 hereof, Landlord will have the right, but not the obligation, to enter upon the Premises to inspect, investigate, sample and/or monitor the Premises to determine if Tenant is in compliance with the terms of this Lease regarding Hazardous Materials. Tenant will, upon the reasonable request of Landlord (which request shall not, unless Tenant has failed to comply with the terms and provisions of this Section 6.3 or except in cases of emergency, be made more than once every six (6) months throughout the Term of this Lease, cause to be performed an environmental audit of the Premises at Tenant's expense by an environmental consulting firm reasonably acceptable to Landlord. As used in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), freon and other chlorofluorocarbons, and any material defined as a "biohazardous waste" or "medical waste" or other waste under California Health and Safety Code, Division 20, Chapter 6.1 (Medical Waste Management Act). The provisions of this Section 6.3 will survive the expiration or earlier termination of this Lease. Tenant shall immediately advise Landlord in writing of, and provide Landlord a copy of: (1) Any notice of violation or potential or alleged violation of any law concerning Hazardous Materials received by Tenant from any governmental agency; and (2) Any and all inquiry, investigation, enforcement, clean-up, removal or governmental or regulatory actions instituted or threatened relating to the Premises. Landlord shall indemnify, defend and hold harmless Tenant from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities and losses (including, without limitation, sums paid in settlement of claims and for reasonable attorneys' fees, consultant fees and expert fees, (but specifically excluding special, indirect or consequential damages including but not limited to claims for loss of use, anticipated profit or business opportunity, market-based stigma damages or business interruption, or mental or emotional distress or fear of injury or disease) to the extent arising as a result of any Hazardous Materials (1) located in, on or under the Building as of the commencement of Tenant's occupancy of the Premises, or (2) hereafter caused to be located in, on or under the Building by Landlord and/or any of Landlord's employees, agents or representatives or any other persons or entities (except Tenant or Tenant's Parties). This indemnification of Tenant by Landlord includes, without limitation, costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work. The provisions of this paragraph shall survive the expiration of the Term or earlier termination of this Lease. Notwithstanding anything above to the contrary, the foregoing indemnity shall not extend to Hazardous Materials caused to be located in, on or under the Building by Tenant or any of Tenant's Parties. 6.4 REFUSE AND SEWAGE. Tenant agrees not to keep any trash, garbage, waste or other refuse on the Premises except in sanitary containers and agrees to regularly and frequently remove same from the Premises. Tenant shall keep all containers or other equipment used for storage of such materials in a clean and sanitary condition. Tenant shall, at Tenant's sole cost and expense, properly dispose of all sanitary sewage and shall not use the sewage disposal system for the disposal of anything except sanitary sewage. Tenant shall keep the sewage disposal system free of all obstructions and in good operating condition. Tenant shall contract directly for all trash disposal services at Tenant's sole cost and expense. 6.5 PARKING. (a) TENANT'S PARKING PRIVILEGES. During the Term of this Lease, Landlord shall lease to Tenant, and Tenant shall lease from Landlord, the number of parking privileges specified in Section 1.14 of the Summary hereof for use by Tenant's employees in the common parking areas for the Premises within the Project, as designated by Landlord from time to time. Landlord shall at all times have the right to reasonably establish and modify the nature and extent of the parking areas for the Premises and Project (including whether such areas shall be surface, underground and/or other structures) as long as Tenant is provided the number of parking privileges designated in Section 1.14 of the Summary. In addition, Landlord may, in its sole discretion, assign any unreserved and unassigned parking privileges, and/or make all or a portion of such privileges reserved, or unreserved so long as Tenant is provided the total number of parking privileges in Section 1.14 of the Summary. (b) PARKING CHARGES; LOSS OF PRIVILEGES. Each of Tenant's parking privileges set forth in Section 1.14 of the Summary hereof shall not be subject to any additional charge to Tenant. In addition to such parking privileges for use by Tenant's employees, Landlord shall permit access to the parking areas for Tenant's visitors, subject to availability of spaces. (c) PARKING RULES. The use of the parking areas shall be subject to any reasonable, non-discriminatory rules and regulations adopted by Landlord and/or Landlord's parking operators from time to time, including any system for controlled ingress and egress and charging visitors and invitees, with appropriate provision for validation of such charges. Tenant shall not use more parking privileges than its allotment and shall not use any parking spaces specifically assigned by Landlord to other tenants of the Project or for such other uses as visitor parking. Tenant's parking privileges shall be used only for parking by vehicles no larger than normally sized passenger automobiles or pick-up trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described herein, then Landlord shall have the right, without notice, in addition to such other -7- rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost thereof to Tenant, which cost shall be immediately payable by Tenant upon demand by Landlord. 7. PAYMENTS AND NOTICES. All Rent and other sums payable by Tenant to Landlord hereunder shall be paid to Landlord at the address designated in Section 1.1 of the Summary, or to such other persons and/or at such other places as Landlord may hereafter designate in writing. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by nationally recognized overnight courier or express mailing service), facsimile transmission, or by registered or certified mail, postage prepaid, return receipt requested, addressed to Tenant at the address(es) designated in Section 1.2 of the Summary, or to Landlord at the address(es) designated in Section 1.1 of the Summary. Either party may, by written notice to the other, specify a different address for notice purposes. Any such notice shall be deemed duly served or given when actually (i) delivered or refused, if personally delivered or sent by registered or certified mail or (ii) recorded as transmitted, if by facsimile transmission. 8. BROKERS. The parties recognize that the broker(s) who negotiated this Lease are stated in Section 1.11 of the Summary. Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Any broker, agent or finder of Tenant whom Tenant has failed to disclose herein shall be paid by Tenant. Tenant shall indemnify, protect, defend (by counsel reasonably approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from any breach by Tenant of the foregoing representation, including, without limitation, any claims that may be asserted against Landlord by any broker, agent or finder undisclosed by Tenant herein. Landlord shall indemnify, protect, defend (by counsel reasonably approved in writing by Tenant) and hold Tenant harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from any breach by Landlord of the foregoing representation, including, without limitation, any claims that may be asserted against Tenant by any broker, agent or finder undisclosed by Landlord herein. The foregoing indemnities shall survive the expiration or earlier termination of this Lease. 9. SURRENDER; HOLDING OVER. 9.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of this Lease, Tenant shall surrender all keys for the Premises to Landlord, and Tenant shall deliver exclusive possession of the Premises to Landlord broom clean and in first-class condition and repair, reasonable wear and tear excepted (and casualty damage excepted if this Lease is terminated as a result thereof pursuant to Section 18), with all of Tenant's personal property (and those items, if any, of Tenant Improvements and Tenant Changes identified by Landlord pursuant to Section 12.2 below) removed therefrom and all damage caused by such removal repaired, as required pursuant to Sections 12.2 and 12.3 below. If, for any reason, Tenant fails to surrender the Premises on the expiration or earlier termination of this Lease, with such removal and repair obligations completed, then, in addition to the provisions of Section 9.3 below and Landlord's rights and remedies under Section 12.4 and the other provisions of this Lease, Tenant shall indemnify, protect, defend (by counsel reasonably approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from such failure to surrender, including, without limitation, any claim made by any succeeding tenant based thereon. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. 9.2 HOLDING OVER. If Tenant holds over after the expiration or earlier termination of the Lease Term, then, without waiver of any right on the part of Landlord as a result of Tenant's failure to timely surrender possession of the Premises to Landlord, Tenant shall become a tenant at sufferance only, upon the terms and conditions set forth in this Lease so far as applicable (including Tenant's obligation to pay all costs, expenses and any other additional rent under this Lease), but at a Monthly Rent equal to one hundred fifty percent (150%) of the Monthly Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination. Acceptance by Landlord of rent after such expiration or earlier termination shall not constitute a consent to a hold over hereunder or result in an extension of this Lease. Tenant shall pay an entire month's Monthly Rent calculated in accordance with this Section 9.2 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Section 9.2. 9.3 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this Section 9 are in addition to, and do not affect, Landlord's right of re-entry or any other rights of Landlord hereunder or otherwise provided at law or in equity. 10. TAXES. 10.1 REAL PROPERTY TAXES. Tenant agrees to pay the Building's Share of all general and special real property taxes, assessments (including, without limitation, change in ownership taxes or assessments), liens, bond obligations, license fees or taxes and any similar impositions in-lieu of other impositions now or previously within the definition of real property taxes or assessments and any and all assessments under any covenants, conditions and restrictions affecting the Project (collectively "REAL PROPERTY TAXES") which may be now or hereafter levied or assessed against the Project applicable to the period from the Early Occupancy Date, until the expiration or sooner termination of this Lease. Notwithstanding the foregoing provisions, if the Real Property Taxes are not levied and assessed against the entire Project by means of a single tax bill (i.e., if the Project is separated into two (2) or more separate tax parcels for purposes of levying and assessing the Real Property Taxes), then, at Landlord's option, Tenant shall pay Tenant's pro rata share of all Real Property Taxes which may be levied or assessed by any lawful authority against the land and improvements of the separate tax parcel on which the Premises are located. Tenant's pro rata share under such circumstances shall be apportioned according to the floor area of the Premises as it relates to the total leasable floor area of all of the buildings (including the Premises) situated in the separate tax parcel in which the Premises is located. Notwithstanding anything in this Section 10.1 to the contrary, "Real Property Taxes" shall not include Landlord's federal or state income, franchise, inheritance or estate taxes. Upon Tenant's request, Landlord shall, at Tenant's sole cost and expense, contest the -8- amount of Real Property Taxes for the Project, which contest shall be undertaken in a manner to be reasonably determined by Landlord. All Real Property Taxes for the tax year in which the Early Occupancy Date occurs and for the tax year in which this Lease terminates shall be apportioned and adjusted so that Tenant shall not be responsible for any Real Property Taxes for a period of time occurring prior to the Early Occupancy Date or subsequent to the expiration of the Lease term. The amount to be paid pursuant to the provisions of this Section 10.1 shall be paid monthly in advance as part of Tenant's Monthly Operating Expense Charge as estimated by Landlord based on the most recent tax bills and estimates of reappraised values (if reappraisal is to occur), commencing with the month (or partial month on a prorated basis if such be the case) that the Commencement Date occurs. The initial estimated monthly charge for the Building's Share of Real Property Taxes is included in the Monthly Operating Expense Charge as provided in Section 4. Notwithstanding anything in this Lease to the contrary, Tenant shall be solely responsible for, and shall pay directly to Landlord (in addition to Tenant's Monthly Operating Expense Charge pertaining to Real Property Taxes), any increase in Real Property Taxes on account of any improvements made to the Premises by Tenant including, but not limited to, the Tenant Improvements. If at any time during the Term under the laws of the United States, or the state, county, municipality, or any political subdivision thereof in which the Premises is located, a tax or excise on rent or any other tax however described is levied or assessed by any such political body against Landlord on account of rent payable to Landlord hereunder or any tax based on or measured by expenditures made by Tenant on behalf of Landlord, such tax or excise shall be considered "Real Property Taxes" for purposes of this Section 10.1, and shall be payable in full by Tenant. Such taxes or excises shall be payable within thirty (30) days after Tenant's receipt of the tax bill therefor from Landlord. 10.2 PERSONAL PROPERTY TAXES. Tenant shall be liable for, and shall pay before delinquency, all taxes and assessments (real and personal) levied against (a) any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures); and (b) any Tenant Improvements or alterations in the Premises (whether installed and/or paid for by Landlord or Tenant). If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, and Tenant shall reimburse Landlord therefor within thirty (30) days after demand by Landlord; provided, however, Tenant, at its sole cost and expense, shall have the right, with Landlord's cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes and assessments so paid under protest. 11. REPAIRS. 11.1 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations under Section 11.2 and except for latent defects in the Premises not caused by Tenant or Tenant's improvements to the Premises, Tenant shall at all times and at Tenant's sole cost and expense, keep, maintain, clean, repair, renovate, retrofit, replace and preserve the Premises and all parts thereof, structural and non-structural, including, without limitation, utility meters, plumbing, pipes and conduits, all heating, ventilating and air conditioning systems located within the Premises, all fixtures, furniture and equipment, Tenant's signs, if any, locks, closing devices, security devices, windows, window sashes, casements and frames, floors and floor coverings, shelving, restrooms, ceilings, interior walls, roof, skylights, interior and demising walls, doors, electrical and lighting equipment, sprinkler systems, walkways, loading dock areas and doors, rail spur areas, fences, signs, and any Tenant Improvements, Tenant Changes or other alterations, additions and other property and/or fixtures located within the Premises in good condition and repair, reasonable wear and tear excepted. Tenant shall at all times during the Term make all structural and non-structural changes, repairs and improvements to the Premises of every kind and nature, whether ordinary or extraordinary, foreseen or unforeseen, which may be required by any Laws or for the safety of the Premises Tenant agrees to procure and maintain maintenance contracts for all heating, ventilating and air conditioning systems with reputable contractors reasonably approved by Landlord. Tenant agrees, at Tenant's sole cost and expense, to use contractors designated or otherwise approved by Landlord for any repairs to, or that will adversely affect, the Building's systems and equipment. Such maintenance and repairs shall be performed with due diligence, lien-free and in a good and workmanlike manner, by licensed contractor(s) which are selected by Tenant and approved by Landlord, which approval Landlord shall not unreasonably withhold or delay. 11.2 LANDLORD'S REPAIR RIGHTS AND OBLIGATIONS. Except as provided in this Section 11.2, Landlord has no obligation whatsoever to alter, remodel, improve, repair, renovate, retrofit, replace, redecorate or paint all or any part of the Premises. Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect (including the provisions of California Civil Code Section 1942 and any successive sections or statutes of a similar nature). If Tenant fails to perform Tenant's obligations under Section 11.1 hereof, or under any other provision of this Lease, then Landlord shall have the option (but not the obligation) to enter upon the Premises after ten (10) days' prior written notice to Tenant, or in the case of an emergency immediately without prior notice, to perform such obligations on Tenant's behalf necessary to return the Premises to good order, condition and repair, whereupon the costs incurred by Landlord shall become due and payable to Landlord, upon demand, together with a fee of ten percent (10%) of the costs of such work for Landlord's managing agent. In addition, Landlord shall, as part of Operating Expenses (but subject, to the extent applicable, Section 4.4(xii) hereof) for the Project, repair and maintain the Building shell, exterior walls, foundations and structural portions of the roof; provided, however, to the extent such maintenance or repairs are required as a result of any act, neglect, fault or omission of Tenant or any of Tenant's Parties or otherwise made necessary due to Tenant's use or occupancy of the Premises, Tenant shall pay to Landlord upon demand, as additional rent, the costs of such maintenance and repairs, together with a fee of ten percent (10%) of said costs. 11.3 AS-IS. Tenant acknowledges and agrees that, except to the extent specifically set forth in this Lease and except for latent defects in the Premises not caused by Tenant or Tenant's improvements to the Premises, Landlord has not -9- made, does not make and specifically negates and disclaims any representations, warranties, promises, covenants, agreements or guarantees of any kind or character whatsoever concerning or with respect to (a) the value, nature, quality or condition of the Premises; (b) the suitability of the Premises for any and all activities and uses which Tenant may conduct thereon; (c) the compliance of the Premises with any laws, rules, ordinances or regulations of any applicable governmental authority or body, including, without limitation, environmental laws (collectively, "LAWS"); (d) the habitability, merchantability, marketability, profitability or fitness for a particular purpose of the Premises; (e) the manner or quality of the construction or materials incorporated into the Premises; (f) the manner, quality, state of repair or lack of repair of the Premises; or (g) any other matter with respect to the Premises. Tenant further acknowledges and agrees that having been given the opportunity to inspect the Premises, Tenant is relying solely on its own investigation of the Premises and not on any information provided or to be provided by Landlord. Tenant further acknowledges and agrees that any information provided or to be provided by or on behalf of Landlord with respect to the Premises, was obtained from a variety of sources and that Landlord has not made any independent investigation or verification of such information and makes no representations as to the accuracy or completeness of such information. Tenant further acknowledges and agrees that, except to the extent specifically set forth in this Lease, the leasing of the Premises as provided for herein is made on an "AS-IS" condition and basis with all faults. Except as otherwise expressly provided in this Lease, Landlord shall have no liability or responsibility for any latent or patent defects in the Premises. Tenant and anyone claiming by, through or under Tenant hereby fully and irrevocably releases Landlord from any and all claims that it may now have or hereafter acquire against Landlord for any cost, loss, liability, damage, expense, demand, action or cause of action arising from or related to any construction defects, errors, omissions or other conditions, including, but not limited to, environmental matters (but subject to Landlord's indemnity set forth in Section 6.3 hereof), now or hereafter affecting the Premises. This release includes claims of which Tenant is presently unaware or which Tenant does not presently suspect to exist in its favor which, if known by Tenant, would materially affect Tenant's release of Landlord. Tenant specifically waives the provision of California Civil Code Section 1542, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." 12. ALTERATIONS. 12.1 TENANT CHANGES; CONDITIONS. (a) Tenant shall not make any alterations, additions, improvements or decorations to the Premises (collectively, "TENANT CHANGES," and individually, a "TENANT CHANGE") unless Tenant first obtains Landlord's prior written approval thereof, which approval Landlord shall not unreasonably withhold or delay. Notwithstanding the foregoing, Landlord's prior approval shall not be required for any Tenant Change which satisfies all of the following conditions (hereinafter a "PRE-APPROVED CHANGE"): (i) the costs of such Tenant Change does not exceed Twenty-Five Thousand Dollars ($25,000.00) individually; (ii) the costs of such Tenant Change when aggregated with the costs of all other Tenant Changes made by Tenant do not exceed One Hundred Thousand Dollars ($100,000.00) in any one (1) year period; (iii) Tenant delivers to Landlord final plans, specifications and working drawings for such Tenant Change at least ten (10) days prior to commencement of the work thereof; (iv) Tenant and such Tenant Change otherwise satisfy all other conditions set forth in this Section 12.1; and (v) the Tenant Change does not affect the structural, mechanical, life-safety, the roof or the exterior of the Premises. (b) All Tenant Changes shall be performed: (i) in accordance with the approved plans, specifications and working drawings; (ii) lien-free and in a good and workmanlike manner; (iii) in compliance with all laws, rules and regulations of all governmental agencies and authorities including, without limitation, the provisions of Title III of the ADA; and (iv) at such times, in such manner and subject to such rules and regulations as Landlord may from time to time reasonably designate. (c) Throughout the performance of the Tenant Changes, Tenant shall obtain, or cause its contractors to obtain, workers compensation insurance and commercial general liability insurance in compliance with the provisions of Section 20 of this Lease. 12.2 REMOVAL OF TENANT CHANGES AND TENANT IMPROVEMENTS. All Tenant Changes and the initial Tenant Improvements in the Premises (whether installed or paid for by Landlord or Tenant), shall become the property of Landlord and shall remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord may, by written notice delivered to Tenant on or before the expiration of the Lease Term (or upon any sooner termination of this Lease) identify those items of the initial Tenant Improvements and Tenant Changes which Landlord shall require Tenant to remove at the end of the Term of this Lease. Landlord shall notify Tenant nine (9) months before the expiration of the Lease Term of any Tenant Changes and Tenant Improvements that Landlord shall require Tenant to remove at the end of the Term of this Lease. If Landlord requires Tenant to remove any such items as described above, Tenant shall, at its sole cost, remove the identified items on or before the expiration or sooner termination of this Lease and repair any damage to the Premises caused by such removal (or, at Landlord's option, shall pay to Landlord all of Landlord's costs of such removal and repair). Notwithstanding anything above to the contrary, Tenant shall have the right, at Tenant's sole cost and expense, to remove any Tenant Improvements in the Premises that constitute Tenant's biomedical manufacturing use improvements (as opposed to those Tenant Improvements that are general office type improvements) (the "SPECIAL IMPROVEMENTS"), which Special Improvements are more particularly described on EXHIBIT "G", attached hereto; provided, however that Tenant shall remove such Special Improvements on or before the expiration or sooner termination of this Lease and repair any damage to the Premises caused by the removal of such Special Improvements (or, at Landlord's option, shall pay to Landlord all of Landlord's costs of such removal and repair). 12.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including business and trade fixtures, furniture and movable partitions) shall be, and remain, -10- the property of Tenant, and shall be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or sooner termination of this Lease. Tenant shall repair any damage caused by such removal. 12.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the expiration or sooner termination of this Lease all of its personal property, or any items of Tenant Improvements or Tenant Changes identified by Landlord for removal pursuant to Section 12.2 above, Landlord may, (without liability to Tenant for loss thereof), at Tenant's sole cost and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a) remove and store such items in accordance with applicable law; and/or (b) upon ten (10) days' prior notice to Tenant sell all or any such items at private or public sale for such price as Landlord may obtain as permitted under applicable law. Landlord shall apply the proceeds of any such sale to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 13. LIENS. Tenant shall not permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. Tenant shall, at Landlord's request, provide Landlord with enforceable, conditional and final lien releases (and other reasonable evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials with respect to the Premises. Landlord shall have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant shall, at its sole cost, immediately cause such lien to be released of record or bonded so that it no longer affects title to the Premises. If Tenant fails to cause such lien to be so released or bonded within thirty (30) days after filing thereof, Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such lien to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord within thirty (30) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. 14. ASSIGNMENT AND SUBLETTING. 14.1 RESTRICTION ON TRANSFER. Tenant will not assign or encumber this Lease in whole or in part, nor sublet all or any part of the Premises, without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold, except as provided in this Section 14. The consent by Landlord to any assignment, encumbrance or subletting shall not constitute a waiver of the necessity for such consent to any subsequent assignment or subletting. This prohibition against assigning or subletting shall be construed to include a prohibition against any assignment or subletting by operation of law. If this Lease is assigned by Tenant, or if the Premises or any part thereof are sublet or occupied by any person or entity other than Tenant, Landlord may collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver on the part of Landlord, or the acceptance of the assignee, subtenant or occupant as Tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained unless expressly made in writing by Landlord. Irrespective of any assignment or sublease, Tenant shall remain fully liable under this Lease and shall not be released from performing any of the terms, covenants and conditions of this Lease. Without limiting in any way Landlord's right to withhold its consent on any reasonable grounds, it is agreed that Landlord will not be acting unreasonably in refusing to consent to an assignment or sublease if, in Landlord's opinion, (i) the net worth or financial capabilities of such assignee is less than that of Tenant at the date hereof, (ii) the proposed assignee or subtenant does not have the financial capability to fulfill the obligations imposed by the assignment, (iii) the proposed assignment or sublease involves a change of use of the Premises from that specified herein, or (iv) the proposed assignee or subtenant is not, in Landlord's reasonable opinion, of reputable or good character. Any proposed assignee or subtenant which Landlord does not disapprove shall be deemed a "PERMITTED BUSINESS." Except with respect to a transfer of stock of Tenant if Tenant is a publicly-held corporation and such stock is transferred publicly or through a recognized security exchange or over-the-counter market, if Tenant is a corporation, or is an unincorporated association or partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of forty-nine percent (49%) shall be deemed an assignment within the meaning and provisions of this Section 14.1. 14.2 TRANSFER NOTICE. If Tenant desires to effect an assignment, encumbrance or subletting (a "TRANSFER"), then at least thirty (30) days prior to the date when Tenant desires the Transfer to be effective (the "TRANSFER DATE"), Tenant agrees to give Landlord a notice (the "TRANSFER NOTICE"), stating the name, address and business of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as "TRANSFEREE"), reasonable information (including references) concerning the character, ownership, and financial condition of the proposed Transferee, the Transfer Date, any ownership or commercial relationship between Tenant and the proposed Transferee, and the consideration and all other material terms and conditions of the proposed Transfer, all in such detail as Landlord may reasonably require. 14.3 LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt of any Transfer Notice, and any additional information requested by Landlord concerning the proposed Transferee's financial responsibility, Landlord will notify Tenant of its election to do one of the following: (i) consent to the proposed Transfer subject to such reasonable conditions as Landlord may impose in providing such consent; or (ii) refuse such consent, which refusal shall be on reasonable grounds; or (iii) with respect to a Transfer (but not including a Transfer to an Affiliate or to a Special Transferee) of more than fifty-one percent (51%) of the Premises, terminate this Lease as to all of the Premises or, in Landlord's sole and absolute discretion, such portion of the Premises which is proposed to be sublet or assigned and recapture all or such portion of the Premises for reletting by Landlord. 14.4 ADDITIONAL CONDITIONS. A condition to Landlord's consent to any Transfer of this Lease will be the delivery to Landlord of a true copy of the fully executed instrument of assignment, sublease, transfer or hypothecation, in form and -11- substance reasonably satisfactory to Landlord. Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of all sums and other consideration payable to and for the benefit of Tenant by the assignee or sublessee in excess of the rent payable under this Lease for the same period and portion of the Premises. In calculating excess rent or other consideration which may be payable to Landlord under this Section, Tenant will be entitled to deduct commercially reasonable third party brokerage commissions and attorneys' fees and other amounts reasonably and actually expended by Tenant in connection with such assignment or subletting if acceptable written evidence of such expenditures is provided to Landlord. No Transfer will release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. Landlord may require that any Transferee remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee, and each sublease shall provide that if Landlord gives said sublessee written notice that Tenant is in default under this Lease, said sublessee will thereafter make all payments due under the sublease directly to or as directed by Landlord, which payments will be credited against any payments due under this Lease. Tenant hereby irrevocably and unconditionally assigns to Landlord all rents and other sums payable under any sublease of the Premises; provided, however, that Landlord hereby grants Tenant a license to collect all such rents and other sums so long as Tenant is not in default under this Lease. Tenant shall, within ten (10) days after the execution and delivery of any assignment or sublease, deliver a duplicate original copy thereof to Landlord. Consent by Landlord to one Transfer will not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. If Tenant effects a Transfer or requests the consent of Landlord to any Transfer (whether or not such Transfer is consummated), then, upon demand, and as a condition precedent to Landlord's consideration of the proposed assignment or sublease, Tenant agrees to pay Landlord a non-refundable administrative fee of Five Hundred Dollars ($500.00), plus Landlord's reasonable attorneys' fees and costs and other costs incurred by Landlord in reviewing such proposed assignment or sublease. Notwithstanding any contrary provision of this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent to a proposed Transfer or otherwise has breached its obligations under this Section 14, Tenant's and such Transferee's only remedy shall be to seek a declaratory judgment and/or injunctive relief, and Tenant, on behalf of itself and, to the extent permitted by law, such proposed Transferee waives, unless Landlord's consent was withheld in bad faith, all other remedies against Landlord, including without limitation, the right to seek monetary damages or to terminate this Lease. 14.5 PERMITTED TRANSFERS. Notwithstanding anything to the contrary contained in this Article 14, Landlord consents to the Transfer of the Premises to an adequately capitalized entity which is controlled by, controls, or is under common control with, Tenant (an "AFFILIATE"), provided that Tenant notifies Landlord of any such Transfer prior to the effective date thereof and promptly supplies Landlord with any documents or information requested by Landlord regarding such Transfer or such Affiliate (including an assumption of Tenant's obligations under this Lease), and further provided that such Transfer is not a subterfuge by Tenant to avoid its obligations under this Lease. "CONTROL," as used in this Section 14.5, shall mean the ownership, directly or indirectly, of greater than fifty percent (50%) of the voting interest in an entity. 15. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all reasonable times following prior notice to Tenant (which notice, except in the case of emergencies and except with respect to ordinary services to be provided by Landlord within the Premises, shall be no less than twenty-four (24) hours prior notice), have the right to enter the Premises to inspect the same, to exhibit the Premises to prospective lenders or purchasers (or during the last twelve (12) months of the Term, to prospective tenants), to post notices of non-responsibility, and/or to alter, improve or repair the Premises as contemplated by Section 11.2 in the event Tenant fails to perform its obligations under Section 11.1, all without being deemed guilty of or liable for any breach of Landlord's covenant of quiet enjoyment or any eviction of Tenant, and without abatement of rent. In exercising such entry rights, Landlord shall endeavor to minimize, as reasonably practicable, the interference with Tenant's business, and shall provide Tenant with reasonable advance written notice of such entry (except in emergency situations). Landlord shall have the means which Landlord may deem proper to open Tenant's doors in an emergency in order to obtain entry to the Premises. Any such entry (in accordance with the terms hereof) to the Premises obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof, or grounds for any abatement or reduction of Rent and Landlord shall not have any liability to Tenant for any damages or losses on account of any such entry by Landlord except, subject to the provisions of Sections 21.1 and 23, to the extent of Landlord's gross negligence or willful misconduct. Except for services (if any) required to be provided by Landlord to the Premises under this Lease and except in the case of emergencies, Landlord's entry rights are conditioned upon a representative of Tenant (but only to the extent a representative is available) accompanying Landlord during any other entry into the Premises. 16. UTILITIES AND SERVICES. Except for Landlord's Work (as such term is defined in EXHIBIT "C"), Tenant shall be solely responsible for obtaining and shall promptly pay all charges for heat, air conditioning, water, gas, electricity or any other utility used, consumed or provided in, furnished to or attributable to the Premises directly to the supplying utility companies. Tenant shall reimburse Landlord within thirty (30) days of billing for fixture charges and/or water tariffs, if applicable, which are charged to Landlord by utility companies. Landlord will notify Tenant of this charge as soon as it becomes known. This charge will increase or decrease with current charges being levied against Landlord or the Premises by the local utility company, and will be due as additional rent. In no event shall Rent abate or shall Landlord be liable for any interruption or failure in the supply of any such utility services to Tenant. Tenant acknowledges and agrees that Tenant shall be solely responsible for providing security for the Premises and that Landlord shall not be liable for, and Landlord is hereby released from any responsibility for, any damage either to persons or property sustained by Tenant or any Tenant Parties on account of any acts of third parties. Tenant may, at its own expense, install its own security system ("TENANT'S SECURITY SYSTEM") in the Premises; provided, however, that Tenant shall coordinate the installation and operation of Tenant's Security System with Landlord to assure that Tenant's Security System is compatible with the Building's systems and equipment and to the extent that Tenant's Security System is not compatible -12- with the Building's systems and equipment, Tenant shall not be entitled to install or operate it. Tenant shall be solely responsible, at Tenant's sole cost and expense, for the monitoring, operation and removal of Tenant's Security System. 17. INDEMNIFICATION AND EXCULPATION. 17.1 TENANT'S ASSUMPTION OF RISK AND WAIVER. Except to the extent such matter is not covered by the insurance required to be maintained by Tenant under this Lease and such matter is attributable to the gross negligence or willful misconduct of Landlord or Landlord's agent(s), Landlord shall not be liable to Tenant, Tenant's employees, agents or invitees for: (i) any damage to property of Tenant, or of others, located in, on or about the Premises, (ii) the loss of or damage to any property of Tenant or of others by theft or otherwise, (iii) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or leaks from any part of the Premises or from the pipes, appliance of plumbing works or from the roof, street or subsurface or from any other places or by dampness or by any other cause of whatsoever nature, or (iv) any such damage caused by other persons in the Premises, occupants of adjacent property, or the public, or caused by operations in construction of any private, public or quasi-public work. Landlord shall in no event be liable for any consequential damages or loss of business or profits and Tenant hereby waives any and all claims for any such damages. All property of Tenant kept or stored on the Premises shall be so kept or stored at the sole risk of Tenant and Tenant shall hold Landlord harmless from any claims arising out of damage to the same, including subrogation claims by Tenant's insurance carriers, unless such damage shall be caused by the gross negligence or willful misconduct of Landlord or Landlord's agent(s). Landlord or its agents shall not be liable for interference with the light or other intangible rights. 17.2 INDEMNIFICATION. Tenant shall be liable for, and shall indemnify, defend, protect and hold Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "Landlord Indemnified Parties") harmless from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities and expenses, including attorneys' fees and court costs (collectively, "INDEMNIFIED CLAIMS"), arising or resulting from (a) any act or omission of Tenant or any of Tenant's agents, employees, contractors, subtenants, assignees, licensees or Tenant's invitees (collectively, "TENANT PARTIES"); (b) the use of the Premises and conduct of Tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises; and/or (c) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel approved in writing by Landlord, which approval shall not be unreasonably withheld. 17.3 LANDLORD'S INDEMNIFICATION OF TENANT. Notwithstanding anything to the contrary contained in Section 17.2 above, subject to the limitation on Landlord's liability contained in Section 30 below and the mutual waivers contained in Section 21.1 below, Landlord will be liable for, and agrees to indemnify, protect, defend and hold harmless Tenant and Tenant's agents, successors and assigns (collectively, "TENANT INDEMNIFIED PARTIES"), from and against, any Indemnified Claims (as defined in Section 17.2 above) (but not for injury to, or interference with, Tenant's or any Tenant Indemnified Parties' business or for consequential damages), to the extent any such Indemnified Claim arises or results from (a) any negligent or willful act or omission of Landlord; (b) any default by Landlord of any obligations on Landlord's part to be performed under the terms of this Lease; and (c) to the extent covered by the insurance required to be maintained by Landlord under this Lease (or which would have been covered if Landlord had carried such required insurance), any acts or omissions of any third parties occurring in the Common Areas other than the gross negligence or willful misconduct of Tenant or any Tenant's Parties; provided, however, that Landlord's indemnity shall not apply or extend to any such damage or injury which occurs within the Premises which is covered by any insurance maintained by Tenant or any Tenant Indemnified Parties (or which would have been covered had Tenant obtained the insurance required under this Lease). In case any action or proceeding is brought against Tenant or any Tenant Indemnified Parties by reason of any such injury or damage indemnified by Landlord as set forth hereinabove, Landlord, upon notice from Tenant, agrees to defend the same at Landlord's expense by counsel approved in writing by Tenant, which approval Tenant will not unreasonably withhold. 17.4 SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligation under Section 17.2, shall survive the expiration or earlier termination of this Lease. Tenant's covenants, agreements and indemnification in Sections 17.1 and 17.2 above, are not intended to and shall not relieve any insurance carrier of its obligations under policies required to be carried by Tenant, pursuant to the provisions of this Lease. 18. DAMAGE OR DESTRUCTION. 18.1 LANDLORD'S RIGHTS AND OBLIGATIONS. In the event the Premises are damaged by fire or other casualty to an extent not exceeding forty percent (40%) of the full replacement cost thereof, and Landlord's contractor estimates in a writing delivered to the parties that the damage thereto is such that the Premises may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within two hundred ten (210) days from the date of such casualty, AND Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (including proceeds from Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord pursuant to Section 18.2 below), then Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease shall continue in full force and effect. If, however, the Premises are damaged to an extent exceeding forty percent (40%) of the full replacement cost thereof, or Landlord's contractor estimates that such work of repair, reconstruction and restoration will require longer than two hundred ten (210) days to complete, OR Landlord will not receive insurance proceeds (and/or proceeds from Tenant, as applicable) sufficient to cover the costs of such repairs, reconstruction and restoration, then Landlord may elect to either: (a) repair, reconstruct and restore the portion of the Premises damaged by such casualty (including the Tenant Improvements and Tenant Changes to the extent of insurance proceeds received from Tenant) to substantially the same condition as existed before the damage or destruction, except for modifications required by building -13- codes and other laws and except for any reasonable modifications to the common areas, in which case this Lease shall continue in full force and effect; or (b) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. Under any of the conditions of this Section 18.1, Landlord shall give written notice ("ELECTION NOTICE") to Tenant of its intention to repair or terminate within the later of sixty (60) days after the occurrence of such casualty, or fifteen (15) days after Landlord's receipt of the estimate from Landlord's contractor. Notwithstanding anything above to the contrary, in the event of a damage or destruction of the Premises where Landlord has made the election in Section 18.1(a) above, Tenant shall have the right to elect to perform the reconstruction and restoration of the Tenant Improvements, which reconstruction and restoration shall be performed in a diligent manner and in accordance with the Work Letter Agreement attached hereto and otherwise in accordance with Section 12 hereof. 18.2 TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or destruction of all or any part of the Premises, Tenant shall immediately: (a) notify Landlord thereof; and (b) deliver to Landlord all insurance proceeds received by Tenant with respect to the Tenant Improvements and Tenant Changes in the Premises (excluding proceeds for Tenant's furniture and other personal property), whether or not this Lease is terminated as permitted in this Section 18, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. In the event Tenant has elected to reconstruct and restore the Tenant Improvements pursuant to Section 18.1 above, then Landlord shall disburse such insurance proceeds to Tenant on a progress payment basis during Tenant's reconstruction and restoration of the Tenant Improvements. If, for any reason (including Tenant's failure to obtain insurance for the full replacement cost of any Tenant Changes which Tenant is required to insure pursuant to Sections 12.1 and/or 20.1(a) hereof), Tenant fails to receive insurance proceeds covering the full replacement cost of such Tenant Improvements and Tenant Changes which are damaged, Tenant shall be deemed to have self-insured the replacement cost of such Tenant Improvements and Tenant Changes, and upon any damage or destruction thereto, Tenant shall immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. 18.3 ABATEMENT OF RENT. In the event that as a result of any such damage, repair, reconstruction and/or restoration of the Premises, Tenant is prevented from using, and does not use, the Premises or any portion thereof, then the rent shall be abated or reduced, as the case may be, during the period that Tenant continues to be so prevented from using and does not use the Premises or portion thereof, in the proportion that the rentable square feet of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable square feet of the Premises. Notwithstanding the foregoing to the contrary, if the damage is due to the negligence or willful misconduct of Tenant or any Tenant Parties, there shall be no abatement of rent. Except for abatement of rent as provided hereinabove, Tenant shall not be entitled to any compensation or damages for loss of, or interference with, Tenant's business or use or access of all or any part of the Premises resulting from any such damage, repair, reconstruction or restoration. 18.4 INABILITY TO COMPLETE. Notwithstanding anything to the contrary contained in this Section 18, if Landlord is obligated or elects to repair, reconstruct and/or restore the damaged portion of the Premises pursuant to Section 18.1 above, but is delayed from completing such repair, reconstruction and/or restoration beyond the date which is two hundred ten (210) days after the date of the damage or destruction or the date specified in Landlord's Election Notice, whichever is later, then any party who has not caused such delay may elect to terminate this Lease upon thirty (30) days' prior written notice sent to the other; provided, however, if Tenant terminates this Lease, Landlord may rescind such termination by completing such work within twenty (20) days following Landlord's receipt of Tenant's written notice to terminate. In no event will Tenant have the right to terminate this Lease pursuant to this Section 18.4 to the extent Tenant has elected to perform the reconstruction and restoration of the Tenant Improvements pursuant to Section 18.1 above. 18.5 DAMAGE TO THE PROJECT. If there is a total destruction of the Project or a partial destruction of the Project, the cost of restoration of which would exceed one-third (1/3) of the then replacement value of the Project, by any cause whatsoever, whether or not insured against and whether or not the Premises are partially or totally destroyed, Landlord may within a period of one hundred eighty (180) days after the occurrence of such destruction, notify Tenant in writing that it elects not to so reconstruct or restore the Project, in which event this Lease shall cease and terminate as of the date of such destruction. 18.6 DAMAGE NEAR END OF TERM. In addition to its termination rights in Sections 18.1 and 18.4 above, Landlord shall have the right to terminate this Lease if any damage to the Premises occurs during the last twelve (12) months of the Term of this Lease and Landlord's contractor estimates in a writing delivered to the parties that the repair, reconstruction or restoration of such damage cannot be completed within the earlier of (a) the scheduled expiration date of the Lease Term, or (b) sixty (60) days after the date of such casualty. 18.7 WAIVER OF TERMINATION RIGHT. This Lease sets forth the terms and conditions upon which this Lease may terminate in the event of any damage or destruction. Accordingly, the parties hereby waive the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any successor statutes thereof permitting the parties to terminate this Lease as a result of any damage or destruction). 19. EMINENT DOMAIN. 19.1 TOTAL OR PARTIAL TAKING. In case all of the Premises, or such part thereof as shall materially and substantially interfere with Tenant's ability to conduct its business upon the Premises, shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, Tenant shall have the right to terminate this Lease effective as of the date possession is required to be surrendered to said authority. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking, and Landlord shall be entitled to receive the entire amount of any award -14- without deduction for any estate or interest of Tenant; provided, however, in the event of such a taking, Tenant shall be entitled to such portion of the award as shall be attributable to the loss of the unamortized cost of the improvements to the Premises made and paid for by Tenant pursuant to EXHIBIT "C" (such amortization being the same as that used by Tenant for federal income tax purposes), goodwill and for damage to, or the cost of removal of, Tenant's personal property. In the event the amount of property or the type of estate taken shall not materially and substantially interfere with the ability of Tenant to conduct its business upon the Premises, Landlord shall be entitled to the entire amount of the award without deduction for any estate or interest of Tenant, Landlord shall restore the Premises to substantially their same condition prior to such partial taking to the extent of any award proceeds received by Landlord, and a fair and equitable abatement shall be made to Tenant for the Annual Rent corresponding to the time during which, and to the part of the Premises of which, Tenant shall be so deprived on account of such taking and restoration. If the award proceeds from the taking are insufficient to restore the Premises as required by the preceding sentence and Landlord does not provide its own funds to so restore the Premises, and if as a result thereof Tenant's ability to use the Premises as contemplated by this Lease is materially and substantially impaired, then Tenant may elect to terminate this Lease by giving Landlord written notice thereof; provided, however, Landlord may rescind such termination by giving Tenant written notice within ten (10) business days following Landlord's receipt of such termination notice from Tenant that Landlord will provide the necessary funds to so restore the Premises. Notwithstanding anything above to the contrary, if any part of the Project shall be taken (whether or not such taking substantially interferes with Tenant's use of the Premises), Landlord may terminate this Lease upon thirty (30) days' prior written notice to Tenant as long as Landlord also terminates leases of all other tenants leasing comparably sized space within the Project for comparable lease terms. 19.2 TEMPORARY TAKING. In the event of taking of the Premises or any part thereof for temporary use, (i) this Lease shall be and remain unaffected thereby and Rent shall not abate, and (ii) Tenant shall be entitled to receive for itself such portion or portions of any award made for such use with respect to the period of the taking which is within the Lease Term. For purposes of this Section 19.2, a temporary taking shall be defined as a taking for a period of one (1) year or less. 19.3 WAIVER OF TERMINATION. Tenant and Landlord waive any right to terminate this Lease under Section 1265.130 of the California Code of Civil Procedure, or any similar statute or law now or hereafter in force. 20. INSURANCE. 20.1 TYPES OF TENANT'S INSURANCE. On or before the earlier of the Early Occupancy Date or the date Tenant commences or causes to be commenced any work of any type in or on any portion of the Premises, and continuing during the entire Term, Tenant shall obtain and keep in full force and effect respecting the Premises, the following insurance: (a) All Risk insurance, including fire and extended coverage, sprinkler leakage (including earthquake sprinkler leakage), vandalism and malicious mischief upon property of every description and kind located on the Premises, including, without limitation, furniture, equipment and any other personal property, any Tenant Changes and the Tenant Improvements (but excluding any improvements previously existing in the Premises) in an amount not less then the full replacement cost thereof. In the event that there shall be a dispute as to the amount which comprises full replacement cost, the decision of Landlord or the mortgagees of Landlord shall be presumptive. (b) Commercial general liability insurance coverage, including personal injury, bodily injury (including wrongful death), broad form property damage, operations hazard, owner's protective coverage, contractual liability, liquor liability (if Tenant serves or stores alcohol on the Premises), products and completed operations liability, and owned/non-owned auto liability, with a general aggregate of not less than Two Million Dollars ($2,000,000.00). The general aggregate amount of such commercial general liability insurance shall be increased every three (3) years during the Term of this Lease to an amount reasonably required by Landlord but only to the extent such increase is required of tenants comparable to Tenant by landlords of buildings comparable to the Building. (c) Worker's compensation and employer's liability insurance, in statutory amounts and limits, covering all persons employed in connection with any work done in, on or about the Premises for which claims for death or bodily injury could be asserted against Landlord, Tenant or the Premises. (d) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time, in form, amounts and for insurance risks against which a prudent tenant would protect itself, but only to the extent such risks and amounts are available in the insurance market at commercially reasonable costs and is required of tenants comparable to Tenant by landlords of buildings comparable to the Building. 20.2 REQUIREMENTS. Each policy required to be obtained by Tenant hereunder shall: (a) be issued by insurers authorized to do business in the state in which the Premises is located and rated not less than financial class VII, and not less than policyholder rating A- in the most recent version of Best's Key Rating Guide (provided that, in any event, the same insurance company shall provide the coverages described in Section 20.1(a) above); (b) be in form reasonably satisfactory from time to time to Landlord; (c) name Tenant as named insured thereunder and shall name Landlord and, at Landlord's request, Landlord's mortgagees and ground lessors of which Tenant has been informed in writing, as additional insureds (and with respect to the insurance described in Section 20.1(a) above, as loss-payees) thereunder, all as their respective interests may appear; (d) shall not have a property insurance deductible amount exceeding Twenty-Five Thousand Dollars ($25,000.00); (e) specifically provide that the insurance afforded by such policy for the benefit of Landlord and Landlord's mortgagees and ground lessors shall be primary, and any insurance carried by Landlord or Landlord's mortgagees and ground lessors shall be excess and non-contributing; (f) except for worker's compensation insurance, contain an endorsement that the insurer waives its right to subrogation as described in Section 22 below; and -15- (g) contain an undertaking by the insurer to notify Landlord (and the mortgagees and ground lessors of Landlord who are named as additional insureds) in writing not less than thirty (30) days prior to any change, reduction in coverage, cancellation or other termination thereof. Tenant agrees to deliver to Landlord, as soon as practicable after the placing of the required insurance, but in no event later than ten (10) days after the date Tenant takes possession of all or any part of the Premises, certificates from the insurance company evidencing the existence of such insurance and Tenant's compliance with the foregoing provisions of this Section 20). Tenant shall cause replacement certificates to be delivered to Landlord not less than thirty (30) days prior to the expiration of any such policy or policies. If any such initial or replacement certificates are not furnished within the time(s) specified herein, Tenant shall be deemed to be in material default under this Lease without the benefit of any additional notice or cure period provided in Section 22.1 below, and Landlord shall have the right, but not the obligation, to procure such policies and certificates at Tenant's expense. 20.3 EFFECT ON INSURANCE. Tenant shall not do or permit to be done anything which (a) will violate or invalidate any insurance policy maintained by Tenant or Landlord hereunder or (b) increase the costs of any insurance policy maintained by Landlord pursuant to Section 20.4 below. If Tenant's occupancy or conduct of its business in or on the Premises results in any increase in premiums for any insurance carried by Landlord with respect to the Building and/or the Project, Tenant shall pay such increase as additional rent within thirty (30) days after being billed therefor by Landlord. If any insurance coverage carried by Landlord shall be cancelled or reduced (or cancellation or reduction thereof shall be threatened) by reason of the use or occupancy of the Premises by Tenant or by anyone permitted by Tenant to be upon the Premises, and if Tenant fails to remedy such condition within five (5) business days after notice thereof, Tenant shall be deemed to be in default under this Lease, without the benefit of any additional notice or cure period specified in Section 22.1 below, and Landlord shall have all remedies provided in this Lease, at law or in equity, including, without limitation, the right (but not the obligation) to enter upon the Premises and attempt to remedy such condition at Tenant's cost. 20.4 LANDLORD'S INSURANCE. During the Term, Landlord shall insure the Common Area improvements and the Premises (excluding, however, Tenant's furniture, equipment, personal property, the Tenant Improvements and Tenant Changes) against damage by fire and standard extended coverage perils and with vandalism and malicious mischief endorsements, rental loss coverage, at Landlord's option, earthquake damage coverage, and such additional coverage as Landlord deems appropriate. Landlord shall also carry commercial general liability insurance, in such reasonable amounts and with such reasonable deductibles as would be carried by a prudent owner of a similar building in the state in which the Building is located. At Landlord's option, all such insurance may be carried under any blanket or umbrella policies which Landlord has in force for other buildings and projects. In addition, at Landlord's option, Landlord may elect to self-insure all or any part of such required insurance coverage. Landlord may, but shall not be obligated to, carry any other form or forms of insurance as Landlord or the mortgagees or ground lessors of Landlord may reasonably determine is advisable. The cost of insurance obtained by Landlord pursuant to this Section 20.4 (including self-insured amounts and deductibles) shall be included in Operating Expenses. 21. WAIVER OF SUBROGATION. 21.1 WAIVER. Tenant and Landlord hereby waive their rights against each other with respect to any claims or damages or losses which are caused by or result from (a) damage insured against under any insurance policy carried by Tenant or Landlord (as the case may be) pursuant to the provisions of this Lease and enforceable at the time of such damage or loss, or (b) damage which would have been covered under any insurance required to be obtained and maintained by Tenant or Landlord (as the case may be) under Section 20 of this Lease had such insurance been obtained and maintained as required therein. The foregoing waiver shall be in addition to, and not a limitation of, any other waivers or releases contained in this Lease. 21.2 WAIVER OF INSURERS. Tenant shall cause each insurance policy required to be obtained by it pursuant to Section 20 to provide that the insurer waives all rights of recovery by way of subrogation against Landlord in connection with any claims, losses and damages covered by such policy. If Tenant fails to maintain property insurance required hereunder, such insurance shall be deemed to be self-insured with a deemed full waiver of subrogation as set forth in the immediately preceding sentence. 22. TENANT'S DEFAULT AND LANDLORD'S REMEDIES. 22.1 TENANT'S DEFAULT. The occurrence of any one or more of the following events shall constitute a default under this Lease by Tenant: (a) the vacation or abandonment of the Premises by Tenant. "ABANDONMENT" is herein defined to include, but is not limited to, any absence by Tenant from the Premises for eight (8) business days or longer while in default in the payment of Rent. "VACATION" shall mean vacating the Premises without providing a reasonable level of security to minimize the potential for vandalism, or where the coverage of the property insurance under Section 20.1(a) is jeopardized as a result thereof; (b) the failure by Tenant to make any payment of Rent or any other payment required to be made by Tenant hereunder, within ten (10) days of written notice from Landlord that such payment was not received; (c) the failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Sections 22.1(a) or (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within said thirty (30) day period and thereafter diligently prosecute such cure to completion; and -16- (d) (i) the making by Tenant of any general assignment for the benefit of creditors, (ii) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against the Tenant, the same is dismissed within sixty (60) days), (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within sixty (60) days, or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within sixty (60) days. (e) Any notice given under this Section 22.1 shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure, Section 1161. 22.2 LANDLORD'S REMEDIES; TERMINATION. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to so terminate this Lease, then Landlord may recover from Tenant: (a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (b) the worth at the time of the award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom including, but not limited to: unamortized Tenant Improvement costs; attorneys' fees; unamortized brokers' commissions; the costs of refurbishment, alterations, renovation and repair of the Premises; and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, Tenant Changes, Tenant Improvements and any other items which Tenant is required under this Lease to remove but does not remove. As used in Sections 22.2(a) and 22.2(b) above, the "worth at the time of award" is computed by allowing interest at the Interest Rate set forth in Section 1.12 of the Summary. As used in Section 22.2(c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 22.3 LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any such default by Tenant (with all applicable notice and cure periods having expired), in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall also have the right as permitted by applicable law, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed, stored and/or disposed of pursuant to Section 12.4 of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Section 22.3, and no acceptance of surrender of the Premises or other action on Landlord's part, shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. 22.4 LANDLORD'S REMEDIES; CONTINUATION OF LEASE. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the right to continue this Lease in full force and effect, whether or not Tenant shall have abandoned the Premises. The foregoing remedy shall also be available to Landlord pursuant to California Civil Code Section 1951.4 and any successor statute thereof in the event Tenant has abandoned the Premises. In the event Landlord elects to continue this Lease in full force and effect pursuant to this Section 22.4, then Landlord shall be entitled to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due. Landlord's election not to terminate this Lease pursuant to this Section 22.4 or pursuant to any other provision of this Lease, at law or in equity, shall not preclude Landlord from subsequently electing to terminate this Lease or pursuing any of its other remedies. 22.5 LANDLORD'S RIGHT TO PERFORM. Except as specifically provided otherwise in this Lease, all covenants and agreements by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement or offset of rent. If Tenant shall fail to pay any sum of money (other than Annual Rent) or perform any other act on its part to be paid or performed hereunder and such failure shall continue for ten (10) days with respect to monetary obligations (or thirty (30) days with respect to non-monetary obligations) after Tenant's receipt of written notice thereof from Landlord, Landlord may, without waiving or releasing Tenant from any of Tenant's obligations, make such payment or perform such other act on behalf of Tenant. All sums so paid by Landlord and all necessary incidental costs incurred by Landlord in performing such other acts shall be payable by Tenant to Landlord within five (5) days after demand therefor as additional rent. 22.6 INTEREST. If any monthly installment of Annual Rent, or any other amount payable by Tenant hereunder is not received by Landlord by the date which is ten (10) days from the date when due, it shall bear interest at the Interest Rate set forth in Section 1.12 of the Summary from the date due until paid. All interest, and any late charges imposed pursuant to Section 22.7 below, shall be considered additional rent due from Tenant to Landlord under the terms of this Lease. -17- 22.7 LATE CHARGES. Tenant acknowledges that, in addition to interest costs, the late payments by Tenant to Landlord of any Annual Rent or other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such other costs include, without limitation, processing, administrative and accounting charges and late charges that may be imposed on Landlord by the terms of any mortgage, deed of trust or related loan documents encumbering the Premises. Accordingly, if any monthly installment of Annual Rent or any other amount payable by Tenant hereunder is not received by Landlord by that date which is ten (10) days from the due date thereof, Tenant shall pay to Landlord an additional sum of six percent (6%) of the overdue amount as a late charge, but in no event more than the maximum late charge allowed by law. The parties agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any late payment as hereinabove referred to by Tenant, and the payment of late charges and interest are distinct and separate in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of late charges is to compensate Landlord for Landlord's processing, administrative and other costs incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of a late charge or interest shall not constitute a waiver of Tenant's default with respect to the overdue amount or prevent Landlord from exercising any of the other rights and remedies available to Landlord under this Lease or at law or in equity now or hereafter in effect. 22.8 [INTENTIONALLY DELETED]. 22.9 RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of Landlord contained in this Section 22 and elsewhere in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Section 22 shall be deemed to limit or otherwise affect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 23. LANDLORD'S DEFAULT. Landlord shall not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord has failed to perform such obligation within thirty (30) days after the receipt of written notice from Tenant specifying in detail Landlord's failure to perform; provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed in default if it commences such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any such uncured default by Landlord, Tenant may exercise any of its rights provided in law or at equity; provided, however: (a) Tenant shall have no right to offset or abate Rent in the event of any default by Landlord under this Lease; and (b) Tenant's rights and remedies hereunder shall be limited to the extent (i) Tenant has expressly waived in this Lease any of such rights or remedies, and/or (ii) this Lease otherwise expressly limits Tenant's rights or remedies, including the limitation on Landlord's liability contained in Section 30 hereof. 24. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises and/or the land upon which the Premises and Project are situated, or both and (b) any mortgage or deed of trust which may now exist or be placed upon the Building, the Project and/or the land upon which the Premises or the Project are situated and (c) any ground lease or underlying leases, or Landlord's interest or estate in any of said items, which is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. In the event that any ground lease or underlying lease terminates for any reason, or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord and Tenant shall not be disturbed in its possession under this Lease by such successor in interest so long as Tenant is not in default under this Lease. Within ten (10) days after request by Landlord, Tenant shall execute and deliver any additional documents evidencing Tenant's attornment or the subordination of this Lease with respect to any such ground leases or underlying leases or any such mortgage or deed of trust, in the form requested by Landlord or by any ground landlord, mortgagee, or beneficiary under a deed of trust, subject to such nondisturbance requirement. Notwithstanding anything above to the contrary, any subordination of this Lease to any such future mortgage, ground lease or deed of trust is conditioned upon any such future mortgagee, lessor or beneficiary providing Tenant with a commercially reasonable form of non-disturbance agreement. Tenant hereby waives its rights under any current or future law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Should Tenant fail to sign and return any such additional documents within the ten (10) day period referred to above, Tenant shall be in default hereunder without the benefit of any additional notice or cure periods specified in Section 22.1 above. Landlord agrees to cause the mortgagees existing as of the date hereof to provide Tenant with a commercially reasonable non-disturbance agreement within a commercially reasonable period of time after Tenant's request therefor. 25. ESTOPPEL CERTIFICATE. 25.1 TENANT'S OBLIGATIONS. Within ten (10) business days following Landlord's written request, Tenant shall execute and deliver to Landlord an estoppel certificate, in a form substantially similar to the form of EXHIBIT "F" attached hereto, certifying: (a) the Commencement Date of this Lease; (b) that this Lease is unmodified and in full force and effect (or, if modified, that this Lease is in full force and effect as modified, and stating the date and nature of such modifications); (c) the date to which the Rent and other sums payable under this Lease have been paid; (d) that there are not, to the best of Tenant's knowledge, any defaults under this Lease by either Landlord or Tenant, except as specified in such certificate; and (e) such other matters as are set forth in EXHIBIT "F" or are reasonably requested by Landlord. Any such estoppel certificate delivered pursuant to this Section 25.1 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of any portion of the Premises, as well as their assignees. 25.2 TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such estoppel certificate within such time shall constitute a default hereunder without the applicability of notice and cure periods specified in Section 22.1 above and shall be -18- conclusive upon Tenant that: (a) this Lease is in full force and effect without modification, except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's or Tenant's performance (other than Tenant's failure to deliver the estoppel certificate); and (c) not more than one (1) month's rental has been paid in advance. 26. INTENTIONALLY OMITTED. 27. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. 27.1 MODIFICATIONS. If, in connection with Landlord's obtaining or entering into any financing or ground lease for any portion of the Premises, the lender or ground lessor shall request modifications to this Lease, Tenant shall, within ten (10) days after request therefor, execute an amendment to this Lease including such modifications, provided such modifications are reasonable, do not increase the obligations of Tenant hereunder, or adversely affect the leasehold estate created hereby or Tenant's rights hereunder. 27.2 CURE RIGHTS. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee covering the Premises or ground lessor of Landlord whose address shall have been furnished to Tenant, and shall offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant's rights hereunder, by power of sale or judicial foreclosure, if such should prove necessary to effect a cure). 28. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that, upon Tenant performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease (including payment of rent hereunder), Tenant shall and may peaceably and quietly have, hold and enjoy the Premises in accordance with and subject to the terms and conditions of this Lease as against all persons claiming by, through or under Landlord. 29. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title to, or a lessee's interest in a ground lease of, the Premises. In the event of any transfer or conveyance of any such title or interest (other than a transfer for security purposes only), the transferor shall be automatically relieved of all covenants and obligations on the part of Landlord contained in this Lease accruing after the date of such transfer or conveyance. Landlord and Landlord's transferees and assignees shall have the absolute right to transfer all or any portion of their respective title and interest in the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 30. LIMITATION ON LANDLORD'S LIABILITY. Notwithstanding anything contained in this Lease to the contrary, the obligations of Landlord under this Lease (including any actual or alleged breach or default by Landlord) do not constitute personal obligations of the individual partners, directors, officers or shareholders of Landlord or Landlord's partners, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or Landlord's partners, or any of their personal assets for satisfaction of any liability with respect to this Lease. In addition, in consideration of the benefits accruing hereunder to Tenant and notwithstanding anything contained in this Lease to the contrary, Tenant hereby covenants and agrees for itself and all of its successors and assigns that the liability of Landlord for its obligations under this Lease (including any liability as a result of any actual or alleged failure, breach or default hereunder by Landlord), shall be limited solely to, and Tenant's and its successors' and assigns' sole and exclusive remedy shall be against, Landlord's interest in the Premises, and no other assets of Landlord. 31. MISCELLANEOUS. 31.1 GOVERNING LAW. This Lease shall be governed by, and construed pursuant to, the laws of the state in which the Premises is located. 31.2 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 29 above, and except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, personal representatives and permitted successors and assigns; provided, however, no rights shall inure to the benefit of any Transferee of Tenant unless the Transfer to such Transferee is made in compliance with the provisions of Section 14, and no options or other rights which are expressly made personal to the original Tenant or an Affiliate of Tenant or in any rider attached hereto shall be assignable to or exercisable by anyone other than the original Tenant or an Affiliate of Tenant. 31.3 NO MERGER. The voluntary or other surrender of this Lease by Tenant or a mutual termination thereof shall not work as a merger and shall, at the option of Landlord, either (a) terminate all or any existing subleases, or (b) operate as an assignment to Landlord of Tenant's interest under any or all such subleases. 31.4 PROFESSIONAL FEES. If either Landlord or Tenant should bring suit against the other with respect to this Lease, including for unlawful detainer or any other relief against the other hereunder, then all costs and expenses incurred by the prevailing party therein (including, without limitation, its actual appraisers', accountants', attorneys' and other professional fees, expenses and court costs), shall be paid by the other party. 31.5 WAIVER. The waiver by either party of any breach by the other party of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant and condition herein contained, nor shall any custom or practice which may become established between the parties in the administration of the terms hereof be deemed a waiver of, or in any way affect, the right of any party to insist upon the -19- performance by the other in strict accordance with said terms. No waiver of any default of either party hereunder shall be implied from any acceptance by Landlord or delivery by Tenant (as the case may be) of any rent or other payments due hereunder or any omission by the non-defaulting party to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 31.6 TERMS AND HEADINGS; INTERPRETATION. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The Section headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. Any deletion of language from this Lease prior to its execution by Landlord and Tenant shall not be construed to raise any presumption, canon of construction or implication, including, without limitation, any implication that the parties intended thereby to state the converse of the deleted language. 31.7 TIME. Time is of the essence with respect to performance of every provision of this Lease in which time or performance is a factor. All references in this Lease to "days" shall mean calendar days unless specifically modified herein to be "business" days. 31.8 PRIOR AGREEMENTS; AMENDMENTS. This Lease, including the Summary and all Exhibits and Riders attached hereto contains all of the covenants, provisions, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and any other matter covered or mentioned in this Lease, and no prior agreement or understanding, oral or written, express or implied, pertaining to the Premises or any such other matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. The parties acknowledge that all prior agreements, representations and negotiations are deemed superseded by the execution of this Lease to the extent they are not expressly incorporated herein. 31.9 SEPARABILITY. The invalidity or unenforceability of any provision of this Lease (except for Tenant's obligation to pay Rent) shall in no way affect, impair or invalidate any other provision hereof, and such other provisions shall remain valid and in full force and effect to the fullest extent permitted by law. 31.10 RECORDING. Neither Landlord nor Tenant shall record this Lease. In addition, neither party shall record a short form memorandum of this Lease without the prior written consent (and signature on the memorandum) of the other, and provided that prior to recordation Tenant executes and delivers to Landlord, in recordable form, a properly acknowledged quitclaim deed or other instrument extinguishing all of the Tenant's rights and interest in and to the Premises, and designating Landlord as the transferee, which deed or other instrument shall be held by Landlord and may be recorded by Landlord once this Lease terminates or expires (but not prior thereto). If such short form memorandum is recorded in accordance with the foregoing, the party requesting the recording shall pay for all costs of or related to such recording, including, but not limited to, recording charges and documentary transfer taxes. 31.11 EXHIBITS AND RIDERS. All Exhibits attached to this Lease are hereby incorporated in this Lease for all purposes as though set forth at length herein. 31.12 AUCTIONS. Tenant shall have no right to conduct any auction in, on or about the Premises. 31.13 ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the rent payment herein stipulated shall be deemed to be other than on account of the rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by any statute or at common law. 31.14 FINANCIAL STATEMENTS. Upon ten (10) days prior written request from Landlord (which Landlord may make at any time during the Term but no more often than once in any calendar year), Tenant shall deliver to Landlord a current 10-Q quarterly report and/or 10-K annual report ("STATEMENTS") of Tenant and any guarantor of this Lease. Such Statements shall be prepared in accordance with generally acceptable accounting principles and certified as true in all material respects by Tenant (if Tenant is an individual) or by an authorized officer or general partner of Tenant (if Tenant is a corporation or partnership, respectively). 31.15 NO PARTNERSHIP. Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint venturer or a member of a joint enterprise with Tenant by reason of this Lease. 31.16 FORCE MAJEURE. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labor troubles, inability to procure materials, failure of power, governmental moratorium or other governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations), injunction or court order, riots, insurrection, war, fire, earthquake, flood or other natural disaster or other reason of a like nature not the fault of the party delaying in performing work or doing acts required under the terms of this Lease (but excluding delays due to financial inability) (herein collectively, "FORCE MAJEURE DELAYS"), then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. The provisions of this -20- Section 31.16 shall not apply to nor operate to excuse Tenant from the payment of Rent strictly in accordance with the terms of this Lease. 31.17 COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. 31.18 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees, agents and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any newspaper or other publication or any other tenant or apparent prospective tenant of the Building or other portion of the Premises, or real estate agent, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease. 31.19 NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be no discrimination against, or segregation of, any person, group of persons, or entity on the basis of race, color, creed, religion, age, sex, marital status, national origin, or ancestry in the leasing, subleasing, transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion thereof. 32. LEASE EXECUTION. 32.1 TENANT'S AUTHORITY. If Tenant executes this Lease as a partnership or corporation, then Tenant and the persons and/or entities executing this Lease on behalf of Tenant represent and warrant that: (a) Tenant is a duly authorized and existing partnership or corporation, as the case may be, and is qualified to do business in the state in which the Premises are located; (b) such persons and/or entities executing this Lease are duly authorized to execute and deliver this Lease on Tenant's behalf in accordance with the Tenant's partnership agreement (if Tenant is a partnership), or a duly adopted resolution of Tenant's board of directors and the Tenant's by-laws (if Tenant is a corporation); and (c) this Lease is binding upon Tenant in accordance with its terms. 32.2 JOINT AND SEVERAL LIABILITY. If more than one person or entity executes this Lease as Tenant: (a) each of them is and shall be jointly and severally liable for the covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant; and (b) the act or signature of, or notice from or to, any one or more of them with respect to this Lease shall be binding upon each and all of the persons and entities executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or signed, or given or received such notice. 32.3 NO OPTION. The submission of this Lease for examination or execution by Tenant does not constitute a reservation of or option for the Premises and this Lease shall not become effective as a Lease until it has been executed by Landlord and delivered to Tenant. 33. CANCELLATION OPTION. Provided Tenant fully and completely satisfies each of the conditions set forth in this Section 33, Tenant shall have a one-time option ("CANCELLATION OPTION") to terminate this Lease effective between the period ("CANCELLATION PERIOD") commencing on January 1, 2003 to March 31, 2003, with the exact cancellation date ("CANCELLATION DATE") to be the date within the Cancellation Period specified by Tenant in Tenant's Cancellation Notice (as defined below) but in no event earlier than nine (9) months after the date of Tenant's Cancellation Notice. In order to exercise the Cancellation Option, Tenant must fully and completely satisfy each and every one of the following conditions: (a) Tenant must give Landlord written notice ("CANCELLATION NOTICE") of its intention to terminate this Lease, which Cancellation Notice must be delivered to Landlord at least nine (9) months prior to the expiration of the Cancellation Period, (b) at the time of the Cancellation Notice, Tenant shall not be in material default under this Lease after expiration of applicable notice and cure periods, (c) concurrently with Tenant's delivery of the Cancellation Notice to Landlord, Tenant shall pay to Landlord a cancellation fee ("CANCELLATION FEE") equal to the sum of (i) the unamortized balance, as of the Cancellation Date, of the brokerage commissions paid by Landlord in connection with this Lease, plus (ii) an amount equal to four (4) months' Monthly Rent calculated at the rate payable at the time of the Cancellation Date and (d) Tenant shall have satisfied all of Tenant's surrender obligations under Section 9.1 of the Lease. On the Cancellation Date, the parties shall be relieved of any further obligations under this Lease except for those obligations in the Lease which survive the termination or expiration thereof. Amortization pursuant to this Section 33 shall be calculated on a ten (10) year amortization schedule commencing as of the Commencement Date based upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of ten percent (10%) per annum. 34. ARBITRATION. In the event of any dispute by Landlord of Tenant's audit of the Building's Share of Operating Expenses as set forth in Section 4.9, such dispute shall be resolved through binding arbitration pursuant to this Section 34. If demand for arbitration is timely made as provided in Subsection (a) below, such arbitration shall be conducted in accordance with Title 9 of the California Code of Civil Procedure, Section 1280, ET SEQ., unless otherwise specified herein. The arbitrator shall be selected from the Commercial Arbitration panel of the American Arbitration Association and shall have commercial real estate leasing and, with respect to a dispute under Section 4.9 hereof, accounting expertise. Any such arbitration shall be held and conducted, within thirty (30) days after the selection of an arbitrator, in San Diego County, California. The provisions of the Commercial Arbitration Rules of the American Arbitration Association shall apply and govern such arbitration, subject, however, to the following: (a) Any demand for arbitration shall be in writing and must be made and served on Tenant within a reasonable time after the claim, dispute or other matter in questions has arisen and in no event shall the demand for arbitration be made after the date that institution of legal or equitable proceedings based on such claim, dispute, or other matter would be barred by the applicable statute of limitations. -21- (b) All proceedings involving the parties shall be reported by a certified shorthand court reporter and written transcripts of the proceedings shall be prepared and made available to the parties. (c) A party can require the arbitrator to make specific rulings on specific items or questions of fact. The arbitrator shall be bound by the provisions of this Lease, and shall not add to, subtract from or otherwise modify such provisions. (d) Final decision by the arbitrator must be provided to the parties within thirty (30) days from the date on which the matter is submitted to the arbitrator. (e) The prevailing party (as defined below) shall be awarded reasonable attorneys' fees, expert and nonexpert witness costs and expenses (including without limitation the fees and costs of the court reporter described in Subsection (c) above), and other costs and expenses incurred in connection with the arbitration, unless the arbitrator for good cause determines otherwise. (f) As used herein, the term "prevailing party" shall mean the party, if any, that the arbitrator determines is "clearly the prevailing party." (g) Costs and fees of the arbitrator shall be borne by the nonprevailing party, unless the arbitrator for good cause determines otherwise. If there is no prevailing party, the parties shall bear their own fees and costs and split the fees and costs of the arbitrator and court reporter. (h) The award or decision of the arbitrator, which may include equitable relief, shall be final and judgment may be entered on it in accordance with applicable law in any court having jurisdiction over the matter. The provisions of this Section 34 are not intended to alter the applicable provisions of law which provide the grounds on which a court may vacate an arbitration award. (i) The provisions of this Section 34 are not intended to require (1) Landlord to arbitrate any matters relating to any monetary default by Tenant under this Lease, which matters shall, at the election of Landlord, be governed by the applicable provisions of this Lease and/or applicable law, or (2) either party to arbitrate any matters arising under this Lease which are not described in the first sentence of this Section 34. IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. "TENANT" ALLIANCE PHARMACEUTICAL CORP., a New York corporation By: /s/ Duane J. Roth --------------------------------------------- Name: Duane J. Roth ---------------------------------------- Title: Chief Executive Officer --------------------------------------- By: /s/ Theodore D. Roth --------------------------------------------- Name: Theodore D. Roth ---------------------------------------- Title: Executive Vice President --------------------------------------- "LANDLORD" WHAMC REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: WHAMC Gen-Par, Inc., a Delaware corporation By: /s/ Brad E. Baker ---------------------------------------- Brad E. Baker Its: Senior Vice President - Southern California -22- EXHIBIT "A-1" PROJECT SITE PLAN AMCC BUILDING - 6175 & 6195 LUSK BLVD. SITE PLAN [MAP] EXHIBIT "A-1" EXHIBIT "A-2" PROJECT LEGAL DESCRIPTION THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF SAN DIEGO AND IS DESCRIBED AS FOLLOWS: LOT 15 OF PACIFIC CORPORATE CENTER UNIT NO. 2, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 11561, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, JULY 9, 1986. EXHIBIT "B" DESCRIPTION OF PREMISES [FLOOR PLATE] EXHIBIT "B" Page 1 of 2 [FLOOR PLATE] EXHIBIT "B" Page 2 of 2 WORK LETTER AGREEMENT 1. Tenant shall, at Tenant's sole cost and expense, improve the Premises in accordance with plans and specifications approved in writing by Landlord and in accordance with the requirements of all Laws. It is contemplated by the parties that the improvements to the Premises will include all interior and exterior improvements that are permanently affixed to the Building (the "TENANT IMPROVEMENTS") as described or depicted on SCHEDULE 1 attached hereto (the "PRELIMINARY PLANS"), which Preliminary Plans are hereby approved by Landlord and Tenant. As part of the material consideration to Landlord entering into this Lease, Tenant covenants to expend between Four Million Dollars ($4,000,000.00) and Six Million Dollars ($6,000,000.00) in the design and construction of Tenant Improvements in the Premises and to provide Landlord with evidence reasonably satisfactory to Landlord of such expenditure. Within thirty (30) days following the Effective Date, Tenant shall provide to Landlord working drawings for the Tenant's Improvements (including signage) based upon and conforming with the Preliminary Plans and prepared by a licensed architect or engineer. Within five (5) days of Landlord's receipt of such working drawings, Landlord shall notify Tenant of any required changes to the working drawings. Landlord's failure to so notify Tenant of any such required changes to the working drawings within said five (5) day period shall be deemed to constitute Landlord's approval thereof. Tenant shall revise the working drawings in accordance with Landlord's comments and deliver the same to Landlord within ten (10) days of Tenant's receipt of Landlord's comments. Tenant shall, at its sole cost and expense, be responsible for obtaining all permits and approvals from governmental authorities necessary for the construction of such improvements and the operation of Tenant's business. Landlord will reasonably cooperate with Tenant (at no cost to Landlord) in Tenant's efforts to obtain all such permits and approvals. Landlord makes no representation concerning the availability of such permits or approvals. 2. No improvement of any kind to the Premises shall be erected or maintained unless and until the plans, specifications and proposed location of such improvement have been approved in by Landlord, which approval shall not be unreasonably withheld or delayed. Tenant shall not be charged for any supervision by Landlord in connection with Tenant's design and construction of the Tenant Improvements. Landlord's review and approval of the plans and specifications for the improvements shall create no liability or responsibility on the part of Landlord for the completeness of such plans or their design sufficiency or compliance with Laws. 3. Landlord shall not be responsible for any costs associated with Tenant's construction of any improvements and Tenant acknowledges that Tenant is accepting the Premises in its "as-is" and "where-is" state, subject to Landlord's obligations under Section 11.2 of the Lease. 4. No work of any kind shall be commenced on and no building or other material shall be delivered until at least five (5) business days after written notice has been given by Tenant to Landlord of the initial commencement of such work or the delivery of such materials. 5. The improvements shall be constructed, and all work performed on the Premises, shall be in accordance with all Laws. All work performed on the Premises shall be done in a good, workmanlike and lien free manner and only with new materials of good quality and high standards. All work required in the construction of the improvements shall be performed only by competent contractors duly licensed as such under the laws of the State of California and approved by Landlord. The following contractors/subcontractors, if used by Tenant, are hereby preapproved by Landlord: (i) DPR; (ii) Biostruct; (iii) Ninteman; (iv) Neal Electric; (v) Dynalectric; (vi) Eickler; (vii) Weather Eng.; (viii) Pacific Rim Eng.; (ix) AO Reed; and (x) Kinetic Systems. Tenant will competitively bid the construction with contractors approved by Landlord. Tenant shall then enter into a construction contract approved by Landlord (which approval shall not be unreasonably withheld or delayed) with the selected contractor to construct the Tenant Improvements and Tenant shall be responsible for all aspects of coordinating the construction management. 6. Notwithstanding anything above to the contrary, Landlord shall, prior to the Commencement Date, perform the following work in the Premises ("LANDLORD'S WORK") in Landlord's standard manner using building-standard materials: (i) Modify existing HVAC system located in the Other Building located in the Project to exclusively service the Premises; and (ii) Install metering and/or submetering devices in the Premises pertaining to water, gas and electricity services serving the Premises as of the date of the Lease. So long as Tenant has not exercised its Cancellation Option and subject to the terms hereof, Landlord also agrees to retrofit the existing HVAC system located in the Other Building to accommodate R123 (or equivalent) HVAC coolant ("ADDITIONAL LANDLORD'S WORK") but only to the extent that Tenant notifies Landlord, on or before the last day of the third (3rd) annual anniversary of the Commencement Date, that Tenant desires Landlord to perform such Additional Landlord's Work; provided, however, that prior to performing such Additional Landlord's Work (and as a condition precedent to Landlord's obligation to perform such Additional Landlord's Work), Tenant shall pay to Landlord any costs in excess of Fifty Thousand Dollars ($50,000.00) ("LANDLORD'S COST CAP") that is required by Landlord to perform such Additional Landlord's Work, which excess costs shall be (i) evidenced by a contractor's bid selected by Landlord, and (ii) due and payable by Tenant to Landlord within thirty (30) days after Landlord's request therefor (and prior to the performance of such Additional Landlord's Work). In no event will Landlord be obligated to pay for any costs in excess of Landlord's Cost Cap to cause such Additional Landlord's Work to be performed, it being the intent of Landlord and Tenant that such excess cost shall be borne solely by Tenant. In the event that Tenant fails to notify Landlord on or before the last day of the third annual anniversary of the Commencement Date that Tenant desires Landlord to perform EXHIBIT "C" such Additional Landlord's Work, then Landlord shall have no obligation whatsoever to perform such Additional Landlord's Work. C-2 SCHEDULE 1 PRELIMINARY PLANS 1. Those certain plans prepared by McGraw/Baldwin Architects as Project No. 97006 and dated October 28, 1997; and 2. Those certain plans prepared by McGraw/Baldwin Architects as Project No. 972928 and dated October 30, 1997. SCHEDULE 1 SAMPLE FORM OF NOTICE OF LEASE TERM DATES To: Date: ------------------------- ------------------ ------------------------- Re: Lease dated ________________________, 19___ between ___________________________, Landlord, and ___________________________________, Tenant, concerning premises located at __________________________ ("PREMISES"). Gentlemen: In accordance with the above-referenced Lease, we wish to advise and/or confirm as follows: 1. That the Premises have been accepted by Tenant in accordance with the Lease. 2. That Tenant has accepted and is in possession of the Premises, and acknowledges that under the provisions of the Lease, the Term of the Lease expires on ________________ (subject to earlier termination as provided in the Lease), with one option to renew for 5 years, and commenced upon ______________. 3 That in accordance with the Lease, rental payment has commenced. 4. If the Actual Commencement Date of the Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 5. Monthly Rent is due and payable in advance on the first day of each and every month during the Term of the Lease. Your rent checks should be made payable to _________________________ at _______________________________. AGREED AND ACCEPTED TENANT: LANDLORD: - ------------------------------ ------------------------------ By: By: -------------------------- -------------------------- By: -------------------------- SAMPLE ONLY [NOT FOR EXECUTION] EXHIBIT "D" ENVIRONMENTAL QUESTIONNAIRE The purpose of this form is to obtain information regarding the use or proposed use of hazardous materials at the premises. Prospective tenants should answer the questions in light of their proposed operations at the premises. Existing tenants should answer the questions as they relate to ongoing operations at the premises and should update any information previously submitted. If additional space is needed to answer the questions, you may attach separate sheets of paper to this form. Your cooperation in this matter is appreciated. 1. GENERAL INFORMATION Name of Responding Company: . -------------------------------------------- Check the Applicable Status: Prospective Tenant __ Existing Tenant __ Mailing Address: -------------------------------------------------------- Contact Person and Title: ----------------------------------------------- Telephone Number: ( ) ----- ------------------------ Address of Leased Premises: --------------------------------------------- Length of Lease Term: -------------------------------------------------- Describe the proposed operations to take place on the premises, including principal products manufactured or services to be conducted. Existing tenants should describe any proposed changes to ongoing operations. ------------------------------------------------------------------------ ------------------------------------------------------------------------ 2. STORAGE OF HAZARDOUS MATERIALS 2.1 Will any hazardous materials be used or stored on-site? Wastes Yes _____ No _____ Chemical Products Yes _____ No _____ 2.2 Attach a list of any hazardous materials to be used or stored, the quantities that will be on-site at any given time, and the location and method of storage (e.g., 55-gallon drums on concrete pad). 3. STORAGE TANKS AND SUMPS 3.1 Is any above or below ground storage of gasoline, diesel or other hazardous substances in tanks or sumps proposed or currently conducted at the premises? Yes _____ No _____ If yes, describe the materials to be stored, and the type, size and construction of the sump or tank. Attach copies of any permits obtained for the storage of such substances. ----------------------------------------------------------------- ----------------------------------------------------------------- 3.2 Have any of the tanks or sumps been inspected or tested for leakage? Yes _____ No _____ If so, attach the results. 3.3 Have any spills or leaks occurred from such tanks or sumps? Yes _____ No _____ If so, describe. ----------------------------------------------------------------- ----------------------------------------------------------------- 3.4 Were any regulatory agencies notified of the spill or leak? Yes _____ No _____ If so, attach copies of any spill reports filed, any clearance letters or other correspondence from regulatory agencies relating to the spill or leak. 3.5 Have any underground storage tanks or sumps been taken out of service or removed? Yes _____ No _____ If yes, attach copies of any closure permits and clearance obtained from regulatory agencies relating to closure and removal of such tanks. EXHIBIT "E" 4. SPILLS 4.1 During the past year, have any spills occurred at the premises? Yes _____ No _____ If yes, please describe the location of the spill. ----------------------------------------------------------------- ----------------------------------------------------------------- 4.2 Were any agencies notified in connection with such spills? Yes _____ No _____ If yes, attach copies of any spill reports or other correspondence with regulatory agencies. 4.3 Were any clean-up actions undertaken in connection with the spills? Yes _____ No _____ Attach copies of any clearance letters obtained from any regulatory agencies involved and the results of any final soil or groundwater sampling done upon completion of the clean-up work. 5. WASTE MANAGEMENT 5.1 Has your company been issued an EPA Hazardous Waste Generator I.D. Number? Yes _____ No _____ 5.2 Has your company filed a biennial report as a hazardous waste generator? Yes _____ No _____ If so, attach a copy of the most recent report filed. 5.3 Attach a list of the hazardous wastes, if any, generated or to be generated at the premises, its hazard class and the quantity generated on a monthly basis. 5.4 Describe the method(s) of disposal for each waste. Indicate where and how often disposal will take place. _____ On-site treatment or recovery ____________________ _____ Discharged to sewer ____________________ _____ Transported and disposed of off-site ____________________ _____ Incinerator ____________________ 5.5 Indicate the name of the person(s) responsible for maintaining copies of hazardous waste manifests completed for off-site shipments of hazardous waste. ----------------------------------------------------------------- 5.6 Is any treatment of processing of hazardous wastes currently conducted or proposed to be conducted at the premises: Yes _____ No _____ If yes, please describe any existing or proposed treatment methods. ------------------------------------------------------- ----------------------------------------------------------------- 5.7 Attach copies of any hazardous waste permits or licenses issued to your company with respect to its operations at the premises. 6. WASTEWATER TREATMENT/DISCHARGE 6.1 Do you discharge wastewater to: _____ storm drain? _____ sewer? _____ surface water? _____ no industrial discharge 6.2 Is your wastewater treated before discharge? Yes _____ No _____ If yes, describe the type of treatment conducted. ----------------------------------------------------------------- ----------------------------------------------------------------- 6.3 Attach copies of any wastewater discharge permits issued to your company with respect to its operations at the premises. E-2 7. AIR DISCHARGES 7.1 Do you have any filtration systems or stacks that discharge into the air? Yes _____ No _____ 7.2 Do you operate any of the following types of equipment or any other equipment requiring an air emissions permit? _____ Spray booth _____ Dip tank _____ Drying oven _____ Incinerator _____ Other (please describe) _________________________ _____ No equipment requiring air permits 7.3 Are air emissions from your operations monitored? Yes _____ No _____ If so, indicate the frequency of monitoring and a description of the monitoring results. ----------------------------------------------------------------- 7.4 Attach copies of any air emissions permits pertaining to your operations at the premises. 8. HAZARDOUS MATERIALS DISCLOSURES 8.1 Does your company handle hazardous materials in a quantity equal to or exceeding an aggregate of 500 pounds, 55 gallons, or 200 cubic feet per month? Yes _____ No _____ 8.2 Has your company prepared a hazardous materials management plan pursuant to any applicable requirements of a local fire department or governmental agency? Yes _____ No _____ If so, attach a copy of the business plan. 8.3 Has your company adopted any voluntary environmental, health or safety program? Yes _____ No _____ If so, attach a copy of the program. No formal program. We recycle paper, aluminum cans, and scrap aluminum. 9. ENFORCEMENT ACTIONS, COMPLAINTS 9.1 Has your company ever been subject to any agency enforcement actions, administrative orders, or consent decrees? Yes _____ No _____ If so, describe the actions and any continuing compliance obligations imposed as a result of these actions. ----------------------------------------------------------------- 9.2 Has your company ever received requests for information, notice or demand letters, or any other inquiries regarding its operations? Yes _____ No _____ 9.3 Have there ever been, or are there now pending, any lawsuits against the company regarding any environmental or health and safety concerns? Yes _____ No _____ 9.4 Has an environmental audit ever been conducted at your company's current facility? Yes _____ No _____ If so, identify who conducted the audit and when it was conducted. ----------------------------------------------------------------- Company By: ------------------------ Title: ------------------------ Date: ------------------------ E-3 SAMPLE FORM OF TENANT ESTOPPEL CERTIFICATE The undersigned ("TENANT") hereby certifies to _________________________________ ("LANDLORD"), and ____________________________, as follows: 1. Attached hereto is a true, correct and complete copy of that certain Lease dated _______________________, 19___ between Landlord and Tenant (the "LEASE"), which demises Premises which are located at __________________________ ___________________________________. The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Section 6 below. 2. The term of the Lease commenced on ________________, 19__ (Office Building), ________________, 19__ (Manufacturing Building, and ________________, 19__ (Parking Lot). 3. The term of the Lease is currently scheduled to expire on ________________, 19__. 4. Tenant has no option to renew or extend the Term of the Lease except: ________________________________. 5. Tenant has no preferential right to purchase the Premises. 6. The Lease has: (Initial One) ( ) not been amended, modified, supplemented, extended, renewed or assigned. ( ) been amended, modified, supplemented, extended, renewed or assigned by the following described agreements, copies of which are attached hereto: __________________________________________________________________. 7. Tenant has accepted and is now in possession of the Premises and has not sublet, assigned or encumbered the Lease, the Premises or any portion thereof except as follows: __________________________________. 8. The current Monthly Rent is $______________. 9. The amount of security deposit (if any) is $________________. No other security deposits have been made. 10. All rental payments payable by Tenant have been paid in full as of the date hereof. No rent under the Lease has been paid for more than thirty (30) days in advance of its due date except as follows: ____________________________ ________________________________________________________________________. 11. All work required to be performed by Landlord under the Lease has been completed and has been accepted by Tenant, and all tenant improvement allowances have been paid in full except as follows: _____________________________________ ________________________________________________________________________. 12. To the best of Tenant's knowledge, as of the date hereof, there are no defaults on the part of Landlord or Tenant under the Lease except as follows: ________________________________________________________________________________ _____________________________________. 13. Tenant has no defense as to its obligations under the Lease and claims no set-off or counterclaim against Landlord except as follows: ________________ _________________________________________________________. 14. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies, except as expressly provided in the Lease except as follows: ____________________________ ________________________________________________________________________. 15. All insurance required of Tenant under the Lease has been provided by Tenant and all premiums have been paid except as follows: _____________________ ________________________________________________________________________. 16. There has not been filed by or against Tenant a petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States or any state thereof, or any other action brought pursuant to such bankruptcy laws with respect to Tenant except as follows: _____________________ ___________________________________________________________________________. 17. Tenant pays rent due Landlord under the Lease to Landlord and does not have any knowledge of any other person who has any right to such rents by collateral assignment or otherwise except as follows: _________________________ ________________________________________________________________________________ _____. EXHIBIT "F" The foregoing certification is made with the knowledge that ________________________ is about to [FUND A LOAN TO LANDLORD OR PURCHASE THE PREMISES FROM LANDLORD], and that ________________________ is relying upon the representations herein made in [FUNDING SUCH LOAN OR PURCHASING THE PREMISES]. Dated: ________________, 19__. "TENANT" - ------------------------- By: --------------------- By: --------------------- SAMPLE ONLY (NOT FOR EXECUTION) F-2 SPECIAL IMPROVEMENTS List of Special Improvements to be provided by Tenant to Landlord within thirty (30) days after the Commencement Date and from time to time thereafter, which list shall be subject to Landlord's reasonable approval. EXHIBIT "G" EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-3 and S-8) of Alliance Pharmaceutical Corp. of our report dated July 31, 1998, except Note 8, as to which the date is August 14, 1998, with respect to the consolidated financial statements of Alliance Pharmaceutical Corp. included in the Annual Report (Form 10-K) for the year ended June 30, 1998. ERNST & YOUNG LLP San Diego, California September 8, 1998 EX-27 11 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 11,809,000 38,046,000 0 0 0 57,396,000 37,085,000 13,998,000 93,677,000 8,666,000 0 0 5,000 320,000 75,765,000 93,677,000 0 21,209,000 0 0 57,970,000 0 0 (33,003,000) 0 (33,003,000) 0 0 0 (33,003,000) (1.04) (1.04)
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