-----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, SCXYA5CDvFR3Pkj4fHpLRxyLnRGUzL6CoD05RIVOrfcXAS/wiyZ0UFq9G6jcsDB9 mFAXwbeuIeoB3SX1EkRrKQ== 0000912057-99-005487.txt : 19991117 0000912057-99-005487.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005487 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMMUNE RESPONSE CORP CENTRAL INDEX KEY: 0000817785 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 330255679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18006 FILM NUMBER: 99751480 BUSINESS ADDRESS: STREET 1: 5935 DARWIN COURT CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 6194317080 MAIL ADDRESS: STREET 1: 5935 DARWIN COURT CITY: CARLSBAD STATE: CA ZIP: 92008 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ---- EXCHANGE ACT OF 1934. For the quarterly period ended SEPTEMBER 30, 1999 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 0-18006 THE IMMUNE RESPONSE CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 33-0255679 (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 5935 DARWIN COURT, CARLSBAD, CA 92008 (Address of Principal Executive Offices) (Zip Code) TELEPHONE (760) 431-7080 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. As of NOVEMBER 2, 1999, 25,925,641 shares of common stock were outstanding. THE IMMUNE RESPONSE CORPORATION FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 2. Changes in Securities 17 Item 6. Exhibits and Reports on Form 8-K 17 Signature 18 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31, 1999 1998 ------------- ------------ (unaudited) Assets Current assets: Cash and cash equivalents $ 2,409 $ 1,519 Marketable securities-available-for-sale 19,810 23,713 Other current assets 1,100 1,613 ----------- ----------- Total current assets 23,319 26,845 Property and equipment, net 10,461 7,825 Deposits and other assets 996 956 ----------- ----------- $ 34,776 $ 35,626 ----------- ----------- ----------- ----------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 3,703 $ 2,755 Other accrued expenses 4,373 1,198 Current portion of equipment notes payable 318 -- ----------- ----------- Total current liabilities 8,394 3,953 Equipment notes payable 1,303 -- Deferred rent obligation 177 266 Convertible preferred stock 9,557 9,347 Stockholders' equity: Preferred stock, 5,000,000 shares authorized; none issued -- -- Common stock, $.0025 par value, 65,000,000 shares authorized, 24,966,761 and 23,795,292 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 62 59 Warrants 2,144 2,144 Additional paid-in capital 197,635 191,317 Unrealized gain (loss) on marketable securities (67) 102 Accumulated deficit (184,429) (171,562) ----------- ----------- Total stockholders' equity 15,345 22,060 ----------- ----------- $ 34,776 $ 35,626 ----------- ----------- ----------- -----------
See accompanying notes. 3 THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenue: Contract research revenue $ 3,494 $ 1,488 $ 10,732 $ 2,488 Licensed research revenue 333 1,000 6,195 11,667 ------------ ------------ ------------ ------------ 3,827 2,488 16,927 14,155 Expenses: Research and development 7,692 7,420 26,129 24,109 General and administrative 1,288 1,062 4,023 3,136 Restructuring costs -- -- 650 -- ------------ ------------ ------------ ------------ 8,980 8,482 30,802 27,245 Other revenue: Investment income 304 513 1,007 1,196 ------------ ------------ ------------ ------------ Net loss $ (4,849) $ (5,481) $ (12,868) $ (11,894) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net loss per share - basic and diluted $ (0.20) $ (0.24) $ (0.53) $ (0.52) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of shares outstanding 24,852,510 23,207,942 24,502,843 22,984,853 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. 4 THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
Nine months ended September 30, -------------------------------- 1999 1998 ---- ---- Operating activities: Net loss $(12,868) $(11,894) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,144 1,112 Deferred rent expense (89) (67) Changes in operating assets and liabilities: Other current assets 513 (1,122) Accounts payable 948 2,052 Accrued expenses 3,175 427 -------- -------- Net cash used in operating activities (7,177) (9,492) Investing activities: Sale of marketable securities, net 3,734 1,290 Purchase of property and equipment (3,779) (1,607) Deposits and other assets (40) (603) -------- -------- Net cash used in investing activities (85) (920) Financing activities: Proceeds from equipment notes payable 1,621 -- Net proceeds from sale of common stock 4,805 1,333 Net proceeds from the sale of convertible preferred stock -- 9,160 Net proceeds from exercise of stock options 1,726 907 -------- -------- Net cash provided by financing activities 8,152 11,400 -------- -------- Net increase in cash and cash equivalents 890 988 Cash and cash equivalents at beginning of period 1,519 4,872 -------- -------- Cash and cash equivalents at end of period $ 2,409 $ 5,860 -------- -------- -------- -------- Supplemental disclosure of noncash investing and financing activities: Unrealized gain (loss) on marketable securities $ (169) $ 141 -------- -------- -------- -------- Accretion of convertible preferred stock $ 210 $ 117 -------- -------- -------- -------- Payment of dividend on convertible preferred stock $ 561 $ -- -------- -------- -------- -------- Declared dividend on convertible preferred stock $ 189 $ 329 -------- -------- -------- --------
See accompanying notes. 5 THE IMMUNE RESPONSE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 1. BASIS OF PRESENTATION The condensed consolidated financial statements of The Immune Response Corporation ("Immune Response" or the "Company") for the three and nine month periods ended September 30, 1999 and 1998 are unaudited. These financial statements reflect all adjustments consisting of only normal recurring adjustments, which in the opinion of management are necessary to fairly present the consolidated financial position as of September 30, 1999 and the consolidated results of operations for the three and nine month periods ended September 30, 1999 and 1998. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the year ended December 31, 1999. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 1998 included in the Company's Form 10-K filed with the Securities and Exchange Commission. Certain prior year amounts have been reclassified in order to conform to current year presentation. 2. NET LOSS PER SHARE Net loss per share for the three and nine months ended September 30, 1999 and 1998 is computed using the weighted average number of common shares outstanding during the period. Outstanding stock options and warrants are not included in the calculation of earnings per share because their effect would be antidilutive. Therefore, there is no difference between basic and diluted net loss per share. 3. COMPREHENSIVE LOSS The components of comprehensive loss are as follows:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net loss $ (4,849) $ (5,481) $(12,868) $(11,894) Net unrealized gain (loss) on marketable securities (15) 191 (169) 141 -------- -------- -------- -------- Comprehensive loss $ (4,864) $ (5,290) $(13,037) $(11,753) -------- -------- -------- -------- -------- -------- -------- --------
4. EQUITY TRANSACTION In February 1999, the initial conversion price of the Series F Convertible Preferred Stock of $14.07 per share of common stock was adjusted downward to $9.77 per share of common stock. In August 1999, the conversion price was adjusted downward to $5.87 per share of common stock. The conversion price may be further adjusted downward at the end of November and at the end of each subsequent three-month period if the Company's common stock does not trade at prices higher than the conversion price over a period of time during the applicable three-month period. The Series F Stock bears a dividend of 7.5% per annum. The dividend is payable in shares of common stock or cash at the Company's option. 5. COLLABORATIONS In July, April and January of 1999, the Company received a $5 million payment in each month from Agouron Pharmaceuticals, Inc., a Warner-Lambert Company, ("Agouron") consisting of a $3 million payment for research and development and a $2 million payment for the purchase of 292,078, 189,350 and 149,911 shares of unregistered common stock, respectively, priced at a premium to the market. These represented the second, third and fourth in a series of six quarterly payments that the Company expects Agouron to make to fund research and development and to purchase unregistered common stock under an agreement entered into in June 1998. Also in conjunction with this agreement, the Company received a $5 million milestone payment in February 1999. Under the agreement, the Company agreed to exclusively license REMUNE, its immune-based therapy under development for the treatment of HIV infection, to Agouron. Under the terms of the agreement, the Company will 6 manufacture commercial supplies of REMUNE and Agouron will have exclusive rights to market REMUNE in North America, Europe and certain other countries, if regulatory approvals are received. In June 1998, the Company initially received a $10 million license fee and Agouron purchased 118,256 shares of newly issued Immune Response common stock, priced at a premium to market, for $2 million. Through September 1999, the Company had received a total of $37 million from Agouron for license fees, milestone and research and development payments and stock purchases. In September 1999, the Company received the first of two payments for $494,000 each from Schering-Plough Corporation ("Schering-Plough") under an amendment to extend the research collaboration and option agreement entered into in July 1998 through the remainder of 1999. In March 1999, the Company received a $988,000 payment to fund research under this agreement. Under this research collaboration and option agreement, the Company agreed to develop gene therapy products for the treatment of hepatitis B and C; and as part of this agreement, Schering-Plough has the option to license the Company's gene delivery system for additional proprietary genes for other diseases for a royalty on future product sales, if any. Through September 1999, the Company had received approximately $3.5 million in payments from Schering-Plough. 6. RESTRUCTURING COSTS In May 1999, the Company announced the conclusion of the Phase III clinical endpoint trial for the immune-based therapy REMUNE based on the recommendation of an independent Data Safety Monitoring Board. As a result of this, in June 1999, the Company implemented a restructuring plan primarily aimed at reducing expenses while focusing the majority of the Company's resources on its late-stage programs of immune-based therapeutics for HIV (REMUNE) and rheumatoid arthritis. The restructuring plan included a reduction in the workforce of approximately 30%. The Company took a one-time restructuring charge against earnings of $650,000. 7. SUBSEQUENT EVENTS In October 1999, the Company received a $5 million payment from Agouron consisting of a $3 million payment for research and development and a $2 million payment for the purchase of 334,589 shares of unregistered common stock priced at a premium to the market. This was the fifth in a series of six quarterly payments that the Company expects Agouron to make to fund development and to purchase unregistered common stock under the June 1998 agreement. In October 1999, the Company sold $3 million of common stock to an institutional investor at a price of $5.0625 per share. The final number of shares to be issued to the institutional investor will be determined by using a price equal to a six percent discount to the average trading price of the Company's common stock during the 20 trading days immediately following the sale of the shares. For every day during this 20 trading day period that the average trading price of the Company's stock is below $4 per share, the institutional investor has agreed to return one-twentieth of the shares and the Company has agreed to return the purchase price of those returned shares. In addition, the Company has agreed to sell to the institutional investor up to an additional $2.5 million of its common stock. The institutional investor is under no obligation to purchase those shares. In October 1999, the Company received the second $494,000 payment from Schering-Plough under the amendment that extended the existing agreement through the remainder of 1999. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS OVERVIEW The Immune Response Corporation (the "Company") is a biopharmaceutical company developing immune-based therapies to induce specific T cell responses for the treatment of HIV and autoimmune diseases. In addition, the Company is working on cancer vaccines and gene therapy. This discussion contains forward-looking statements concerning the Company's operating results and timing of anticipated expenditures. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include those discussed under "Risk Factors". The following should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q. These forward-looking statements speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. In May 1999, the Company announced the conclusion of the Phase III clinical endpoint trial for the immune-based therapy REMUNE based on the recommendation of an independent Data Safety Monitoring Board. As a result of this, in June 1999, the Company implemented a restructuring plan primarily aimed at reducing expenses while focusing the majority of the Company's resources on its late-stage programs of immune-based therapeutics for HIV (REMUNE) and rheumatoid arthritis. The restructuring plan included a reduction in the workforce of approximately 30%. The Company took a one-time restructuring charge against earnings of $650,000. The total projected decrease in expenses as a result from restructuring will phase in over several quarters. In July, April and January of 1999, the Company received a $5 million payment in each month from Agouron Pharmaceuticals, Inc., a Warner-Lambert Company, ("Agouron") consisting of a $3 million payment for research and development and a $2 million payment for the purchase of 292,078, 189,350 and 149,911 shares of unregistered common stock, respectively, priced at a premium to the market. These represented the second, third and fourth in a series of six quarterly payments that the Company expects Agouron to make to fund research and development and to purchase unregistered common stock under an agreement entered into in June 1998. Also in conjunction with this agreement, the Company received a $5 million milestone payment in February 1999. Under the agreement, the Company agreed to exclusively license REMUNE, its immune-based therapy under development for the treatment of HIV infection, to Agouron. Under the terms of the agreement, the Company will manufacture commercial supplies of REMUNE and Agouron will have exclusive rights to market REMUNE in North America, Europe and certain other countries, if regulatory approvals are received. Through September 1999, the Company had received a total of $37 million from Agouron for license fees, milestone and research and development payments and stock purchases. In September 1999, the Company received the first of two payments for $494,000 each from Schering-Plough under an amendment to extend the research collaboration and option agreement entered into in July 1998 through the remainder of 1999. The second payment was received in October 1999. In March 1999, the Company received a payment of $988,000 to fund research under this agreement. Under this research collaboration and option agreement, the Company agreed to develop gene therapy products for the treatment of hepatitis B and C; and as part of this agreement, Schering-Plough has the option to license the Company's gene delivery system for additional proprietary genes for other diseases for a royalty on future product sales, if any. Through September 1999, the Company had received approximately $3.5 million in payments from Schering-Plough. In September 1999, the Company entered into a $3 million equipment line of credit, of which $1.6 million was utilized in the quarter to fund capital improvements related to increasing the capacity of its manufacturing facility. In October 1999, the Company received a $5 million payment from Agouron consisting of a $3 million payment for research and development and a $2 million payment for the purchase of 334,589 shares of unregistered common stock priced at a premium to the market. This was the fifth in a series of six quarterly payments that the Company expects Agouron to make to fund research and development and to purchase unregistered common stock under the June 1998 agreement. 8 In October 1999, the Company sold $3 million of common stock to an institutional investor at a price of $5.0625 per share. The final number of shares to be issued to the institutional investor will be determined by using a price equal to a six percent discount to the average trading price of the Company's common stock during the 20 trading days immediately following the sale of the shares. For every day during this 20 trading day period that the average trading price of the Company's stock is below $4 per share, the institutional investor has agreed to return one-twentieth of the shares and the Company has agreed to return the purchase price of those returned shares. In addition, the Company has agreed to sell to the institutional investor up to an additional $2.5 million of its common stock. The institutional investor is under no obligation to purchase those shares. The Company has not been profitable since inception and had an accumulated deficit of $184.4 million as of September 30, 1999. To date, the Company has not recorded any revenues from the sale of products. Revenues recorded through September 30, 1999 were earned in connection with contract research, licensing of technology, milestone achievement and investment income. The Company expects its operating losses to continue, as well as to have quarter-to-quarter fluctuations, some of which could be significant, due to research, development and clinical trial activities. There can be no assurance that the Company will be able to generate sufficient product revenue to become profitable at all or on a sustained basis. RESULTS OF OPERATIONS Revenue for the quarter ended September 1999 was $3.8 million as compared to $2.5 million for the same period in 1998. The increase in revenue was primarily attributable to the Agouron collaboration entered into in 1998 which provided the Company with a $3 million research and development payment received in 1999 versus only $2.5 million from research collaborations with Schering-Plough and Bayer for the same period in 1998. Revenue for the nine months ended September 1999 was $16.9 million as compared to $14.2 million for the same period in 1998. The increase in revenue was primarily attributable to an increase in combined license, research and development and milestone payments received in 1999 from Agouron which were greater than the Agouron up-front license payment received during the same period in 1998. None of the revenue received was from the commercial sale of products and the Company does not expect to derive revenue from the sale of products for the foreseeable future. The Company incurred research and development expenses of $7.7 million and $7.4 million for the three months ending September 1999 and 1998, respectively. For the nine months ended September 1999 and 1998, research and development expenses were $26.1 million and $24.1 million, respectively. The increased spending in research and development during the third quarter and nine months ended September 1999 resulted primarily from expenses associated with scale-up of the manufacturing process for REMUNE. Future spending associated with the HIV clinical trials is expected to decrease as future pivotal studies will be conducted by Agouron under the 1998 collaboration agreement. However, spending associated with the Company's scale-up of the manufacturing process for REMUNE and the cost of producing clinical supplies for ongoing and future REMUNE studies could continue to increase in the foreseeable future. Research and development expenses for gene therapy are expected to level off while spending for the rheumatoid arthritis and cancer programs will remain somewhat constant. Overall future research and development expenditures are expected to decline for the next one to two quarters. Future spending for research and development may increase if additional collaborations are completed, but there can be no assurance that any will be completed. General and administrative expenses for the three and nine months ended September 1999 were $1.3 million and $4.0 million, respectively, as compared to $1.1 million and $3.1 million for the same periods in 1998. The increase in spending was attributable to higher support costs associated with its research and development and public company activities. General and administrative expenses for the remainder of 1999 are expected to remain level. Restructuring costs of $650,000 for the nine months ended September 1999 were associated with the Company's restructuring plan implemented in June 1999, which reduced the work force by approximately 30%. Employee severance, health benefits, placement services and other implementation costs were included in the restructuring costs. 9 Investment income decreased to $304,000 for the quarter ended September 1999 from $513,000 for the same period of 1998. This decrease was due primarily to a decrease in the Company's average cash position in the third quarter of 1999 compared to the third quarter of 1998, which included the $10 million up-front license payment from Agouron in 1998. For the nine months ended September 1999, investment income was $1 million compared to $1.2 million for the same period in 1998. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, the Company had working capital of $14.9 million, including $22.2 million of cash, cash equivalents and marketable securities. This compares with working capital as of December 31, 1998 of $22.9 million, including $25.2 million of cash, cash equivalents and marketable securities. Working capital decreased as a result of the cost of operations, in particular, the cost of the REMUNE HIV clinical trials, clinical trial materials and manufacturing supplies, and the capital improvements incurred to increase the capacity of the manufacturing facility producing REMUNE. As of September 30, 1999, the Company had $1.4 million remaining under a $3.0 million equipment line of credit that was put in place during the quarter. The Company will need to raise additional funds to conduct research and development, preclinical studies and clinical trials necessary to bring its potential products to market and establish manufacturing and marketing capabilities. The Company anticipates that in 1999, the REMUNE clinical trials and manufacturing costs will continue to represent a significant portion of the Company's overall expenditures. The Company also anticipates that costs related to the clinical trials of REMUNE will decrease as future pivotal studies will be conducted by Agouron. However, spending associated with the Company's scale-up of the manufacturing process for REMUNE and the cost of producing clinical supplies for ongoing and future REMUNE studies could continue to increase in the foreseeable future. Research and development expenses for gene therapy are expected to level off while spending for the rheumatoid arthritis and cancer programs will remain somewhat constant. Overall future research and development expenditures are expected to decline for the next one to two quarters. Future spending for research and development may increase if additional collaborations are completed, but there can be no assurance that any will be completed. The Company anticipates additional capital improvements of approximately $1.4 million for the remainder of 1999 related to increasing the capacity of its manufacturing facility, some of which the Company anticipates it will fund with debt financing. Other anticipated costs with respect to REMUNE, including investment in inventory, will depend on many factors, including the results of clinical trials, the continuation of the Company's collaboration with Agouron and other factors which will influence the Company's determination of the appropriate continued investment of the Company's financial resources in this program. The Company's future capital requirements will depend on many factors, including continued scientific progress in its research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the cost of manufacturing scale-up and inventories, effective commercialization activities and arrangements and other factors not within the Company's control. The Company intends to seek additional funding through additional research and development agreements with suitable corporate collaborators, extensions of existing corporate collaborations, and through public or private financings if available. There can be no assurances, however, that such collaboration arrangements, or any public or private financings, will be available on acceptable terms, if at all. If funds are raised through equity arrangements, further dilution to stockholders may result. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or take other measures to cut costs, which could have a material adverse effect on the Company. The Company estimates that its existing capital resources, along with funding under existing research and development collaborations, available equipment financing and the commitment for equity funding from an existing collaborative partner will be sufficient to fund its current and planned operations into the second half of 2000. There can be no assurances, however, that changes in the Company's research and development plans or other changes affecting the Company's operating expenses may result in the expenditure of such resources before such time. In any event, the Company will need to raise substantial additional capital to fund its operations in future periods. IMPACT OF YEAR 2000 The Company has performed a review of its computer applications and equipment related to their continuing functionality for the year 2000 and beyond. The Company does not believe that it has material exposure with respect to the year 2000 issue concerning its computer applications and equipment. The Company has completed its assessment of third parties with whom it has a material relationship to assess its risk with respect to year 2000 issues. The Company is not aware, at this time, of any material year 2000 issues with respect to 10 its dealings with such third parties. The Company does have a contingency plan in place to address material year 2000 issues. In the event that year 2000 issues were to disrupt the Company, such disruption may have a material impact on the Company and its results of operations. CERTAIN RISK FACTORS (For a discussion of additional Risk Factors applicable to the Company, see the Company's Annual Report on Form 10-K for the year ended December 31, 1998.) THE FAILURE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE PRODUCTS MAY CAUSE US TO CEASE OPERATIONS. We have not completed the development of any products. A failure to successfully develop and commercialize products may cause us to cease operations. Our potential therapies under development will require significant additional research and development efforts and regulatory approvals prior to potential commercialization. The conclusion of the Phase III trial of REMUNE due to lack of efficacy has had a material adverse effect on us. If Agouron fails to successfully initiate or complete additional pivotal trials with REMUNE we may have to abandon REMUNE or seek additional funding. Our other therapies and technologies are at earlier stages of development than REMUNE. Some of our technologies have not yet been tested in humans. Human testing of potential products based on these technologies may not be permitted by regulatory authorities. Even if human testing is permitted, the products based on these technologies may not be successfully developed or be shown to be safe and efficacious. Potential immune-based therapies based on some of our technologies are at an early stage of clinical testing and may not be shown to be safe or efficacious or ever receive regulatory approval. The results of our preclinical studies and clinical trials may not be indicative of future clinical trial results. A commitment of substantial resources to conduct time-consuming research, preclinical studies and clinical trials will be required if we are to develop any products. Delays in planned patient enrollment in our clinical trials may result in increased costs, program delays or both. None of our potential products may prove to be safe and effective in clinical trials. FDA or other regulatory approvals may not be obtained and even if successfully developed and approved, our products may not achieve market acceptance. Any products resulting from our programs are not expected to be successfully developed or commercially available for a number of years, if at all. Unacceptable toxicities or side effects may occur at any time in the course of human clinical trials or, if any products are successfully developed and approved for marketing, during commercial use of our products. The appearance of any unacceptable toxicities or side effects could interrupt, limit, delay or abort the development of any of our products or, if previously approved, necessitate their withdrawal from the market. OUR ADDITIONAL FINANCING REQUIREMENTS AND LIMITED ACCESS TO FINANCING MAY ADVERSELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS. We will need to raise additional funds to conduct research and development, preclinical studies and clinical trials necessary to bring our potential products to market and establish manufacturing and marketing capabilities. A failure to raise additional funds would require us to scale back or eliminate some or all of our research and development programs or license to third parties products or technologies that we would otherwise seek to develop ourselves. We believe that our existing resources will enable us to maintain our current and planned operations into the second half of 2000. We anticipate that in 1999, the REMUNE clinical trials will continue to represent a significant portion of our overall expenditures. We also anticipate that costs related to the clinical trials of REMUNE will decrease in 2000. In particular, we anticipate additional capital improvements of approximately $1.4 million to be made during 1999 related to increasing the capacity of our manufacturing facility. Other anticipated costs with respect to REMUNE will depend on many factors, in particular the continuation of our collaboration with Agouron. Our future capital requirements will depend on many factors, including: - continued scientific progress in our research and development programs, - the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, - the costs involved in filing, prosecuting and enforcing patent claims, - competing technological and market developments, 11 - the cost of manufacturing scale-up, - effective commercialization activities and arrangements, and - other factors not within our control. We intend to seek additional funding through public or private financings, arrangements with corporate collaborators or other sources. If funds are acquired through additional collaborations, we will likely be required to relinquish some or all of the rights to products that we may have otherwise developed ourselves. If adequate funds are not available when needed or on terms acceptable to us, we may be required to scale back some or all of our research and development programs or license to third parties products or technologies that we would otherwise seek to develop ourselves. IF AGOURON TERMINATES ITS COLLABORATION WITH US WE MAY HAVE TO ABANDON REMUNE. Our binding Letter of Intent with Agouron is the primary collaborative agreement that provides us with contract revenue. The termination of our agreement with Agouron might require us to abandon REMUNE. Agouron has been acquired by Warner-Lambert Company and Warner-Lambert may be acquired. We do not know which Agouron research products Warner-Lambert Company or any successor will continue to fund in the future. WE MAY NOT BE ABLE TO ENTER INTO ADDITIONAL COLLABORATIONS. We intend to seek additional collaborative arrangements to develop and commercialize our products. We may not be able to negotiate collaborative arrangements on favorable terms, or at all, in the future and our current or future collaborative arrangements may not be successful. This may cause us to abandon some of our products under development. OUR PATENTS AND PROPRIETARY TECHNOLOGY MAY NOT PROVIDE US WITH ANY BENEFIT AND THE PATENTS AND PROPRIETARY TECHNOLOGY OF OTHERS MAY PREVENT US FROM COMMERCIALIZING PRODUCTS. A failure to obtain meaningful patent protection for our potential products and processes would greatly diminish the value of our potential products and processes. In addition, whether or not our patents are issued, or issued with limited coverage, others may receive patents which contain claims applicable to our products. We are aware that a group working with Connetics Corporation has received a United States and European patent related to autoimmune disease research that covers technology similar to that used by us. We are also aware that AstraZeneca PLC has acquired the rights to a patent, which has been issued in Europe and other countries, that may interfere with our ability to develop some of our technologies related to autoimmune disease if the patent is upheld after current opposition proceedings. These patents, and others that we are not aware of, may adversely affect our ability to develop and commercialize products. The patent positions of biotechnology and pharmaceutical companies can be highly uncertain, and involve complex legal and factual questions. Therefore, the breadth of claims allowed in biotechnology and pharmaceutical patents cannot be predicted. We also rely upon unpatented trade secrets and know how, and others may independently develop substantially equivalent trade secrets or know how. We also rely on protecting our proprietary technology in part through confidentiality agreements with our corporate collaborators, employees, consultants and certain contractors. These agreements may be breached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or independently discovered by our competitors. Our products and processes may infringe, or be found to infringe, patents not owned or controlled by us, such as the patent rights owned by Connetics Corporation and AstraZeneca PLC. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patents, or would be required to obtain licenses to redesign our products or processes to avoid infringement. Licenses may not be available at all or on terms commercially reasonable to us and we may not be able to redesign our products or processes to avoid infringement. Litigation may be necessary to defend against claims of infringement, to enforce patents issued to us or to protect trade secrets. Litigation could result in substantial costs and diversion of management efforts regardless of the results of the litigation. An adverse result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed or require us to cease using some technology. 12 OUR HISTORY OF OPERATING LOSSES AND OUR EXPECTATIONS OF CONTINUING LOSSES MAY HURT OUR ABILITY TO CONTINUE OPERATIONS. As of September 30, 1999, we had a consolidated accumulated deficit of $184.4 million. We have not generated revenues from the commercialization of any product. We expect to incur substantial net operating losses over the next several years, which may imperil our ability to continue operations. We may not be able to generate sufficient product revenue to become profitable at all or on a sustained basis. THE LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PRODUCTS. Clinical testing, manufacture, promotion and sale of our products are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state and foreign regulatory agencies. This regulation may delay or prevent us from commercializing products. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, seizure of products, total or partial suspension of product marketing, failure of the government to grant premarket approval, withdrawal of marketing approvals and criminal prosecution. The regulatory process for new therapeutic drug products, including the required preclinical studies and clinical testing, is lengthy and expensive. We may not receive necessary FDA clearances for any of our potential products in a timely manner, or at all. The length of the clinical trial process and the number of patients the FDA will require to be enrolled in the clinical trials in order to establish the safety and efficacy of our products is uncertain. Even if additional pivotal surrogate marker trials of REMUNE are successfully completed, the FDA may not approve REMUNE for commercial sale. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals. Regulatory requirements are evolving and uncertain. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of our products. We may not be able to obtain the necessary approvals for clinical trials, manufacturing or marketing of any of our products under development. Even if commercial regulatory approvals are obtained, they may include significant limitations on the indicated uses for which a product may be marketed. In addition, a marketed product is subject to continual FDA review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions. Among the other requirements for regulatory approval is the requirement that prospective manufacturers conform to the FDA's Good Manufacturing Practices ("GMP") requirements specifically for biological drugs, as well as for other drugs. In complying with the FDA's GMP requirements, manufacturers must continue to expend time, money and effort in production, recordkeeping and quality control to assure that the product meets applicable specifications and other requirements. Failure to comply with the FDA's GMP requirements subjects the manufacturer to possible FDA regulatory action. We or our contract manufacturers, if any, may not be able to maintain compliance with the FDA's GMP requirements on a continuing basis. Failure to maintain compliance could have a material adverse effect on us. The FDA has not designated expanded access protocols for REMUNE as "treatment" protocols. The FDA may not determine that REMUNE meets all of the FDA's criteria for use of an investigational drug for treatment use. Even if REMUNE is allowed for treatment use, third-party payers may not provide reimbursement for the costs of treatment with REMUNE. The FDA may not consider REMUNE or any other of the Company's products under development to be an appropriate candidate for accelerated approval, expedited review or fast track designation. To market any drug products outside of the United States, we are also subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country. 13 TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS OBSOLETE. The biotechnology industry continues to undergo rapid change, and competition is intense and is expected to increase. Competitors may succeed in developing technologies and products that are more effective or affordable than any which are being developed by us, or which would render our technology and products obsolete and noncompetitive. Many of our competitors have substantially greater experience, financial and technical resources and production, marketing and development capabilities than us. Accordingly, some of our competitors may succeed in obtaining regulatory approval for products more rapidly or effectively than us. OUR LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE MAY PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS. We have not manufactured our product candidates in commercial quantities. We may not successfully make the transition from manufacturing clinical trial quantities to commercial production quantities or be able to arrange for contract manufacturing and this could prevent us from commercializing products. Even if REMUNE is successfully developed and receives FDA approval, we have not demonstrated the capability to manufacture REMUNE in commercial quantities. Except for REMUNE, we have not demonstrated the ability to manufacture our treatments in large-scale clinical or commercial quantities. We have no experience in the sales, marketing and distribution of pharmaceutical products. Thus, our products may not be successfully commercialized even if they are developed and approved for commercialization. The manufacturing of our products involves a number of steps and requires compliance with stringent quality control specifications imposed by us and by the FDA. Moreover, our products can only be manufactured in a facility that has undergone a satisfactory inspection by the FDA. For these reasons, we would not be able quickly to replace our manufacturing capacity, if we were unable to use our manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure or other difficulty; or if such facilities are deemed not in compliance with the FDA's GMP requirements, and the non-compliance could not be rapidly rectified. Our inability or reduced capacity to manufacture our products would prevent us from successfully commercializing products. We may enter into arrangements with contract manufacturing companies to expand our own production capacity in order to meet requirements for our products, or to attempt to improve manufacturing efficiency. If we choose to contract for manufacturing services and encounter delays or difficulties in establishing relationships with manufacturers to produce, package and distribute our finished products, clinical trials, market introduction and subsequent sales of the products would be delayed. Further, contract manufacturers must also operate in compliance with the FDA's GMP requirements; failure to do so could result in, among other things, the disruption of product supplies. Our potential dependence upon third parties for the manufacture of our products may adversely affect our profit margins and our ability to develop and deliver products on a timely and competitive basis. ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS. Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for the costs of the products and related treatments will be available from government health administration authorities, private health coverage insurers, managed care organizations and other organizations. Failure to obtain appropriate reimbursement could prevent us from successfully commercializing products. Third party payors are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using the products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and whether adequate third-party coverage will be available. PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY. We face an inherent business risk of exposure to product liability and other claims in the event that the development or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not avoid significant liability exposure. We may not have sufficient insurance coverage and we may not be able to obtain sufficient coverage, at a reasonable cost. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us. A product liability claim could hurt our financial performance. 14 HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS COULD EXPOSE US TO SIGNIFICANT COSTS. Although we do not currently manufacture commercial quantities of our product candidates, we produce limited quantities of these products for our clinical trials. We may be required to incur significant costs to comply with current or future environmental laws and regulations. Our research and development processes involve the controlled storage, use and disposal of hazardous materials, biological hazardous materials and radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and some waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed our resources. Our operations, business or assets may be materially and adversely affected by current or future environmental laws or regulations. SUBORDINATION OF COMMON STOCK TO PREFERRED STOCK COULD HURT COMMON STOCKHOLDERS. Our common stock is expressly subordinate to our Series F Convertible Preferred Stock in the event of our liquidation, dissolution or winding up. If we were to cease operations and liquidate our assets, there may not be any remaining value available for distribution to the holders of common stock after providing for the Series F Convertible Preferred Stock liquidation preference. VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS MAY HURT COMMON STOCKHOLDERS. The market price of our common stock, like that of the common stock of many other biopharmaceutical companies, has been and is likely to be highly volatile. Factors such as: - the results of preclinical studies and clinical trials by us, our collaborators or our competitors, - other evidence of the safety or efficacy of our products or our competitors, - announcements of technological innovations or new products by us or our competitors, - governmental regulatory actions, - changes or announcements in reimbursement policies, - developments with our collaborators, - developments concerning patent or other proprietary rights of ours or our competitors (including litigation), - concern as to the safety of our products, - period-to-period fluctuations in our operating results, - changes in estimates of our performance by securities analysts, - market conditions for biopharmaceutical stocks in general, and - other factors not within our control could have a significant adverse impact on the market price of our common stock. We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. 15 EFFECT OF ANTI-TAKEOVER PROVISIONS COULD ADVERSELY AFFECT OUR COMMON STOCKHOLDERS. Our Certificate of Incorporation and Bylaws include provisions that could discourage potential takeover attempts and make attempts by stockholders to change management more difficult. The approval of 66-2/3 percent of our voting stock is required to approve certain transactions and to take certain stockholder actions, including the calling of special meetings of stockholders and the amendment of any of the anti-takeover provisions contained in our Certificate of Incorporation. Further, pursuant to the terms of our stockholder rights plan, we have distributed a dividend of one right for each outstanding share of common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by the Board of Directors and may have the effect of deterring hostile takeover attempts. 16 PART II. OTHER INFORMATION ITEM 2. -- CHANGES IN SECURITIES During the third quarter of 1999, the Company sold 292,078 shares of newly issued Immune Response common stock to Agouron, priced at a premium to market, for $2 million. The common stock was sold under the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.69 Master Loan and Security Agreement dated as of September 30, 1999 between The Immune Response Corporation, I.R.C. Inc. and Transamerica Business Credit Corporation. 27 Financial Data Schedule b) Reports on Form 8-K A report on Form 8-K dated May 14, 1999 was filed by The Immune Response Corporation reporting under Item 5., Other Events, as follows: (1) Announcement of the restructuring plan implemented June 21, 1999 to reduce expenses, which included a workforce reduction of approximately 30%, while focusing the majority of the Company's resources on its late stage programs. (2) A summary of the Company's Principal Clinical Trials using Remune and the status of each trial as a follow-up to the recommendation of the independent Data Safety Monitoring Board that the Phase III clinical endpoint trial evaluating Remune be concluded early. 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE IMMUNE RESPONSE CORPORATION Date: NOVEMBER 15, 1999 /s/ HOWARD SAMPSON ---------------------- ----------------------------------------------- Howard Sampson Vice President Finance, Chief Financial Officer and Treasurer 18 EX-10.69 2 EXHIBIT 10.69 Exhibit 10.69 MASTER LOAN AND SECURITY AGREEMENT THIS AGREEMENT dated as of September 30, 1999, is made by The Immune Response Corporation ("IMNR"), a Delaware corporation having its principal place of business and chief executive office at 5935 Darwin Court, Carlsbad, California 92008, and I.R.C Inc. ("IRC"), a Delaware corporation, having its principal place of business and chief executive office at 5935 Darwin Court, Carlsbad, California 92008, (individually and collectively, the "Borrower") in favor of Transamerica Business Credit Corporation, a Delaware corporation (the "Lender"), having its principal office at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018. WHEREAS, the Borrower has requested that the Lender make Loans to it from time to time; and WHEREAS, the Lender has agreed to make such Loans on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and to induce the Lender to extend credit, the Borrower hereby agrees with the Lender as follows: SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following meanings, and shall be equally applicable to both the singular and plural forms of the terms defined: AGREEMENT shall mean this Master Loan and Security Agreement together with all schedules and exhibits hereto, as amended, supplemented, or otherwise modified from time to time. APPLICABLE LAW shall mean the laws of the State of Illinois (or any other jurisdiction whose laws are mandatorily applicable notwithstanding the parties' choice of Illinois law) or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. BUSINESS DAY shall mean any day other than a Saturday, Sunday, or public holiday or the equivalent for banks in New York City. CODE shall have the meaning specified in Section 8(d). COLLATERAL shall have the meaning specified in Section 2. COLLATERAL ACCESS AGREEMENT shall mean any landlord waiver, mortgagee waiver, bailee letter, or similar acknowledgement of any warehouseman or processor in possession of any Equipment. EFFECTIVE DATE shall mean the date on which all of the conditions specified in Section 3.3 shall have been satisfied. EQUIPMENT shall have the meaning specified in Section 2. EVENT OF DEFAULT shall mean any event specified in Section 7. FINANCIAL STATEMENTS shall have the meaning specified in Section 6.1. GAAP shall mean generally accepted accounting principles in the United States of America, as in effect from time to time. LOANS shall mean the loans and financial accommodations made by the Lender to the Borrower in accordance with the terms of this Agreement and the Notes. LOAN DOCUMENTS shall mean, collectively, this Agreement, the Notes, and all other present and future documents, agreements, certificates, instruments, and opinions delivered by the Borrower under, in connection with or relating to this Agreement, or any other present or future instrument or agreement between Lender and Borrower, as each of the same may be amended, modified, extended, restated or supplemented from time to time. MATERIAL ADVERSE CHANGE shall mean, with respect to any Person, a material adverse change in the business, prospects, operations, results of operations, assets, liabilities, or condition (financial or otherwise) of such Person taken as a whole. MATERIAL ADVERSE EFFECT shall mean, with respect to any Person, a material adverse effect on the business, prospects, operations, results of operations, assets, liabilities, or condition (financial or otherwise) of such Person taken as a whole. NOTE shall mean each Promissory Note made by the Borrower in favor of the Lender, as amended, supplemented, or otherwise modified from time to time, in each case substantially in the form of Exhibit B. OBLIGATIONS shall mean and include all loans (including the Loans), advances, debts, liabilities, obligations, covenants and duties owing by Borrower to Lender of any kind or nature, present or future, whether or not evidenced by the Note or any note, guaranty or other instrument, whether or not arising under or in connection with, this Agreement, any other Loan Document or any other present or future instrument or agreement, whether or not for the payment of money, whether arising by reason of an extension of credit, opening, guaranteeing or confirming of a letter of credit, loan, guaranty, indemnification or in any other manner, whether direct or indirect (including those acquired by assignment, purchase, discount or otherwise), whether absolute or contingent, due or to become due, now due or hereafter arising and however acquired (including without limitation all loans previously made by Lender to Borrower). The term includes, without limitation, all interest (including interest accruing on or after a bankruptcy, whether or not an allowed claim), charges, expenses, commitment, facility, closing and collateral management fees, letter of credit fees, reasonable attorneys' fees, taxes and any other sum properly chargeable to Borrower under this Agreement, the other Loan Documents or any other present or future agreement between Lender and Borrower. PERMITTED LIENS shall mean such of the following as to which no enforcement, collection, execution, levy, or foreclosure proceeding shall have been commenced: (a) liens for taxes, assessments, and other governmental charges or levies or the claims or demands of landlords, carriers, warehousemen, mechanics, laborers, materialmen, and other like Persons arising by operation of law in the ordinary course of business for sums which are not yet due and payable, or liens which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are maintained to the extent required by GAAP; (b) deposits or pledges to secure the payment of worker's compensation, unemployment insurance, or other social security benefits or obligations, public or statutory obligations, surety or appeal bonds, bid or performance bonds, or other obligations of a like nature incurred in the ordinary course of business; (c) licenses, restrictions, or covenants for or on the use of the Equipment which do not materially impair either the use of the Equipment in the operation of the business of the Borrower or the value of the Equipment; and (d) attachment or judgment liens that do not constitute an Event of Default. PERSON shall mean any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party, or government (including any division, agency, or department thereof), and the successors, heirs, and assigns of each. SCHEDULE shall mean each Schedule in the form of Schedule A hereto delivered by the Borrower to the Lender from time to time. SOLVENT means, with respect to any Person, that as of the date as to which such Person's solvency is measured: 2 (a) the fair saleable value of its assets is in excess of the total amount of its liabilities (including contingent liabilities as valued in accordance with GAAP) as they become absolute and matured; (b) it has sufficient capital to conduct its business; and (c) it is able generally to meet its debts as they mature. TAXES shall have the meaning specified in Section 5.5. SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower hereby assigns and grants to the Lender a continuing general, first priority lien on, and security interest in, all the Borrower's right, title, and interest in and to the collateral described in the next sentence (the "Collateral") to secure the payment and performance of all the Obligations. The Collateral consists of all equipment set forth on all the Schedules delivered from time to time under the terms of this Agreement (the "Equipment"), together with all present and future additions, parts, accessories, attachments, substitutions, repairs, improvements, and replacements thereof or thereto, and any and all proceeds thereof, including, without limitation, proceeds of insurance and all manuals, blueprints, know-how, warranties, and records in connection therewith, all rights against suppliers, warrantors, manufacturers, sellers, or others in connection therewith, and together with all substitutes for any of the foregoing. SECTION 3. THE CREDIT FACILITY. SECTION 3.1. BORROWINGS. Each Loan shall be in an amount not less than $50,000, and in no event shall the sum of the aggregate Loans made exceed the amount of the Lender's written commitment to the Borrower in effect from time to time. Notwithstanding anything herein to the contrary, the Lender shall be obligated to make the initial Loan and each other Loan only after the Lender, in its sole discretion, determines that the applicable conditions for borrowing contained in Sections 3.3 and 3.4 are satisfied. The timing and financial scope of Lender's obligation to make Loans hereunder are limited as set forth in a commitment letter executed by Lender and Borrower, dated as of September 23, 1999 and attached hereto as EXHIBIT A (the "Commitment Letter"). SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower shall not directly or indirectly use any proceeds of the Loans, or cause, assist, suffer, or permit the use of any proceeds of the Loans, for any purpose other than for the purchase, acquisition, installation, or upgrading of Equipment or the reimbursement of the Borrower for its purchase, acquisition, installation, or upgrading of Equipment. SECTION 3.3. CONDITIONS TO INITIAL LOAN. (a) The obligation of the Lender to make the initial Loan is subject to the Lender's receipt of the following, each dated the date of the initial Loan or as of an earlier date acceptable to the Lender, in form and substance satisfactory to the Lender and its counsel: (i) completed requests for information (Form UCC-11) listing all effective Uniform Commercial Code financing statements naming the Borrower as debtor and all tax lien, judgment, and litigation searches for the Borrower as the Lender shall deem necessary or desirable; (ii) Uniform Commercial Code financing statements (Form UCC-1) duly executed by the Borrower (naming the Lender as secured party and the Borrower as debtor and in form acceptable for filing in all jurisdictions that the Lender deems necessary or desirable to perfect the security interests granted to it hereunder) and, if applicable, termination statements or other releases duly filed in all jurisdictions that the Lender deems necessary or desirable to perfect and protect the priority of the security interests granted to it hereunder in the Equipment related to such initial Loan; (iii) a Note duly executed by the Borrower evidencing the amount of such Loan; 3 (iv) a Collateral Access Agreement duly executed by the lessor or mortgagee, as the case may be, of each premises where the Equipment is located; (v) certificates of insurance required under Section 5.4 of this Agreement together with loss payee endorsements for all such policies naming the Lender as lender loss payee and as an additional insured; (vi) a certificate of the Secretary or an Assistant Secretary of the Borrower ("Secretary's Certificate") certifying (A) that attached to the Secretary's Certificate is a true, complete, and accurate copy of the resolutions of the Board of Directors of the Borrower (or a unanimous consent of directors in lieu thereof) authorizing the execution, delivery, and performance of this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and that such resolutions have not been amended or modified since the date of such certification and are in full force and effect; (B) the incumbency, names, and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is a party; (C) that attached to the Secretary's Certificate is a true and correct copy of the Articles or Certificate of Incorporation of the Company, as amended, which Articles or Certificate of Incorporation have not been further modified, repealed or rescinded and are in full force and effect; (D) that attached to the Secretary's Certificate of the Borrower is a true and correct copy of the Bylaws, as amended, which Bylaws of the Company have not been further modified, repealed or rescinded and are in full force and effect; and (E) that attached to the Secretary's Certificate is a valid Certificate of Good Standing issued by the Secretary of the State of the Borrower's state of incorporation; (vii) the opinion of counsel for the Borrower covering such matters incident to the transactions contemplated by this Agreement as the Lender may reasonably require; and (viii) such other agreements and instruments as the Lender may reasonably request. (b) There shall be no pending or, to the knowledge of the Borrower after reasonable inquiry, threatened litigation, proceeding, inquiry, or other action (i) seeking an injunction or other restraining order, damages, or other relief with respect to the transactions contemplated by this Agreement or the other Loan Documents or thereby or (ii) which affects or could affect the business, prospects, operations, assets, liabilities, or condition (financial or otherwise) of the Borrower, except, in the case of clause (ii), where such litigation, proceeding, inquiry, or other action could not be expected to have a Material Adverse Effect in the good faith judgment of the Lender. (c) The Borrower shall have paid all fees and expenses required to be paid by it to the Lender as of such date. (d) The security interests in the Equipment related to the initial Loan granted in favor of the Lender under this Agreement shall have been duly perfected and shall constitute first priority liens. SECTION 3.4. CONDITIONS PRECEDENT TO EACH LOAN. The obligation of the Lender to make each Loan is subject to the satisfaction of the following conditions precedent: (a) the Lender shall have received the documents, agreements, and instruments set forth in Section 3.3(a)(i) through (v) applicable to such Loan, each in form and substance satisfactory to the Lender and its counsel and each dated the date of such Loan or as of an earlier date acceptable to the Lender; (b) the Lender shall have received a Schedule of the Equipment related to such Loan, in form and substance satisfactory to the Lender and its counsel, and the security interests in such Equipment related to such Loan granted in favor of the Lender under this Agreement shall have been duly perfected and shall constitute first priority liens; 4 (c) all representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such Loan as if then made, other than representations and warranties that expressly relate solely to an earlier date, in which case they shall have been true and correct in all material respects as of such earlier date; (d) no Event of Default or event which with the giving of notice or the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing or would result from the making of the requested Loan as of the date of such request; and (e) the Borrower shall be deemed to have hereby reaffirmed and ratified all security interests, liens, and other encumbrances heretofore granted by the Borrower to the Lender. SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES. SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS. The Borrower (a) is duly organized, validly existing, and in good standing under the laws of the State of its organization, (b) has the power and authority to own its properties and assets and to transact the businesses in which it is presently, or proposes to be, engaged, and (c) is duly qualified and authorized to do business and is in good standing in every jurisdiction in which the failure to be so qualified could have a Material Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform its obligations under the Loan Documents, or (iii) the rights of the Lender hereunder. SECTION 4.2. DUE EXECUTION, ETC. The execution, delivery, and performance by the Borrower of each of the Loan Documents to which it is a party are within the powers of the Borrower, do not contravene the organizational documents, if any, of the Borrower, and do not (a) violate any law or regulation, or any order or decree of any court or governmental authority, (b) conflict with or result in a breach of, or constitute a default under, any indenture, mortgage, or deed of trust or any lease, agreement, or other instrument binding on the Borrower or any of its properties, except as would have a Material Adverse Effect upon the Borrower, or (c) require the consent, authorization by, or approval of or notice to or filing or registration with any governmental authority or other Person. This Agreement is, and each of the other Loan Documents to which the Borrower is or will be a party, when delivered hereunder or thereunder, will be, the legal, valid, and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, or similar laws affecting creditors' rights generally and by general principles of equity. SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is Solvent and will be Solvent upon the completion of all transactions contemplated to occur hereunder (including, without limitation, the Loan to be made on the Effective Date); the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral other than Permitted Liens; and the Borrower is, or will be at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer, and create a security interest therein, free and clear of any and all claims or liens in favor of any other Person other than Permitted Liens. SECTION 4.4. NO JUDGMENTS, LITIGATION. No judgments are outstanding against the Borrower nor is there now pending or, to the best of the Borrower's knowledge after reasonable inquiry, threatened any litigation, contested claim, or governmental proceeding by or against the Borrower except judgments and pending or threatened litigation, contested claims, and governmental proceedings which would not, in the aggregate, have a Material Adverse Effect on the Borrower. SECTION 4.5. NO DEFAULTS. The Borrower is not in default or has not received a notice of default under any material contract, lease, or commitment to which it is a party or by which it is bound. The Borrower knows of no dispute regarding any contract, lease, or commitment which could have a Material Adverse Effect on the Borrower. SECTION 4.6. COLLATERAL LOCATIONS. On the date hereof, each item of the Collateral is located at the place of business specified in the applicable Schedule. 5 SECTION 4.7. NO EVENTS OF DEFAULT. No Event of Default has occurred and is continuing nor has any event occurred which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. Except as permitted herein, none of the Collateral is subject to contractual obligations that may restrict or inhibit the Lender's rights or abilities to sell or dispose of the Collateral or any part thereof after the occurrence of an Event of Default. SECTION 4.9.PERFECTION AND PRIORITY OF SECURITY INTEREST. This Agreement creates a valid and, upon completion of all required filings of financing statements, perfected first priority and exclusive security interest in the Collateral, securing the payment of all the Obligations. SECTION 4.10. MODEL AND SERIAL NUMBERS. The Schedules set forth the true and correct model number and serial number of each item of Equipment that constitutes Collateral. SECTION 4.11. ACCURACY AND COMPLETENESS OF INFORMATION. All data, reports, and information heretofore, contemporaneously, or hereafter furnished by or on behalf of the Borrower in writing to the Lender or for purposes of or in connection with this Agreement or any other Loan Document, or any transaction contemplated hereby or thereby, are or will be true and accurate in all material respects on the date as of which such data, reports, and information are dated or certified and not incomplete by omitting to state any material fact necessary to make such data, reports, and information not misleading at such time (considered in the full context of all other information provided to Lender). There are no facts now known to the Borrower which individually or in the aggregate would reasonably be expected to have a Material Adverse Effect and which have not been specified herein, in the Financial Statements, or in any certificate, opinion, or other written statement previously furnished by the Borrower to the Lender. SECTION 4.12. PRICE OF EQUIPMENT. The cost of each item of Equipment does not exceed the fair and usual price for such type of equipment purchased in like quantity and reflects all discounts, rebates and allowances for the Equipment (including, without limitation, discounts for advertising, prompt payment, testing, or other services) given to the Borrower by the manufacturer, supplier, or any other person. SECTION 5. COVENANTS OF THE BORROWER. SECTION 5.1. EXISTENCE, ETC. The Borrower shall: (a) retain its existence and its current yearly accounting cycle, (b) maintain in full force and effect all licenses, bonds, franchises, leases, trademarks, patents, contracts, and other rights necessary or desirable to the profitable conduct of its business unless the failure to do so could not reasonably be expected to have a Material Adverse Effect on the Borrower, (c) continue in, and limit its operations to, the same general lines of business as those presently conducted by it, and (d) comply with all applicable laws and regulations of any federal, state, or local governmental authority, except for such laws and regulations the violations of which would not, in the aggregate, have a Material Adverse Effect on the Borrower. SECTION 5.2. NOTICE TO THE LENDER. As soon as possible, and in any event within five days after the Borrower obtains knowledge of the following, the Borrower will give written notice to the Lender of (a) any proceeding instituted or threatened to be instituted by or against the Borrower in any federal, state, local, or foreign court or before any commission or other regulatory body (federal, state, local, or foreign) involving a sum, together with the sum involved in all other similar proceedings, which would reasonably be expected to have a Material Adverse Effect on the Borrower, (b) any contract that is terminated or amended and which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower, (c) the occurrence of any Material Adverse Change with respect to the Borrower, and (d) the occurrence of any Event of Default or event or condition which, with notice or lapse of time or both, would constitute an Event of Default, together with a statement of the action which the Borrower has taken or proposes to take with respect thereto. 6 SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The Borrower will maintain books and records pertaining to the Collateral in such detail, form, and scope as the Lender shall require in its commercially reasonable judgment. The Borrower agrees that the Lender or its agents may enter upon the Borrower's premises at any time and from time to time during normal business hours, and at any time upon the occurrence and continuance of an Event of Default, for the purpose of inspecting the Collateral and any and all records pertaining thereto. SECTION 5.4. INSURANCE. The Borrower will maintain insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, and covering such risks as are at all times satisfactory to the Lender. All such policies shall be made payable to the Lender, in case of loss, under a standard non-contributory "lender" or "secured party" clause and are to contain such other provisions as the Lender may reasonably require to protect the Lender's interests in the Collateral and to any payments to be made under such policies. Certificates of insurance policies are to be delivered to the Lender, premium prepaid, with the loss payable endorsement in the Lender's favor, and shall provide for not less than thirty days' prior written notice to the Lender, of any alteration or cancellation of coverage. If the Borrower fails to maintain such insurance, the Lender may arrange for (at the Borrower's expense and without any responsibility on the Lender's part for) obtaining the insurance. Unless the Lender shall otherwise agree with the Borrower in writing, the Lender shall have the sole right, in the name of the Lender or the Borrower, to file claims under any insurance policies, to receive and give acquittance for any payments that may be payable thereunder, and to execute any endorsements, receipts, releases, assignments, reassignments, or other documents that may be necessary to effect the collection, compromise, or settlement of any claims under any such insurance policies. SECTION 5.5. TAXES. The Borrower will pay, when due, all taxes, assessments, claims, and other governmental charges ("Taxes") lawfully levied or assessed against the Borrower or the Collateral other than Taxes that are being currently contested in good faith by the Borrower by appropriate proceedings instituted and for which an adequate reserve is being maintained by the Borrower in accordance with GAAP. If any Taxes remain unpaid after the date fixed for the payment thereof, or if any lien shall be claimed therefor, then, with notice to the Borrower, but on the Borrower's behalf, the Lender may pay such Taxes, and the amount thereof shall be included in the Obligations. SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST CLAIMS; FEES ON COLLATERAL. The Borrower will defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein. The Borrower will not permit any notice creating or otherwise relating to liens on the Collateral or any portion thereof to exist or be on file in any public office other than Permitted Liens. The Borrower shall promptly pay, when payable, all transportation, storage, and warehousing charges and license fees, registration fees, assessments, charges, permit fees, and taxes (municipal, state, and federal) which may now or hereafter be imposed upon the ownership, leasing, renting, possession, sale, or use of the Collateral, other than taxes on or measured by the Lender's income and fees, assessments, charges, and Taxes which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are maintained to the extent required by GAAP. SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE, OR IDENTITY. The Borrower will not (a) change the location of its chief executive office or establish any place of business other than those specified herein or (b) move or permit the movement of any item of Collateral from the location specified in the applicable Schedule, except that the Borrower may change its chief executive office and keep Collateral at other locations within the United States provided that the Borrower has delivered to the Lender (i) prior written notice thereof and (ii) duly executed financing statements and other agreements and instruments (all in form and substance satisfactory to the Lender) necessary or, in the opinion of the Lender, desirable to perfect and maintain in favor of the Lender a first priority security interest in the Collateral. Notwithstanding anything to the contrary in the immediately preceding sentence, the Borrower may keep any Collateral consisting of motor vehicles or rolling stock at any location in the United States provided that the Lender's security interest in any such Collateral is conspicuously marked on the certificate of title thereof and the Borrower has complied with the provisions of Section 5.9. 7 SECTION 5.8. USE OF COLLATERAL; LICENSES; REPAIR. The Collateral shall be operated by competent, qualified personnel in connection with the Borrower's business purposes, for the purpose for which the Collateral was designed and in accordance with applicable operating instructions, laws, and government regulations, and the Borrower shall use every reasonable precaution to prevent loss or damage to the Collateral from fire and other hazards. The Collateral shall not be used or operated for personal, family, or household purposes. The Borrower shall procure and maintain in effect all orders, licenses, certificates, permits, approvals, and consents required by federal, state, or local laws or by any governmental body, agency, or authority in connection with the delivery, installation, use, and operation of the Collateral. The Borrower shall keep all of the Equipment in a satisfactory state of repair and satisfactory operating condition in accordance with industry standards, and will make all repairs and replacements when and where necessary and practical. The Borrower will not waste or destroy the Equipment or any part thereof, and will not be negligent in the care or use thereof. The Equipment shall not be annexed or affixed to or become part of any realty without the Lender's prior written consent. SECTION 5.9. FURTHER ASSURANCES. The Borrower will, promptly upon request by the Lender, execute and deliver or use its best efforts to obtain any document reasonably required by the Lender (including, without limitation, warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers, or subordination agreements with respect to the Obligations and the Collateral), give any notices, execute and file any financing statements, mortgages, or other documents (all in form and substance satisfactory to the Lender), mark any chattel paper, deliver any chattel paper or instruments to the Lender, and take any other actions that are reasonably necessary or, in the opinion of the Lender, desirable to perfect or continue the perfection and the first priority of the Lender's security interest in the Collateral, to protect the Collateral against the rights, claims, or interests of any Persons, or to effect the purposes of this Agreement. The Borrower hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Borrower where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. To the extent required under this Agreement, the Borrower will pay all costs incurred in connection with any of the foregoing. SECTION 5.10. NO DISPOSITION OF COLLATERAL. The Borrower will not in any way hypothecate or create or permit to exist any lien, security interest, charge, or encumbrance on or other interest in any of the Collateral, except for the lien and security interest granted hereby and Permitted Liens which are junior to the lien and security interest of the Lender, and the Borrower will not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise dispose of any of the Collateral. In the event the Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in violation of these provisions, the security interest of the Lender shall continue in such Collateral or part thereof notwithstanding such sale, transfer, assignment, exchange, or other disposition, and the Borrower will hold the proceeds thereof in a separate account for the benefit of the Lender. Following such a sale, the Borrower will transfer such proceeds to the Lender in kind. SECTION 5.11. NO LIMITATION ON LENDER'S RIGHTS. The Borrower will not enter into any contractual obligations which may restrict or inhibit the Lender's rights or ability to sell or otherwise dispose of the Collateral or any part thereof. SECTION 5.12. PROTECTION OF COLLATERAL. Upon notice to the Borrower (provided that if an Event of Default has occurred and is continuing the Lender need not give any notice), the Lender shall have the right at any time to make any payments and do any other acts the Lender may deem necessary to protect its security interests in the Collateral, including, without limitation, the rights to satisfy, purchase, contest, or compromise any encumbrance, charge, or lien which, in the reasonable judgment of the Lender, appears to be prior to or superior to the security interests granted hereunder, and appear in, and defend any action or proceeding purporting to affect its security interests in, or the value of, any of the Collateral. The Borrower hereby agrees to reimburse the Lender for all payments made and expenses incurred under this Agreement including reasonable fees, expenses, and disbursements of attorneys and paralegals (including the allocated costs of in-house counsel) acting for the Lender, including any of the foregoing payments under, or acts taken to protect its security interests in, any of the Collateral, which amounts shall be secured under this Agreement, and agrees it shall be bound by any payment made or act taken by the Lender hereunder absent the Lender's gross negligence or willful misconduct. The Lender shall have no obligation to make any of the foregoing payments or perform any of the foregoing acts. 8 SECTION 5.13. DELIVERY OF ITEMS. The Borrower will (a) promptly (but in no event later than three Business Days) after its receipt thereof, deliver to the Lender any documents or certificates of title issued with respect to any property included in the Collateral, and any promissory notes, letters of credit or instruments related to or otherwise in connection with any property included in the Collateral, which in any such case come into the possession of the Borrower, or shall cause the issuer thereof to deliver any of the same directly to the Lender, in each case with any necessary endorsements in favor of the Lender and (b) deliver to the Lender as soon as available copies of any and all press releases and other similar communications issued by the Borrower. SECTION 5.14. SOLVENCY. The Borrower shall be and remain Solvent at all times. SECTION 5.15. FUNDAMENTAL CHANGES. The Borrower shall not (a) amend or modify its name, unless the Borrower delivers to the Lender thirty days prior to any such proposed amendment or modification written notice of such amendment or modification and within ten days before such amendment or modification delivers executed Uniform Commercial Code financing statements (in form and substance satisfactory to the Lender) or (b) merge or consolidate with any other entity or make any material change in its capital structure, in each case without the Lender's prior written consent which shall not be unreasonably withheld. SECTION 5.16. ADDITIONAL REQUIREMENTS. The Borrower shall take all such further actions and execute all such further documents and instruments as the Lender may reasonably request. SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction in full of all Obligations, the Borrower shall deliver to the Lender the following financial information: SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as available, but not later than 120 days after the end of each fiscal year of the Borrower and its consolidated subsidiaries, the consolidated balance sheet, income statement, and statements of cash flows and shareholders equity for the Borrower and its consolidated subsidiaries (the "Financial Statements") for such year, reported on by independent certified public accountants without an adverse qualification; and SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon as available, but not later than 60 days after the end of each of the first three fiscal quarters in any fiscal year of the Borrower and its consolidated subsidiaries, the Financial Statements for such fiscal quarter, together with a certification duly executed by a responsible officer of the Borrower that such Financial Statements have been prepared in accordance with GAAP and are fairly stated in all material respects (subject to normal year-end audit adjustments). SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an Event of Default hereunder: (a) the Borrower shall fail to pay within five days of when due any amount required to be paid by the Borrower under or in connection with any Note and this Agreement; (b) any representation or warranty made or deemed made by the Borrower under or in connection with any Loan Document or any Financial Statement shall prove to have been false or incorrect in any material respect when made; (c) the Borrower shall fail to perform or observe (i) any of the terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14, or 5.15 hereof or (ii) any other term, covenant, or agreement contained in any Loan Document (other than the other Events of Default specified in this Section 7) and such failure remains unremedied for the earlier of fifteen days from (A) the date on which the Lender has given the Borrower written notice of such failure and (B) the date on which the Borrower knew or should reasonably have known of such failure; (d) any provision of any Loan Document to which the Borrower is a party shall for 9 any reason cease to be valid and binding on the Borrower, or the Borrower shall so state; (e) dissolution, liquidation, winding up, or cessation of the Borrower's business, failure of the Borrower generally to pay its debts as they mature, admission in writing by the Borrower of its inability generally to pay its debts as they mature, or calling of a meeting of the Borrower's creditors for purposes of compromising any of the Borrower's debts; (f) the commencement by or against the Borrower of any bankruptcy, insolvency, arrangement, reorganization, receivership, or similar proceedings under any federal or state law and, in the case of any such involuntary proceeding, such proceeding remains undismissed or unstayed for forty-five days following the commencement thereof, or any action by the Borrower is taken authorizing any such proceedings; (g) an assignment for the benefit of creditors is made by the Borrower, whether voluntary or involuntary, the appointment of a trustee, custodian, receiver, or similar official for the Borrower or for any substantial property of the Borrower, or any action by the Borrower authorizing any such proceeding; (h) the Borrower shall default in (i) the payment of principal or interest on any indebtedness in excess of $50,000 (other than the Obligations) beyond the period of grace, if any, provided in the instrument or agreement under which such indebtedness was created; or (ii) the observance or performance of any other agreement or condition relating to any such indebtedness or contained in any instrument or agreement relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such indebtedness to cause, with the giving of notice if required, such indebtedness to become due prior to its stated maturity and such default shall not be remedied, cured, waived or consented to within the period of grace thereto; (i) the Borrower suffers or sustains a Material Adverse Change; (j) any tax lien, other than a Permitted Lien, is filed of record against the Borrower and is not bonded or discharged within five Business Days; (k) any final judgment which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower and such judgment shall not be stayed, vacated, bonded, or discharged within sixty days; (l) any material covenant, agreement, or obligation, as determined in the sole discretion of the Lender, made by the Borrower and contained in or evidenced by any of the Loan Documents shall cease to be enforceable, or shall be determined to be unenforceable, in accordance with its terms; the Borrower shall deny or disaffirm the Obligations under any of the Loan Documents or any liens granted in connection therewith; or any liens granted on any of the Collateral in favor of the Lender shall be determined to be void, voidable, or invalid, or shall not be given the priority contemplated by this Agreement; or (m) there is a change in more than 35% of the ownership of any equity interests of the Borrower on the date hereof or more than 35% of such interests become subject to any contractual, judicial, or statutory lien, charge, security interest, or encumbrance. SECTION 8. REMEDIES. If any Event of Default shall have occurred and be continuing: (a) The Lender may, without prejudice to any of its other rights under any Loan Document or Applicable Law, declare all Obligations to be immediately due and payable (except with respect to any Event of Default set forth in Section 7(f) hereof, in which case all Obligations shall automatically become immediately due and payable without necessity of any declaration) without presentment, representation, demand of payment, or protest, which are hereby expressly waived. (b) The Lender may take possession of the Collateral and, for that purpose may 10 enter, with the aid and assistance of any person or persons, any premises where the Collateral or any part hereof is, or may be placed, and remove the same. (c) The obligation of the Lender, if any, to make additional Loans or financial accommodations of any kind to the Borrower shall immediately terminate. (d) The Lender may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein (or in any Loan Document) or otherwise available to it, all the rights and remedies of a secured party under the applicable Uniform Commercial Code (the "Code") whether or not the Code applies to the affected Collateral and also may (i) require the Borrower to, and the Borrower hereby agrees that it will at its expense and upon request of the Lender forthwith, assemble all or part of the Collateral as directed by the Lender and make it available to the Lender at a place to be designated by the Lender that is reasonably convenient to both parties and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Lender's offices or elsewhere, for cash, on credit, or for future delivery, and upon such other terms as the Lender may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (e) All cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Lender, be held by the Lender as collateral for, or then or at any time thereafter applied in whole or in part by the Lender against, all or any part of the Obligations in such order as the Lender shall elect. Any surplus of such cash or cash proceeds held by the Lender and remaining after the full and final payment of all the Obligations shall be paid over to the Borrower or to such other Person to which the Lender may be required under applicable law, or directed by a court of competent jurisdiction, to make payment of such surplus. SECTION 9. MISCELLANEOUS PROVISIONS. SECTION 9.1. NOTICES. Except as otherwise provided herein, all notices, approvals, consents, correspondence, or other communications required or desired to be given hereunder shall be given in writing and shall be delivered by overnight courier, hand delivery, or certified or registered mail, postage prepaid, if to the Lender, then to Transamerica Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention: Legal Department, with a copy to the Lender at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department, and if to the Borrower, then to 5935 Darwin Court, Carlsbad, California 92008, or such other address as shall be designated by the Borrower or the Lender to the other party in accordance herewith. All such notices and correspondence shall be effective when received. SECTION 9.2. HEADINGS. The headings in this Agreement are for purposes of reference only and shall not affect the meaning or construction of any provision of this Agreement. SECTION 9.3. ASSIGNMENTS. The Borrower shall not have the right to assign any Note or this Agreement or any interest therein unless the Lender shall have given the Borrower prior written consent and the Borrower and its assignee shall have delivered assignment documentation in form and substance satisfactory to the Lender in its sole discretion. The Lender may assign its rights and delegate its obligations under any Note or this Agreement. SECTION 9.4. AMENDMENTS, WAIVERS, AND CONSENTS. Any amendment or waiver of any provision of this Agreement and any consent to any departure by the Borrower from any provision of this Agreement shall be effective only by a writing signed by the Lender and shall bind and benefit the Borrower and the Lender and their respective successors and assigns, subject, in the case of the Borrower, to the first sentence of Section 9.3. 11 SECTION 9.5. INTERPRETATION OF AGREEMENT. Time is of the essence in each provision of this Agreement of which time is an element. All terms not defined herein or in a Note shall have the meaning set forth in the applicable Code, except where the context otherwise requires. To the extent a term or provision of this Agreement conflicts with any Note, or any term or provision thereof, and is not dealt with herein with more specificity, this Agreement shall control with respect to the subject matter of such term or provision. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant in determining the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. SECTION 9.6. CONTINUING SECURITY INTEREST. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the indefeasible payment in full of the Obligations, (ii) be binding upon the Borrower and its successors and assigns and (iii) inure, together with the rights and remedies of the Lender hereunder, to the benefit of the Lender and its successors, transferees, and assigns. SECTION 9.7. REINSTATEMENT. To the extent permitted by law, this Agreement and the rights and powers granted to the Lender hereunder and under the Loan Documents shall continue to be effective or be reinstated if at any time any amount received by the Lender in respect of the Obligations is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation, or reorganization of the Borrower or upon the appointment of any receiver, intervenor, conservator, trustee, or similar official for the Borrower or any substantial part of its assets, or otherwise, all as though such payments had not been made. SECTION 9.8. SURVIVAL OF PROVISIONS. All representations, warranties, and covenants of the Borrower contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and final payment and performance by the Borrower of the Obligations secured hereby. SECTION 9.9. INDEMNIFICATION. The Borrower agrees to indemnify and hold harmless the Lender and its directors, officers, agents, employees, and counsel from and against any and all costs, expenses, claims, or liability incurred by the Lender or such Person hereunder and under any other Loan Document or in connection herewith or therewith, unless such claim or liability shall be due to willful misconduct or gross negligence on the part of the Lender or such Person. SECTION 9.10. COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but both of which shall together constitute one and the same instrument. This Agreement and each of the other Loan Documents and any notices given in connection herewith or therewith may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same was a fully executed and delivered original manual counterpart. SECTION 9.11. SEVERABILITY. In case any provision in or obligation under this Agreement or any Note or any other Loan Document shall be invalid, illegal, or unenforceable in any jurisdiction, the validity, legality, and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 9.12. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay of the Lender to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by the Lender of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy. SECTION 9.13. ENTIRE AGREEMENT. The Borrower and the Lender agree that this Agreement, the Schedule hereto, and the Commitment Letter are the complete and exclusive statement and 12 agreement between the parties with respect to the subject matter hereof, superseding all proposals and prior agreements, oral or written, and all other communications between the parties with respect to the subject matter hereof. Should there exist any inconsistency between the terms of the Commitment Letter and this Agreement, the terms of this Agreement shall prevail. SECTION 9.14. SETOFF. In addition to and not in limitation of all rights of offset that the Lender may have under Applicable Law, and whether or not the Lender has made any demand or the Obligations of the Borrower have matured, the Lender shall have the right to appropriate and apply to the payment of the Obligations of the Borrower all deposits and other obligations then or thereafter owing by the Lender to or for the credit or the account of the Borrower. SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 9.16. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. SECTION 9.17. VENUE; SERVICE OF PROCESS. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO RIGHTS AND REMEDIES. 13 IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement to be duly executed and delivered by its proper and duly authorized officer as of the date first set forth above. THE IMMUNE RESPONSE CORPORATION By: /s/ Howard Sampson ---------------------------------- Name: Howard Sampson Title: Chief Financial Officer Federal Tax ID No.: 33-0255679 I.R.C. INC. By: /s/ Howard Sampson ---------------------------------- Name: Howard Sampson Title: Chief Financial Officer Federal Tax ID No.: 33-0324090 Accepted as of the 30th day of September, 1999 ----- TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Gary P. Moro - ---------------------------------------------- Name: Gary P. Moro Title: Senior Vice President 14 SCHEDULE A TO LOAN AND SECURITY AGREEMENT Other Places of Business and Locations of Collateral (Section 4.16): Prior Names of Obligor (Section 4.7): Prior Trade Names of Obligor (Section 4.7): Existing Trade Names of Obligor (Section 4.7): Federal Tax ID (Section 4.7): 15 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS EXTRACTED FROM ITEM 1 OF FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999, FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 2,409 19,810 0 0 0 23,319 18,292 7,831 34,776 8,394 0 9,557 0 62 15,350 34,776 0 16,927 0 30,802 0 0 0 (4,849) 0 (4,849) 0 0 0 (4,849) (.20) (.20)
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