-----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, L/cdVmV0wQ66YnIsPELlLEzJW3xigHCB3x9XyeWXbCPgw3s7IcZUGCbcW4ZIVRuS bNHdUx8cWbh+eQY1UlFA9w== /in/edgar/work/20000811/0000891618-00-004338/0000891618-00-004338.txt : 20000921 0000891618-00-004338.hdr.sgml : 20000921 ACCESSION NUMBER: 0000891618-00-004338 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIRON CENTRAL INDEX KEY: 0000949173 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 770309686 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20815 FILM NUMBER: 695226 BUSINESS ADDRESS: STREET 1: 297 N BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6509196500 MAIL ADDRESS: STREET 1: 297 NORTH BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 e10-q.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2000 1 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 June 30, 2000 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 0-20815 AVIRON (Exact name of registrant as specified in its charter) DELAWARE 77-0309686 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 297 North Bernardo Avenue, Mountain View, California 94043 (Address of principal executive offices including zip code) (650) 919-6500 (Registrant's telephone number, including area code) --------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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.
Common Stock $.001 par value 21,927,904 shares ---------------------------- ----------------------- (Class) (Outstanding at August 8, 2000)
-1- 2 AVIRON TABLE OF CONTENTS
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION 3 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (UNAUDITED). 3 Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations for the three- and six-month periods ended June 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13 PART II. OTHER INFORMATION 14 ITEM 1. LEGAL PROCEEDINGS. 14 ITEM 2. CHANGES IN SECURITIES. 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 16 ITEM 5. OTHER INFORMATION. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18 SIGNATURES 19 EXHIBIT INDEX 20
-2- 3 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES AVIRON CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, 2000 1999 ------------- ------------- (UNAUDITED) (NOTE 1) ASSETS Current Assets: Cash and cash equivalents ....................................................... $ 76,135 $ 28,081 Short-term investments .......................................................... 37,432 24,235 Accounts receivable ............................................................. 3,768 3,241 Inventory ....................................................................... 2,082 2,082 Prepaid expenses and other current assets ....................................... 1,179 1,009 ------------- ------------- Total current assets .......................................................... 120,596 58,648 Property and equipment, net ....................................................... 24,800 25,635 Deposits and other assets ......................................................... 6,762 7,411 ------------- ------------- TOTAL ASSETS ...................................................................... $ 152,158 $ 91,694 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable ................................................................ $ 1,593 $ 3,038 Accrued compensation ............................................................ 1,985 1,739 Accrued clinical trial costs .................................................... 1,076 846 Accrued interest ................................................................ 1,438 1,438 Accrued expenses and other liabilities .......................................... 5,078 6,591 Current portion of capital lease obligations .................................... 38 101 Current portion of long term debt ............................................... 2,846 2,680 ------------- ------------- Total current liabilities ..................................................... 14,054 16,433 Deferred rent ..................................................................... 1,888 2,214 Capital lease obligations, noncurrent ............................................. -- 9 Long-term debt, net of current portion ............................................ 111,191 112,657 Commitments and contingencies Stockholders' Equity (Deficit): Preferred stock, $0.001 par value; 5,000,000 shares authorized, issuable in series; none outstanding at June 30, 2000 and December 31, 1999 ............................................................. -- -- Common stock, $0.001 par value; 100,000,000 shares authorized as of June 30, 2000; 30,000,000 shares authorized as of December 31,1999; 21,357,879 and 16,669,018 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively ...................................... 21 17 Additional paid-in capital ...................................................... 257,001 143,822 Notes receivable from stockholders .............................................. (50) (83) Deferred compensation ........................................................... (74) (96) Accumulated deficit ............................................................. (231,873) (183,279) ------------- ------------- Total stockholders' equity (deficit) .............................................. 25,025 (39,619) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) .............................. $ 152,158 $ 91,694 ============= =============
See accompanying notes -3- 4 AVIRON CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- REVENUES: Contract revenues and grants ................ $ 2,378 $ 2,944 $ 5,035 $ 18,475 -------- -------- -------- -------- OPERATING EXPENSES: Research and development .................... 17,476 14,362 35,070 28,367 Acquisition of in-process research and development ........................... -- -- 10,904 -- General, administrative and marketing ....... 3,369 3,151 5,937 5,833 -------- -------- -------- -------- TOTAL OPERATING EXPENSES ...................... 20,845 17,513 51,911 34,200 -------- -------- -------- -------- LOSS FROM OPERATIONS .......................... (18,467) (14,569) (46,876) (15,725) -------- -------- -------- -------- OTHER INCOME/(EXPENSE): Interest income ............................. 1,648 1,062 2,370 2,273 Interest expense ............................ (2,056) (1,613) (4,145) (3,187) -------- -------- -------- -------- TOTAL OTHER INCOME (EXPENSE) net ........................................ (408) (551) (1,775) (914) -------- -------- -------- -------- NET LOSS ...................................... $(18,875) $(15,120) $(48,651) $(16,639) ======== ======== ======== ======== Basic and diluted net loss per share .......... $ (0.90) $ (0.96) $ (2.55) $ (1.06) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share .......................... 21,039 15,749 19,067 15,726 ======== ======== ======== ========
See accompanying notes -4- 5 AVIRON CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ..................................................................... $ (48,651) $ (16,639) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 2,770 2,193 Amortization of convertible debt offering costs ....................... 282 288 Amortization of deferred compensation ................................. 22 76 Issuance of warrant for acquisition of in-process research and development .................................................... 10,904 -- Changes in assets and liabilities: Accounts receivable ................................................... (527) (2,735) Inventory ............................................................. -- (956) Prepaid expenses and other current assets ............................. (70) 216 Deposits and other assets ............................................. 765 (995) Accounts payable ...................................................... (1,445) 1,137 Accrued expenses and other liabilities ................................ (724) 186 Deferred rent ......................................................... (326) 600 --------- --------- Net cash used in operating activities ........................................ (37,000) (16,629) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments .............................................. (232,689) (28,536) Maturities of investments ............................................. 219,551 40,138 Loan to officer ....................................................... (500) -- Expenditures for property and equipment ............................... (1,935) (7,115) --------- --------- Net cash (used in) provided by investing activities .......................... (15,573) 4,487 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations ....................... (72) (192) Principal payments on long-term debt .................................. (1,300) -- Notes to shareholders collected ....................................... 33 -- Repurchase of common stock ............................................ (4) -- Proceeds from issuance of common stock, net ........................... 101,970 366 --------- --------- Net cash provided by financing activities .................................... 100,627 174 --------- --------- Net increase (decrease) in cash and cash equivalents ......................... 48,054 (11,968) CASH AND CASH EQUIVALENTS, at beginning of period ............................ 28,081 28,164 --------- --------- CASH AND CASH EQUIVALENTS, at end of period .................................. $ 76,135 $ 16,196 ========= ========= Supplemental schedule of non-cash financing activities: Issuance of warrant for legal settlement ............................ 313 -- Supplemental disclosures of cash flow information: Cash paid for interest .............................................. 3,814 2,907
See accompanying notes -5- 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated financial statements include the accounts of Aviron and its wholly owned subsidiary, Aviron UK Limited. All significant inter-company accounts and transactions have been eliminated. The financial information as of June 30, 2000 and for the three-month and six-month periods ended June 30, 2000 and 1999 are unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which Aviron considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. The balance sheet data at December 31, 1999 is derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 1999. The results of our operations for any interim period are not necessarily indicative of the results of our operations for a full fiscal year. Comprehensive Income (Loss) Comprehensive income (loss) is not presented separately as it approximates the net loss presented in the statement of operations for the three-month and six-month periods ended June 30, 2000 and 1999. Net Loss Per Share We calculate net loss per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share, or SFAS 128. SFAS 128 requires the presentation of basic earnings (loss) per share and diluted earnings per share, if more dilutive, for all periods presented. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share has not been presented separately as, given our net loss position, the result would be anti-dilutive. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133, which is required to be adopted for the year ending December 31, 2001. Management does not anticipate that the adoption of SFAS 133 will have a significant effect on the results of operations or the financial position of Aviron. In December 1999, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB 101, which includes the SEC staff's view on accounting for non-refundable up-front fees received in connection with collaboration agreements. We have determined that, pursuant to the guidance in SAB 101, a change in accounting will be necessary for the $15.0 million up-front license fee received from Wyeth Lederle Vaccines, or Wyeth, a business unit of American Home Products Corporation, or AHP, which was recognized as revenue in the first quarter of 1999. Based on recent guidance from the SEC staff on the implementation of SAB 101, we expect to make this change in our accounting in the fourth quarter of 2000, which will result in a charge to operations for the cumulative effect of the change as of January 1, 2000. This amount will be recorded as -6- 7 deferred revenue and recognized as revenue ratably over 2000 and future periods. We have not yet determined the precise period over which the revenue will be recognized pending additional implementation guidance from the SEC. Prior financial statements will not be restated. 2. Financing Transactions during the six-months ended June 30, 2000. On January 11, 2000, we received a commitment for up to $48.0 million in equity financing from Acqua Wellington North America Equities Fund, Ltd., or Acqua Wellington, in amounts of up to $4.0 million per month, at our discretion, through January 2001. On June 9, 2000, Acqua Wellington increased its equity financing commitment to $8.0 million per month and increased its total commitment from $48.0 million to $84.0 million through February 2001. The commitment is reduced by the monthly allocation whether we draw on the commitment or not. These funds are available at our discretion at a small discount to the market price of our common stock with the market price to be determined based on the volume weighted average market price for the 18 trading days ending two business days prior to sale. The following table summarizes Acqua Wellington financing transactions completed during 2000.
Date Sold # of Shares Price Per Share Aggregate Proceeds --------- ----------- --------------- ------------------ Transactions during six months ended June 30, 2000: March 6, 2000 253,935 $31.50 $ 8.0 million April 13, 2000 144,185 27.74 4.0 million May 12, 2000 348,983 22.92 8.0 million June 12, 2000 339,955 23.53 8.0 million --------- ------------- Total 1,087,058 28.0 million --------- ------------- Transactions subsequent to June 30, 2000: July 11, 2000 270,013 29.63 8.0 million August 8, 2000 262,200 30.51 8.0 million
As of June 30, 2000, $64.0 million of these funds were available, with $48.0 million available after the financings in July and August 2000. On February 3, 2000, we sold 309,995 shares of common stock to Ridgeway Investment, Ltd., or Ridgeway, for total proceeds of $6.0 million, or $19.36 per share. This share price was based on the volume weighted average market price for the 18 trading days ending on February 1, 2000. On February 3, 2000, we sold 103,322 shares of common stock to AHP for total proceeds of $2.0 million at the same share price and terms as those for the Ridgeway investment described above. On March 6, 2000, we sold 121,212 shares of common stock to AHP for total proceeds of $2.0 million, or $16.50 per share, which were sold pursuant to a December 30, 1999 agreement with AHP. On April 10, 2000, we sold 2,200,000 shares of our common stock in a follow-on public offering at a price of $22.50 per share. Concurrent with this public offering, AHP purchased 686,160 shares of common stock at $21.38 per share, the price equal to the net proceeds per share to the company in the public offering. Aggregate net proceeds to the Company from both the public offering and the AHP transaction, after expenses and underwriters' discounts and commissions, were approximately $60.7 million. 3. Warrants In February 2000, we amended our licensing agreement for cold adapted influenza virus vaccine technology with the University of Michigan to accelerate the issuance of a warrant to the university. As a result of this amendment, we granted the university a warrant to purchase 340,000 shares of our common stock at an exercise price of $10.00 per share and, as the related technology is under development, we recorded a one-time (non-cash) charge of approximately $10.9 million in the first quarter of 2000. Upon the date of the first commercial sale of FluMist(TM), if 1.25 percent of the common stock then outstanding exceeds 340,000 shares, we will issue an additional warrant on the same terms, allowing the university to -7- 8 purchase a number of shares equal to the difference between 340,000 shares and 1.25 percent of the common stock outstanding. On June 23, 2000, as part of a legal Settlement Agreement with ARCH Development Corporation, or ARCH, we issued to ARCH a warrant to purchase 14,077 shares of our common stock at an exercise price of $23.00 per share. 4. Stock Options To motivate our employees and align their interests with stockholders, on February 9, 2000, we granted options for the purchase of a total of 1,264,900 shares of common stock at an exercise price of $24.00, the closing price of our common stock on February 8, 2000. Approximately 27 percent of the options become exercisable upon the acceptance by the U.S. Food and Drug Administration, or FDA, of our Biologics License Application, or BLA, submission for FluMist and another 40 percent become exercisable when FluMist is approved for marketing in the United States. These options will become exercisable in February 2005 unless these events related to FluMist occur earlier. The final 33 percent of these options will become exercisable when FluMist is approved for marketing in the United States, but only if this event occurs in 2001. If FDA approval for FluMist is not obtained by December 31, 2001, these options will be cancelled. If the final 33 percent of these options become exercisable, we will incur compensation expense in the period in which they become exercisable in an amount equal to the difference between the exercise price of the options and the then current fair market value of our common stock. Through June 30, 2000, we have granted options for the purchase of an additional 180,600 shares of common stock at prices ranging from $24.25 to $40.56 with all of the same vesting provisions. 5. Related Party Transaction In January 2000, we made a non-interest bearing loan to C. Boyd Clarke, our President and Chief Executive Officer, in the amount of $500,000. The loan, which is secured by real property, is repayable in equal annual installments over a five year period. -8- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in our Annual Report on Form 10-K, as amended, in the section entitled "Business Risks." OVERVIEW We are a biopharmaceutical company focused on the prevention of disease through innovative vaccine technology. We are currently focusing our product development and commercialization efforts on our lead product candidate, FluMist(TM), an investigational intranasal live virus influenza vaccine. Our goal is to become a leader in the discovery, development, manufacture and marketing of innovative vaccines which are safe, effective and economical enough to merit their use in immunization programs targeting the general population. Our vaccine development programs are based both on techniques for producing weakened live virus vaccines and on our proprietary genetic engineering technologies. Live virus vaccines, including those for smallpox, polio, measles, mumps, rubella and chicken pox, have had a long record of preventing disease. FluMist According to the Centers for Disease Control and Prevention, or CDC, epidemics of influenza occur during the winter months nearly every year. In the United States, influenza epidemics are responsible for approximately 20,000 deaths and cause illness in 10-20 percent of the population each year. Influenza viruses also can cause global epidemics of disease during which rates of illness and death from influenza-related complications can increase dramatically. Influenza viruses cause disease in all age groups. Rates of infection are highest among children, but rates of serious illness and death are highest among persons over age 64, and persons of any age who have medical conditions that place them at high risk for complications from influenza. FluMist is designed to prevent influenza. FluMist induces an immune response similar to that resulting from natural infection. With FluMist, the immune response is induced in the nose and throat, the point of contact for airborne infections such as influenza, as well as in the bloodstream. FluMist has been shown to provide a high protection rate against influenza in Phase 3 clinical trials in children and healthy adults. In addition, reductions in days of illness, antibiotic use, health resource use and missed work because of illness were observed in a trial conducted in healthy working adults. We are developing and intend to commercialize FluMist primarily in collaboration with our partner Wyeth Lederle Vaccines, or Wyeth, a business unit of the pharmaceutical division of American Home Products Corporation, or AHP. FluMist BLA Submission We are in the process of completing the requirements we believe necessary to support a Biologics License Application, or BLA, submission for FluMist to the U.S. Food and Drug Administration, or FDA, during the fourth quarter of 2000. This process includes validating our manufacturing processes, facilities and equipment, and tests used to characterize and release our product. Cooperative Research and Development Agreement On June 23, 2000, we announced the extension of our cooperative research and development agreement, or CRADA, for the development of FluMist with the National Institute of Allergy and Infectious Diseases, or NIAID, of the National Institutes of Health, or NIH, through June 2003. -9- 10 Other Products in Development We also have a number of other vaccines in various stages of development: - a vaccine to prevent cytomegalovirus, or CMV, disease began clinical testing during the second quarter of 2000. CMV is the leading infectious cause of birth defects in the United States; - a parainfluenza virus type 3, or PIV, vaccine to prevent the most common cause of croup, a respiratory infection in children, for which we have completed a successful Phase 2 clinical trial; and - an Epstein-Barr virus, or EBV, vaccine to prevent infectious mononucleosis for which our collaborative partner, SmithKline Beecham Biologicals S.A., or SmithKline Beecham, has completed a successful Phase 1 clinical trial. We are using our proprietary technologies to develop new vaccine candidates, including vaccines for herpes simplex virus type 2, or HSV, the virus responsible for genital herpes, and respiratory syncytial virus, or RSV, a virus responsible for severe lower respiratory infection in infants and young children. Personnel Announcements On April 14, 2000, we announced that Charlene A. Friedman had been appointed Vice President and General Counsel. On May 11, 2000, we announced that Alan C. Mendelson had been appointed to our Board of Directors, that Jane E. Shaw, Ph.D. had resigned from our Board of Directors and that Charlene A. Friedman had been named our Corporate Secretary. On May 11, 2000, we announced that Edward J. Arcuri, Ph.D. had been promoted to the newly created position of Senior Vice President, Operations. On August 7, 2000 we announced the appointments of David M. Wonnacott as Vice President, Regulatory Affairs and Charles F. Katzer as Vice President, Manufacturing. Cumulative Losses Since our inception in April 1992, we have devoted nearly all of our resources to our research and development programs. To date, we have not generated any revenues from the sale of products and do not expect to generate any revenues from the sale of products until 2001 at the earliest. We have incurred cumulative net losses of approximately $231.9 million as of June 30, 2000, and expect to incur substantial operating losses over at least the next several years. Business Risks Our business is subject to significant risks, including but not limited to manufacturing uncertainties; the risks inherent in our research and development efforts, including preclinical testing and clinical trials; uncertainties associated both with obtaining and enforcing our patents and with the patent rights of others; the lengthy, expensive and uncertain process of seeking regulatory approvals; uncertainties regarding government reforms and product pricing and reimbursement levels; technological change and competition; and dependence on third parties. Even if product candidates appear promising at early stages of development, they may not reach the market for numerous reasons. Such reasons include the possibilities that the products will not be found to be safe or effective during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a commercial scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. See also section entitled "Business Risks" in our Annual Report on Form 10-K, as amended. This Form 10-Q contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. When used herein, the words "expects," "anticipates," "estimates," "intends," "plans" and similar expressions are intended to identify such forward-looking statements. Our actual results could differ materially from the results discussed in the forward-looking statements. -10- 11 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Revenues We earned $2.4 million in revenue for the three months ended June 30, 2000, compared to $2.9 million for the three months ended June 30, 1999. In the second quarters of 2000 and 1999, revenues were comprised principally of expense reimbursements for clinical and commercialization expenses from Wyeth related to the clinical development of FluMist, under the terms of our FluMist collaboration agreement. Operating Expenses Research and development expenses increased to $17.5 million for the three months ended June 30, 2000, from $14.4 million for the three months ended June 30, 1999. The increase was due primarily to an increase in development activities, documentation, validation and other commercial scale-up expenses associated with FluMist. These increases were partially offset by reductions in spending on clinical trials. We expect our expenses to increase in the future as development and manufacturing activities expand in preparation for potential commercialization of FluMist. General, administrative and marketing expenses rose to $3.4 million in the three months ended June 30, 2000 from $3.2 million for the three months ended June 30, 1999 due to an increase in infrastructure and support activities. These expenses are expected to increase in the future in support of the potential commercialization of FluMist. Net Interest Income (Expense) Net interest expense decreased to $408,000 in the three months ended June 30, 2000, as compared to $551,000 for the three months ended June 30, 1999. The decrease in net interest expense reflects the increase in interest expense in connection with debt financing in December 1999 which is more than offset by the increase in interest income due to higher average balances of cash, cash equivalents, and investments resulting from the financing transactions in December 1999 and during the six months ended June 30, 2000. SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Revenues We earned $5.0 million in revenue for the six months ended June 30, 2000, compared to $18.5 million for the six months ended June 30, 1999. The 2000 revenues were comprised primarily of amounts earned from Wyeth under the FluMist collaboration agreement combined with other revenues from other contracts and research grants. The 1999 revenues were comprised primarily of amounts earned from Wyeth under the FluMist collaboration agreement, which included a non-refundable initial payment in the amount of $15.0 million and $2.8 million in payments related to the clinical development of FluMist, combined with other revenues from other contracts and research grants. Operating Expenses Research and development expenses increased to $35.1 million for the six months ended June 30, 2000, from $28.4 million for the six months ended June 30, 1999. The increase was due primarily to an increase in development activities, documentation, validation and other commercial scale-up expenses associated with FluMist. These increases were partially offset by reductions in spending on clinical trials. We expect our expenses to increase in the future as development and manufacturing activities expand in preparation for potential commercialization of FluMist. In addition, we recognized a one-time, non-cash charge for the acquisition of in-process research and development in the amount of $10.9 million in the first quarter of -11- 12 2000 due to the amendment of our agreement with the University of Michigan to accelerate the issuance of a warrant to the university which was originally granted in connection with our license to cold-adapted influenza technology which is the basis for FluMist. General, administrative and marketing expenses rose to $5.9 million in the six months ended June 30, 2000, compared to $5.8 million for the six months ended June 30, 1999, due to an increase in infrastructure and support activities. These expenses are expected to increase in the future in support of the potential commercialization of FluMist. Net Interest Income (Expense) Net interest expense increased to $1.8 million in the six months ended June 30, 2000, as compared to $914,000 for the six months ended June 30, 1999. The increase in net interest expense reflects the increase in interest expense in connection with debt financing in December 1999, which is partially offset by the increase in interest income due to higher yields on average balances of cash, cash equivalents, and investments during the six months ended June 30, 2000, as compared with the same period of 1999. Recent Accounting Pronouncement In December 1999, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB 101, which includes the SEC staff's view on accounting for non-refundable up-front fees received in connection with collaboration agreements. We have determined that, pursuant to the guidance in SAB 101, a change in accounting will be necessary for the $15.0 million up-front license fee received from Wyeth, which was recognized as revenue in the first quarter of 1999. Based on recent guidance from the SEC staff on the implementation of SAB 101, we expect to make this change in our accounting in the fourth quarter of 2000, which will result in a charge to operations for the cumulative effect of the change as of January 1, 2000. This amount will be recorded as deferred revenue and recognized as revenue ratably over 2000 and future periods. We have not yet determined the precise period over which the revenue will be recognized pending additional implementation guidance from the SEC. Prior financial statements will not be restated. LIQUIDITY AND CAPITAL RESOURCES We had cash, cash equivalents and marketable securities, at June 30, 2000, of approximately $113.6 million. In order to preserve principal and maintain liquidity, our funds are invested in United States Treasury and agency obligations, highly rated corporate obligations and other liquid investments. We have financed our operations since inception primarily through sales of equity, convertible debt securities, and other debt financing. Through December 31, 1999, we had raised approximately $263.0 million from such activities, net of offering expenses. During the six months ended June 30, 2000, we raised approximately $102.0 million through the sale of common stock, bringing the total raised through financing activities since inception to approximately $365.0 million. On January 11, 2000, we received a commitment for up to $48.0 million in equity financing from Acqua Wellington in amounts of up to $4.0 million per month, at our discretion, through January 2001. On June 9, 2000 Acqua Wellington increased this commitment to $8.0 million per month and increased its total commitment from $48.0 million to $84.0 million through February 2001. The commitment is reduced by the monthly allocation whether we draw on the commitment or not. As of June 30, 2000, $64.0 million of these funds were available, with $48.0 million available after the financings in July and August 2000. For the first six months of 2000, $37.0 million of cash was used in operations as compared with the first six months of 1999, during which period $16.6 million of cash was used in operations. The increase in cash used in operating activities was primarily due to an increase in the net loss of $32.0 million, offset by a $10.9 million non-cash charge related to the issuance of a warrant to the University of Michigan for the acquisition of in-process research and development. We expect expenditures for research and development and general, administrative and marketing expenses to continue to increase during the remainder of 2000 and beyond as we develop our products and prepare for the potential commercial launch of FluMist. Cash expended for capital additions amounted to approximately $1.9 million and $7.1 million for the first six months of 2000 and 1999, respectively. Capital expenditures decreased in 2000 primarily due to a decrease in the level of expenditures for facilities and equipment at Medeva and at our facilities in Pennsylvania and Santa Clara. Capital expenditures are expected to increase during the remainder of 2000, -12- 13 primarily in connection with building additions at our Pennsylvania facility and equipment additions at all facilities. Principal payments in the amount of $1.3 million were made during the first six months of 2000 on debt incurred in December 1999. Such payments will continue over the life of the debt and will increase slightly in the future as greater portions of the payments are allocated to principal reduction. In July and August 2000, we generated an additional $16.0 million of equity financing in two transactions for sale of common stock. We anticipate that our existing cash, cash equivalents and short-term investments, and proceeds from existing collaborations and recent financings will enable us to maintain our current and planned operations into 2001. Our future cash requirements will depend on numerous factors, including the time and costs involved in obtaining regulatory approvals; the ability to successfully launch FluMist in the United States; continued scientific progress in the research and development of our technology and vaccine programs; the size and complexity of these programs; our ability to establish and maintain collaborative arrangements; progress with preclinical testing and clinical trials; the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; the cost of constructing additional manufacturing facilities, should they be deemed necessary; and product commercialization activities. In particular, if we were to construct and equip an additional manufacturing facility during this period, we anticipate that we would likely begin to make substantial additional capital expenditures in 2000 and beyond, which may require us to seek additional funding. In addition, there can be no assurance that, should we require outside funding through additional debt or equity financings, such funds will be available on favorable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or to obtain funds through collaborative agreements with others that may require us to relinquish rights to certain of our technologies, product candidates or products we would otherwise seek to develop or commercialize ourselves, which could harm our business, financial condition and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, including changes to interest rates and foreign currency exchange rates. Interest Rates -- Our investments and interest income are sensitive to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates primarily affect the interest earned on our cash equivalents and investments. To mitigate the impact of fluctuations in U.S. interest rates, we place our cash in investments that meet high credit standards, as specified in our investment policy, and generally hold such securities to maturity. The policy also limits the amount of credit exposure to any one issue, issuer, or type of investment and does not permit derivative financial instruments in our investment portfolio. As a result, we do not expect any material loss with respect to our investment portfolio. Foreign Currency Exchange Rates -- We pay for the costs of manufacturing and development activities, equipment, and facilities modifications at Medeva, which is located in the United Kingdom (U.K.) in British Pounds Sterling. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the U.K. We are exposed to changes in exchange rates in the United Kingdom. When the U.S. dollar strengthens against the British Pound Sterling, the U.S. dollar value of British Pound Sterling-based expenses decreases; when the U.S. dollar weakens, the U.S. dollar value of British Pound Sterling-based expenses increases. Accordingly, changes in exchange rates, and in particular a weakening of the U.S. dollar, may adversely affect our financial position as expressed in U.S. dollars. We currently do not hedge our obligations in British Pounds Sterling. Cash, Cash Equivalents and Investments -- At June 30, 2000, we had cash and cash equivalents of $76.1 million, with a weighted average interest rate of 6.50 percent per year, and short-term investments with a basis of $37.4 million and a fair value of $37.5 million, with a weighted average interest rate of 6.56 percent. -13- 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On June 30, 1999, the European Patent Office held oral proceedings in an Opposition filed by American Cyanamid against Aviron's granted European Patent No. 0490972 relating to methods and compositions of recombinant negative-strand RNA viruses. At the oral proceedings, the Opposition Division of the European Patent Office informed us of its intent to issue a written opinion which upholds claims limited to recombinant influenza and denies claims generically encompassing negative-strand RNA viruses. This decision will not affect our FluMist cold-adapted influenza product. We intend to appeal the decision insofar as it relates to the denied claims; the appeal will request the Technical Board of Appeals to reverse the decision with respect to the denial of the claims encompassing recombinant negative-strand RNA viruses. There can be no assurance that we will be successful in obtaining claims as originally granted as a result of the appeal. If we do not succeed in the appeal of the claims which encompass negative-strand RNA viruses, in particular non-segmented RNA viruses, it could negatively impact our ability to exclude others from commercializing an RSV or PIV vaccine based on genetically engineered candidates in Europe. On July 8, 1999, a lawsuit entitled Joany Chou v. the University of Chicago, ARCH Development Corp., Bernard Roizman and Aviron Company, was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division, or Court, by an individual formerly associated with the University of Chicago. On September 30, 1999, this individual filed an amended complaint against the same defendants. This amended complaint appeared to purport to assert claims of inventorship relating to the United States Patent Nos. 5,328,688; 5,795,713, 5,922,328; their foreign counterparts; and potentially other patents and applications, unjust enrichment, fraud, conversion, breach of fiduciary duty, breach of contract and breach of implied contract. The amended complaint seeks, among other things, money damages, an order correcting the inventorship and ownership of the patents referenced above, disgorgement, a constructive trust, possible injunctive and equitable relief, punitive damages, attorneys' fees, costs, and interest. All of the claims appear to relate to patent and patent applications for HSV, and none appear to relate to Aviron's cold-adapted influenza product or technology or any other pipeline products in research or development. On February 18, 2000, the Court granted Aviron's motion to dismiss, thereby dismissing all pending claims made by the plaintiff against Aviron. On April 19, 2000, the plaintiff appealed the Court's ruling. We cannot be sure that we will prevail in the defense of this lawsuit in the event that the plaintiff is successful in reinstating her claims, or in bringing in new claims against Aviron. In July 1992, we entered into a license agreement with ARCH Development Corporation, or ARCH, pursuant to which we obtained an exclusive, worldwide commercialization license, with the right to sublicense, to patent rights and related intellectual property and materials pertaining to the herpes simplex viruses, EBV and various recombinant methods and materials. In return for the rights granted to us under this agreement, we agreed to make payments to ARCH upon the achievement of certain milestones in the development of products covered by the license and to pay royalties to ARCH on net sales of such products. ARCH also granted us rights to improvements and additional related technology. The term of this agreement extends until the expiration of the last-to-expire patent rights covered under the license. ARCH had asserted an interpretation of the financial terms of this agreement, relating to the license by us of its EBV technology to SmithKline Beecham and to our sublicense of certain HSV technology to NeuroVir Therapeutics, both of which would have required us to pay ARCH a portion of any future or past payments, including sublicense fees and milestone payments we received under the SmithKline Beecham and NeuroVir Therapeutics agreements. On May 8, 2000, we executed a Settlement Agreement and Release, or Settlement Agreement, with ARCH whereby, among other provisions, we made a settlement payment to ARCH in the form of cash and a warrant. We also agreed on the percentage amount owed to ARCH of certain future milestone and royalty payments received from SmithKline Beecham and the percentage of future royalty payments received from NeuroVir Therapeutics. In addition, the Settlement Agreement provides for the termination of Aviron's option rights to obtain future improvements and later developments from ARCH. A separate agreement with NeuroVir Therapeutics sets the amount of the royalty to be paid pursuant to the NeuroVir license agreement. The Settlement Agreement also provides for ARCH to receive a percentage of Aviron's current ownership interest in NeuroVir Therapeutics stock and in a warrant for NeuroVir stock issued to Aviron as part of the original NeuroVir license agreement. -14- 15 ITEM 2. CHANGES IN SECURITIES. On April 13, 2000, we sold and issued to American Home Products Corporation 686,160 shares of our common stock for a purchase price of $21.38 per share, in a private placement. The aggregate proceeds from this transaction were $14.7 million. We are obligated to register the shares within 180 days of the purchase date. No underwriter or placement agent was involved in the transaction. The sale of the shares was made in reliance on Section 4(2) of the Securities Act of 1933, as amended. On June 23, 2000, as part of a legal Settlement Agreement with ARCH Development Corporation, or ARCH, we issued to ARCH a warrant to purchase 14,077 shares of our common stock at an exercise price of $23.00 per share. If the holder of such warrant is unable to sell or otherwise dispose of the warrant shares pursuant to Rule 144 of the Securities Act of 1933, as amended, then such holder may request the Company to register such warrant shares. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None -15- 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's Annual Meeting of Stockholders, or Annual Meeting, was held on June 1, 2000. At the Annual Meeting, the stockholders of the registrant (i) elected the two people listed below to serve as directors to hold office until the 2003 Annual Meeting of Stockholders and until their successors are elected; (ii) approved an amendment to our Amended and Restated Certificate of Incorporation; (iii) approved an amendment to the Company's 1996 Equity Incentive Plan; (iv) approved an amendment to our 1996 Non-Employee Directors' Stock Option Plan; and (v) ratified the selection of Ernst & Young LLP as our Independent Accountants for the fiscal year ending December 31, 2000. The Company had 20,625,940 shares of common stock outstanding as of April 14, 2000, the record date for the Annual Meeting. At the Annual Meeting, holders of a total of 16,004,690 shares of common stock were present in person or represented by proxy. The following sets forth information regarding the results of the voting at the Annual Meeting. -16- 17
Proposal 1 -- Election of Directors Director J. Leighton Read Votes in Favor ............................................................... 15,910,491 Votes Withheld ............................................................... 94,199 Director Reid W. Dennis Votes in Favor ............................................................... 15,945,615 Votes Withheld ............................................................... 59,075 Proposal 2-- Amendment to the Company's Amended and Restated Certificate of Incorporation Votes in Favor ............................................................... 14,342,363 Votes Against ................................................................ 1,558,559 Abstentions .................................................................. 103,768 Proposal 3 -- Amendment to the Company's 1996 Equity Incentive Plan Votes in Favor ............................................................... 10,939,271 Votes Against ................................................................ 3,322,974 Abstentions .................................................................. 1,742,445 Proposal 4 -- Amendment to the Company's 1996 Non-Employee Directors' Stock Option Plan Votes in Favor ............................................................... 14,908,934 Votes Against ................................................................ 982,456 Abstentions .................................................................. 113,300 Proposal 5 -- Ratification of Selection of Independent Accountants Votes in Favor ............................................................... 15,925,286 Votes Against ................................................................ 62,008 Abstentions .................................................................. 17,396
ITEM 5. OTHER INFORMATION. None -17- 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS ITEM DESCRIPTION ---- ----------- 3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation. 4.15 Common Stock Purchase Agreement between the Company and American Home Products Corporation, dated April 15, 2000.(1) 4.16 Amendment to Common Stock Purchase Agreement, dated as of June 9, 2000, by and between Acqua Wellington North American Equities Fund Ltd. and the Company.(2) 4.17 Warrant for Common Stock, issued to ARCH Development Corporation. 10.30 Form of Management Continuity Agreement. 27.1 Financial Data Schedule. - ---------- (1) Incorporated by reference to the correspondingly numbered exhibit to our Quarterly Report on Form 10-Q, File No. 0-20815, for the quarter ended March 31, 2000, filed May 15, 2000. (2) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K dated June 12, 2000. (b) REPORTS ON FORM 8-K On June 12, 2000, we filed a Current Report on Form 8-K, reporting that the Company had entered into the Amendment to the Common Stock Purchase Agreement, dated as of June 9, 2000, with Acqua Wellington North American Equities Fund Ltd. -18- 19 AVIRON SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. AVIRON Date: August 11, 2000 By: /s/ C. BOYD CLARKE ---------------------------------- ------------------------------ C. Boyd Clarke President and Chief Executive Officer Date: August 11, 2000 By: /s/ FRED KURLAND --------------------------------- ------------------------------ Fred Kurland Senior Vice President and Chief Financial Officer -19- 20 EXHIBIT INDEX
NO. OF EXHIBIT DESCRIPTION -------------- ----------- 3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation. 4.15 Common Stock Purchase Agreement between the Company and American Home Products Corporation, dated April 15, 2000.(1) 4.16 Amendment to Common Stock Purchase Agreement, dated as of June 9, 2000, by and between Acqua Wellington North American Equities Fund Ltd. and the Company.(2) 4.17 Warrant for Common Stock, issued to ARCH Development Corporation. 10.30 Form of Management Continuity Agreement. 27.1 Financial Data Schedule.
- --------- (1) Incorporated by reference to the correspondingly numbered exhibit to our Quarterly Report on Form 10-Q, File No. 0-20815, for the quarter ended March 31, 2000, filed May 15, 2000. (2) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K dated June 12, 2000. -20- EX-3.3 2 ex3-3.txt EXHIBIT 3.3 1 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF AVIRON C. BOYD CLARKE hereby certifies as follows: FIRST: The original name of this corporation is Aviron Merger Corporation (the "Corporation") and the date on which the Certificate of Incorporation of the Corporation was originally filed with the Secretary of State of the State of Delaware was March 7, 1996. SECOND: That he is the duly elected and acting President and Chief Executive Officer of Aviron, a Delaware corporation. THIRD: The Certificate of Incorporation of the Corporation was amended and restated by that certain Amended and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 22, 1996. FOURTH: The Board of Directors of the Corporation, acting in accordance with the provisions of Sections 141 and 242 of the General Corporation Law of the State of Delaware, adopted resolutions amending its Amended and Restated Certificate of Incorporation as follows: Article IV, Paragraph 1, shall be amended and restated to read in its entirety as follows: "This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issued is One Hundred Five Million (105,000,000) shares. One Hundred Million (100,000,000) shares shall be Common Stock, each having a par value of one tenth of one cent ($.001). Five Million (5,000,000) shares shall be Preferred Stock, each having a par value of one tenth of one cent ($.001)." FIFTH: Thereafter pursuant to a resolution of the Board of Directors, this Certificate of Amendment was submitted to the stockholders of the Corporation for their approval, and was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 2 IN WITNESS WHEREOF, Aviron has caused this Certificate of Amendment to be signed by its President and Chief Executive Officer and attested to by its Secretary this 5th day of July, 2000. AVIRON By: /s/ C. Boyd Clarke -------------------------------------- C. Boyd Clarke President and Chief Executive Officer ATTEST: /s/ Charlene A. Friedman - --------------------------- Charlene A. Friedman Secretary EX-4.17 3 ex4-17.txt EXHIBIT 4.17 1 EXHIBIT 4.17 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. AVIRON WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK No. CSW-3 14,077 Shares FOR VALUE RECEIVED, AVIRON, a Delaware corporation (the "Company"), with its principal office at 297 North Bernardo Avenue, Mountain View, CA 94043, hereby certifies that ARCH Development Corporation, an Illinois not-for-profit corporation, or its assigns (the "Holder"), is entitled, subject to the provisions of this Warrant, to purchase from the Company, at any time prior to the Expiration Date (as defined in Section 12 below), fourteen thousand seventy seven (14,077) fully paid and nonassessable shares of Common Stock of the Company, at an exercise price per share equal to twenty-three dollars ($23.00) (the "Exercise Price"). The term "Common Stock" shall mean the aforementioned Common Stock of the Company, together with any other equity securities that may be issued by the Company in addition thereto or in substitution therefor as provided herein. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares." SECTION 1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part on any business day prior to the Expiration Date by presentation and surrender to the Company at its principal office at the address set forth in the initial paragraph hereof (or at such other address as the Company may hereafter notify the Holder in writing) with the Purchase Form annexed hereto duly executed and accompanied by proper payment of the Exercise Price in lawful money of the United States of America in the form of a check, subject to collection, for the number of Warrant Shares specified in the Purchase Form. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this Warrant and such Purchase 2 Form, together with proper payment of the Exercise Price, at such office, the Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to the Holder. SECTION 2. NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A - B) --------- A Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the number of shares purchased under the Warrant being canceled (at the date of such calculation) A = the fair market value as determined by the closing sales price on the date of exercise of one share of the Company's Common Stock as quoted on NASDAQ B = Exercise Price (as adjusted to the date of such calculation) SECTION 3. ISSUANCE OF NEW WARRANT. In the event of any exercise of the rights represented by this Warrant, certificates for the Warrant Shares so purchased shall be delivered to the Holder hereof as soon as practicable and, unless this Warrant has been fully exercised or has expired, a new Warrant representing the portion of the Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder hereof within a reasonable time. Such exercise shall be deemed to have been made immediately prior to the close of business on the date of surrender of this Warrant. SECTION 4. RESERVATION OF SHARES. The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant all shares of its Common Stock or other shares of capital stock of the Company from time to time issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise in accordance with the terms of this Warrant, shall be validly issued, fully paid and nonassessable. SECTION 5. FRACTIONAL INTEREST. The Company will not issue a fractional share of Common Stock upon exercise of this Warrant. Instead, the Company will deliver its check for the current fair market value of the fractional share, as determined in good faith by the Board of Directors of the Company. 2 3 SECTION 6. ASSIGNMENT OR LOSS OF WARRANT. (a) Except as provided in Section 10, the Holder of this Warrant shall be entitled, without obtaining the consent of the Company, to assign its interest in this Warrant in whole or in part to any person or persons. Subject to the provisions of Section 10, upon surrender of this Warrant to the Company or at the office of its stock transfer agent or warrant agent, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such instrument of assignment and, if the Holders entire interest is not being assigned, in the name of the Holder, and this Warrant shall promptly be canceled. (b) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. SECTION 7. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder of the Company on any matters or with respect to any rights whatsoever as a shareholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Warrant Shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms. SECTION 8. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of the Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) RECLASSIFICATION OF OUTSTANDING SECURITIES. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), the Company shall execute a new Warrant (in form and substance reasonably satisfactory to the Holder of this Warrant) providing that the Holder of this Warrant shall have the right to exercise such new Warrant and upon such exercise to receive, in lieu of each share of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of Common Stock. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 8. The provisions of this subsection (a) shall similarly apply to successive reclassification or changes. 3 4 (b) SUBDIVISIONS OR COMBINATION OF SHARES. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the Exercise Price and the number of Warrant Shares issuable upon exercise hereof shall be proportionately adjusted. (c) STOCK DIVIDENDS. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Common Stock (except any distribution specifically provided for in the foregoing subsections (a) and (b)), then the Exercise Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (a) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution and the number of Warrant Shares subject to this Warrant shall be proportionately adjusted. (d) NOTICE OF RECORD DATE. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the Holder of this Warrant, at least ten days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (e) NO ADJUSTMENT UPON EXERCISE OF WARRANTS. No adjustments shall be made under any Section herein in connection with the issuance of Warrant Shares upon exercise of the Warrants. SECTION 9. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of Section 8, the Company shall deliver an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment and the manner of computing such adjustment. Each such officer's certificate shall be signed by the chairman, president or chief financial officer of the Company. SECTION 10. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This Warrant may not be exercised and neither this Warrant nor any of the Warrant Shares, nor any interest in either, may be sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities or Blue Sky laws and the terms and conditions hereof. Each Warrant shall bear a legend in substantially the same form as the legend set forth on the first page of this Warrant. Each certificate for Warrant Shares issued upon exercise of this Warrant, 4 5 unless at the time of exercise such Warrant Shares are acquired pursuant to a registration statement that has been declared effective under the Act, shall bear a legend substantially in the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Any certificate for any Warrant Shares issued at any time in exchange or substitution for any certificate for any Warrant Shares bearing such legend (except a new certificate for any Warrant Shares issued after the acquisition of such Warrant Shares pursuant to a registration statement that has been declared effective under the Act) shall also bear such legend unless, in the opinion of counsel for the Company, the Warrant Shares represented thereby need no longer be subject to the restriction contained herein. The provisions of this Section 10 shall be binding upon all subsequent Holders of certificates for Warrant Shares bearing the above legend and all subsequent Holders of this Warrant, if any. In addition in connection with the issuance of this Warrant, the Holder specifically represents to the Company by acceptance of this Warrant as follows: (a) The Holder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The Holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof in violation of the Act. (b) The Holder understands that this Warrant has not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder's investment intent as expressed herein. (c) The Holder further understands that this Warrant must be held indefinitely unless subsequently registered under the Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. (d) The Holder is aware of the provisions of Rule 144 promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things, the availability of certain public information about the Company, the resale occurring not less than 5 6 two years after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein. (e) The Holder further understands that in the event all of the requirements of Rule 144 are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the staff of the Securities and Exchange Commission (the "SEC") has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. SECTION 11. REGISTRATION RIGHTS. In the event the Holder is unable to sell or otherwise dispose of all or portion of the Warrant Shares delivered upon exercise hereof, without restriction pursuant to Rule 144, then with respect to such Warrant Shares, the Holder shall be entitled to registration rights as provided in this Section 1.1. (a) REGISTRATION REQUIREMENTS. (i) Except as provided in paragraph (iv) below, if the Company shall receive a written request from the Holder that the Company file a registration statement under the Act covering the registration of those Warrant Shares which Holder cannot sell or otherwise dispose pursuant to Rule 144, then the Company shall use its best efforts to prepare and file a registration statement on Form S-3 with the SEC under the Act within 30 days of the receipt of such written request, to register such Warrant Shares by the Holder (the "Registration Statement") and to use its best efforts to cause the Registration Statement to be declared effective as soon as practicable. In the event that at any time the filing of such Registration Statement is undertaken or is required to be undertaken the Company fails to qualify for use of Form S-3 (or other available form for similar type securities registration) for purposes of registering for resale the Warrant Shares, the Company shall cause a registration statement on Form S-1 (or other available form for similar type securities registration) to be filed as soon as practicable thereunder. The Holder agrees to furnish promptly to the Company in writing all information reasonably required by the Company to file such Registration Statement. (ii) The Company shall pay all Registration Expenses (as defined below) in connection with any registration, qualification or compliance hereunder, and Holder shall pay all Selling Expenses (as defined below). "Registration Expenses" shall mean all expenses, except for Selling Expenses, incurred by the Company in complying with the registration provisions herein described, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel and independent public accountants for the Company, blue sky fees, transfer agent fees and expenses and the expense of any special audits incident to or required by any such registration. 6 7 "Selling Expenses" shall mean selling commissions, underwriting fees and stock transfer taxes applicable to the Warrant Shares. (iii) In the case of the registration effected by the Company pursuant to these registration provisions, the Company will use its best efforts to: (1) keep such registration effective until the earliest of (A) the second anniversary of the date hereof, (B) such date as all of the Warrant Shares have been resold or (C) such time as all of the Warrant Shares held by Holder can be sold without restriction pursuant to Rule 144 under the Act; (2) prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by the Registration Statement; (3) furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as Holder from time to time may reasonably request in order to facilitate the public sale or other disposition of all or any of the Warrant Shares held by Holder; (4) cause all Warrant Shares registered as described herein to be listed on each securities exchange and quoted on each quotation service on which similar securities issued by the Company are then listed or quoted; (5) provide a transfer agent and registrar for all Warrant Shares registered pursuant to the Registration Statement and a CUSIP number for all such Warrant Shares; (6) otherwise use its best efforts promptly to comply with all applicable rules and regulations of the SEC; and (7) file the documents required of the Company and otherwise use its best efforts promptly to obtain, if applicable, and maintain requisite blue sky clearance in (A) all jurisdictions in which any of the Warrant Shares are originally sold and (B) all other states specified in writing by Holder, provided as to clause (B), however, that the Company shall not be required to qualify to do business or consent to service of process in any state in which it is not now so qualified or has not so consented. The Company shall use its best efforts to qualify for use of Form S-3 or other similar form then available under the Act to register the resale of the Warrant Shares and to maintain such qualification during the periods described in paragraph (i). (iv) The Company may delay the filing of the Registration Statement for up to forty-five (45) days by giving written notice to Holder if the Board of Directors of the Company shall have determined in good faith that the Company may be required to disclose any material corporate development which disclosure may have a material effect on the Company. (v) Following the effectiveness of the Registration Statement, the Company may, at any time, but not more than once in any six-month period, suspend the effectiveness of such Registration Statement for up to 30 days, as appropriate (a "Suspension Period"), by giving notice to Holder, if the Company shall have determined that the Company may be required to disclose any material corporate development which disclosure may have a material effect on the Company. The Company agrees to use commercially reasonable efforts to minimize the length of any such suspension. The duration of any Suspension Period shall be added to the period of time that the Company agrees to keep the Registration Statement effective. Holder agrees that, upon receipt of any notice from the Company of a Suspension Period, Holder shall forthwith discontinue disposition of Warrant Shares covered by such Registration Statement or prospectus until Holder (i) is advised in writing by the Company that the use of the applicable prospectus may be resumed, (ii) has received copies of a supplemental or amended 7 8 prospectus, if applicable, and (iii) has received copies of any additional or supplemental filings which are incorporated or deemed to be incorporated by reference in such prospectus. (vi) The Company will, as expeditiously as possible, notify Holder (1) of the effective date of the Registration Statement and the date when any post-effective amendment to the Registration Statement becomes effective; (2) of any stop order or notification from the SEC or any other jurisdiction as to the suspension of the effectiveness of the Registration Statement; and (3) of the end of any suspension hereunder. (vii) With a view to making available to Holder the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit Holder to sell the Warrant Shares to the public without registration or pursuant to registration, the Company covenants and agrees to: (1) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) the second anniversary of the date hereof or (B) such date as all of the Warrant Shares shall have been resold; (2) file with the SEC in a timely manner all reports and other documents required of the Company under the Exchange Act and maintain registration of its Common Stock under Section 12 of the Exchange Act; and (3) furnish to Holder upon request, as long as Holder owns any Warrant Shares, (A) a written statement by the Company that it has complied with the reporting requirements of the Exchange Act, (B) a copy of the most recent annual or quarterly report of the Company, and (C) such other information as may be reasonably requested in order to avail Holder of any rule or regulation of the SEC that permits the selling of any such Warrant Shares without registration. (b) INDEMNIFICATION AND CONTRIBUTION. (i) The Company agrees to indemnify Holder and hold Holder harmless from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which Holder may become subject (under the Act, Exchange Act, state securities laws or otherwise) insofar as such losses, claims, damages or liabilities (or actions proceedings or settlements in respect thereof) arise out of, or are based upon, (1) any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement, on the effective date thereof or any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, (2) the omission or the alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading or (3) any failure by the Company (or its agents) to fulfill any undertaking included in the Registration Statement, and the Company will, as incurred, reimburse Holder for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, loss, damage, proceeding or claim; provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of, or is based upon (1) an untrue statement (or omission) made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of Holder specifically for use in preparation of the Registration Statement, or (2) any untrue statement (or omission) in any Prospectus that is corrected in any subsequent Prospectus that was delivered to Holder by the Company prior to the pertinent sale or sales by Holder. The Company will reimburse Holder for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under 8 9 this section and the possibility that such payments might later be held to be improper, provided, that (1) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (2) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. (ii) Holder agrees to indemnify and hold harmless the Company from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which the Company may become subject (under the Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon (1) an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of Holder specifically for use in preparation of the Registration Statement, provided, however, that Holder shall not be liable in any such case for any untrue statement included in any Prospectus which statement has been corrected, in writing, by Holder and delivered to the Company before the sale from which such loss occurred, or (2) any untrue statement in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Holder prior to the pertinent sale or sales by Holder, provided, further, however, that the liability of Holder hereunder shall be limited to the proceeds received by Holder from the sale of the Warrant Shares covered by such Registration Statement; and provided, further, however, that the obligations of Holder hereunder shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action settlement is effected without the consent of Holder. Holder will reimburse the Company for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim up to the limits set forth herein notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this section and the possibility that such payments might later be held to be improper, provided, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to Holder, upon request, reasonable assurances of their ability to effect any refund, when and if due. (iii) Promptly after receipt by any indemnified person of a notice of a claim or the commencement of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 11(b), such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, and, subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person and the indemnifying person shall have been notified thereof, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall wish, to assume and undertake the defense thereof, with counsel reasonably satisfactory to the indemnified person. After notice from the indemnifying person to such indemnified person of the indemnifying person's election to assume and undertake the defense thereof, the indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate in the reasonable judgment of the indemnified person for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person. 9 10 (iv) If the indemnification provided for in this Section 11(b) is unavailable to or insufficient to hold harmless an indemnified party under paragraph (i) or (ii) above in respect of any losses, claims, damages or liabilities (or actions proceedings or settlements in respect thereof) referred to therein, then the indemnifying party shall contribute to the amount paid or payable by such indemnified party as result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or Holder on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Holder agree that it would not be just and equitable if contribution pursuant to this paragraph (iv) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this paragraph (iv). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above in this paragraph (iv) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph (d), Holder shall not be required to contribute any amount in excess of the amount by which the amount received by Holder (net of Selling Expenses) from the sale of the Warrant Shares to which such loss relates exceeds the amount of any damages which Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (v) The obligations of the Company and Holder under this Section 11(b) shall be in addition to any liability which the Company and Holder may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Company or Holder within the meaning of the Act. SECTION 12. EXPIRATION DATE. This Warrant shall expire and shall be wholly void and have no effect after 5:00 p.m. (San Francisco time) on the date which is the earlier of (a) the fifth anniversary of the date hereof, or (b) the closing date of a merger or consolidation of the Company with or into any other entity, including a reverse triangular merger involving the Company (other than a merger or consolidation in which the Holders of the voting power of the Company immediately prior to such consolidation or merger hold a majority of the surviving or resulting entity immediately following such consolidation or merger), provided that, if the last day on which this Warrant may be exercised, or on which it may be exercised at a particular Exercise Price, is a Sunday or a legal holiday or a day on which banking institutions doing business in the city of San Francisco are authorized by law to close, this Warrant may be exercised prior to 5:00 p.m. (San Francisco time) on the next succeeding full business day with the same force and effect and at the same Exercise Price as if exercised on such last day specified herein. 10 11 SECTION 13. GOVERNING LAW. This Warrant is delivered in the State of California and shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of that State. SECTION 14. MODIFICATION AND WAIVER. Neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by an instrument in writing signed by the Company and by the Holder hereof. SECTION 15. NOTICES. Any notice, request or other document required or permitted to be given or delivered to the Holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant. SECTION 16. DESCRIPTIVE HEADINGS. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. SECTION 17. ENTIRE AGREEMENT. This Warrant constitutes the entire agreement between the parties pertaining to the subject matter herein and supersedes all prior and contemporaneous agreements, representation and undertakings of the parties. 11 12 IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed by its duly authorized officer and to be dated as of June 23, 2000. AVIRON By: /s/ C. Boyd Clarke ------------------------------------- C. Boyd Clarke President and Chief Executive Officer 12 13 SUBSCRIPTION FORM THE UNDERSIGNED, holder of this Warrant, (1) hereby irrevocably elects to exercise the right of purchase represented by this Warrant for, and to purchase thereunder, ________________ full Warrant Shares of the Common Stock of Aviron provided for therein, (2) makes payment in full of the purchase price of such Warrant Shares, (3) requests that certificates for such Warrant Shares be issued in the name of ---------------------------------------------------------------- (Please print name and address) ---------------------------------------------------------------- (Please insert social security or other identifying number) and (4) if said number of shares shall not be all the shares purchasable thereunder, requests that a new Warrant for the unexercised portion of this Warrant be issued in the name of and delivered to: ---------------------------------------------------------------- ---------------------------------------------------------------- (Please print name and address) Dated: ------------------------------------------------------- Signature: --------------------------------------------------- By: ---------------------------------------------------------- 13 14 ASSIGNMENT FORM Dated _________, 20__ FOR VALUE RECEIVED, ________________________________ hereby sells, assigns and transfers unto _________________________________________________ (the "Assignee"),____________________________________________________________________ (please type or print in block letters) ________________________________________________________________________________ (insert address) its right to purchase up to ____ shares of Common Stock of AVIRON represented by this Warrant and does hereby irrevocably constitute and appoint ____________________________ Attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. Signature _____________________________ 14 EX-10.30 4 ex10-30.txt EXHIBIT 10.30 1 EXHIBIT 10.30 MANAGEMENT CONTINUITY AGREEMENT THIS MANAGEMENT CONTINUITY AGREEMENT (the "Agreement") is entered into effective as of the ______ day of _____, 2000, between ____________, ("Employee") and AVIRON, a Delaware corporation (the "Company"). This Agreement is intended to provide Employee with certain benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Agreement are defined in Article 4. RECITALS A. It is expected that another company may from time to time consider the possibility of acquiring the Company or that a change of control may otherwise occur, with or without the approval of the Company's Board of Directors. The Board of Directors recognizes that such consideration can be a distraction to Employee and can cause Employee to consider alternative employment opportunities. The Board of Directors has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Company's Board of Directors believes it is in the best interests of the Company and its stockholders to retain Employee and provide incentives to Employee to continue in the service of the Company. C. The Board of Directors further believes that it is imperative to provide Employee with certain benefits upon a Change of Control and, under certain circumstances, upon termination of Employee's employment in connection with a Change of Control, which benefits are intended to provide Employee with financial security and provide sufficient income and encouragement to Employee to remain with the Company, notwithstanding the possibility of a Change of Control. D. To accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by Employee, to agree to the terms provided in this Agreement. Now therefore, in consideration of the mutual promises, covenants and agreements contained herein, and in consideration of the continuing employment of Employee by the Company, the parties hereto agree as follows: ARTICLE 1 CHANGE OF CONTROL 1.1 TERMINATION EVENTS. If Employee's employment terminates under circumstances constituting a Covered Termination upon or within eighteen (18) months 2 following a Change of Control of the ownership of the Company, Employee shall be entitled to receive the following benefits set forth in Sections 1.2, 1.3 and 1.4. 1.2 SALARY CONTINUATION. Employee shall receive Base Salary that has accrued but is unpaid as of the date of such Covered Termination, and, within thirty (30) days following such Covered Termination, Employee also shall receive a lump sum payment equal to one year of the base salary which the employee was receiving immediately prior to the Change of Control and the Employee's targeted bonus for the fiscal year in which the Change of Control occurs. 1.3 HEALTH INSURANCE COVERAGE IN THE EVENT OF CHANGE OF CONTROL: Provided that Employee makes a timely election to continue coverage under the Company's group health plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") in connection with Employee's Covered Termination, the Company will pay Employee's COBRA premiums for a maximum period of one (1) year following the date of such Covered Termination (the "COBRA Continuation Period"). In addition, if Employee's spouse and/or dependents were enrolled in the Company's group health plan on the date of the Covered Termination, the Company will pay the COBRA premiums for Employee's dependents during the COBRA Continuation Period, but only to the same extent that such dependents' premiums under such plan were paid by the Company prior to the date of such Covered Termination. No provision of this Agreement will affect the continuation coverage rules under COBRA, except that the Company's payment of any applicable premiums during the COBRA Continuation Period will be credited as payment by Employee for purposes of the Employee's payment required under COBRA. Therefore, the period during which Employee must elect to continue the Company's group health coverage at his or her own expense under COBRA, the length of time during which COBRA coverage will be made available to Employee, and all other rights and obligations of the Employee under COBRA (except the obligation to pay premiums that the Company pays during the COBRA Continuation Period) will be applied in the same manner that such rules would apply in the absence of this Agreement. At the conclusion of the COBRA Continuation Period, Employee will be responsible for the entire payment of premiums required under COBRA for the remaining duration of eligibility for COBRA, if any. Notwithstanding the foregoing, the Company's obligation to make COBRA payments for Employee shall cease immediately if Employee becomes eligible for other health insurance benefits at the expense of a new employer. Employee agrees to notify a duly authorized officer of the Company, in writing, immediately upon acceptance of any employment following the Covered Termination which provides Employee with eligibility for health insurance benefits. 1.4 ACCELERATION OF VESTING OF OUTSTANDING OPTIONS. In the event of a Covered Termination where the Company has assumed or substituted the Employee's options in connection with the Change of Control, the vesting of outstanding stock options to purchase common stock of the Company granted to Employee prior to the date of termination of employment shall accelerate as of the date of such Covered Termination so that all outstanding options are one hundred percent (100%) vested and immediately exercisable. Such acceleration of vesting of outstanding options also shall apply to any unvested option shares that were acquired by Employee on or before the date of the Covered Termination and that were subject to 2 3 a repurchase option by the Company as of such date. Where the Company does not assume or substitute the Employee's options in connection with a Change of Control, one hundred percent (100%) of options will vest immediately prior to a Change of Control. 1.5 PARACHUTE PAYMENTS. In the event that the acceleration of the vesting provided for in Section 1.4 and benefits otherwise payable to Employee (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code"), or any comparable successor provision, and (ii) but for this section would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provision (the "Excise Tax"), then Employee's benefits hereunder shall be either (i) provided to Employee in full, or (ii) provided to Employee as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by Employee, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax. Unless the Company and Employee otherwise agree in writing, any determination required under this section shall be made in writing in good faith by the Accountants. In the event of a reduction of benefits hereunder, benefits payable in cash shall be reduced first. For purposes of making the calculations required by this section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority. The Company and Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this section. If, notwithstanding any reduction described in this section, the IRS determines that Employee is liable for the Excise Tax as a result of the receipt of the payment of benefits as described above, then Employee shall be obligated to pay back to the Company, within thirty (30) days after a final IRS determination or in the event that Employee challenges the final IRS determination, a final judicial determination, a portion of the payment equal to the "Repayment Amount." The Repayment Amount with respect to the payment of benefits shall be the smallest such amount, if any, as shall be required to be paid to the Company so that Employee's net after-tax proceeds with respect to any payment of benefits (after taking into account the payment of the Excise Tax and all other applicable taxes imposed on such payment) shall be maximized. The Repayment Amount with respect to the payment of benefits shall be zero if a Repayment Amount of more than zero would not result in Employee's net after-tax proceeds with respect to the payment of such benefits being maximized. If the Excise Tax is not eliminated pursuant to this paragraph, Employee shall pay the Excise Tax. Notwithstanding any other provision of this Section 1.5, if (i) there is a reduction in the payment of benefits as described in this section, (ii) the IRS later determines that 3 4 Employee is liable for the Excise Tax, the payment of which would result in the maximization of Employee's net after-tax proceeds (calculated as if Employee's benefits had not previously been reduced), and (iii) Employee pays the Excise Tax, then the Company shall pay to Employee those benefits which were reduced pursuant to this section contemporaneously or as soon as administratively possible after Employee pays the Excise Tax so that Employee's net after-tax proceeds with respect to the payment of benefits is maximized. ARTICLE 3 LIMITATIONS AND CONDITIONS ON BENEFITS 3.1 WITHHOLDING OF TAXES. The Company shall withhold appropriate federal, state, local (and foreign, if applicable) income and employment taxes from any payments hereunder. 3.2 RELEASE PRIOR TO RECEIPT OF BENEFITS. Upon the occurrence of a Covered Termination, and prior to the receipt of any benefits under this Agreement on account of the occurrence of such Covered Termination, Employee shall execute a release (the "Release") in the form incorporated herein and attached hereto as Attachment I. Such Release shall specifically relate to all of Employee's rights and claims in existence at the time of such execution and shall confirm Employee's obligations under the Company's standard form of proprietary information agreement. It is understood that Employee has twenty-one (21) days to consider whether to execute such Release, and Employee may revoke such Release within seven (7) business days after execution. In the event Employee does not execute such Release within the twenty-one (2l)-day period, or if Employee revokes such Release within the subsequent seven (7) business day period, no benefits shall be payable under this Agreement and this Agreement shall be null and void. Notwithstanding the foregoing, in addition to or in lieu of the release contained in Attachment I, Employee may be required to execute and deliver an effective release in such other form as the Company may, in its sole discretion, determine to be necessary or appropriate in order to comply with the requirements of the laws of any jurisdiction applicable to Employee in order to make a general release of claims effective and enforceable. ARTICLE 4 OTHER RIGHTS AND BENEFITS 4.1 NONEXCLUSIVITY. Except as otherwise expressly provided herein, nothing in the Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Employee may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as Employee may have under other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the date of a Covered Termination shall be payable in accordance with such plan, policy, practice or program. 4.2 NON-DUPLICATION OF BENEFITS. Notwithstanding any other provision of the Agreement to the contrary, any benefits payable to Employee under this Agreement shall be in 4 5 lieu of any severance benefits payable by the Company to such individual under any other arrangement covering the individual, unless expressly otherwise agreed to by the Company in writing. ARTICLE 5 DEFINITIONS For purposes of the Agreement, the following terms are defined as follows: 5.1 "ACCOUNTANTS" means the independent public accountants of the Company. 5.2 DEFINITION OF BASE SALARY: Base Salary means the Employee's base salary (exclusive of bonuses and other forms of supplemental compensation) at the rate in effect during the last regularly scheduled payroll period immediately preceding the date of Employee's Covered Termination or prior to the Change of Control, unless a different time period for establishing Base Salary is expressly set forth in this Agreement. 5.3 "CAUSE" Employee's dismissal or discharge for fraud, misappropriation, embezzlement or intentional misconduct on the part of Employee which resulted in material loss, damage or injury to the Company. 5.4 "CHANGE OF CONTROL" means a (i) dissolution or liquidation of the Company; (ii) a sale, lease or other disposition of all or substantially all of the assets of the Company; (iii) a merger or consolidation in which the Company is not the surviving corporation and in which beneficial ownership of securities of the Company representing at least forty percent (40%) of the combined voting power entitled to vote in the election of the members of the Board of Directors has changed; (iv) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, and in which beneficial ownership of securities of the Company representing at least forty percent (40%) of the combined voting power entitled to vote in the election of the member of the Board of Directors has changed; (v) an acquisition by any entity (other than (A) a controlled affiliate of the Company, (B) any employee benefit plan, or related trust, sponsored or maintained by the Company or subsidiary of the Company or other entity controlled by the Company, or (C) any company owned directly or indirectly by stockholders of the Company in substantially the same proportions as their ownership of Common Stock interest of the Company, immediately prior to the occurrence with respect to which the evaluation of the Change in Control is being made) of the beneficial ownership, directly or indirectly, of securities of the Company representing at least forty percent (40%) of the combined voting power of the Company's then outstanding securities; or (vi) in the event that the individuals who, as of the date of adoption of the Plan, are members of the Company's Board of Directors (the "Incumbent Board"), cease for any reason to constitute at least forty percent (40%) of the Board of Directors. (If the election, or nomination for election by the Company's stockholders, of any new Director is approved by a vote of at least forty percent (40%) of the Incumbent Board, such new Director shall be considered to be a member of the Incumbent Board in the future.) 5 6 5.5 "CODE" means the Internal Revenue Code of 1986, as amended. 5.6 "COVERED TERMINATION" means involuntary termination by the Company of Employee's employment with the Company for any reason other than death, disability or for Cause or upon or within eighteen (18) months following a Change of Control of the ownership of the Company, Employee voluntarily terminates employment after any of the following are undertaken without Employee's express written consent: (a) the assignment to Employee of any duties or responsibilities which result in a material diminution or adverse change of Employee's position, status or circumstances of employment; (b) a reduction by the Company in Employee's Base Salary; (c) any failure by the Company to continue in effect any benefit plan or arrangement, including incentive plans or plans to receive securities of the Company, in which Employee is participating (hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect Employee's participation in or reduce Employee's benefits under any Benefit Plans or deprive Employee of any fringe benefit then enjoyed by Employee; provided, however, a Covered Termination shall not exist under this subsection 4.6(c) if the Company offers a range of benefit plans and programs which, taken as a whole, are comparable to the Benefit Plans provided to Employee as of the date of this Agreement, as determined in good faith by the Company; (d) a relocation of Employee or the Company's principal business offices to a location more than twenty-five (25) miles from ___________, at which Employee has performed duties, except for required travel by Employee on the Company's business to an extent substantially consistent with Employee's business travel obligations as of the date of this Agreement; (e) any material breach by the Company of any provision of this Agreement which is not cured by the Company within twenty (20) days of delivery of written notice from Employee of such breach; or (f) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company. ARTICLE 6 GENERAL PROVISIONS 6.1 EMPLOYMENT STATUS. This Agreement does not constitute a contract of employment or impose on Employee any obligation to remain as an employee, or impose on the Company any obligation (i) to retain Employee as an employee, (ii) to change the status of Employee as an at-will employee, or (iii) to change the Company's policies regarding termination of employment; or (iv) to be unable to terminate Employee's employment with the Company at any time, with or without notice, for any reason or no reason. 6 7 6.2 NOTICES. Any notices provided hereunder must be in writing and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Employee at Employee's address as listed in the Company's payroll records. Any payments made by the Company to Employee under the terms of this Agreement shall be delivered to Employee either in person or at the address as listed in the Company's payroll records. 6.3 SEVERABILITY. If a legal authority of competent jurisdiction determines that any term or provision of this Agreement is invalid or unenforceable, in whole or in part, then the remaining terms and provisions hereof shall be unimpaired. Such legal authority will have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision that most accurately embodies the parties' intention with respect to the invalid or unenforceable term or provision. 6.4 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.5 COMPLETE AGREEMENT. This Agreement, including Attachment I, and any other written agreements referred to in this Agreement, constitutes the entire agreement between Employee and the Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. It is entered into without reliance on any promise or representation other than those expressly contained herein. 6.6 AMENDMENT OR TERMINATION OF AGREEMENT. This Agreement may be changed or terminated only upon the mutual written consent of the Company and Employee. The written consent of the Company to a change or termination of this Agreement must be signed by an Employee officer of the Company after such change or termination has been approved by the Company's Board of Directors. 6.7 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.8 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning hereof. 6.9 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Employee and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Employee may not assign any duties hereunder and may not assign any rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. 6.10 ATTORNEYS' FEES. If either party hereto brings any action to enforce his or its rights hereunder, the prevailing party in any such action shall be entitled to recover his or its reasonable attorneys' fees and costs incurred in connection with such action. 7 8 6.11 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California, without regard to such state's conflict of laws rules. 6.12 NON-PUBLICATION. The parties mutually agree not to disclose publicly the terms of this Agreement except to the extent that disclosure is mandated by applicable law or to respective personal advisors. 6.13 CONSTRUCTION OF AGREEMENT. In the event of a conflict between the text of this Agreement and anysummary, description or other information regarding this Agreement, the text of this Agreement shall control. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year written above. AVIRON [EMPLOYEE] By: ------------------------------- ---------------------------------- Name: C. Boyd Clarke Title: Chief Executive Officer 8 9 ATTACHMENT I RELEASE Certain capitalized terms used in this Release are defined in the Management Continuity Agreement (the "Agreement") which I have executed and of which this Release is a part. I hereby confirm my obligations under the Company's proprietary information and inventions agreement. Except as otherwise set forth in this Release, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to the date I execute this Release, including, but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of disputed compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Employee Retirement Income Security Act of 1974, as amended; the federal Americans with Disabilities Act of 1990; tort law; contract law; statutory law; common law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to indemnify me pursuant to the Company's indemnification obligation pursuant to agreement or applicable law. In giving this release, which includes claims that may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any unknown or unsuspected claims I may have against the Company. 9 10 I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under ADEA. I also acknowledge that the consideration given under the Agreement for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise on or after the date I execute this Release; (B) I have the right to consult with an attorney prior to executing this Release; (C) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following the execution of this Release by the parties to revoke the Release; and (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Release is executed by me. [EMPLOYEE] ----------------------------------------- Date: ------------------------------------ 10 EX-27.1 5 ex27-1.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 76,135 37,432 3,768 0 2,082 120,596 37,298 12,498 152,158 14,054 114,075 0 0 21 25,004 152,158 0 5,035 0 0 51,911 0 4,145 (48,651) 0 (48,651) 0 0 0 (48,651) (2.55) (2.55)
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