-----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, H9nIlze5LSNlOildZ5YAqDsRN6BB2DursiKNma6/iZ/sMFXGPmkFR4aR4d0cnKwo F831QoEcIA6SisegfgvQkA== 0000891618-99-005224.txt : 19991117 0000891618-99-005224.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891618-99-005224 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIRON CENTRAL INDEX KEY: 0000949173 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [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: 99754429 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 FORM 10-Q FOR PERIOD ENDED 9/30/99 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 SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 0-20815 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 15,887,315 SHARES ---------------------------- --------------------------------- (CLASS) (OUTSTANDING AT NOVEMBER 9, 1999) 1 2 AVIRON TABLE OF CONTENTS
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND NOTES (UNAUDITED) Condensed Balance Sheets as of September 30, 1999 and December 31, 1998 3 Condensed Statements of Operations for the three- and nine-month periods ended September 30, 1999 and 1998 4 Condensed Statements of Cash Flows for the nine- month periods ended September 30, 1999 and 1998 5 Notes to Condensed 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 19 PART II. OTHER INFORMATION 20 ITEM 1. LEGAL PROCEEDINGS 20 ITEM 2. CHANGES IN SECURITIES 21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21 ITEM 5. OTHER INFORMATION 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 SIGNATURES 22
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AVIRON CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- (UNAUDITED) (NOTE 1) ASSETS Current Assets: Cash and cash equivalents ............................................... $ 7,729 $ 28,164 Short-term investments .................................................. 36,808 60,692 Accounts receivable ..................................................... 4,011 75 Inventory ............................................................... 2,029 -- Prepaid expenses and other current assets ............................... 797 1,228 --------- --------- Total current assets .................................................. 51,374 90,159 Long-term investments ..................................................... 4,360 6,002 Property and equipment, net ............................................... 25,762 18,521 Deposits and other assets ................................................. 7,484 6,303 --------- --------- TOTAL ASSETS .............................................................. $ 88,980 $ 120,985 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable ........................................................ $ 3,820 $ 2,792 Accrued compensation .................................................... 1,319 804 Accrued clinical trial costs ............................................ 730 757 Accrued interest ........................................................ 2,875 1,445 Accrued expenses and other liabilities .................................. 7,315 4,584 Current portion of capital lease obligations ............................ 224 408 --------- --------- Total current liabilities ............................................. 16,283 10,790 Deferred rent ............................................................. 1,958 1,116 Capital lease obligations, noncurrent ..................................... 20 113 Convertible debt .......................................................... 100,000 100,000 --------- --------- Total liabilities ......................................................... 118,261 112,019 --------- --------- Commitments and contingencies Stockholders' Equity (Deficit): Preferred stock, $0.001 par value; 5.0 million shares authorized, issuable in series; none outstanding at September 30, 1999 and December 31, 1998 ..................................................... -- -- Common stock, $0.001 par value; 30.0 million shares authorized, 15.8 million and 15.7 million shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively ............. 16 16 Additional paid-in capital .............................................. 131,588 130,524 Notes receivable from stockholders ...................................... (83) (83) Deferred compensation ................................................... (132) (237) Accumulated deficit ..................................................... (160,670) (121,254) --------- --------- Total stockholders' equity (deficit) ...................................... (29,281) 8,966 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ...................... $ 88,980 $ 120,985 ========= =========
See accompanying notes 3 4 AVIRON CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- REVENUES: Contract revenues and grants ................ $ 1,363 $ 107 $ 19,838 $ 494 -------- -------- -------- -------- OPERATING EXPENSES: Research and development .................... 19,593 12,469 47,960 33,126 General, administrative and marketing ....... 3,602 2,673 9,435 7,325 -------- -------- -------- -------- TOTAL OPERATING EXPENSES ...................... 23,195 15,142 57,395 40,451 -------- -------- -------- -------- LOSS FROM OPERATIONS .......................... (21,832) (15,035) (37,557) (39,957) -------- -------- -------- -------- OTHER INCOME/(EXPENSE): Interest income ............................. 804 1,668 3,077 4,468 Interest expense ............................ (1,590) (1,606) (4,777) (3,267) -------- -------- -------- -------- TOTAL OTHER INCOME (EXPENSE), NET ............. (786) 62 (1,700) 1,201 -------- -------- -------- -------- NET LOSS ...................................... $(22,618) $(14,973) $(39,257) $(38,756) ======== ======== ======== ======== Basic and diluted net loss per share .......... $ (1.43) $ (0.95) $ (2.49) $ (2.46) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share .......................... 15,814 15,643 15,755 15,739
See accompanying notes. 4 5 AVIRON CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................. $(39,257) $(38,756) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization ..................... 3,423 1,918 Amortization of debt issuance costs ............... 429 279 Amortization of deferred compensation ............. 105 307 Changes in assets and liabilities: Accounts receivable ............................... (3,936) 29 Inventory ......................................... (2,029) -- Prepaid expenses and other current assets ......... 431 (54) Deposits and other assets ......................... (1,610) (405) Accounts payable .................................. 1,028 1,549 Accrued expenses and other liabilities ............ 4,649 (144) Deferred rent ..................................... 842 396 -------- -------- Net cash used in operating activities .................... (35,925) (34,881) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments .......................... (40,282) (55,305) Maturities of investments ......................... 65,649 47,734 Expenditures for property and equipment ........... (10,664) (11,485) -------- -------- Net cash provided by (used in) investing activities ...... 14,703 (19,056) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligation .... (277) (374) Proceeds from convertible debt offering, net ...... -- 96,000 Repurchase of Common Stock ........................ -- (13,337) Proceeds from issuance of Common Stock, net: ...... 1,064 725 -------- -------- Net cash provided by financing activities ................ 787 83,014 -------- -------- Net increase (decrease) in cash and cash equivalents ..... (20,435) 29,077 Cash and cash equivalents at beginning of period ......... 28,164 15,239 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 7,729 $ 44,316 ======== ========
See accompanying notes. 5 6 AVIRON NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed 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 financial information as of September 30, 1999 and for the three-month and nine-month periods ended September 30, 1999 and 1998 are unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which Aviron (the Company) 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, 1998 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 financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for a full fiscal year. Accounts Receivable Accounts receivable is comprised principally of amounts receivable from partners in connection with reimbursement of certain expenses associated with the development and commercialization of FLUMIST(TM), the Company's live cold-adapted virus vaccine. Inventory Inventory is comprised principally of sprayer components that will be used in the manufacture of commercial batches of FLUMIST(TM) for sale. Inventory is valued at the lower of cost (FIFO) or market value. 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 nine-month periods ended September 30, 1998 and 1999. 2. Net Loss Per Share The Company calculates net loss per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (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 the Company's net loss position, the result would be anti-dilutive. 3. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (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 the Company. 6 7 As of January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires companies to capitalize certain qualifying computer software costs, which are incurred during the application development stage, and amortize them over the software's estimated useful life. The adoption of SOP 98-1 did not have a significant effect on the results of operations or the financial position of the Company. 4. Collaboration Agreement On January 12, 1999, the Company announced a worldwide collaboration for the marketing of FLUMIST(TM) with Wyeth Lederle Vaccines, a business unit of Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation (Wyeth). On March 15, 1999, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1996 regarding this collaboration. Under the agreement, Aviron is granting Wyeth exclusive worldwide rights to market FLUMIST(TM). Wyeth and Aviron will co-promote FLUMIST(TM) in the United States, while Wyeth will have the exclusive right to market the product outside the United States. In each case, Wyeth will hold the marketing rights for up to eleven years. The collaboration excludes Korea, Australia, New Zealand and certain South Pacific countries. The companies will collaborate on the regulatory, clinical, and marketing programs for the product. As consideration under the agreement, the Company received a cash payment of $15.0 million for the initial license that was recognized as revenue during the quarter ended March 31, 1999. During the period from March 15 through September 30, 1999, the Company recorded $3.7 million of revenue in expense reimbursement from Wyeth for a portion of its clinical development and commercialization costs. In addition, the Company will receive $15.5 million upon acceptance for filing with the U.S. Food and Drug Administration (FDA), and $20 million upon FDA marketing approval for FLUMIST(TM). Compensation for achieving additional development and regulatory milestones is included in the agreement terms. The granting of certain rights under the license would trigger additional payments in excess of $140 million to the Company. Consideration for the license also includes a commitment to provide up to $40 million in future financing to the Company from Wyeth, a portion of which is contingent upon regulatory approval of the product, with the remaining amount to come from participation in the Company's future securities offerings. The potential value for the license fees, milestones and financing support that the Company could receive under the collaboration exceeds $400 million. In addition to the payments mentioned above, the Company anticipates that it will earn product revenues from Wyeth, in the form of product transfer payments and royalties, which increase at higher sales levels. The Company will incur expenses to supply and co-promote the product. 5. Credit Facilities During 1999, the Company entered into two new credit facilities that could provide a total of up to $27 million of additional financing during 1999 and 2000. The credit facilities are secured by various assets of the Company and require the maintenance of a minimum balance of cash and investments in the amount of $20 million. As of September 30, 1999, no amounts have been drawn against either of these credit lines. Once drawn, the loans will be repaid over varying terms ranging from 48 to 73 months in monthly payments. 6. Manufacturing Agreement On July 2, 1999 the Company and Medeva Pharma Limited (Medeva Pharma), a subsidiary of Medeva PLC, extended their collaboration covering the manufacture of key components of FLUMIST(TM) through December 2005. The Company paid Medeva Pharma $1.0 million upon execution of the agreement and will pay an additional $1.0 million on December 31, 1999. 7 8 Under the terms of the new agreement, the Company will make specified payments to Medeva for reaching certain technological, regulatory, and employment milestones, supplying the vaccine components of FLUMIST(TM), and providing the use of facilities. The Company is required to make annual minimum payments to Medeva Pharma totaling 25 million British Pounds Sterling over the term of the agreement. These minimum payments include all of the milestone, supply, and facility use payments described above. In addition, the Company will make payments to Medeva Pharma totaling $20 million over the term of the agreement based on net sales of FLUMIST(TM). 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. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the Company's Registration Statement on Form S-3 (No. 333-87185), filed in September 1999, in the section entitled "Risk Factors." OVERVIEW Since its inception in April 1992, Aviron has devoted substantially all of its resources to its research and development programs. To date, Aviron has not generated any revenues from the sale of products and does not expect to generate any such revenues until 2001 at the earliest. Aviron has incurred cumulative net losses of approximately $160.7 million as of September 30, 1999 and it expects to incur substantial operating losses over at least the next few years. Aviron has financed its operations through proceeds from private placements of preferred stock, two public offerings and a private placement of Common Stock, a private placement of convertible subordinated notes, revenue from its collaborative agreements, equipment lease financings and investment income earned on cash, cash equivalent balances and marketable securities. On June 30, 1998, Aviron submitted its first Product License Application/Establishment License Application (PLA/ELA) to the U.S. Food and Drug Administration (FDA) for its live cold-adapted influenza vaccine, FLUMIST(TM), a trivalent vaccine. On August 31, 1998 the Company announced that it had received notice from the FDA that its submission was not accepted for filing due to lack of data on manufacturing, validation and stability. On December 10, 1998, the Company reported on a meeting with the U.S. Food and Drug Administration Center for Biologics Evaluation and Research (CBER) regarding plans for submission of the Company's license applications for FLUMIST(TM). Requirements for completion of the submission include data on manufacturing and assay validation, stability, and clinical equivalence. The resubmission will be in the form of a Biologics License Application (BLA) in accordance with current FDA requirements. On November 14, 1999, the Company announced that it will not file a BLA for FLUMIST(TM) in 1999. The schedule change is due to issues that arose in routine validation tests during the vaccine manufacturing process. The Company has initiated investigations to evaluate certain tests (assays) which have provided inconsistent readings. The investigations will determine the need for any additional validation work on the assays or the manufacturing process. Separately, Medeva Pharma Limited (Medeva Pharma), formerly Evans Medical Limited, a subsidiary of Medeva PLC, which manufactures components of the vaccine, notified Aviron of facilities compliance issues at its facility near Liverpool, England. Aviron is working closely with Medeva to determine how this may impact FLUMIST(TM) manufacturing, and the steps necessary to achieve compliance. The timing of a BLA filing will depend on the information obtained from these inquiries. Once they are completed, the Company will announce a new timeline for filing. 9 10 The Company expects its research and development expenditures to increase substantially over the next several years as the Company expands its research and development efforts, preclinical testing and clinical trials with respect to certain of its programs, and manufacturing activities principally in regard to FLUMIST(TM). In addition, general, administrative and marketing expenses are expected to continue to increase as the Company expands its operations and prepares for the potential commercial launch of FLUMIST(TM). The Company announced in late 1998 positive preliminary results of a Phase 2 clinical trial for a live intranasal vaccine for Parainfluenza Virus Type 3 (PIV-3) to protect against croup. The Company intends to continue preparation for further clinical trials for PIV-3. The Company also is developing a subunit vaccine for Epstein-Barr Virus (EBV) to protect against infectious mononucleosis in collaboration with SmithKline Beecham Biologicals, S.A. (SmithKline Beecham). On August 11, 1999, the Company announced the completion of a Phase 1 clinical trial of this vaccine. The study showed that the vaccine tested was generally safe and well tolerated whether or not subjects had been exposed to EBV prior to the study. Although the study was not designed to evaluate the efficacy of the vaccine, laboratory tests showed evidence of immune response in vaccine recipients. The trial was a randomized, double-blind study to evaluate safety and immunogenicity of two formulations of intramuscularly injected vaccines in healthy young adults. It was conducted at University Hospital of Liege, Belgium. The vaccine was administered to 67 subjects. The vaccine under development is based on the single surface antigen responsible for most of the neutralizing antibodies stimulated by EBV infection, and combines Aviron's antigen with SmithKline's proprietary adjuvant technology. In addition, the Company expects to begin a clinical trial by early 2000 for a vaccine candidate for Cytomegalovirus (CMV) with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institute of Health (NIH). Aviron is also using its proprietary Rational Vaccine Design technologies to develop vaccine candidates for diseases caused by Herpes Simplex Virus Type 2 (HSV-2) and Respiratory Syncytial Virus (RSV). Influenza Clinical Trials The Company has conducted and continues to conduct clinical trials to evaluate safety and efficacy of FluMist(TM). To date, the Company has tested FLUMIST(TM) in over 11,000 children and adults in completed clinical trials. The Company's clinical trials relate to the safety, efficacy, and effectiveness of the trivalent formulation of its intranasal spray delivery method. The Company enrolled a total of 647 patients in Phase 1/Phase 2 clinical trials; 92 patients in a challenge efficacy study in healthy adults, in collaboration with the NIH; 1,602 children in Year 1 of the Phase 3 pediatric protective efficacy trial, 1,358 of whom returned for Year 2, 948 of whom returned for Year 3, and 508 of whom have returned for Year 4 of the trial; and 10,379 adults and children in six additional studies and in a healthy working adult effectiveness trial. The Company has received limited data on the efficacy of FLUMIST(TM) against culture-confirmed influenza from clinical trials in healthy adults. There can be no assurance that data from such trials, in addition to prior trials, will be sufficient to support the FDA approval in healthy children or adults. The Company's clinical trials are being designed to support the planned BLA submission seeking approval of FLUMIST(TM) in several target populations. Phase 3 Clinical Trials in Children The Company has completed a two-year pivotal Phase 3 clinical trial to evaluate one-and two-dose regimens in children. The Company's clinical trial data suggest that a repeat or booster dose may be required in young children without previous exposure to influenza or influenza vaccines. Two doses of the inactivated injectable influenza vaccine are recommended annually for young children receiving influenza prophylaxis for the first time. The Company enrolled 1,602 children at 10 clinical sites in the pivotal Phase 3 clinical trial, of which 1,314 were vaccinated with a second dose 46 to 74 days after initial vaccination. The primary endpoint of the first stage of the study was defined as protection of children from culture-confirmed influenza during naturally occurring epidemics of influenza. 10 11 In May 1998, data from the first year of this trial of FLUMIST(TM) were published in The New England Journal of Medicine. In the randomized, placebo-controlled study, results show that only 14 of the 1,070 children vaccinated with FLUMIST(TM) experienced culture-confirmed influenza, while 95 of the 532 placebo recipients experienced culture-confirmed influenza. Of the children who received FLUMIST(TM), only one child developed influenza-associated otitis media (ear infection), while 20 of the placebo recipients developed influenza-associated ear infections. Throughout the entire cough, cold and flu season, 1,070 children vaccinated with FLUMIST(TM) experienced 30 percent fewer ear infections with fever than children who received placebo and a 35 percent reduction in related antibiotic use. The children who participated in the first year of this study were invited back to participate for a second year of the trial during the 1997-98 flu season, and they were vaccinated with either a single dose of FLUMIST(TM) or a placebo spray. In September 1998, the results of Year 2 of the Phase 3 efficacy trial of FLUMIST(TM) in children, conducted in collaboration with NIAID, were presented at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC). The study showed that FLUMIST(TM) provided 87 percent protection against culture-confirmed influenza overall, 86 percent protection against A/Sydney, an unexpected variant which was the predominant strain of influenza circulating during the 1997-98 flu season, and 100 percent protection against the influenza strains included in the 1997-98 vaccine. Among the 1,358 participants, there were five cases of influenza due to influenza strains included in the vaccine and 66 cases caused by A/Sydney. Two percent of children vaccinated with FLUMIST(TM) (15 out of 917) experienced culture-confirmed influenza, all of which was attributable to the A/Sydney strain, while 13 percent of the placebo recipients (56 out of 441) experienced culture-confirmed influenza. The difference between these two influenza attack rates is used to calculate the overall protection rate of 87 percent. The incidence of pneumonia and other lower respiratory diseases was also reduced in those children vaccinated with FLUMIST(TM), compared to placebo in Year 2 of the study. Eight children in the placebo group developed influenza-related wheezing, bronchitis or pneumonia, all of which were due to the A/Sydney strain. No children who received FLUMIST(TM) experienced such lower respiratory complications. Among the 15 of the 917 children in the FLUMIST(TM) group who did contract influenza, the illness appeared to be milder than in the control group, based on frequency of complications and duration of fever. The Company began a large scale clinical trial in August 1998 to assess the impact of community-wide influenza immunization. The three-year trial, taking place in Temple, Texas, is expected to enroll up to 15,000 children and is funded by a $3 million grant from the NIAID awarded to the Baylor College of Medicine. More than 4,000 children were vaccinated in the first year of the trial. As of November 9, 1999, more than 3,000 children have been vaccinated in the second year of the trial that commenced in September 1999. The trial will evaluate the impact of vaccinating pre-school and school-age children with FLUMIST(TM) on the incidence of doctor visits for flu-related illness. Clinical Trials in Healthy Adults FLUMIST(TM) has been tested in a double-blind, placebo-controlled challenge efficacy study at two Vaccine Treatment Evaluation Units (VTEUs) involving 92 healthy young adults. Subjects were randomized to receive either FLUMIST(TM), the inactivated injectable vaccine, or placebo. There were no serious adverse events attributable to FLUMIST(TM) seen in any subjects, and there were no statistically significant differences in the occurrence of any potential reactions assessed in the study between either vaccine or placebo. Following vaccination and subsequent intranasal administration of the wild-type challenge virus, the incidence of laboratory-documented influenza, a prospectively defined primary endpoint of the trial, was seven percent in subjects vaccinated with FLUMIST(TM), 13 percent in subjects vaccinated with the inactivated injectable influenza vaccine and 45 percent in subjects who received placebo. The reduction in laboratory-documented influenza compared to placebo was statistically significant for FLUMIST(TM) and the inactivated vaccine. These data have not been peer reviewed. No assurance can be given that the conclusions drawn from this analysis will not change as a result of further study by the Company or during the peer review process. 11 12 The Company conducted a Phase 3 trial in 4,561 healthy working adults to assess the impact of immunization on the frequency of influenza-like illness, utilization of health care services, and absenteeism from work. Results of this study were published in the July 14, 1999 issue of the Journal of the American Medical Association. The double-blind, placebo-controlled study was conducted at 13 clinical sites nationwide during the 1997-98 flu season. The participants, aged 18 to 65, each received one dose of vaccine. FLUMIST(TM) recipients had reduced illness by multiple definitions including days of febrile illness (22.9 percent less), days of severe febrile illness (27.3 percent less) and days of febrile upper respiratory tract illness (24.8 percent less). Reductions in illness-associated absenteeism and health resource use were observed across several illness definitions. For example, those receiving FLUMIST(TM) missed 28.4 percent fewer work days due to febrile upper respiratory illness and had a 40.9 percent reduction in health care provider visits. In addition, FLUMIST(TM) recipients experienced a 45.2 percent reduction in days of prescription antibiotic use and 28.0 percent fewer days of OTC medication due to febrile upper respiratory illness. Data from this study are expected to be part of the Company's BLA submission to the FDA. Clinical Trials in High-Risk Adults The Company has completed a clinical trial for safety in 200 elderly high-risk adults for the use of FLUMIST(TM) for co-administration with the inactivated injectable influenza vaccine. As this trial was not designed to generate efficacy data on use of FLUMIST(TM) in high-risk adults, there can be no assurance that data from this trial, combined with data from the Company's other clinical trials and prior trials, will be sufficient to support FDA approval for use of FLUMIST(TM) in high-risk adults even if the FDA were satisfied with the safety data submitted. Early in the fourth quarter of 1998, the Cooperative Studies program of the Department of Veterans Affairs Office of Research and Development began a one-year trial to evaluate the potential additional benefit of co-administration of FLUMIST(TM) with the flu shot, compared to the flu shot alone, in high-risk patients with chronic obstructive pulmonary disease. This study involved over 2,000 volunteers at 20 participating VA Medical Centers in the United States. Results from this trial are being prepared for analysis by the VA. Clinical Trials for Manufacturing Consistency and Process In February 1998, the Company reported positive results from a manufacturing consistency lot trial of bulk vaccine manufactured, blended, and filled into sprayers at Medeva Pharma. The Company conducted a randomized, double-blind, placebo-controlled trial in 500 children, designed to evaluate the safety and immunogenicity of three new manufacturing lots of FLUMIST(TM). The children were vaccinated between April and September 1997. Analysis of patient diary cards and antibody responses following two doses of FLUMIST(TM) showed consistent safety and immunogenicity for the different lots according to the pre-defined endpoints. On June 9, 1999, the Company announced completion of a bridging study on FLUMIST(TM) designed to compare FLUMIST(TM) blended and filled at Aviron's facility at Packaging Coordinators, Inc. (PCI) in Philadelphia, Pennsylvania, to vaccine manufactured with the process used in earlier clinical trials, blended and filled by Medeva Pharma. The study's primary endpoint was to show that FLUMIST(TM) blended and filled at Aviron's PCI facility had similar immunogenicity for all three 1997-98 influenza strains to the vaccine blended and filled at Medeva Pharma. The secondary endpoint was to show that the two lots of vaccine had similar safety and tolerability profiles. The 225-person trial was conducted in Australia from December 1998 through March 1999. Participants were children aged 12 to 42 months, randomized to receive vaccine blended and filled at one of the two manufacturing sites. The study was conducted in collaboration with CSL Limited, Aviron's Australian marketing partner for FLUMIST(TM). The Company's preliminary analysis indicates that the results appear to meet all of the Company's objectives. Aviron will include data from this clinical study in its licensing application for the vaccine. 12 13 Partnering Agreements The Company has entered into several development and marketing agreements with respect to its products. In January 1999, the Company announced a worldwide collaboration for the marketing of FLUMIST(TM) with Wyeth Lederle Vaccines, a business unit of Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation (Wyeth), under which Wyeth and the Company will co-promote FLUMIST(TM) in the United States, while Wyeth will have the exclusive right to market the product outside the United States, except for Korea, Australia, New Zealand and certain countries in the South Pacific region. Wyeth and the Company will collaborate on the regulatory, clinical and marketing programs for FLUMIST(TM). In June 1998, the Company announced the signing of an agreement with CSL Limited to develop, sell and distribute FLUMIST(TM) in Australia, New Zealand and certain countries in the South Pacific region. Under the agreement, CSL Limited and Aviron will jointly carry out additional trials in Australia for FLUMIST(TM). Expenses associated with these agreements are expected to increase as the Company continues preclinical testing and clinical trials and prepares for the potential commercial launch of FLUMIST(TM). No assurance can be given, however, that the Company will receive any future payments from CSL Limited or Wyeth. In October 1995, the Company signed an agreement with SmithKline Beecham defining a collaboration on the Company's EBV vaccine technology. Under the terms of this agreement, the Company granted SmithKline Beecham an exclusive license to produce, use and sell non-live EBV vaccines incorporating the Company's technology for prophylactic and therapeutic uses on a worldwide basis, except in Korea. The Company retained U.S. co-marketing rights to a monovalent EBV vaccine formulation which will be supplied by SmithKline Beecham. The Company is entitled to royalties from SmithKline Beecham based on net sales of the non-live EBV vaccine. No assurance can be given, however, that the Company will receive any future payments from SmithKline Beecham or that SmithKline Beecham will not terminate this agreement. In May 1995, the Company entered into a Development and License Agreement with Sang-A Pharm. Co., Ltd. (Sang-A). The Company granted to Sang-A certain exclusive clinical development and marketing rights in Korea for specified products developed by the Company, including vaccines for influenza (cold-adapted and recombinant), PIV, EBV, CMV, HSV-2 and RSV on meeting certain conditions. However, the Company is under no obligation to develop any product. Sang-A also will make payments to the Company upon Sang-A's meeting certain regulatory milestones for each product in Korea and will pay a royalty to the Company on net sales of such products in South and North Korea. No assurance can be given, however, that the Company will receive any future payments from Sang-A or that Sang-A will not terminate its agreement with the Company. In January 1997, Sang-A declared bankruptcy. The Company is unable to predict what, if any, long-term effect the bankruptcy will have on Sang-A and on the Company's agreement with Sang-A. Manufacturing Facilities In April 1997, the Company entered into an agreement with Medeva Pharma for the commercial manufacture of FLUMIST(TM) through December 2001. In July 1999, the agreement with Medeva Pharma was revised and extended through December 2005. In October 1997, the Company entered into an agreement with PCI for the blending, filling, labeling and packaging of FLUMIST(TM) in the United States until October 2004. In 1998, Aviron and PCI opened a 34,000-square-foot manufacturing suite in Philadelphia, Pennsylvania at PCI's site, in which PCI blended, filled and packaged doses of FLUMIST(TM) for use in 1998-99 clinical trials. In April 1999, the employees performing the blending and filling activities were transferred to the Company's payroll. All activities at this site will henceforth be referred to collectively as Aviron PA. If regulatory approval is received, this Aviron PA facility is expected to be used to blend, fill, label, package and store FLUMIST(TM). The agreements with Medeva Pharma and PCI have required the Company to fund the construction of facilities, improvements, and equipment and will continue to require the Company to incur expenses for the duration of the agreements for facility space, utilities and insurance. 13 14 In February 1999, the Company leased a 69,000 square-foot building in Santa Clara, California. The facility will provide additional laboratory, pilot plant, manufacturing and office space to accommodate growth. This additional space will require the commitment of significant additional funds during 1999, 2000, and 2001 for renovation, equipment and furnishings. The Company may be capacity constrained in its supply of FLUMIST(TM). In order to secure future production capacity, the Company may extend and expand its existing arrangements, collaborate with other third parties, or expand its own manufacturing facilities. Using an alternative supplier or expanding its proprietary facility would require a substantial amount of funds and additional clinical trials and testing. There can be no assurance that an alternative source of supply will be established on a timely basis, or that the Company will have or be able to obtain funds sufficient for building or equipping such additional facilities. The Company is currently evaluating the costs and benefits of developing internal manufacturing capabilities or contracting for expanded or alternative sources of supply from third-party manufacturers for products other than FLUMIST(TM). Research Grants During 1998, the Company received notice from the NIAID of a Small Business Innovation Research (SBIR) grant to support development of its live attenuated vaccine for the prevention of disease caused by CMV in amounts totaling approximately $950,000. In September 1999, the Company received notification of an additional award from the NIAID for CMV in the amount of $600,000. A portion of the award has been used to produce recombinant CMV vaccine candidates for human testing. The remainder of the award will be used to determine the safety and immunogenicity of these vaccine candidates in a Phase 1 clinical trial in collaboration with the NIAID Vaccine Treatment and Evaluation Unit network. No assurance can be given, however, that the Company will receive any future grants to support its research or that such research will result in commercially viable products. This trial will be conducted under an Investigational New Drug (IND) which has been filed by the NIH. As of September 1999, approximately $925,000 of these awards has been utilized. Business Risks The Company's business is subject to significant risks, including but not limited to manufacturing uncertainties; the risks inherent in its research and development efforts, including preclinical testing and clinical trials; uncertainties associated both with obtaining and enforcing its 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 the Company's product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons. Such reasons include the possibilities that the products will be found unsafe or ineffective 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 the section entitled "Risk Factors" in the Company's Registration Statement on Form S-3 (No. 333-87185), filed in September 1999. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Revenues The Company earned $1.4 million in revenues for the three months ended September 30, 1999, compared to $107,000 for the three months ended September 30, 1998. 14 15 The 1999 revenues were comprised principally of expense reimbursement from Wyeth under the FLUMIST(TM) collaboration agreement, combined with research grants and revenues from other contracts. The 1998 revenues came from contract services rendered to other biotechnology companies. Operating Expenses Research and development expenses increased to $19.6 million in the three months ended September 30, 1999 from $12.5 million for the three months ended September 30, 1998. The increase was due primarily to an increase in development activities, depreciation, documentation, validation, and other expenses associated with the commercial scale-up of the manufacturing facilities associated with FLUMIST(TM). The Company expects these expenses to continue to increase during the remainder of 1999 as development and manufacturing activities expand in preparation for potential commercialization of FLUMIST(TM). These expenses are expected to increase in the future in continued support of these activities. General, administrative and marketing expenses increased to $3.6 million in the three months ended September 30, 1999 from $2.7 million for the three months ended September 30, 1998. This increase was due to additional staffing, legal and other infrastructure costs necessary to support the development of FLUMIST(TM) and other products. These expenses are also expected to increase in the future in continued support of these activities. Net Interest Income (Expense) Net interest income decreased to a net expense of $786,000 in the three months ended September 30, 1999, as compared to net interest income of $62,000 for the three months ended September 30, 1998. The decrease in net interest is primarily due to the reduced cash, cash equivalents, and investment balances as funds have been used to meet operating expenses and capital requirements. NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Revenues The Company earned $19.8 million in revenues for the nine months ended September 30, 1999, compared to $494,000 for the nine months ended September 30, 1998. The 1999 revenues are comprised primarily of amounts earned from Wyeth under the FLUMIST(TM) collaboration agreement, which included a non-refundable initial payment in the amount of $15.0 million, $3.7 million in expense reimbursement from Wyeth, and revenues from other contracts and research grants. The 1998 revenues were from a grant payment from the NIH for research on the Company's CMV vaccine and from payments received for services rendered to other biotechnology companies. Operating Expenses Research and development expenses increased to $48.0 million in the nine months ended September 30, 1999, from $33.1 million for the nine months ended September 30, 1998. The increase was due primarily to an increase in development activities, depreciation, documentation, validation, and other expenses associated with the commercial scale-up of the manufacturing facilities associated with FLUMIST(TM). The Company expects these expenses to increase during the remainder of 1999 as development and manufacturing activities expand in preparation for potential commercialization of FLUMIST(TM). These expenses are expected to increase in the future in continued support of these activities. General, administrative and marketing expenses increased to $9.4 million in the nine months ended September 30, 1999, from $7.3 million for the nine months ended September 30, 1998. This increase was due to additional staffing, legal and other infrastructure costs necessary to support the development of FLUMIST(TM) and other products. These expenses are expected to increase in the future in continued support of these activities. 15 16 Net Interest Income (Expense) Net interest decreased to a net expense of $1.7 million for the nine months ended September 30, 1999, as compared to net interest income of $1.2 million for the nine months ended September 30, 1998. The decrease in net interest is due to a combination of increased interest expense associated with the issuance of the Company's convertible debt on March 30, 1998 and decreased interest income associated with a reduction in the average balances of cash, cash equivalents, and investments as funds have been used to meet operating expenses and capital requirements. LIQUIDITY AND CAPITAL RESOURCES The Company had cash, cash equivalents and marketable securities at September 30, 1999 of approximately $48.9 million. In order to preserve principal and maintain liquidity, the Company's funds are invested in United States Treasury and agency obligations, highly rated corporate obligations and other liquid investments. The Company has financed its operations since inception primarily through private placements of Preferred Stock from 1992 to 1995, an initial public offering of Common Stock in November 1996, a private sale of Common Stock in March 1997, a second public offering of Common Stock in August 1997, and a private placement of convertible subordinated notes in March 1998. Through September 30, 1999, the Company had raised approximately $236.3 million from such activities net of offering expenses. During 1999, the Company entered into two new credit facilities that could provide a total of up to $27 million of additional financing during 1999 and 2000. (See Note 5 to the financial statements.) Cash used in operations was $35.9 million and $34.9 million for the first nine months of 1999 and 1998, respectively. The increase in cash used in operating activities was primarily due to increases in operating expenses, which was partially offset by the receipt of the $15.0 million payment from Wyeth. The Company expects expenditures for research and development, clinical trials and general, administrative and marketing expenses to continue to increase during the remainder of 1999 and beyond as the Company develops its products, expands its clinical trials and prepares for the potential commercial launch of FLUMIST(TM). Cash expended for capital additions and to repay lease financing arrangements amounted to approximately $10.9 million and $11.9 million for the nine months ended September 30 of 1999 and 1998, respectively. Capital expenditures decreased in 1999 primarily due to a decrease in the level of expenditures for facilities and equipment at PCI and Medeva, which is partially offset by increases in expenditures for the Santa Clara and Mountain View facilities. Capital expenditures are expected to increase during the last quarter of 1999 and beyond, primarily in connection with the Santa Clara facility. The Company anticipates that its existing cash, cash equivalents and short-term investments, revenues and other advances available under existing collaborations, and borrowings under its existing credit facilities will enable it to maintain its current and planned operations into 2000. The Company's future cash requirements beyond 1999 will depend on numerous factors, including the time and costs involved in obtaining regulatory approvals; the ability to successfully launch FLUMIST(TM) in the United States; continued scientific progress in the research and development of the Company's technology and vaccine programs; the size and complexity of these programs; the ability of the Company to establish and maintain collaborative arrangements; the timing of receipt of milestone payments and loans, if any, under such collaborative agreements; progress with preclinical testing and clinical trials; the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; the cost of constructing or expanding any or all of its manufacturing facilities, and product commercialization activities. The Company anticipates raising outside funding through additional debt or equity financings in 2000. There can be no assurance that such funds will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or to obtain funds through collaborative agreements with others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself, which could materially adversely affect the Company's business, financial condition and results of operations. 16 17 IMPACT OF "YEAR 2000" Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead, the so-called "Year 2000" problem (Y2K). If not corrected, those programs could cause date-related failures. The Company has completed its assessment of Y2K related problems. Four potential areas of exposure -- (a) internal information systems (b) scientific equipment (c) facility support systems (d) the readiness of significant third parties with whom the company has material business relationships -- have been evaluated. The results of the assessment and the status of remedial action and testing are as indicated below. 1. Internal Information Systems The Company uses a number of computers and software programs throughout its entire operations. An inventory has been performed of computer equipment and programs, to determine if Y2K problems exist which may affect the Company's internal information processes. - - The Company has completed the process of upgrading its older financial and accounting programs to Y2K compliant systems. These systems were tested and have been verified to be Y2K compliant. - - During 1998, the Company also completed the installation of internal systems for the accumulation and statistical evaluation of clinical trial data. These systems were tested and have been verified to be Y2K compliant. - - To date, no other significant internal information systems have been identified as non-Y2K compliant. - - Procedures have been enacted to verify the Y2K compliance of new systems. 2. Scientific Equipment All major pieces of scientific equipment have been inventoried. As part of its assessment, the Company made inquiries of its internal staff and third-party vendors, including its suppliers of scientific equipment, to determine if Y2K problems exist which may affect the Company's research and development operations. - - Only one piece of laboratory equipment was found to require remediation in the form of an inexpensive software upgrade. - - To date, no other significant pieces of scientific equipment have been identified as non-Y2K compliant. - - Procedures have been enacted to verify the Y2K compliance of new scientific equipment. 3. Facility Support Systems The Company has made inquiries of its internal staff and third-party vendors of utilities, communication and other facility support systems at the Mountain View and Santa Clara facilities, to determine if Y2K problems exist which may affect communications, administrative or support functions. - - Remediation was determined to be necessary for certain of the communication and process systems and for certain of the building control, access and alarm systems. With the exception of one environmental monitoring system and certain access control systems, remediation efforts in this area have been completed. Certain hardware replacements and software upgrades were completed as of the end of the third quarter of 1999 at a cost of less than $20,000. These systems will be tested to verify Y2K compliance. - - Remediation efforts on one environmental monitoring system will be completed during the fourth quarter of 1999 at an estimated cost of less than $10,000. This system will then be tested to verify Y2K compliance. - - Manual controls are being identified to address access control issues and will be in place prior to the end of 1999. 17 18 4. Third Parties with Major Business Relationships The Company currently has no products available for commercial sale. In preparation for the potential commercial launch of FLUMIST(TM), the Company has contacted its third party manufacturers and its marketing and distribution partners to determine their level of Y2K readiness. All of these parties have advised us that they have a Y2K plan in place and that remediation steps, if any, will be completed prior to December 1999. It is not possible for the Company to undertake an independent verification and testing of the readiness of these parties for all potential Y2K issues. The failure of any of these parties to successfully identify and remedy the impact of Y2K upon their businesses could have a material adverse effect on the Company's business, including delaying or adversely affecting the potential commercial launch of FLUMIST(TM). External and internal costs specifically associated with modifying internal use software for Y2K compliance are expensed as incurred. To this point, these costs have not been material, and the Company does not expect such costs to be material in the future. There can be no assurance, however, that the Company's assessment of Y2K's potential impact will not change as we complete our remediation steps and continue to monitor the issue, or that Y2K will not ultimately cause a material disruption in the business of the Company. 18 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including changes to interest rates and foreign currency exchange rates. The Company's exposure to such market risk has not changed substantially since December 31, 1998 and reference is made to the more detailed disclosures of market risk included in the Company's Annual Report on Form 10K for such period. Interest Rates -- The Company's 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 market value of the Company's cash equivalents and investments. To mitigate market risk, the Company places its cash in investments that meet high credit standards, as specified in the Company's investment policy guidelines, and staggers the maturity of the investments to meet expected cash demands. 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 its investment portfolio. As a result, the Company does not expect any material loss with respect to its investment portfolio. Foreign Currency Exchange Rates -- The Company pays for the costs of manufacturing and development activities, equipment, and facilities modifications at Medeva Pharma, which is located in the United Kingdom (U.K.) in British Pounds Sterling. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the U.K. The Company is exposed to changes in exchange rates in the United Kingdom. When the U.S. dollar strengthens against the British Pounds Sterling, the U.S. dollar value of British Pounds Sterling-based expenses decreases; when the U.S. dollar weakens, the U.S. dollar value of British Pounds Sterling-based expenses increases. Accordingly, changes in exchange rates, and in particular a weakening of the U.S. dollar, may adversely affect the Company's financial position as expressed in U.S. dollars. 19 20 AVIRON 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 the Company of its intent to issue a written opinion which upholds claims limited to influenza and denies claims directed to non-segmented negative-strand RNA viruses. This decision will not affect Aviron's FLUMIST(TM) cold-adapted influenza product. Aviron intends 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 directed to non-segmented RNA viruses. There can be no assurance that Aviron will be successful in obtaining claims directed to non-segmented RNA viruses as a result of the appeal. If Aviron does not succeed in the appeal of the claims directed to non-segmented RNA viruses it could negatively impact Aviron's ability to exclude others from commercializing an RSV 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 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 appears to purport to assert claims of inventorship relating to 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 patents and patent applications for HSV, and none appear to relate to Aviron's FLUMIST(TM) cold-adapted influenza product or technology or any other pipeline products in research or development. Dr. Roizman is a founder and director of Aviron and a member of its Scientific Advisory Board. Aviron believes the allegations of the lawsuit are unfounded and intends to vigorously defend itself in the matter. There can be no assurance that the Company will prevail in the defense of this lawsuit. 20 21 ITEM 2. CHANGES IN SECURITIES. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS
ITEM DESCRIPTION ---- ----------- 10.28 Master Loan and Security Agreement by and between the Registrant and FINOVA Capital Corporation dated July 23, 1999 27.1 Financial Data Schedule.
---------- (b) REPORTS ON FORM 8-K None 21 22 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: November 15, 1999 By: /s/ J. Leighton Read, M.D. --------------------------- ----------------------------------- J. Leighton Read, M.D. Chairman and Chief Executive Officer Date: November 15, 1999 By: /s/ Fred Kurland --------------------------- ----------------------------------- Fred Kurland Senior Vice President and Chief Financial Officer 22 23 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 10.28 Master Loan and Security Agreement by and between the Registrant and FINOVA Capital Corporation dated July 23, 1999 27.1 Financial Data Schedule.
EX-10.28 2 MASTER LOAN AND SECURITY AGREEMENT 1 FINOVA FINANCIAL INNOVATORS FINOVA Capital Corporation 10 Waterside Drive Farmington, CT 06032-3065 (860) 676-1818 MASTER LOAN AND SECURITY AGREEMENT Master Loan and Security Agreement No. S7250 Dated July 23, 1999 FINOVA Capital Corporation ("we," "us" or "FINOVA"), having its principal place of business at 1850 North Central Avenue, Phoenix, Arizona 85004 is willing to make a loan (the "Loan") to Aviron, Inc. ("you" or "Borrower"), having its principal place of business at 297 N. Bernardo Avenue, Mountain View, California 94043 in one or more advances made from time to time (individually, an "Advance" and collectively, the "Advances"), in the aggregate principal amount of up to Seventeen Million Dollars ($17,000,000), under the terms and conditions contained in this Master Loan and Security Agreement (this "Master Agreement"). The entire Loan will be "cross collateralized" and secured by the collateral (the "Collateral") described in each schedule (individually, a "Schedule" and collectively, "Schedules") which will be executed in connection with each Advance and the related Note (as hereinafter defined). The Collateral includes the FF&E hereinafter described and any and all replacement parts, additions, accessories and accessions that you may add to the FF&E, as well as all replacements and substitutions of the FF&E and all proceeds of the FF&E, including, without limitation, insurance proceeds. We may treat any Schedule as a separate loan and security agreement containing all of the provisions of this Master Agreement. 1. THE CREDIT (a) ADVANCES. Each Advance shall be evidenced by and the specific terms applicable thereto set forth in a Note and related Schedule. All of the Notes and Schedules, taken together, will evidence the entire Loan. We will only make the Loan to you if all the conditions in this Master Agreement have been met to our satisfaction. We will rely on your representations and warranties contained in this Master Agreement, in making the Loan. The terms of this Master Agreement will each apply to the entire Loan. (b) USE OF PROCEEDS. The proceeds of the Advances will be used solely to reimburse you for your payment of the acquisition, construction and installation of the machinery, equipment, fixtures, leasehold improvements and other assets acquired, constructed and/or financed with the proceeds of any Advance and the Loan, all of which shall be satisfactory to us and which is described in the applicable Schedule ("FF&E"). If you have not yet paid for the FF&E (but the same is otherwise satisfactory to us), the proceeds of the Advance will be paid by us directly to the supplier or contractor (which you have chosen) to pay the purchase price or cost of the FF&E. (c) NOTES. Your obligation to repay the Advance and to pay interest thereon will 2 be evidenced by separate secured promissory notes (individually, a "Note" and collectively, the "Notes"). Each Note will be dated the date of the Schedule to which the Advance evidenced by the Note is related. The related Schedule will be deemed to be part of the Note. (d) TERM. The term ("Term") of each Schedule (and the related Advance) begins upon the date that we make payment for the Collateral covered under the Schedule (the "Closing Date"). The Term continues until you fully perform all of your obligations under this Master Agreement, each related Schedule and the related Note(s). (e) LOAN ACCOUNT. We will keep a loan account on our books and records for the Loan. We will record all payments of principal and interest in the loan account. Unless the entries in the loan account are clearly in error, the loan account will definitively indicate the outstanding principal balance and accrued interest on the Loan. (f) PAYMENTS. The scheduled payments of principal and interest (the "Payments") are indicated on and due and payable in accordance with the terms of the applicable Note and Schedule. The Payments are payable in advance and otherwise on the dates and in the amounts set forth on the applicable Schedule. (g) FIRST PAYMENT AND SUBSEQUENT PAYMENTS. The first Payment under a Note and Advance ("First Payment") is due at the beginning of its Term and shall, at our option, either be deducted from the proceeds of the Advance or paid directly to us by you. Subsequent Payments are due on the thirtieth (30th) day of each successive month as set forth on the Schedule until you pay to us in full all of the Payments and any other fees, costs, charges and expenses that you owe us. (h) INTEREST. Prior to Maturity of an Advance, you will pay us interest on the Advance at the interest rate indicated in the applicable Schedule (the "Interest Rate"). "Maturity" means the scheduled maturity or any earlier date on which we accelerate the Loan. The Payment amount indicated in the Schedule includes interest at the applicable Interest Rate. Interest is calculated in advance using a year of 360 days with twelve months of 30 days. (i) INTERIM INTEREST PAYMENT. If an Advance is made on a day other than the thirtieth (30th) or thirty-first (31st) day of a month, you will also pay to us, together with the First Payment, interest on the Advance at the applicable interest rate for the period from the date the Advance is made until the twenty-ninth (29th) day of the month in which the Advance is made. If an Advance is made on the thirty-first (31st) day of a month, you will also pay to us, together with the First Payment, interest on the Advance at the applicable interest rate for the period from the date the Advance is made until the twenty-ninth (29th) day of the following month. If an Advance is made on the thirtieth (30th) day of a month, no interim interest will be due. (j) DEFAULT INTEREST RATE. After Maturity of the Loan or any Advance, you will pay us interest thereon at a rate of four (4%) percent per year above the applicable Interest Rate. This is referred to as the "Default Rate." (k) USURY. You and we intend to obey the law. If the Interest Rate charged would exceed the maximum legal rate, you will only have to pay the maximum legal rate. You do not have to pay any excess interest over and above the maximum legal rate of interest. However, if it later becomes legal for you to pay all or part of any excess interest, you will then pay it to us upon our request. -2- 3 (l) PAYMENT DETAILS. You will make all Payments due under this Master Agreement by 2:00 P.M., Connecticut time, on the day they are due. You will make all Payments in US Dollars (US$) in immediately available funds. We do not have to make or give "presentment, demand, protest or notice" to get paid. You waive "presentment, demand, protest and notice." (m) APPLICATION OF PAYMENTS. Each Payment under this Master Agreement is to be applied in the following order: first, to any fees, costs, expenses and charges you may owe us; second, to any interest due; and third to the principal balance. (n) PREPAYMENT. You may not prepay the Loan or any Advance, in whole or in part, unless this is specifically permitted by Exhibit B to the applicable Schedule. (o) NO SETOFFS. Your obligation to pay us all Payments is absolute and unconditional. You are not excused from making the Payments, in full, for any reason. You agree that you have no defense for failure to make the Payments and you will not make any counterclaims or setoffs to avoid making the Payments. 2. SECURITY INTEREST (a) You grant us a first and only lien (subject only to Permitted Liens, as hereinafter defined) on and security interest in the Collateral. The Collateral secures the full and timely payment and performance of all of your now existing or hereafter arising indebtedness, liabilities and obligations to us, whether under this Master Agreement, the Schedules, the Notes and any other agreement, loan or lease that you may at any time or times have with us or otherwise (collectively, the "Obligations"). You also grant us a security interest in any additional collateral identified in any Schedule. Any additional collateral is considered to be "Collateral" and it secures all of the Obligations. (b) If we request, you will put labels supplied by us stating "PROPERTY SUBJECT TO A SECURITY INTEREST HELD BY FINOVA CAPITAL CORPORATION" on the Collateral where they are clearly visible. (c) You give us permission to add to this Master Agreement or any Schedule the serial numbers and other information about the Collateral. (d) You give us permission to file this Master Agreement or Uniform Commercial Code financing statements, at your expense, in order to perfect our security interest in the Collateral. You also give us permission to sign your name on the Uniform Commercial Code financing statements where this is permitted by law. (e) You will pay our reasonable fees and costs for documentation, closing, administration and termination of this Master Agreement, the Notes and Schedules. Notwithstanding the foregoing, you will pay such fees and expenses incurred in connection with the transaction, including the fees and expenses of counsel to prepare, review and negotiate the documentation and close the transaction, up to a maximum of $7,000. Any fees and expenses in excess of $7,000 will be shared equally by FINOVA and you. These fees include such items as reasonable attorneys fees and expenses incurred in preparing this Master Agreement and all agreements, instruments and documents executed in connection herewith, and all amendments, supplements and waivers hereto and thereto, as well as due diligence searches and fees for preparing and filing UCC terminations and releases. You will also pay any filing, recording or stamp fees or taxes resulting from filing this Master -3- 4 Agreement or a Uniform Commercial Code financing statements. (f) At your expense, you will defend our first priority security interest in the Collateral against, and keep the Collateral free of, any legal process, liens, other security interests, attachments, levies and executions, other than Permitted Liens. You will give us immediate written notice of any legal process, liens, attachments, levies or executions, and you will indemnify us against any loss that results to us from these causes. (g) You will notify us at least 15 days before you change the address of your principal executive office or principal place of business. Your principal executive office and principal place of business are set forth at the beginning of this Master Agreement. (h) You will promptly sign and return additional documents that we may reasonably request in order to protect our first priority security interest in the Collateral. (i) Except as set forth in a Schedule, the Collateral is personal property and will remain personal property. Except as set forth in a Schedule, you will not incorporate it into real estate and will not do anything that will cause the Collateral to become part of real estate or a fixture. 3. CONDITIONS OF LENDING (a) See our Commitment Letter to you dated May 6, 1999 (the "Commitment Letter"), which you and we consider to be a part of this Master Agreement. The terms and conditions of the Commitment Letter continue following the making of the first Advance, including, without limitation, conditions to the Loan. However, if there is a conflict between the terms and conditions of this Master Agreement, any Schedule or any Note and the terms and conditions of the Commitment Letter, then you and we agree that the terms and conditions of this Master Agreement, the Schedules and the Notes control over the Commitment Letter terms and conditions. (b) Before we disburse any proceeds of any Advance, we also require the following: (i) That no payment is past due to us under any other agreement, loan or lease that you have with us. (ii) That you are complying with all terms of this Master Agreement, the Schedules and the Notes and there are no defaults hereunder or thereunder. (iii) That we have received all the documents we requested, including the signed Schedule and Note. (iv) That there has been no material adverse change in your financial condition, business or operations, from the financial condition that you have disclosed to us. (v) All conditions contained in the Commitment Letter have been satisfied. 4. REPRESENTATIONS AND WARRANTIES You represent and warrant to us as follows: (a) You are duly organized, existing and in good standing wherever you or it are required by law to be so qualified. You have full power and authority to execute, deliver and carry out the provisions of this Master Agreement, the Schedules and the Notes and to borrow hereunder and thereunder. This Master Agreement, the Schedules and the Notes are validly executed and delivered by you and are the legal, valid and binding obligations of -4- 5 you, each enforceable in accordance with its terms. (b) Except as disclosed in a Schedule, you are not a defendant under any material litigation and there are no judgments outstanding against you. (c) All of the FF&E has been delivered to you and installed at the location set forth on the Schedule and you have accepted all of the FF&E for all purposes of this Master Agreement. (d) You have good title to all of your assets, including, without limitation, the Collateral, and in the case of the Collateral, free and clear of all security interests, liens and other encumbrances, except for Permitted Liens. Upon filing of UCC-1 financing statements in all applicable filing offices, we will be granted a first and only (except for Permitted Liens) perfected lien on and security interest in all of the Collateral. There are no other security interests, liens or encumbrances covering the Collateral, except for Permitted Liens. For purposes of this Master Agreement, "Permitted Liens" means (i) liens for taxes, assessments and other governmental charges or levies or the claims or demands of landlords, carriers, warehousemen, mechanics, laborers, materialmen and other like persons arising by operation of law in the ordinary course of business for sums which are not yet due and payable; (ii) liens to secure the payment of sums which are not yet due and payable incurred in the ordinary course of business with respect to workers' compensation, unemployment insurance or other social security benefits or obligations, public or statutory obligations; (iii) liens in favor of FINOVA; and (iv) liens in favor of customs and revenue authorities arising as a matter of law to secure payments of customs duties in connection with the importation of goods, which liens are limited to the extent that such assets are in the possession of customs authorities.. (e) You have supplied us with information about the Collateral. You promise to us that the amount of our Advance as to each item of FF&E is no more than the fair and usual price for this kind of FF&E, taking into account any discounts, rebates and allowances that you or any affiliate of yours may have been given for the FF&E. (f) The Collateral is located at the premises set forth on the Schedule. (g) All financial information and other information that you have given us is true and complete. You have not failed to tell us anything that would make the financial information not misleading. There has been no material adverse change in your financial condition, business or operations, from the financial condition, business or operations that you disclosed to us. (h) You have complied with all "environmental laws" and will continue to comply with all "environmental laws," except where noncompliance could not reasonably be expected to have a material adverse effect on the business, property or assets, condition (financial or otherwise) or operations of you and your subsidiaries. No "hazardous substances" are used, generated, treated, stored or disposed of by you or at your properties except in compliance with all environmental laws. "Environmental laws" mean all federal, state or local environmental laws and regulations, including the following laws: CERCLA, RCRA, Hazardous Materials Transport Act and The Federal Water Pollution Control Act. "Hazardous substances" means all hazardous or toxic wastes, materials or substances, as defined in the environmental laws, as well as oil, flammable substances, asbestos that is or -5- 6 could become friable, urea formaldehyde insulation, polychlorinated biphenyls and radon gas. 5. COVENANTS You agree to do the following things (or not to do the following things if so stated) until full payment of all amounts due to us under this Master Agreement, the Schedules and the Notes: (a) CARE, USE, LOCATION, TRANSFER, ENCUMBRANCE AND ALTERATION OF THE COLLATERAL. (i) You will make sure that the Collateral is maintained in good operating condition (ordinary wear and tear excepted), and that it is serviced, repaired and overhauled when this is necessary to keep the Collateral in good operating condition. All maintenance must be done according to the Supplier's or Manufacturer's requirements or recommendations. All maintenance must also comply with any legal or regulatory requirements. (ii) You will maintain service logs for the Collateral, if applicable, and permit us or our agents to inspect the Collateral, the service logs and service reports. You give us and our agents permission to make copies of the service logs and service reports. (iii) We will give you prior notice if we, or our agents, want to inspect the Collateral or the service logs or service reports. We may inspect it during regular business hours. If we find during an inspection that you are not complying with this Master Agreement or if you are otherwise in default under this Master Agreement, you (and not we) will pay our travel, meals and lodging costs, our salary costs, and our costs and fees and those of our agents for reinspection. You will promptly cure any problems with the Collateral that are discovered during our inspections. (iv) You will use the Collateral only for business purposes. You will obey all legal and regulatory requirements in your use of the Collateral, except where noncompliance could not reasonably be expected to have a material adverse effect on the business, property or assets, condition (financial or otherwise) or operations of you and your subsidiaries. (v) You will make all additions, modifications and improvements to the Collateral that are required by law or government regulation. Otherwise, you will not alter the Collateral without our written permission. You will replace all worn, lost, stolen or destroyed parts of the Collateral with replacement parts that are as good or better than the original parts. The new parts will become subject to our security interest upon replacement. (vi) You will not remove the Collateral from the location indicated in the Schedule, provided, however, that you may move the Collateral presently located at such location to another location located in the continental United States, but if and only if (a) you shall have given us not less than thirty (30) days prior written notice of the -6- 7 actual move and a list of all Collateral being so moved, (b) there is then no default hereunder, (c) if the new location is leased, prior to such move, we shall have received a Landlord Waiver executed by the landlord of the new location, said Landlord Waiver to be in form and substance satisfactory to us, (d) we shall have been granted a first perfected lien and security interest on such moved Collateral and there shall be no other liens covering such Collateral (other than Permitted Liens), (e) you shall have executed and delivered to us all such agreements, instruments and documents reasonably requested by us in connection therewith, and (f) we shall have received satisfactory results of all due diligence searches (including, without limitation, environmental audits). (vii) You have and will have good and merchantable title to all of the Collateral. (viii) You will not convey, assign, sell, mortgage, transfer, encumber, pledge, hypothecate, grant a security interest in, grant options with respect to, lease or otherwise dispose of all or any part of any interest whatsoever in or to any or all of the Collateral, or any interest therein. (b) YEAR 2000 COMPLIANT. You represent, warrant and agree to take all action necessary, including, but not limited to, due inquiry and due diligence with critical business partners to assure that there will be no material adverse change to your business by reason of the advent of the year 2000, including, without limitation, that all computer-based systems, embedded microchips and other processing capabilities effectively recognize and process all dates before and after December 31, 1999 ("Y2K Compliant"). At our request, you shall provide to us assurance reasonably acceptable to us that your computer-based systems, embedded microchips and other processing capabilities are Y2K Compliant. (c) RISK OF LOSS. (i) You have the complete risk of loss or damage to the Collateral. Loss or damage to the Collateral will not relieve you of your obligation to make the Payments. (ii) If any Collateral is lost or damaged, you have two choices although if you are in default under this Master Agreement, we and not you will have the two options). The choices are: (A) Repair or replace the damaged or lost Collateral so that, once again, the Collateral is in good operating condition and we have a perfected first priority security interest in it. (B) Pay us the present value (as of the date of payment) of the remaining Payments. We will calculate the present value using a discount rate of five (5%) percent per year. Once you have paid us this amount and any other amount that you may owe us, we will release our security interest in the damaged or lost Collateral and you (or your insurer) -7- 8 may keep the Collateral for salvage purposes, on an "AS IS, WHERE IS" basis and without any representation or warranty whatsoever. (d) INSURANCE. (i) Until you have made all Payments to us under this Master Agreement, the Schedules and the Notes and all Obligations have been satisfied in full, you will keep the Collateral insured. The amount of insurance, the coverage, and the insurance company must be acceptable to us. (ii) If you do not provide us with written evidence of insurance that is acceptable to us, we may buy the insurance ourselves, at your expense. You will promptly pay us the cost of this insurance. We have no obligation to purchase any insurance. Any insurance that we purchase will be our insurance, and not yours, and we may insure the Collateral beyond the date of satisfaction of the Obligations. (iii) Insurance proceeds may be used to repair or replace damaged or lost Collateral or to pay us the present value of the Payments, as provided above. (iv) You appoint us as your "attorney-in-fact" to make claims under the insurance policies, to receive payments under the insurance policies, and to endorse your name on all documents, checks or drafts relating to insurance claims for Collateral. (e) TAXES. (i) You will pay all sales, use, excise, stamp, documentary and ad valorum taxes, license, recording and registration fees, assessments, fines, penalties and similar charges imposed on the ownership, possession, use, lease or rental of the Collateral or on the Loan. (ii) You will pay all taxes (other than our federal or state net income taxes) imposed on you or on us regarding the Payments. (iii) You will reimburse us for any of these taxes that we pay or advance. (iv) You will file and pay for any personal property taxes on the Collateral. (f) INFORMATION SUPPLIED BY YOU. (i) During the Term you will promptly provide us with copies of any current, quarterly and annual reports and all proxy (or information) statements you file with the Securities and Exchange Commission ("SEC"). (ii) You will also provide us with the following financial statements: (A) Quarterly balance sheet and statements of earnings and cash flow - within 45 days after the end of your first three fiscal quarters in each fiscal year. These will be certified by the chief financial officer. (B) Annual balance sheet and statements of -8- 9 earnings and cash flow - within 90 days after the end of each fiscal year. These will be audited by independent auditors acceptable to us. Their audit report must be unqualified. All financial statements will be prepared according to generally accepted accounting principles, consistently applied. The consolidated balance sheets of the Borrower and its subsidiaries as of the date thereof, and the statements of income and cash flows fairly present the results of the operations of the Borrower and its subsidiaries and their cash flows for the periods indicated. The SEC filings that you provide us will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading. (iii) At the same time you deliver the financial statements described in paragraph 5(f)(ii)(A), you will also provide us with a certificate of your chief financial officer stating that no default exists, or, if he cannot certify this because a default does exist, he must specify in reasonable detail the nature of the default. (iv) The audited financial statements described in paragraph 5(f)(ii)(B), must be accompanied by a certificate of such independent auditor stating that no default exists, or, if it cannot certify this because a default does exist, it must specify in reasonable detail the nature of the default. (g) MINIMUM CASH COVENANT. You shall at all times maintain a cash balance (cash and marketable securities) of not less than $20,000,000. You shall deliver to us, monthly, on the 10th day of each month, a copy of your bank and/or securities statements or other documents satisfactory to us evidencing such cash balance, which evidence shall be certified by your Chief Financial Officer as being complete, true and accurate. If the cash balance for any one month is less than $20,000,000, you shall cause to have issued and delivered to us an irrevocable standby letter of credit (in form and substance satisfactory to us and issued by a bank satisfactory to us) in our favor as beneficiary, in an amount equal to the then outstanding principal balance of the Loan and all accrued interest thereon. Thereafter, it shall be an additional condition to the making of each further Advance, that you shall have caused to be issued and delivered to us an additional irrevocable standby letter of credit (each in form and substance satisfactory to us and issued by a bank satisfactory to us) in our favor as beneficiary, each in an amount equal to the requested Advance. Each letter of credit shall provide for automatic renewal annually for the entire Term of the Loan and shall permit us to draw in full if any such letter of credit is not so renewed or if a new letter of credit (satisfactory to us issued by a bank satisfactory to us) is not substituted at least sixty (60) days prior to the expiration of any such letter of credit. The failure to provide any such letter of credit or if any such letter of credit shall at any time cease to be in full force and effect, shall be a default under this Master Agreement. 6. DEFAULTS (a) DEFAULTS. You are in default if any of the -9- 10 following happens: (i) You do not pay us, within five (5) business days of the date when it is due, any Payment or other amount that you owe us under this Master Agreement, any Schedule or any Note or that you owe us under any other agreement, loan, lease or other financial arrangement that you have with us. (ii) Any of the financial information that you give us is not true and complete, or you fail to tell us anything that would make the financial information not misleading. (iii) You do something you are not permitted to do, or you fail to do, within fifteen (15) days of the date required for performance, anything that is required of you, under this Master Agreement, any Schedule or any other lease, loan or other financial arrangement that you have with us. (iv) An event of default occurs for any other lease, loan or obligation of yours that exceeds $100,000 in the aggregate. (v) You file bankruptcy, or involuntary bankruptcy is filed against you and such involuntary bankruptcy is not dismissed within sixty (60) days. (vi) You are subject to any other insolvency proceeding other than bankruptcy (for example, a receivership action or an assignment for the benefit of creditors) and such proceeding that is involuntary is not dismissed within sixty (60) days. (vii) Without our permission, you sell all or a substantial part of your assets, merge or consolidate, or a majority of your voting stock or interests is transferred. (viii) There is a material adverse change in your financial condition, business or operations. (b) REMEDIES, DEFAULT INTEREST, LATE FEES. If you are in default we may exercise one or more of our "remedies." Each of our remedies is independent. We may exercise any of our remedies, all of our remedies or none of our remedies. We may exercise them in any order we choose. Our exercise of any remedy will not prevent us from exercising any other remedy or be an "election of remedies." If we do not exercise a remedy, or if we delay in exercising a remedy, this does not mean that we are forgiving your default or that we are giving up our right to exercise the remedy. Our remedies allow us to do one or more of the following: (i) "Accelerate" the Loan balance under any or all Notes. This means that we may require you to immediately pay us the entire outstanding principal balance of the entire Loan. (ii) Require you to immediately pay us all amounts that you are required to pay us for the entire Term of any other agreements, loans, leases or financial arrangements that you have with us. (iii) Sue you for the entire outstanding principal balance of the Loan and all other amounts you owe us (including, without limitation, all accrued and unpaid interest, including interest at the Default Rate), outstanding fees, -10- 11 costs, expenses and charges, plus all prepayment premiums. (iv) Require you at your expense to assemble the Collateral at a location we request in the United States of America. (v) Remove and repossess the Collateral from where it is located, without demand or notice, or make the Collateral inoperable. We have your permission to remove any physical obstructions to removal of the Collateral. We may also disconnect and separate all Collateral from other property. No court order, court hearing or "legal process" will be required for us to repossess the Collateral. You will not be entitled to any damages resulting from removal or repossession of the Collateral. We may use, ship, store, repair or lease any Collateral that we repossess. We may sell any repossessed Collateral at private or public sale. You give us permission to show the Collateral to buyers at your location free of charge during normal business hours. If we do this, we do not have to remove the Collateral from your location. If we repossess the Collateral and sell it, we will give you credit for the net sale price, after subtracting our costs of repossessing and selling the Collateral. If we rent the Collateral to somebody else, we will give you credit for the net rent received, after subtracting our costs of repossessing and renting the Collateral, but the credit will be discounted to present value using a discount rate equal to the Default Rate. The credit will be applied against what you owe us under this Master Agreement, the Schedules, the Notes and any other agreements, loans, leases and other financial arrangements that you have with us. If the credit exceeds the amount you owe under this Master Agreement, the Schedule, the Notes and any other agreements, loans, leases or financial arrangements that you have with us, we will refund the amount of the excess to you. (vi) We will have all of our rights and remedies under this Master Agreement, the Notes, the Schedules and all agreements, instruments and documents executed in connection herewith and therewith and all of our rights and remedies under applicable law, whether as a secured party or otherwise. (vii) Return conditions: (A) Following a default, at our request you will return the Collateral, freight and insurance prepaid by you, to us at a location we request in the United States of America. It will be returned in good operating condition, as required by Section 5 above. The Collateral will not be subject to any liens when it is returned. (B) You will pack or crate the Collateral for shipping in the original containers, or comparable ones. You will do this carefully and follow all recommendations of the Supplier and the Manufacturer as to packing or crating. -11- 12 (C) You will also return to us the plans, specifications, operating manuals, software, documentation, discs, warranties and other documents furnished by the Manufacturer or Supplier. You will also return to us all service logs and service reports, as well as all written materials that you may have concerning the maintenance and operation of the Collateral. (D) At our request, you will provide us with up to 60 days free storage of the Collateral at your location, and will let us (or our agent) have access to the Collateral in order to inspect it, display it to others for purchase and sell it. (E) You will pay us what it costs us to repair the Collateral if you do not return it in the required condition. (viii) You will also pay us the following: (A) All our expenses of enforcing our remedies. This includes all our expenses to repossess, store, ship, repair and sell the Collateral. (B) Our reasonable attorney's fees and expenses. (C) Default interest on everything you owe us from the date of your default to the date on which we are paid in full at the Default Rate. (D) A premium in the amount of five percent (5%) of the outstanding principal balance of the Loan. (ix) You will pay us a late fee whenever you pay any amount that you owe us more than ten (10) days after it is due. You will pay the late fee within one month after the late Payment was originally due. The late fee will be ten (10%) percent of the late Payment. If this exceeds the highest legal amount we can charge you, you will only be required to pay the highest legal amount. The late fee is intended to reimburse us for our collection costs that are caused by late Payment. It is charged in addition to all other amounts you are required to pay us, including Default Interest. (x) You realize that the damages we could suffer as a result of your default are very uncertain. This is why we have agreed with you in advance on the Default Rate to be used in calculating the payments you will owe us if you default. You agree that, for these reasons, the payments you will owe us if you default are "agreed" or "liquidated" damages. You understand that these payments are not "penalties" or "forfeitures." 7. PERFORMING YOUR OBLIGATIONS IF YOU DO NOT If you do not perform one or more of your obligations under this Master Agreement or a Schedule or Note, we may perform it for you. We will notify you in writing at least ten (10) days -12- 13 before we do this. We do not have to perform any of your obligations for you. If we do choose to perform them, you will pay us all of our expenses to perform the obligations. You will also reimburse us for any money that we advance to perform your obligations, together with interest at the Default Rate on that amount. These will be additional "Payments" that you will owe us and you will pay them at the same time that your next Payment is due. 8. INDEMNITY (a) You will indemnify us, defend us and hold us harmless from and against any and all claims, expenses and attorney's fees concerning or arising from the Collateral, this Master Agreement, any Schedule or Note, or your breach of any representation, warranty or covenant. It includes, without limitation, any claims, losses or charges concerning, arising out of or in connection with the manufacture, selection, delivery, possession, use, operation or return of the Collateral and any claims, losses or damages concerning, arising out of or in connection with this Master Agreement, any Schedule or the Notes. (b) This obligation of yours to indemnify us continues even after the Term is over. 9. MISCELLANEOUS (a) ASSIGNMENT. WE MAY ASSIGN OR GRANT A SECURITY INTEREST IN THIS MASTER AGREEMENT, ANY SCHEDULE, ANY NOTE OR ANY PAYMENTS WITHOUT YOUR PERMISSION. THE PERSON TO WHOM WE ASSIGN IS CALLED THE "ASSIGNEE." THE ASSIGNEE WILL NOT HAVE ANY OF OUR OBLIGATIONS UNDER THIS MASTER AGREEMENT. YOU WILL NOT BE ABLE TO RAISE ANY DEFENSE, COUNTERCLAIM OR OFFSET AGAINST THE ASSIGNEE. NOTWITHSTANDING ANY SUCH ASSIGNMENT OR GRANTING OF A SECURITY INTEREST, WE WILL CONTINUE TO BE LIABLE FOR ALL OF OUR OBLIGATIONS UNDER THIS MASTER AGREEMENT. UNLESS YOU RECEIVE OUR WRITTEN PERMISSION, YOU MAY NOT ASSIGN OR TRANSFER YOUR RIGHTS UNDER THIS MASTER AGREEMENT OR ANY SCHEDULE. YOU ALSO ARE NOT ALLOWED TO LEASE OR RENT THE COLLATERAL OR LET ANYBODY ELSE USE IT UNLESS WE GIVE YOU OUR WRITTEN PERMISSION. (b) ACCEPTANCE BY FINOVA, GOVERNING LAW, JURISDICTION, VENUE, SERVICE OF PROCESS, WAIVER OF JURY TRIAL. THIS MASTER AGREEMENT WILL ONLY BE BINDING WHEN WE HAVE ACCEPTED IT IN WRITING. THIS MASTER AGREEMENT IS GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF ARIZONA (NOT INCLUDING THE "CHOICE OF LAW" DOCTRINE), THE STATE IN WHICH OUR OFFICE IS LOCATED IN WHICH FINAL APPROVAL OF THE TERMS OR CONDITIONS OF THIS MASTER AGREEMENT OCCURRED AND FROM WHICH DISBURSEMENT OF THE LOAN PROCEEDS WILL BE ORDERED. HOWEVER, IF THIS MASTER AGREEMENT IS UNENFORCEABLE UNDER ARIZONA LAW, IT WILL INSTEAD BE GOVERNED BY THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED. YOU MAY ONLY SUE US IN A FEDERAL OR STATE COURT THAT IS LOCATED IN MARICOPA COUNTY, ARIZONA. THIS APPLIES TO ALL LAWSUITS UNDER ALL LEGAL THEORIES, INCLUDING CONTRACT, TORT AND STRICT LIABILITY. YOU CONSENT TO THE -13- 14 PERSONAL JURISDICTION OF THESE ARIZONA COURTS. YOU WILL NOT CLAIM THAT MARICOPA COUNTY, ARIZONA, IS AN "INCONVENIENT FORUM" OR THAT IT IS NOT A PROPER "VENUE." WE MAY SUE YOU IN ANY COURT THAT HAS JURISDICTION. WE MAY SERVE YOU WITH PROCESS IN A LAWSUIT BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO YOUR ADDRESS INDICATED AFTER YOUR SIGNATURE BELOW. YOU AND WE EACH WAIVE ANY RIGHT YOU OR WE MAY HAVE TO A JURY TRIAL IN ANY LAWSUIT BETWEEN YOU AND US. (c) NOTICES. Your address for notices is your address set forth below your name on the signature page of this Master Agreement. We may give you written notice in person, by mail, by overnight delivery service, or by fax. Mail notice will be effective three (3) days after we deposit it with the U.S. Postal Service. Overnight delivery notice requires a receipt and tracking number. Fax notice requires a receipt from the sending machine showing that it has been sent to your fax number and received. Our address for notices is our address set forth below our name on the signature page of this Master Agreement, with attention: Director, Contract Administration. You will also give copies of all notices to us at our principal place of business at the address set forth in the opening paragraph of this Master Agreement, with attention to Vice President, Law Department. You may give us notice the same way that we may give you notice. (d) GENERAL This Master Agreement benefits our successors and assigns. This Master Agreement benefits only those successors and assigns of yours that we have approved in writing. This Master Agreement binds your successors and assigns. This Master Agreement binds only those successors and assigns of ours that clearly assume our obligations in writing. TIME IS OF THE ESSENCE OF THIS MASTER AGREEMENT This Master Agreement, all of the Schedules and the Notes and the Commitment Letter are together the entire agreement between you and us concerning the Collateral. Only an employee of FINOVA who is authorized by corporate resolution or policy may modify or amend this Master Agreement or any Schedule or Note on our behalf, and this must be in writing. Only he or she may give up any of our rights, and this must be in writing. If more than one person is the Borrower under this Master Agreement, then each of you is jointly and severally liable for your obligations under this Master Agreement and all Schedules and Notes. This Master Agreement is only for your benefit and for our benefit, as well as our successors and assigns. It is not intended to benefit any other person. If any provision in this Master Agreement is unenforceable, then that provision must be deleted. Only unenforceable provisions are to be deleted. The rest of this Master Agreement will remain as written. We may make press releases and publish a tombstone announcing this transaction and its total amount. You may publicize this transaction with our prior written consent. -14- 15 LENDER: BORROWER: FINOVA CAPITAL CORPORATION AVIRON, INC. 10 WATERSIDE DRIVE 297 N. BERNARDO AVENUE FARMINGTON, CT 06032-3065 MOUNTAIN VIEW, CA 94043 BY: /s/ Linda A. Moschitto BY: /s/ Fred Kurland ----------------------------- ---------------------------- PRINTED NAME: Linda A. Moschitto PRINTED NAME: Fred Kurland ------------------- ------------------ TITLE: Director-Contract Administration TITLE: Senior Vice President and CFO -------------------------- ------------------------- FAX NUMBER: (860) 676-1814 Taxpayer ID#77-0309686 ------------------- DATE ACCEPTED: July 23, 1999 FAX NUMBER: 650-919-6612 ------------------ -------------------- DATED: June 22, 1999 ------------------------- -15- 16 STATE OF CALIFORNIA COUNTY OF SANTA CLARA I acknowledge that Fred Kurland, who stated that he is Senior Vice President & CFO of the Borrower named above, signed this Master Loan and Security Agreement in my presence today: June 22, 1999. He/She acknowledged to me that his/her signature on this Master Loan and Security Agreement was authorized by a valid resolution or other valid authorization from Borrower's board of directors or other governing body. /s/ Anne M. LeDoux --------------------------- Notary Public [SEAL] -16- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 7,729 41,168 4,011 0 2,029 51,374 34,112 8,350 88,980 16,283 100,000 0 0 16 (29,297) 88,980 0 19,838 0 0 57,395 0 4,737 (39,257) 0 (39,257) 0 0 0 (39,257) (2.49) (2.49)
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