<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SEQUUS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 2834 94-3031834
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
960 HAMILTON COURT, MENLO PARK, CALIFORNIA 94025, (415) 323-9011
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
L. SCOTT MINICK
PRESIDENT AND CHIEF OPERATING OFFICER
960 HAMILTON COURT, MENLO PARK, CALIFORNIA 94025
(415) 323-9011
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
WITH COPIES OF ALL ORDERS, NOTICES AND COMMUNICATIONS TO:
NEIL FLANZRAICH ALAN K. AUSTIN
RICHARD FRIEDMAN ELIZABETH R. FLINT
HELLER EHRMAN WHITE & MCAULIFFE WILSON SONSINI GOODRICH & ROSATI
525 UNIVERSITY AVENUE 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94301 PALO ALTO, CALIFORNIA 94306
TELEPHONE: (415) 324-7000 TELEPHONE: (415) 493-9300
FACSIMILE: (415) 324-0638 FACSIMILE: (415) 493-6811
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ------------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF OFFERING PRICE AGGREGATE
SECURITIES TO BE AMOUNT TO BE PER OFFERING AMOUNT OF
REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ Convertible
Exchangeable Preferred
Stock.................. 1,150,000 shares $50.00 $57,500,000 $17,425
- ------------------------------------------------------------------------------------------------
% Convertible
Subordinated Debentures
due 2007(3)............ $57,500,000 100% $57,500,000 --
- ------------------------------------------------------------------------------------------------
Common Stock(4)......... -- -- -- --
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 150,000 shares of $ Convertible Exchangeable Preferred Stock
which the Underwriters have the option to purchase to cover over-
allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(3) There are also registered hereunder % Convertible Subordinated
Debentures due 2007 issuable in exchange for the $ Convertible
Exchangeable Preferred Stock. No separate consideration will be received
for such Debentures in the event such exchange occurs.
(4) There is also registered hereunder such indeterminate number of shares of
Common Stock as may be issuable upon conversion of the $ Convertible
Exchangeable Preferred Stock and the % Convertible Subordinated
Debentures due 2007 being registered hereunder.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1997
[LOGO OF SEQUUS PHARMACEUTICALS, INC. APPEARS HERE]
1,000,000 SHARES
$ CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
(CUMULATIVE DIVIDEND, LIQUIDATION PREFERENCE $50 PER SHARE)
The shares of $ Convertible Exchangeable Preferred Stock, par value
$0.01 per share (the "Preferred Stock"), of SEQUUS Pharmaceuticals, Inc.
("SEQUUS" or the "Company") offered hereby are convertible at the option of the
holder at any time after 90 days following the date hereof, unless previously
redeemed or exchanged, into Common Stock, par value $0.0001 per share (the
"Common Stock"), of the Company, at an initial conversion price of $
(equivalent to a conversion rate of approximately shares of Common Stock
for each share of Preferred Stock). The initial conversion price with respect
to the Preferred Stock is subject to adjustment in certain events, including a
Non-Stock Fundamental Change or a Common Stock Fundamental Change (each as
defined). See "Description of Preferred Stock -- Conversion Rights." On
February 5, 1997, the last reported sale price of the Company's Common Stock as
reported on the Nasdaq National Market was $12.50 per share.
Dividends on the Preferred Stock will be cumulative from the date of original
issue and will be payable quarterly, commencing June 1, 1997 and payable each
March 1, June 1, September 1 and December 1 thereafter, at the annual rate of
$ per share of Preferred Stock. Prior to March 2, 2000, the Preferred
Stock is not redeemable at the option of the Company. Thereafter the Preferred
Stock is redeemable at the option of the Company, in whole or in part, at the
declining redemption prices set forth herein, together with accrued dividends.
See "Description of Preferred Stock -- Optional Redemption." The Preferred
Stock has a liquidation preference of $50 per share, plus accrued and unpaid
dividends.
The Preferred Stock is exchangeable, in whole but not in part, at the option
of the Company on any dividend payment date beginning March 1, 1998, for the
Company's % Convertible Subordinated Debentures due 2007 (the "Debentures")
at the rate of $50 principal amount of Debentures for each share of Preferred
Stock. See "Description of Preferred Stock -- Exchange Provisions." The
Debentures, if issued, will contain conversion and optional redemption
provisions substantially identical to those of the Preferred Stock. See
"Description of Debentures."
Application has been made to have the shares of Preferred Stock approved for
quotation on the Nasdaq National Market under the symbol "SEQUP."
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC (1) COMMISSIONS COMPANY (2)
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<S> <C> <C> <C>
Per Share.................. $ $ $
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Total (3).................. $ $ $
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from , 1997.
(2) Before deducting expenses payable by the Company, estimated at $375,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 150,000 shares of Preferred Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively.
----------
The Preferred Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of such shares will be
made through the offices of Robertson, Stephens & Company LLC ("Robertson,
Stephens & Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
DILLON, READ & CO. INC.
PUNK, ZIEGEL & KNOELL
The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, part of which has been omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement, including the
exhibits filed as a part thereof and otherwise incorporated therein.
Statements made in this Prospectus as to the contents of any document referred
to are not necessarily complete, and in each instance reference is made to
such exhibit for a more complete description and each such statement is
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports and other information with the Commission.
The Registration Statement, including exhibits, as well as such other reports,
proxy statements and information filed by the Company may be inspected,
without charge, and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549 and
at the Commission's regional offices located at 7 World Trade Center, Suite
1300, New York, New York 10048, and at 500 West Madison St., Suite 1400,
Chicago, Illinois 60661. Reports, proxy and information statements and other
information filed electronically by the Company with the Commission are
available at the Commission's World Wide Web site at http://www.sec.gov.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Common Stock of the Company is traded on the Nasdaq
National Market. Reports and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed or to be filed with the Commission under the
Exchange Act, are hereby incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. The description of the Company's Common Stock set forth in its
Registration Statement on Form 8-A filed with the Commission on May 8,
1987, and the description of the Company's Preferred Stock set forth in its
Registration Statement on Form 8-A filed on February 6, 1997; and
3. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such
documents.
Any statement contained in this Prospectus or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the documents that have been
incorporated by reference herein (other than exhibits incorporated by
reference into such document, unless such exhibits are specifically
incorporated by reference into this Prospectus). Such request may be directed
to SEQUUS Pharmaceuticals, Inc., 960 Hamilton Court, Menlo Park, California
94025, Attention: Secretary, telephone number (415) 323-9011.
---------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
STOCK AND THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN SO AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH
THEY RELATE OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents By Reference........................... 2
Summary................................................................... 4
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Price Range of Common Stock............................................... 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 27
Management................................................................ 47
Description of Preferred Stock............................................ 50
Description of Debentures................................................. 58
Certain Federal Income Tax Consequences................................... 64
Description of Common Stock............................................... 70
Underwriting.............................................................. 71
Legal Matters............................................................. 72
Experts................................................................... 72
Index to Financial Statements............................................. F-1
</TABLE>
The following trademarks of SEQUUS are used throughout this Prospectus:
STEALTH(R), AMPHOTEC(TM), AMPHOCIL(TM), DOXIL(R), CAELYX(TM) and SEQUUS(TM).
Tradenames and trademarks appearing in this Prospectus are the property of
their respective holders.
3
<PAGE>
SUMMARY
The statements in this Prospectus that relate to future plans, events or
performance are 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 a variety of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information, including "Risk Factors" and Financial Statements and
Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
SEQUUS Pharmaceuticals, Inc. is a leader in developing and commercializing
lipid-based biopharmaceutical products primarily to treat cancer and infectious
diseases. The Company formulates its proprietary STEALTH liposomes with
existing drugs, or with therapeutics under development, to develop new products
with improved safety and efficacy profiles. The Company has developed and is
marketing DOXIL, an anticancer drug, and AMPHOTEC, an antifungal drug, in the
United States through its direct sales organization and internationally through
its marketing partners. The Company is currently conducting additional clinical
trials for the use of DOXIL in the treatment of certain solid tumors, including
a Phase III clinical trial in refractory ovarian cancer and a number of breast
cancer trials. In addition, SEQUUS is currently conducting a Phase I trial of
its STEALTH cisplatin formulation for the treatment of cancer.
Liposomes are microscopic lipid spheres used to encapsulate drugs for
delivery to targeted areas of the body in order to increase efficacy and reduce
toxicity. SEQUUS has created and patented STEALTH liposomes that avoid the
body's natural defense mechanisms and degrade more slowly than conventional
liposomes, thereby significantly increasing circulation time of encapsulated
therapeutic agents in the body. For example, clinical data demonstrate that an
anthracyline encapsulated in STEALTH liposomes (DOXIL) has a circulating half-
life of approximately 55 hours compared to a half-life of approximately five
hours for the other commercially available liposomal anthracycline product.
This long circulation time allows STEALTH liposomes to accumulate in tissues
where new blood vessels are forming, such as tumors and sites of inflammation
or injury, delivering sustained and increased drug concentration to these
target tissues.
SEQUUS developed DOXIL, a proprietary STEALTH liposome formulation
encapsulating a leading anticancer drug, doxorubicin. In November 1995, SEQUUS
received marketing clearance from the United States Food and Drug
Administration ("FDA") for DOXIL for the treatment of Kaposi's sarcoma ("KS")
in AIDS patients whose KS has progressed on prior chemotherapy or in patients
who are intolerant to such therapy ("refractory KS"). In December 1995, the
Company launched DOXIL in the United States, using its own marketing and sales
team, and achieved domestic product sales of approximately $20.9 million in
1996. In June 1996, the Company was granted marketing authorization for DOXIL
under the tradename CAELYX in the 15 member states of the European Union
("EU"), for the treatment of first-line and refractory KS. The Company has
entered into a distribution agreement with Schering-Plough Corporation
("Schering-Plough") under which Schering-Plough has rights to market and sell
CAELYX worldwide, except for the United States, Japan and certain other
countries. In addition, the Company and Schering-Plough are jointly planning
the clinical development of DOXIL for the treatment of solid tumors in the
United States and certain international markets. Schering-Plough will be
responsible for conducting certain of these clinical trials.
The Company used another lipid-based delivery technology to develop AMPHOTEC,
a proprietary formulation of a leading antifungal drug, amphotericin B. In
November 1996, SEQUUS received marketing clearance from the FDA for AMPHOTEC
for the treatment of invasive aspergillosis, a life-threatening fungal
infection, in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B therapy in effective doses and
in patients where prior amphotericin B therapy has failed. In December 1996,
the Company launched AMPHOTEC in the United States, using its own marketing and
sales
4
<PAGE>
organization. AMPHOTEC has also received marketing clearance in a number of
other countries for the treatment of systemic fungal infections in patients
refractory to or intolerant of conventional amphotericin B therapy. The
Company's strategy is to commercialize AMPHOTEC in international markets, under
the tradename AMPHOCIL, through distribution partners. The Company has entered
into a number of distribution agreements, including agreements with Zeneca
Limited and Bayer, Inc. in selected countries.
The Company is developing SPI-077, a proprietary STEALTH liposome formulation
of encapsulated cisplatin, a widely used anticancer drug. The utility of
unencapsulated cisplatin is limited by a range of potentially serious and
irreversible toxicities. Based upon results from preclinical studies, the
Company believes that SPI-077 may have safety and efficacy advantages over
unencapsulated cisplatin. In December 1996, the Company began a Phase I
clinical trial of SPI-077 in the treatment of solid tumors. The Phase I trial
is focused on determining the maximum tolerated dose of SPI-077 and
establishing the toxicity profile in patients with advanced malignancies not
amenable to other cancer treatments.
The Company's research and development efforts focus on developing new
products by encapsulating other drugs in, or attaching other drugs to, STEALTH
liposomes and expanding the STEALTH platform to create additional methods of
drug delivery. Products in the development stage include STEALTH liposome
formulations of CD4 for treating people with HIV, a quinolone antibiotic for
treating life-threatening respiratory tract infections or other severe systemic
bacterial infections, and a radiosensitizing agent for treating cancer. The
Company is also conducting research in the field of small molecule, peptide and
gene delivery using STEALTH liposomes.
SEQUUS was incorporated in California in 1981 and was reincorporated in
Delaware in 1987. The Company's principal executive offices are located at 960
Hamilton Court, Menlo Park, California 94025 and its telephone number is (415)
323-9011.
5
<PAGE>
THE OFFERING
Securities Offered.......... 1,000,000 shares of $ Convertible
Exchangeable Preferred Stock (the "Preferred
Stock"), par value $0.01 per share (1,150,000
shares of Preferred Stock if the over-allotment
option is exercised in full).
Dividends................... Cumulative from the date of original issue at the
annual rate of $ per share of Preferred
Stock, payable quarterly on the first day of
March, June, September and December, commencing
June 1, 1997, when, as, and if declared by the
Board of Directors out of funds legally available
therefor. See "Description of Preferred Stock --
Dividends."
Conversion Rights........... The Preferred Stock will be convertible at the
option of the holder at any time after 90 days
following the date hereof, unless previously
redeemed or exchanged, into shares of Common
Stock at an initial conversion price of $
(equivalent to a conversion rate of approximately
shares of Common Stock for each share of
Preferred Stock). The initial conversion price
with respect to the Preferred Stock is subject to
adjustment in certain events, including a Non-
Stock Fundamental Change or a Common Stock
Fundamental Change (each as defined). See
"Description of Preferred Stock -- Conversion
Rights."
Liquidation Preference...... $50 per share of Preferred Stock, plus accrued
and unpaid dividends. See "Description of
Preferred Stock -- Liquidation Rights."
Optional Redemption......... Prior to March 2, 2000, the Preferred Stock is
not redeemable at the option of the Company.
Thereafter, the Preferred Stock is redeemable at
the option of the Company, in whole or in part,
at the declining redemption prices set forth
herein, together with accrued dividends. See
"Description of Preferred Stock -- Optional
Redemption."
Exchange Provisions......... The Preferred Stock is exchangeable in whole, but
not in part, at the option of the Company on any
dividend payment date beginning on March 1, 1998
for the Company's % Convertible Subordinated
Debentures due 2007 (the "Debentures") at the
rate of $50 principal amount of Debentures for
each share of Preferred Stock. See "Description
of Preferred Stock -- Exchange Provisions."
Voting Rights............... Except as provided by law, holders of shares of
Preferred Stock will not be entitled to any
voting rights, except that, among other things,
holders will be entitled to vote as a separate
class to elect two directors if the equivalent of
six or more quarterly dividends (whether or not
consecutive) on the Preferred Stock are in
arrears. These voting rights will continue until
such time as the dividend arrearage on the
Preferred Stock has been paid in full. See
"Description of Preferred Stock -- Voting
Rights."
6
<PAGE>
Debentures.................. The Debentures, if issued, will bear interest at
a rate per annum of % of the principal amount
thereof payable semiannually on March 1 and
September 1 of each year, commencing on the first
interest payment date following the date of
exchange. Prior to March 2, 2000, the Debentures
are not redeemable at the option of the Company.
Thereafter, the Debentures are redeemable at the
option of the Company, in whole or in part, at
the declining redemption prices set forth herein,
together with accrued interest. The Debentures
are not entitled to the benefits of any mandatory
sinking fund payments. At the option of the
holder, the Debentures may be converted into
Common Stock at the same conversion price as
would have been applicable to the Preferred Stock
if the Preferred Stock were outstanding. The
Debentures will be subordinated to all Senior
Indebtedness (as defined). The Indenture will not
limit the amount of additional indebtedness,
including Senior Indebtedness, which the Company
can create, incur, assume or guarantee, nor will
the Indenture limit the amount of indebtedness
that any subsidiary can incur. See "Description
of Debentures."
Use of Proceeds............. For activities related to the clinical trials of
DOXIL and AMPHOTEC for additional indications and
the clinical trial program for SPI-077,
increasing manufacturing capacity, research and
development and other general corporate purposes.
See "Use of Proceeds."
Trading..................... Application has been made to have the shares of
Preferred Stock approved for quotation on the
Nasdaq National Market under the symbol "SEQUP."
The Company's Common Stock is traded on the
Nasdaq National Market under the symbol "SEQU."
Risk Factors................ An investment in the securities offered hereby
involves a high degree of risk. See "Risk
Factors" for a discussion of certain factors that
should be considered in evaluating an investment
in the securities offered hereby.
7
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales.............. $ 293 $ 1,299 $ 3,664 $ 1,907 $ 25,462
Royalties and fees (1)..... 425 5,458 91 109 7,461
-------- -------- -------- -------- --------
Total revenues............... 718 6,757 3,755 2,016 32,923
Operating expenses:
Cost of goods sold......... 13 232 916 511 3,990
Research and development... 15,769 21,128 25,378 22,651 27,652
Selling, general and
administrative............ 2,723 6,653 7,622 13,856 20,302
-------- -------- -------- -------- --------
Total operating expenses..... 18,505 28,013 33,916 37,018 51,944
Loss from operations......... (17,787) (21,256) (30,161) (35,002) (19,021)
Interest income.............. 2,394 1,602 976 1,406 1,844
-------- -------- -------- -------- --------
Net loss..................... $(15,393) $(19,654) $(29,185) $(33,596) $(17,177)
======== ======== ======== ======== ========
Net loss per share........... $ (0.84) $ (1.05) $ (1.54) $ (1.54) $ (0.59)
======== ======== ======== ======== ========
Weighted average shares
outstanding................. 18,270 18,789 18,978 21,831 28,937
Ratio of earnings to combined
fixed charges
and preferred stock
dividends (2)............... -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term marketable
investments............................................ $ 32,946 $ 80,821
Total assets............................................ 54,968 102,843
Accumulated deficit..................................... (150,624) (150,624)
Total stockholders' equity.............................. 44,327 92,202
</TABLE>
- --------
(1) Includes a signing fee and regulatory milestone fee totaling $5.3 million
from Zeneca Limited in 1993 and a distribution rights fee of $5.3 million
from Schering-Plough in 1996.
(2) For the years ended December 31, 1992, 1993, 1994, 1995 and 1996, earnings
were insufficient to cover fixed charges by $15,267,000, $19,496,000,
$29,002,000, $33,421,000 and $16,966,000, respectively. There were no
preferred stock dividends declared or paid by the Company during any of the
years in the five year period ended December 31, 1996. For these reasons,
no ratios are provided.
(3) As adjusted to reflect the sale by the Company of the 1,000,000 shares of
Preferred Stock offered hereby, less estimated underwriting discounts and
commissions and expenses of the offering payable by the Company.
Except as otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.
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RISK FACTORS
The statements in this Prospectus that relate to future plans, events or
performance are 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 below and elsewhere in this Prospectus. The
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the securities offered hereby.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's future financial performance depends on revenues from and
market acceptance of DOXIL in the United States and international markets. To
date, DOXIL can only be promoted for KS and cannot be promoted for the
treatment of solid tumors. In order for the Company to promote DOXIL for any
solid tumor indications, it must establish the clinical benefit of DOXIL in
clinical trials for each tumor type and gain regulatory clearance to market
for such use. The Company does not expect sales of DOXIL to grow
significantly, if at all, for KS in the United States because the population
of persons with KS is relatively small and may decline, particularly if recent
developments in the treatment of AIDS are successful and decrease the
incidence of KS. In the United States, the Company is prohibited from
marketing DOXIL for indications other than refractory KS. Physicians and
patients are often limited in their use of pharmaceutical products for
indications that have not been cleared by the FDA, as reimbursement by third-
party payors for off-label use may be unavailable. There can be no assurance
that clinical trials will demonstrate that DOXIL is safe and efficacious for
the treatment of solid tumors, that the Company will receive regulatory
approval for any solid tumor indications or that the Company will be able to
achieve reimbursement for or market acceptance in the treatment of solid
tumors with DOXIL.
The Company is also dependent on market acceptance of AMPHOTEC in the United
States and in international markets. To date, the Company has had very limited
sales of AMPHOTEC. The Company only received FDA clearance for AMPHOTEC in
late 1996 and, therefore, cannot predict market acceptance of AMPHOTEC in the
United States. In addition, the Company received marketing clearance in a
limited number of international markets in 1996 and faces intense competition
and price pressure in many of these markets, where a competing liposomal
amphotericin B product has been on the market for a number of years and
another was recently introduced. A number of factors may limit the market
acceptance of DOXIL and AMPHOTEC and any other products developed by the
Company, including the timing of regulatory approval and market entry relative
to competitive products, the availability of alternate therapies, the price of
the Company's products relative to alternative therapies, the availability of
third-party reimbursement and the extent of marketing efforts by third-party
distributors or agents retained by the Company, as well as the success of the
marketing efforts by the Company's sales team which was organized within the
last 18 months. In addition, therapeutic products based on liposome or lipid-
based technology have become commercially available only in the last few
years. As a result, unanticipated side effects or unfavorable publicity
concerning any product incorporating liposome or lipid-based technologies
could have an adverse effect on the Company's ability to obtain physician,
patient or third-party payor acceptance and to sell the Company's products.
There can be no assurance that physicians, patients or third-party payors will
accept liposome products or any of the Company's products as readily as
traditional forms of medication or at all. See "Business -- Products and
Products Under Development."
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The Company's current and potential products compete with existing and new
drugs offered by or under development by pharmaceutical, biopharmaceutical and
biotechnology companies. Many of these companies, both in the United States
and international markets, are developing products based on improved drug
delivery technologies as well as novel therapeutics for the treatment of
cancer, infectious diseases and other indications targeted by the Company.
Some of these companies are active in liposome and lipid-based research and
product development, and many have financial and technical resources and
production and marketing capabilities substantially greater than those of the
Company. In addition, many of these companies have significantly greater
experience than the Company in preclinical and clinical development
activities, in obtaining regulatory approval, and in manufacturing and
marketing biopharmaceutical products.
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A number of large pharmaceutical companies, including Bristol-Myers Squibb
Company ("Bristol-Myers") and Pfizer Inc., have established strong market
positions for oncology and infectious diseases. For example, AMPHOTEC competes
with traditional amphotericin B therapy, which is currently produced and
marketed by Bristol-Myers and others. The Company also faces competition from
two companies specializing in liposome drug delivery, NeXstar Pharmaceuticals,
Inc. ("NeXstar") and The Liposome Company ("TLC"), both of which have received
regulatory approvals in the United States and internationally for products
competitive with the Company's products. In some cases, the competing
liposomal products have been able to obtain significant market share in
certain territories by being the first to market, have been introduced at
lower prices than the Company's competing products, or have received marketing
clearance covering a broader range of indications than the Company's competing
products. For example, TLC recently received FDA clearance to market its
amphotericin B lipid formulation for treating a broader range of indications
than the indications for which AMPHOTEC has received marketing clearance.
SEQUUS believes that competition in pharmaceutical products and in drug
delivery will continue to be intense as new products enter the market and
advanced technologies become available for drug discovery and development.
Existing products or new products developed by the Company's competitors may
be more effective, or be more effectively marketed and sold, than any that
have been or may be developed by the Company. Competitive products may render
the Company's technology and products obsolete or noncompetitive prior to the
Company's recovery of research, development or commercialization expenses
incurred with respect to any such products, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Competition."
LIMITED MARKETING AND SALES EXPERIENCE; DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
AND AGENTS
The Company has limited experience marketing and selling its products. The
Company currently markets and sells its products in the United States with a
recently expanded sales team of 42 persons. The Company's ability to generate
future revenue in the United States is dependent on the success of its direct
sales team in marketing DOXIL and AMPHOTEC. Future development of its
marketing and sales organization may require significant additional
expenditures, management resources and time. In addition, the loss of certain
key sales personnel could adversely affect the sales effort and have a
material adverse effect on the Company's business, financial condition and
results of operations. Several biotechnology and pharmaceutical companies have
recently expanded their sales forces, particularly in the field of oncology,
which has increased competition for experienced personnel. Furthermore, if the
Company enters into marketing partnerships with other companies to augment its
own sales organization, the Company's margins on these products would be
significantly reduced.
In September 1996, the Company announced an exclusive arrangement with
Schering-Plough under which Schering-Plough has rights to market and sell
DOXIL worldwide, under the tradename CAELYX, except for the United States,
Japan and certain other countries. The Company has also entered into
distribution agreements with a number of corporate partners covering the
marketing and distribution of AMPHOCIL in various international markets. The
Company's future sales of CAELYX and AMPHOCIL outside of the United States
will depend upon the success of marketing efforts by Schering-Plough and other
distribution partners, the continuation of existing distribution arrangements,
market acceptance of the products, availability of third-party reimbursement,
as well as the timing of additional approvals, including pricing approvals, in
other countries, if any. If Schering-Plough or any other distributor were to
terminate its agreement with the Company or be unsuccessful in meeting its
sales objectives, the Company's business, financial condition and results of
operations could be materially adversely affected. There can be no assurance
that the Company will be able to successfully market its products through its
sales team, partners, agents or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, "Business --
Marketing and Sales" and "-- Strategic Alliances."
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DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SOLE-SOURCE SUPPLIERS;
MANUFACTURING RISKS
The Company's internal manufacturing capabilities are limited to producing
products for preclinical development. The Company is dependent on Ben Venue
Laboratories, Inc. ("Ben Venue"), a United States-based contract manufacturer,
to manufacture commercial-scale quantities of AMPHOTEC and DOXIL pursuant to
supply agreements. There can be no assurance that Ben Venue will continue to
meet FDA or product specification standards or that the Company's
manufacturing requirements can be met in a consistent and timely manner. Only
a limited number of contract manufacturers are capable of manufacturing
AMPHOTEC and DOXIL, and any alternative manufacturer would require regulatory
approval to manufacture the product which would likely take several months, if
at all. The Company is in the process of identifying an alternative
manufacturer, but to date has not sought approval of an alternative
manufacturer for its products. The Company has in the past experienced batch
failures in the manufacturing process for AMPHOTEC and DOXIL. Any batch
failures in the future could result in a material increase in cost of goods
sold or in the Company's inability to deliver products on a timely basis. In
addition, the Company may be unable to obtain sufficient contract
manufacturing capacity due to competing demands on the contract manufacturer's
capacity or other reasons. In the event of any interruption of supply from the
contract manufacturer due to regulatory reasons, significant batch failures,
capacity constraints or other causes, there can be no assurance that the
Company could make alternative manufacturing arrangements on a timely basis,
if at all. Such an interruption would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company relies on certain suppliers of key raw materials to provide an
adequate supply of such materials for production of finished products. Certain
materials are purchased from single sources. In particular, amphotericin B and
doxorubicin are currently each supplied to the Company by single sources, and
the number of alternative sources is limited. The Company has a sole-source
supply agreement with Meiji Seika Pharma International, Ltd., which expires in
1999, to supply the Company with doxorubicin for DOXIL. The Company also has a
sole-source supply agreement with A.L. Laboratories, Inc., which expires in
1999, to supply the Company with amphotericin B for AMPHOTEC. There can be no
assurance that the doxorubicin or the amphotericin B supplied under these
agreements will continue to meet FDA requirements applicable to DOXIL or
AMPHOTEC, which could delay or prevent future sales of DOXIL or AMPHOTEC, if
any, by the Company. The number of alternative qualified suppliers of key raw
materials required for the manufacture of DOXIL and AMPHOTEC is limited. The
disqualification or loss of a sole-source supplier could have a material
adverse effect on the Company because of a delay or inability in obtaining and
qualifying an alternate supplier and the costs associated with such delay and
in finding and qualifying an alternate supplier. Regulatory requirements
applicable to pharmaceutical products tend to make the substitution of
suppliers costly and time consuming. The unavailability of adequate commercial
quantities, the loss of a supplier's regulatory approval, the inability to
develop alternative sources, a reduction or interruption in supply or a
significant increase in the price of materials could impair the Company's
ability to manufacture and market its products which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Strategic Alliances" and "-- Manufacturing and
Production."
UNCERTAINTY OF PRODUCT DEVELOPMENT
The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at various
stages of development may not receive regulatory approval, reach the market or
achieve widespread use for a number of reasons. For example, DOXIL is being
clinically tested in various types of solid tumors. The Company's clinical
data in treatment of solid tumors are derived from a limited number of
patients and are not necessarily predictive of future results obtained in
subsequent clinical trials. Moreover, even when a drug does demonstrate
activity, it may not be sufficiently efficacious to replace existing
therapies. There can be no assurance that the Company's research and
development efforts will be successful, that any given product will be
approved by appropriate regulatory authorities or that any product candidate
under development will be safe, effective or capable of being manufactured in
commercial quantities at an economical cost, will not infringe the proprietary
rights of others or will achieve market acceptance.
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There are a number of challenges the Company must address successfully to
develop commercial products in each of its development programs. The Company's
potential products will require significant additional research and
development efforts, including process development and significant additional
clinical testing, prior to any commercial use. There can be no assurance that
the Company will have sufficient resources or will successfully address any of
these technological challenges, or others that may arise in the course of
development. See "Business -- Products and Products Under Development" and "--
Government Regulation."
NO ASSURANCE OF REGULATORY APPROVALS; UNCERTAINTY OF GOVERNMENT REGULATION
The production and marketing of the Company's products are subject to
rigorous manufacturing requirements, preclinical testing and clinical trials
and approval by the FDA, by comparable agencies in other countries and by
state regulatory authorities prior to marketing. The process of conducting
clinical trials and obtaining regulatory approval for a product typically
takes a number of years and involves substantial expenditures. In addition,
product approvals may be withdrawn or limited for noncompliance with
regulatory standards or the occurrence of unforeseen problems following
initial marketing. The Company has received regulatory clearance in the United
States for the commercial sale of only two of its products, DOXIL and
AMPHOTEC, and such clearance is only for limited indications. The Company may
encounter significant delays or excessive costs in its efforts to secure and
maintain necessary approvals or licenses. Future federal, state, local or
foreign legislative or administrative acts could also prevent or delay
regulatory approval of the Company's products. There can be no assurance that
the Company will be able to obtain or maintain the necessary approvals for
manufacturing or marketing the Company's products for current or expanded
indications or that the data it obtains in clinical trials will be sufficient
to establish the safety and efficacy of its products. Even if the Company
obtains regulatory approval for any particular product, there can be no
assurance that it will be economically feasible for the Company to
commercialize its products. In addition, identification of certain side
effects after a drug is on the market or the occurrence of manufacturing
problems could cause subsequent withdrawal of approval, reformulation of the
drug, additional preclinical testing or clinical trials, and changes in
labeling of the product. Failure to obtain or maintain requisite governmental
approvals, failure to obtain approvals of the clinically intended uses or the
identification of side effects could delay or preclude the Company from
further developing particular products or from marketing its products, or
could limit the commercial use of its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's regulatory clearances to market DOXIL in the United States for
refractory KS and in certain European countries for first-line and refractory
KS were based on extensive clinical data. In 1996, the Company submitted data
from its two randomized clinical trials to the FDA to obtain clearance to
market DOXIL as a first-line therapy. The FDA has informed the Company that it
would require additional information that addresses the methodology of
assessing the response rates seen in the trials in order to approve DOXIL for
a first-line indication. The Company is currently re-analyzing its existing
clinical data, analyzing data not previously submitted, and considering
expanding ongoing trials, if necessary, to support a first-line indication.
There can be no assurance that the Company will provide such data to the FDA
or that any such submission would result in clearance for a KS first-line
indication. The marketing clearance for DOXIL in the United States was
provided in accordance with the FDA's procedures for Accelerated Approval of
New Drugs for Serious or Life-Threatening Illnesses. Accelerated approval
regulations require that an applicant study an investigational drug following
product launch to verify and describe the drug's clinical benefit. The Company
is conducting a post-marketing clinical trial designed to meet accelerated
approval requirements. Under FDA accelerated approval regulations, the FDA may
withdraw approval following product launch if the Company fails to show due
diligence in conducting the post-marketing clinical trial or if this clinical
trial fails to demonstrate clinical benefit to the FDA's satisfaction. There
can be no assurance that the Company will be able to conduct a satisfactory
post-marketing clinical trial or that the results will be satisfactory to the
FDA. If the Company is unable to successfully complete the post-marketing
clinical trials or if the results are not satisfactory to the FDA, the
Company's business, financial condition and results of operations could be
materially adversely affected. See "Business -- Government Regulation."
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The Company is also subject to regulation under numerous federal, state and
local laws regarding, among other things, occupational safety, laboratory
practices, the use and handling of radioisotopes and hazardous chemicals,
prevention of illness and injury, environmental protection and hazardous
substance control. Failure to comply with such regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use
in each target indication. The results from preclinical studies and early
clinical trials may not be predictive of results that will be obtained in
large-scale testing, and there can be no assurance that the Company's clinical
trials will demonstrate the safety and efficacy of any products or will result
in marketable products. For example, the Company has only conducted clinical
trials for the use of DOXIL in certain solid tumors on a limited number of
patients. The Company must conduct additional clinical testing in larger
patient populations to expand the indications for DOXIL. Many pharmaceutical
and drug delivery companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. The Company is dependent
on third parties including hospitals and physicians to conduct the clinical
trials. In addition, the Company is reliant on Schering-Plough to conduct
certain clinical trials for the use of DOXIL in treatment of solid tumors.
There is substantial competition to enroll patients in clinical trials for
oncology products. Delays in planned patient enrollment can result in
increased costs and delays. If the Company is unable to successfully complete
its clinical trials, its business, financial condition and results of
operations could be materially adversely affected. See "Business -- Products
and Products Under Development" and "-- Government Regulation."
UNCERTAINTY OF FUTURE FINANCIAL RESULTS; FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results depend upon a variety of factors,
including the price, volume and timing of sales of the Company's approved
products; variations in payments under collaborative agreements, including
royalties, fees and other contract revenues; the availability of third-party
reimbursement; and the regulatory approvals of new products, or expanded
labeling of existing products. The Company's quarterly operating results may
also fluctuate significantly depending on other factors, including the timing
of the expansion of clinical trials for DOXIL and AMPHOTEC and the level of
clinical trials for SP1-077; changes in the Company's level of research and
development; changes in manufacturing capabilities; and variations in gross
margins of the Company's products which may be caused by cost increases from
third-party manufacturers, availability and cost of raw materials, competitive
pricing pressures and the mix between product sales in the United States and
sales to the Company's international marketing partners. The Company expects
operating expenses to increase in 1997, and there can be no assurance that the
Company will maintain or increase revenues or ever achieve profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
There are significant challenges and risks to the Company associated with
selling products and conducting business in international markets, including,
but not limited to, varying government regulation of pharmaceutical products,
varying third-party and government reimbursement policies, uncertain
intellectual
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property protections, delays in establishing international distribution
channels and difficulties in collecting international accounts receivable. The
Company does not have extensive experience in international sales and is
relying on third parties to address these markets. The Company's international
business and financial performance could also be adversely affected by matters
such as currency controls, tariff regulations, foreign duties and taxes,
pricing controls and regulations and difficulties in obtaining export
licenses. In addition, the Company's products are priced in the currency of
the country in which such products are sold. Accordingly, the prices of such
products in dollars will vary as the value of the dollar fluctuates against
such local currencies. Increases in the value of the dollar against such
currencies, therefore, will reduce the dollars realized by the Company on the
sale of its products. The Company does not presently engage in any hedging or
other transactions intended to manage the risks relating to foreign currency
exchange rates or interest rate fluctuations. However, the Company may in the
future undertake such transactions if it determines that it is advisable to
offset such risks, although no assurance can be given that these efforts will
be successful.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The Company's business may be materially adversely affected by the
continuing efforts of worldwide governmental and third-party payors to contain
or reduce the costs of health care in general and drugs in particular. For
example, in most international markets, including markets the Company is
seeking to enter, pricing of prescription pharmaceuticals is subject to
government price controls. In these markets, once marketing approval is
received, pricing negotiation could take another six to 12 months or longer.
In the United States there have been, and there may continue to be, federal
and state proposals to implement similar government price controls. In
addition, an increasing emphasis on managed care and consolidation of hospital
purchasing in the United States has and will continue to put pressure on
pharmaceutical pricing. Such proposals, if adopted, and such initiatives could
decrease the price that the Company receives for any current or future
products and thereby have a material adverse effect on the Company's business,
financial condition and results of operations. Further, to the extent that
such proposals or initiatives have a material adverse effect on pharmaceutical
companies that are collaborators or prospective collaborators for certain of
the Company's products, the Company's ability to commercialize its products
may be materially adversely affected. In addition, price competition may
result from competing product sales, attempts to gain market share or
introductory pricing programs, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's ability to commercialize DOXIL, AMPHOTEC and other products
may depend in part on the extent to which reimbursement for such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, and third-party payors are increasingly challenging the prices
charged for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any of the
Company's products. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting the level of reimbursement
for new therapeutic products, and by refusing, in some cases, to provide
coverage or reimbursement for indications for which the FDA has not granted
marketing clearance. Moreover, reimbursement may be denied even for FDA-
approved indications. If adequate coverage and reimbursement levels are not
provided by the government and third-party payors for the Company's products,
the Company's business, financial condition and results of operations would be
materially adversely affected. See "Business-- Government Regulation."
PRODUCT LIABILITY
Testing, manufacturing, marketing and use of the Company's products will
entail substantial risk of product liability. The Company currently maintains
product liability insurance in an amount of $10 million per occurrence and $10
million in the aggregate. A single product liability claim could exceed the
$10 million coverage limit, and there is a possibility of multiple claims.
There can be no assurance that the amount of insurance the Company has
obtained against the risk of product liability will be adequate, that the
amount of
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such insurance can be renewed at acceptable cost or at all, or that the amount
and scope of any coverage obtained will be adequate to protect the Company in
the event of a successful product liability claim. The Company's business,
financial condition and results of operations could be materially adversely
affected by one or more successful product liability claims.
In addition, with respect to the sale of products in the United States, the
Company believes it has significantly greater risk in connection with product
liability claims due to the greater frequency of lawsuits and higher claims
paid in courts in the United States as opposed to most other countries. The
Company is required by government regulations to test its products even after
they have been sold and used by patients. As a result of such tests, the
Company may be required to, or may determine that it should, recall products
when such products have already been sold. Such testing and any product
recalls could increase the Company's potential exposure to product liability
claims and may have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTIES REGARDING PATENTS AND TRADE SECRETS
There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. A
substantial number of patents relating to liposomes have been issued to, or
are controlled by, other public and private entities, including academic
institutions. In addition, others, including competitors of SEQUUS, may have
filed applications for, or may have been issued patents or may obtain
additional patents and proprietary rights relating to products or processes
competitive with those of SEQUUS. The patent positions of pharmaceutical,
biopharmaceutical, biotechnology and drug delivery companies, including
SEQUUS, are uncertain and involve complex legal and factual issues.
Additionally, the coverage claimed in a patent application can be
significantly reduced before the patent is issued. As a consequence, the
Company does not know whether any of its patent applications will result in
the issuance of patents or whether any of the Company's existing patents will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first inventor of inventions covered
by its pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to
participate in interference proceedings to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. There can be no assurance that any
patents owned or controlled by the Company will protect SEQUUS against
infringement litigation or afford commercially significant protection of the
Company's technology. Almost none of the Company's patents has been tested in
court to determine their validity and scope. Moreover, the patent laws of
foreign countries differ from those of the United States and the degree of
protection, if any, afforded by foreign patents may therefore be different.
The Company has a practice of monitoring patents and other developments in
the liposome field. To the extent that the Company becomes aware of patents of
other parties which the Company's processes or products might infringe, it is
the Company's practice to seek review of such patents by the Company's patent
counsel. With respect to the Company's anticancer drug, DOXIL, SEQUUS is aware
of TLC's United States Patent No. 5,077,056 (the "056 Patent") relating to the
loading of therapeutic drugs into liposomes. The Company's patent counsel has
rendered an opinion that DOXIL would not infringe any valid claim of this
patent. International equivalent patents to the 056 Patent are now undergoing
opposition proceedings in the European and Japanese patent offices and the
Company is party to such proceedings. The Company is also aware of recently
issued United States Patent No. 5,562,925 (the "925 Patent") covering
therapeutic cisplatin compositions held by Research Corporation Technologies
Inc., which the Company believes has been licensed exclusively to Bristol-
Myers. The Company's patent counsel has rendered an opinion that its STEALTH
cisplatin formulation would not infringe any valid claims of the 925 Patent.
The Company is also aware of TLC's United States Patent No. 5,008,050 relating
to reducing liposome size by extrusion, and United States Patent No. 5,435,989
held by NeXstar relating to targeting of liposomes to solid tumors. The
Company's
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patent counsel has rendered an opinion that DOXIL would not infringe any valid
claim of either of these patents. The Company is also aware of United States
Patent Nos. 4,426,330 and 4,534,899 assigned to Lipid Specialties, Inc.,
relating to conjugates of phospholipids and polyethyleneglycol. The Company's
patent counsel has rendered an opinion that DOXIL would not infringe any valid
claims of these patents.
In November 1991, the Company received a letter from TLC bringing to the
Company's attention TLC's United States Patent No. 5,059,591 for "Reduced
Toxicity" (the "591 Patent") containing claims directed to amphotericin
B/sterol compositions and their method of use. Subsequently, the Company's
patent counsel delivered an opinion to the Company that, among other things,
AMPHOTEC does not infringe any valid claim of the 591 Patent. The Company has
not received any further written correspondence with respect to this issue.
However, no assurance can be given that TLC will not make a claim against
SEQUUS with respect to the 591 Patent, which could have a material adverse
effect on the Company's ability to commercialize AMPHOTEC.
Even if the Company's patent counsel renders advice that the Company's
products do not infringe any valid claim under such patents, there can be no
assurance that any third party will not commence litigation to enforce such
patents. If another company were to successfully bring legal actions against
the Company claiming patent or other intellectual property right
infringements, in addition to any liability for damages, the Company could be
enjoined by a court from selling such products or processes or might be
required to obtain a license to manufacture or sell the affected product or
process. There can be no assurance that the Company would prevail in any such
action or that the Company could obtain any license required under any such
patent on acceptable terms, if at all. Any litigation, whether or not resolved
in favor of the Company, could be expensive and time-consuming, could consume
substantial management resources and could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and other technologies. Although
SEQUUS has entered into confidentiality agreements with its employees,
consultants, representatives and other business associates, there can be no
assurance that trade secrets and know-how will remain undisclosed or that
similar trade secrets or know-how will not be independently developed by
others. See "Business -- Patents and Trade Secrets."
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $150.6 million in net losses through December 31,
1996, including a net loss of $17.2 million in the fiscal year ended December
31, 1996. There can be no assurance that revenues from product sales or other
sources will be sufficient to fund operations or that the Company will achieve
profitability or positive cash flow. Additional financing may be required to
fund the Company's continuing operations and product and business development
activities in the form of debt or equity securities or bank financing. There
can be no assurance that such financing will be available on acceptable terms,
if at all. The unavailability of such financing could delay or prevent the
development, testing, regulatory approval, manufacturing or marketing of some
or all of the Company's products and could have a material adverse effect on
the Company's business, financial conditions or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT TRANSITION
The Company's success depends largely upon its ability to attract and retain
qualified scientific, medical, engineering, manufacturing, sales and marketing
and management personnel. The Company faces competition for such personnel
from other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful
in hiring or retaining such personnel. Three of the key executive officers of
the Company have joined the management team in the past two years. The new
management team will face significant challenges in transitioning the Company
from research and development to manufacturing and marketing of the Company's
products that have received
16
<PAGE>
regulatory approval. There can be no assurance that the management team can
successfully manage the transition of the Company's business. See "Business --
Employees" and "Management."
HAZARDOUS MATERIALS
As with many biopharmaceutical companies, the Company's research and
development involves the controlled use of hazardous materials and chemical
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by federal, state and local regulations or that it will not be
subject to the risk of accidental contamination or injury from these
materials. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could materially adversely
affect the Company's business, financial condition and results of operations.
See "Business -- Government Regulation."
MARKET FOR PREFERRED STOCK AND DEBENTURES
Prior to this offering there has been no public market for the Preferred
Stock. Although the Preferred Stock is expected to be listed on the Nasdaq
National Market, there can be no assurance that a liquid trading market in the
Preferred Stock will develop. In addition, if the Preferred Stock is exchanged
for Debentures, the Company is not obligated to list the Debentures, and there
can be no assurances that a market in the Debentures will develop. See
"Description of Preferred Stock" and "Description of Debentures."
UNCERTAINTY OF PAYMENT OF DIVIDENDS ON PREFERRED STOCK
Under Delaware law, dividends or distributions to stockholders may be made
only from the surplus of the Company, or, in certain situations, from the net
profits for the current fiscal year or the fiscal year before which the
dividend or distribution is declared. The Company's ability to pay dividends
in the future will depend upon its financial results, liquidity and financial
condition. The Company has no history of generating positive cash flow or
profits to make periodic dividend payments, and there can be no assurances
that the Company will have the surplus or profit necessary to pay any
dividends. As a result, the Company may be unable to pay the quarterly
installments of the cumulative annual dividend on the Preferred Stock. See
"Description of Preferred Stock."
VOLATILITY OF STOCK PRICE
The market price of the Company's securities, like the stock prices of many
publicly traded biopharmaceutical companies, has been and may continue to be
highly volatile. A variety of events, both concerning and unrelated to the
Company and the biopharmaceutical industry, such as the level of sales of the
Company's products, problems with clinical development of the Company's
potential products, announcements of technological innovations, regulatory
developments or new commercial products by the Company or its competitors,
government regulation, delays or other developments relating to regulatory
approvals, developments or disputes relating to patent or proprietary rights,
comments and reports by securities analysts, product liability claims, as well
as period-to-period fluctuations in the Company's financial results, may have
a significant negative impact on the market price of the Common Stock, the
Preferred Stock and the Debentures (if issued). Any large sale of securities
of the Company could have a significant adverse effect on the market price of
the Common Stock, the Preferred Stock and the Debentures (if issued). See
"Price Range of Common Stock."
TAX CONSEQUENCES OF EXCHANGE FOR DEBENTURES
An exchange of Preferred Stock for Debentures will be a taxable event for
federal income tax purposes which may result in tax liability to the holder
without any corresponding receipt of cash by the holder. See "Certain Federal
Income Tax Considerations -- Exchange for Debentures."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Preferred Stock offered by the Company are estimated to be $ 47,875,000
($55,113,000 if the Underwriters' over-allotment option is exercised in full)
after deducting estimated underwriting discounts and commissions and expenses
of the offering payable by the Company.
The Company intends to use the proceeds of this offering for (i) activities
relating to the clinical trials of DOXIL and AMPHOTEC for additional
indications and the clinical trial program for SPI-077; (ii) increased
manufacturing capacity and additional production facilities; (iii) research
and development related to new product opportunities; and (iv) other general
corporate purposes, including working capital and capital expenditures. The
Company may also use a portion of its available cash to acquire technologies
or products complementary to its business. Although the Company does consider
such acquisitions from time to time, as part of normal business operations and
planning, it has no present commitments or agreements with respect to any such
acquisitions.
The precise allocation of the proceeds and the timing of expenditures will
vary depending on numerous factors, including the progress of the Company's
research and development efforts, the results of clinical trials, the timing
of regulatory approvals and strategic partnering activities. Such expenditures
are likely to be substantial and may exceed the proceeds of this offering. The
Company believes that its existing cash balances, interest income, revenues
from operations and the net proceeds of this offering will be adequate to fund
its planned activities at least through 1998. However, the Company may seek
additional financing sooner. Pending their application, the net proceeds will
be invested in investment-grade, short-term, interest-bearing investments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception and does not anticipate paying any dividends on the Common Stock in
the foreseeable future. For a discussion of dividends payable on the Preferred
Stock, see "Description of Preferred Stock -- Dividends."
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "SEQU." The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for the Company's Common
Stock on the Nasdaq National Market. These prices do not include retail
markups, markdowns, or commissions.
<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
1995
First Quarter.................................... $ 9 /1///2/ $ 5 /1///2/
Second Quarter................................... 12 /1///8/ 5 /3///4/
Third Quarter.................................... 15 /1///8/ 10 /1///4/
Fourth Quarter................................... 14 /1///4/ 9 /3///4/
1996
First Quarter.................................... 19 /1///2/ 12 /3///8/
Second Quarter................................... 22 /1///2/ 13 /3///4/
Third Quarter.................................... 20 /1///8/ 11 /1///2/
Fourth Quarter................................... 17 12 /1///4/
1997
First Quarter (through February 5, 1997)......... 16 /5///8/ 12 /1///4/
</TABLE>
As of December 31, 1996 there were approximately 454 holders of record of
the Common Stock. On February 5, 1997, the last sale price reported on the
Nasdaq National Market for the Company's Common Stock was $12.50 per share.
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the Company's actual capitalization at
December 31, 1996, and (ii) as adjusted capitalization to reflect the sale by
the Company of 1,000,000 shares of Preferred Stock in the offering, less
estimated underwriting discounts and commissions and expenses of the offering
payable by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
AS
ACTUAL ADJUSTED
--------- ---------
(in thousands,
except share
and per share data)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, par value $0.01; 4,000,000 shares
authorized, issuable in series; no shares issued and
outstanding, actual (1,000,000 shares issued and
outstanding, as adjusted)............................. $ -- $ 10
Common Stock, par value $0.0001; 45,000,000 shares
authorized; 29,660,319 shares issued and outstanding,
actual and as adjusted(1)............................. 3 3
Additional paid-in capital............................. 194,948 242,813
Accumulated deficit.................................... (150,624) (150,624)
--------- ---------
Total stockholders' equity........................... 44,327 92,202
--------- ---------
Total capitalization............................... $ 44,327 $ 92,202
========= =========
</TABLE>
- --------
(1) Excludes 4,086,188 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $9.67 per
share and 1,972,023 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $6.58 per
share. The Company will reserve shares of Common Stock for issuance
upon conversion of the Preferred Stock or Debentures.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996 are
derived from the Company's financial statements which have been audited by
Ernst & Young LLP, independent auditors, which are included elsewhere herein.
The selected financial data set forth below as of December 31, 1992, 1993 and
1994 and for each of the two years in the period ended December 31, 1993 are
derived from audited financial statements not included or incorporated by
reference herein. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Prospectus and the financial statements and related notes
included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales............ $ 293 $ 1,299 $ 3,664 $ 1,907 $ 25,462
Royalties and fees (1)... 425 5,458 91 109 7,461
-------- -------- -------- --------- ---------
Total revenues............. 718 6,757 3,755 2,016 32,923
Operating expenses:
Cost of goods sold....... 13 232 916 511 3,990
Research and development. 15,769 21,128 25,378 22,651 27,652
Selling, general and
administrative.......... 2,723 6,653 7,622 13,856 20,302
-------- -------- -------- --------- ---------
Total operating expenses... 18,505 28,013 33,916 37,018 51,944
-------- -------- -------- --------- ---------
Loss from operations....... (17,787) (21,256) (30,161) (35,002) (19,021)
Interest income............ 2,394 1,602 976 1,406 1,844
-------- -------- -------- --------- ---------
Net loss................... $(15,393) $(19,654) $(29,185) $ (33,596) $ (17,177)
======== ======== ======== ========= =========
Net loss per share......... $ (0.84) $ (1.05) $ (1.54) $ (1.54) $ (0.59)
======== ======== ======== ========= =========
Weighted average shares
outstanding............... 18,270 18,789 18,978 21,831 28,937
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (2)............. -- -- -- -- --
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents
and short-term marketable
investments............... $ 41,325 $ 34,658 $ 11,757 $ 50,276 $ 32,946
Long-term marketable
investments............... 12,782 2,520 500 -- --
Total assets............... 60,523 45,179 18,198 57,808 54,968
Long-term debt and lease
obligations............... -- -- -- -- --
Accumulated deficit........ (51,014) (70,668) (99,865) (133,427) (150,624)
Total stockholders' equity. 58,577 39,318 10,938 49,599 44,327
</TABLE>
- --------
(1) Includes a signing fee and regulatory milestone fee totaling $5.3 million
from Zeneca Limited in 1993 and a distribution rights fee of $5.3 million
from Schering-Plough in 1996.
(2) For the years ended December 31, 1992, 1993, 1994, 1995 and 1996, earnings
were insufficient to cover fixed charges by $15,267,000, $19,496,000,
$29,002,000, $33,421,000 and $16,966,000, respectively. There were no
preferred stock dividends declared or paid by the Company during any of
the year in the five year period ended December 31, 1996. For these
reasons, no ratios are provided.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that relate to future plans, events or
performance are 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 a variety of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
The Company is a leader in developing and commercializing lipid-based
biopharmaceutical products primarily to treat cancer and infectious diseases.
The Company formulates its proprietary STEALTH liposomes with existing drugs,
or with therapeutics under development, to develop new products with improved
safety and efficacy profiles. The Company has developed and is marketing
DOXIL, an anticancer drug, and AMPHOTEC, an antifungal drug, in the United
States through its direct sales organization and internationally through its
marketing partners. The Company is currently conducting additional clinical
trials for the use of DOXIL in the treatment of certain solid tumors,
including a Phase III clinical trial in refractory ovarian cancer and a number
of breast cancer trials. In addition, SEQUUS is currently conducting a Phase I
trial of its STEALTH cisplatin formulation for the treatment of cancer.
SEQUUS developed DOXIL, a proprietary STEALTH liposome formulation
encapsulating a leading anticancer drug, doxorubicin. In November 1995, SEQUUS
received marketing clearance from the FDA for DOXIL for the treatment of KS in
people with AIDS whose KS has progressed on prior chemotherapy or in patients
who are intolerant to such therapy. In December 1995, the Company launched
DOXIL in the United States, using its own marketing and sales team, and
achieved domestic product sales of approximately $20.9 million in 1996. In
June 1996, the Company was granted marketing authorization for DOXIL under the
tradename CAELYX in the 15 member states of the EU for the treatment of first-
line and refractory KS in patients with low CD4 counts and extensive
mucocutaneous or visceral disease. The drug may be used as first-line systemic
chemotherapy, or as second-line chemotherapy, in KS patients with disease that
has progressed with, or in patients who are intolerant to, prior combination
chemotherapy comprising at least two of the following agents: a Vinca
alkaloid, bleomycin, and doxorubicin (or other anthracycline).
The Company has entered into a distribution agreement with Schering-Plough
under which Schering-Plough has rights to market and sell CAELYX worldwide,
except for the United States, Japan and certain other countries. Schering-
Plough will conduct pricing discussions with the appropriate agencies in those
European countries where pricing approval is required. In addition, the
Company and Schering-Plough are jointly planning the clinical development of
DOXIL for the treatment of solid tumors in the United States and certain
international markets. Schering-Plough will be responsible for conducting
certain of these clinical trials. In 1996, the Company received fees of $7.3
million from Schering-Plough.
The Company used another lipid-based delivery technology to develop
AMPHOTEC, a proprietary formulation of a leading antifungal drug, amphotericin
B. In November 1996, SEQUUS received marketing clearance from the FDA for
AMPHOTEC for the treatment of invasive aspergillosis, a life-threatening
fungal infection, in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B therapy in effective doses
and in patients where prior amphotericin B therapy has failed. In December
1996, the Company launched AMPHOTEC in the United States, using its own
marketing and sales organization. AMPHOTEC has also received marketing
clearance in a number of other countries for the treatment of systemic fungal
infections in patients for whom conventional amphotericin B is contraindicated
due to toxicity or renal failure or for whom previous antifungal therapy was
unsuccessful. The Company's strategy is to commercialize AMPHOTEC in
international markets, under the tradename AMPHOCIL, through distribution
partners and has entered into a number of distribution agreements, including
agreements
22
<PAGE>
with Zeneca Limited ("Zeneca") and Bayer, Inc. ("Bayer") in selected countries.
A liposome-based amphotericin B product which targets indications similar to
those targeted by AMPHOCIL has been first to market and captured a significant
portion of market share in many foreign markets. Another competitor introduced
its lipid-based amphotericin B product as the third entrant in the U.K. market
at a price substantially below the price of the other lipid-based antifungals
and launched the product as the first lipid-based antifungal agent in the
United States. Competition from these two competitors could have an adverse
effect on the market penetration and pricing of AMPHOTEC in both Europe and in
the United States.
In August 1993, the Company signed a distribution agreement with Zeneca under
which Zeneca was to market and sell AMPHOCIL in most European countries. In
March 1994, SEQUUS and Zeneca announced the expansion of their August 1993
agreement to cover additional markets. In July 1996, SEQUUS announced that it
had reacquired from Zeneca all international marketing and distribution rights
for AMPHOCIL except for nine European countries to which Zeneca had retained
such rights (Denmark, Finland, Iceland, Ireland, Italy, the Netherlands,
Portugal, Sweden and the U.K.). In exchange for the return to SEQUUS of
marketing and distribution rights throughout the rest of the world, SEQUUS
agreed to restructure certain future milestone payments specified in the
original agreement, adjust the pricing terms for AMPHOCIL to provide greater
competitive pricing flexibility, and exchange certain inventory held by Zeneca.
The Company recognizes product sales upon shipment of product to its
marketing partners internationally and to its customers in the United States.
Historically, sales revenue recorded under the Zeneca agreement has fluctuated
quarter to quarter depending on the number of shipments in each quarter. For
example, there have been quarters where there were no shipments. The Company
expects this type of quarter to quarter fluctuation to continue.
The Company has incurred losses in each year since its inception and has
accumulated approximately $150.6 million in net losses through December 31,
1996, including a net loss of approximately $17.2 million in the fiscal year
ended December 31, 1996. Although the Company and its marketing partners have
commenced marketing DOXIL in the United States and certain international
markets and AMPHOTEC in the United States and 18 other countries, there can be
no assurance that revenues from product sales or other sources will be
sufficient to fund operations or that the Company will achieve profitability or
positive cash flow.
The Company expects its research and development expenses to increase as a
result of expanded clinical trials of DOXIL in a variety of solid tumors and
clinical trials of SPI-077. The Company expects its marketing and sales
expenses to increase as it proceeds with the commercialization of DOXIL and
AMPHOTEC through its United States direct sales and marketing organization. As
of December 31, 1996, SEQUUS had a United States sales team of 42 individuals
experienced in the sale of pharmaceutical and biopharmaceutical products, with
particular emphasis on oncology and infectious disease.
The Company's business is subject to significant risks, including, but not
limited to, the risks inherent in seeking market acceptance of current and
future products; managing a marketing and sales organization; depending on
third-party distributors, manufacturers and sole-source suppliers; obtaining
and enforcing patents; uncertainties relating to product development, clinical
trials and the regulatory approval process; uncertainties relating to the
patent rights of others; and uncertainties relating to pharmaceutical pricing
and reimbursement.
23
<PAGE>
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
Revenues
Total revenues were $32.9 million, of which $25.5 million were product
sales, during the year ended December 31, 1996 compared with $2.0 million
during the year ended December 31, 1995. DOXIL product sales represented 89%
of total product sales in 1996 compared to 49% in 1995. For 1996, 3% of the
Company's product sales represented sales of AMPHOTEC to Zeneca as compared to
41% in 1995. In 1996, the Company received approximately $7.5 million in
upfront fees and payments, which included $7.3 million from Schering-Plough.
Operating Expenses
The Company's gross margin increased to 84% of product sales in 1996 from
73% of net sales in 1995. This increase in the gross margin is due to the
increase in the percentage of direct product sales in 1996 versus 1995. The
Company generally recognizes higher margins on direct product sales in the
United States than it does on sales to the Company's international
distribution partners and agents. Direct product sales were 89% of product
sales in 1996 and were 32% of product sales in 1995. The Company anticipates
that its gross margin will continue to fluctuate depending on the mix between
direct product sales in the United States and sales to the Company's
international distribution partners and agents.
Generally, a majority of the Company's operating expenses are incurred for
research and development ("R&D"), including preclinical testing and clinical
trials required for new pharmaceutical products. The principal items of R&D
expense are personnel costs, costs of clinical trials, clinical production and
supplies. R&D expense increased to $27.7 million in 1996, from $22.7 million
in 1995. This increase in expenses resulted from higher spending in 1996
associated with clinical trials for DOXIL, expenses associated with the
regulatory approval of AMPHOTEC and an increase in spending on R&D projects.
The Company anticipates that future clinical trial expenses will increase due
to expanded clinical trials of DOXIL in a variety of solid tumors and on
clinical trials of SPI-077.
Selling, general and administrative expenses increased to $20.3 million in
1996 from $13.9 million in 1995. The increase in selling, general and
administrative expenses was primarily due to the first full year of marketing
DOXIL, and, to a lesser extent, preparation for the launch of AMPHOTEC in
December 1996, which required the hiring of 17 additional sales personnel.
Interest Income
Interest income increased to $1.8 million in 1996 from $1.4 million in 1995,
due to the increase in cash available for investment resulting primarily from
the net proceeds of $45.6 million received by the Company from a public
offering of Common Stock in the fourth quarter of 1995.
Net Loss
The Company's net loss decreased to $17.2 million in 1996 from $33.6 million
in 1995. The net loss per share was $0.59 for 1996 compared to a net loss of
$1.54 per share for 1995. The decrease in the loss was due primarily to an
increase in product sales, partially offset by an increase in marketing and
sales costs in anticipation of the AMPHOTEC December 1996 launch, a full year
of marketing and sales expenses for DOXIL and an increase in clinical and
preclinical costs for additional trials.
Years Ended December 31, 1995 and 1994
Revenues
Total revenues, of which the majority were product sales, were $2.0 million,
during the year ended December 31, 1995 compared with $3.8 million recorded
during the year ended December 31, 1994. DOXIL
24
<PAGE>
product sales represented 49% of total product sales in 1995 compared to 3% in
1994. For 1995, 41% of the Company's product sales represented sales of
AMPHOCIL to Zeneca as compared to 91% for 1994. A significant portion of the
1994 and 1995 product sales reflect pipeline-filling (inventory) orders.
Product sales declined during 1995 due primarily to the absence of AMPHOCIL
shipments to Zeneca after the first quarter of 1995.
Operating Expenses
R&D expenses decreased to $22.7 million in 1995 from $25.4 million in
1994. This reduction resulted from higher spending in 1994 associated with
clinical trials in preparation for the NDA filing for DOXIL in the treatment
of KS.
Selling, general and administrative expenses increased to $13.9 million in
1995 from $7.6 million in 1994, principally reflecting an increase in
marketing and sale expenses in preparation of the December 1995 DOXIL launch.
The Company hired 24 individuals and additional internal staff to support
sales operations. In addition, the Company recorded expenses in fiscal 1995 in
connection with the departure of certain officers.
Interest Income
Interest income increased to $1.4 million in 1995 from $1.0 million in 1994,
due to the increase in cash available for investment resulting from
approximately $70.9 million received by the Company through equity financings
during 1995.
Net Loss
The Company's net loss increased to $33.6 million in 1995 from $29.2 million
in 1994. The net loss per share was $1.54 for both 1995 and 1994. The increase
in the loss was due primarily to an increase in marketing and sales costs in
anticipation of the December 1995 DOXIL launch and a decline in AMPHOTEC sales
to Zeneca.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable investments at
December 31, 1996 were $32.9 million, a decrease of $17.4 million from $50.3
million at December 31, 1995. This decrease represents net cash used by
operating activities of $25.0 million, capital expenditures of $3.6 million
offset by $11.3 million of cash provided by financing activities. During the
fiscal year ended December 31, 1996, the Company received approximately $10.7
million from the exercise of warrants issued to investors in private
placements and employee stock options. Of this, approximately $3.0 million was
due to the exercise of warrants to purchase approximately 706,000 shares of
Common Stock at $4.25 per share. Approximately $0.9 million was due to the
exercise of warrants to purchase 120,682 shares of Common Stock at $7.43 per
share. Approximately $2.6 million was due to the exercise of warrants to
purchase 352,460 shares of Common Stock at $7.43 per share. At December 31,
1996, the following warrants for shares of the Company's Common Stock were
outstanding: 525,000 shares at $4.25 per share, expiring March 1997; 687,638
shares at $7.43 per share, expiring April 1998; and 759,385 shares at $7.43,
expiring May 1999. In April 1996 the Company completed the conversion of each
of the 480,000 shares of Series A Convertible Reset Preferred Stock into 3.367
shares of Common Stock.
The Company's strategy is to fund from its own cash resources and the
proceeds from this offering, the preclinical development of its proprietary
products, DOXIL, AMPHOTEC and SPI-077, and the continued research and
development of additional STEALTH liposome products. This strategy will
require significant operating and capital expenditures including the
construction of a pilot production facility which is currently in the planning
phase.
25
<PAGE>
The Company believes that its existing cash balances, interest income,
revenues from operations and the net proceeds of this offering will be
adequate to fund its planned activities at least through 1998. However, the
Company may seek additional financing sooner. There can be no assurance that
adequate financing will be available on satisfactory terms, if at all.
As of December 31, 1996, the Company had Federal and California net
operating loss carryforwards of approximately $99.0 million and $10.0 million,
respectively. The Company also has Federal and California research and
development tax credit carryforwards of approximately $4.9 million and $3.4
million, respectively. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar
California provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.
26
<PAGE>
BUSINESS
The statements in this Prospectus that relate to future plans, events or
performance are 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 a variety of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
SEQUUS Pharmaceuticals, Inc. is a leader in developing and commercializing
lipid-based biopharmaceutical products primarily to treat cancer and
infectious diseases. The Company formulates its proprietary STEALTH liposomes
with existing drugs, or with therapeutics under development, to develop new
products with improved safety and efficacy profiles. The Company has developed
and is marketing DOXIL, an anticancer drug, and AMPHOTEC, an antifungal drug,
in the United States through its direct sales organization and internationally
through its marketing partners. The Company is currently conducting additional
clinical trials for the use of DOXIL in the treatment of certain solid tumors,
including a Phase III clinical trial in refractory ovarian cancer and a number
of breast cancer trials. In addition, SEQUUS is currently conducting a Phase I
trial of its STEALTH cisplatin formulation for the treatment of cancer.
Liposomes are microscopic lipid spheres used to encapsulate drugs for
delivery to targeted areas of the body in order to increase efficacy and
reduce toxicity. SEQUUS has created and patented STEALTH liposomes that avoid
the body's natural defense mechanisms and degrade more slowly than
conventional liposomes, thereby significantly increasing circulation time of
encapsulated therapeutic agents in the body. For example, clinical data
demonstrate that an anthracycline encapsulated in STEALTH liposomes (DOXIL)
has a circulating half-life of approximately 55 hours compared to a half-life
of approximately five hours for the other commercially available liposomal
anthracycline product. This long circulation time allows STEALTH liposomes to
accumulate in tissues where new blood vessels are forming, such as tumors and
sites of inflammation or injury, delivering sustained and increased drug
concentration to these target tissues.
SEQUUS developed DOXIL, a proprietary STEALTH liposome formulation
encapsulating a leading anticancer drug, doxorubicin. In November 1995, SEQUUS
received marketing clearance from the FDA for DOXIL for the treatment of KS in
people with AIDS whose KS has progressed on prior chemotherapy or in patients
who are intolerant to such therapy ("refractory KS"). In December 1995, the
Company launched DOXIL in the United States, using its own marketing and sales
team, and achieved domestic product sales of approximately $20.9 million in
1996. In June 1996, the Company was granted marketing authorization for DOXIL
under the tradename CAELYX in the 15 member states of the EU for the treatment
of first-line and refractory KS in patients with low CD4 counts and extensive
mucocutaneous or visceral disease. The drug may be used as first-line systemic
chemotherapy, or as second-line chemotherapy, in KS patients with disease that
has progressed with, or in patients who are intolerant to, prior combination
chemotherapy comprising at least two of the following agents: a Vinca
alkaloid, bleomycin, and doxorubicin (or other anthracycline). The Company has
entered into a distribution agreement with Schering-Plough under which
Schering-Plough has rights to market and sell CAELYX worldwide, except for the
United States, Japan and certain other countries. In addition, the Company and
Schering-Plough are jointly planning the clinical development of DOXIL for the
treatment of solid tumors in the United States and certain international
markets. Schering-Plough will be responsible for conducting certain of these
clinical trials.
The Company used another lipid-based delivery technology to develop
AMPHOTEC, a proprietary formulation of a leading antifungal drug, amphotericin
B. In November 1996, SEQUUS received marketing clearance from the FDA for
AMPHOTEC for the treatment of invasive aspergillosis, a life-threatening
fungal infection, in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B therapy in effective doses
and in patients where prior amphotericin B therapy has failed. In December
1996, the Company launched AMPHOTEC in the United States, using its own
marketing and sales
27
<PAGE>
organization. AMPHOTEC has also received marketing clearance in a number of
other countries for the treatment of systemic fungal infections in patients for
whom conventional amphotericin B is contraindicated due to toxicity or renal
failure or for whom previous antifungal therapy was unsuccessful. The Company's
strategy is to commercialize AMPHOTEC in international markets, under the
tradename AMPHOCIL, through distribution partners. The Company has entered into
a number of distribution agreements, including agreements with Zeneca and Bayer
in selected countries.
The Company is developing SPI-077, a proprietary STEALTH liposome formulation
of encapsulated cisplatin, a widely used anticancer drug. The utility of
unencapsulated cisplatin is limited by a range of potentially serious and
irreversible toxicities. Based upon results from preclinical studies, the
Company believes that SPI-077 may have safety and efficacy advantages over
unencapsulated cisplatin. In December 1996, the Company began a Phase I
clinical trial of SPI-077 in the treatment of solid tumors. The Phase I trial
is focused on determining the maximum tolerated dose of SPI-077 and
establishing the toxicity profile of SPI-077 in patients with advanced
malignancies not amenable to other cancer treatment.
The Company's research and development efforts focus on developing new
products by encapsulating other drugs, or attaching other drugs to, STEALTH
liposomes and expanding the STEALTH platform to create additional methods of
drug delivery. Products in the early development stage include STEALTH liposome
formulations of CD4 for treating people with HIV, a quinolone antibiotic for
treating life-threatening respiratory tract infections or other severe systemic
bacterial infections, and a radiosensitizing agent for treating cancer. The
Company is also conducting research in the field of small molecule, peptide and
gene delivery using STEALTH liposomes.
TECHNOLOGY
Liposomes are microscopic spheres composed of lipid membranes surrounding
internal aqueous compartments. When liposomes were first characterized as
potential drug carriers in the mid-1960s, scientists believed that these lipid
vesicles showed promise for improving intravenous drug delivery, theorizing
that liposomes would reduce drug toxicity by delivering entrapped drug to
diseased sites in the body and avoiding healthy tissue. As development of
liposome products progressed, two serious limitations emerged. First,
conventional liposomes were attacked by proteins in the blood, causing rupture
and premature release of entrapped drug into the bloodstream. Second, liposomes
that survived rupture were quickly removed from circulation, primarily by
immune cells that line the ducts of the liver.
To address these limitations, SEQUUS developed patented liposomes that are
stable in plasma and avoid rapid removal from the bloodstream. This was
achieved by attaching polyethyleneglycol ("PEG") to the surface of the
liposomes to form the Company's proprietary long-circulating STEALTH liposomes.
For example, clinical data demonstrate that an anthracycline encapsulated in
STEALTH liposomes (DOXIL) has a circulating half-life of approximately 55 hours
compared to a half-life of approximately five hours for the other commercially
available liposomal anthracycline product. In addition, the STEALTH liposomes
are large enough that they typically do not escape out of the blood stream and
into tissues through normal, healthy blood vessels. As a consequence, STEALTH
liposomes continue to circulate intact until they reach tissues where new blood
vessels are forming, such as tumors, sites of inflammation, and sites of
injury. The Company's clinical data have demonstrated that the STEALTH
liposomes leave the blood vessels in these locations, accumulate in high
amounts, and then slowly release the encapsulated drug. As a result, the
Company believes that STEALTH liposomes target diseased tissue, where the drugs
can have a benefit, and avoid healthy tissues where the drugs will cause
damage. For example, the Company has shown an up to 53-fold increase of DOXIL-
delivered doxorubicin in certain tumors as compared to unencapsulated
doxorubicin. An additional significant benefit of STEALTH technology is that
certain molecules which cannot be encapsulated inside a liposome can be
attached to the PEG on the surface of the liposomes. The Company believes that
this may enable it to develop additional drug delivery products using its
STEALTH technology.
28
<PAGE>
The Company uses additional lipid-based technology in the development of its
proprietary products. For example, AMPHOTEC is a novel lipid-based colloidal
dispersion which forms a stable suspension of the active drug, amphotericin B.
The Company believes the stability of the formulation enables it to reduce
manufacturing costs, lengthen shelf-life and ease preparation of the product
prior to administration relative to other lipid-based products.
BUSINESS STRATEGY
The Company's strategy is to build an integrated biopharmaceutical company
that develops, manufactures, markets and sells innovative drug formulations of
proven drugs and new therapeutics in development with enhanced safety or
efficacy profiles based primarily on its proprietary STEALTH liposome
technology. The Company intends to focus its near-term efforts on: (i) the
commercialization of DOXIL and AMPHOTEC in the United States through its own
sales team and in selected international markets through marketing partners;
(ii) the development of additional uses for DOXIL and AMPHOTEC by establishing
clinical efficacy in a range of additional indications; (iii) the expansion of
the clinical development program for SPI-077; (iv) the development of new
products in the SEQUUS pipeline that utilize STEALTH liposomes; (v) the
increase of its manufacturing capacity and expansion into additional
production facilities; and (vi) the expansion of the STEALTH platform, either
alone or through strategic alliances, to create additional proprietary
products and drug delivery technologies.
29
<PAGE>
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The table below lists the primary therapeutic indications for and current
status of the Company's principal products, potential products under
development and research projects. The table is qualified in its entirety by
reference to the more detailed descriptions elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARKETING/
PRODUCT/DEVELOPMENT PRIMARY INDICATION(S) STATUS(1) DISTRIBUTION RIGHTS
------------------- --------------------- --------- -------------------
<C> <S> <C> <C>
DOXIL KS (refractory) Marketed in U.S. SEQUUS
(STEALTH doxorubicin)
KS (first-line SEQUUS/Schering-
therapy and re- Approved in 15 Plough(2)
fractory) EU countries
Ovarian cancer Phase II and SEQUUS/Schering-
(refractory) Phase III Plough(2)
SEQUUS/Schering-
Breast cancer Phase II Plough(2)
Combination Phase I/II
chemotherapy SEQUUS/Schering-
(e.g. Plough(2) (DOXIL
DOXIL/paclitaxel) only)
Other solid tu- SEQUUS/Schering-
mors Phase I/II Plough(2)
Aspergillosis Marketed in U.S. SEQUUS
AMPHOTEC (second-line
(Lipid-based amphotericin B) therapy)
Systemic fungal SEQUUS/Partners(3)
infections where Approved in 8 EU
amphotericin B and 10 other
therapy has countries; MAAs
failed or is con- pending in 7
traindicated other countries
Aspergillosis
(first-line ther-
apy) Phase III SEQUUS/Partners(3)
Fever of unknown Phase III SEQUUS/Partners(3)
origin (febrile
neutropenia)
SPI-077 Solid tumors Phase I SEQUUS
(STEALTH cisplatin)
SPI-119 HIV/AIDS Preclinical SEQUUS
(Liposome-CD4)
SPI-850 Bacterial infec- Preclinical SEQUUS
(STEALTH quinolones) tions
SPI-40 Solid tumors Preclinical SEQUUS
(Radiosensitizers)
SPI-01 Genetic diseases, Research SEQUUS
(Gene delivery) cancer
</TABLE>
--------
(1) The meaning of terms used to describe the status of the Company's
product development activities are as set forth below. See "--
Government Regulation" for a more complete description. "NDA": "New
Drug Application" filed with FDA for approval to market product for
certain treatment indications. "MAA": "Marketing Authorization
Application" (the European equivalent of a NDA). "Research": Early
stage work to develop formulation or explore feasibility.
"Preclinical": Laboratory pharmacology and/or toxicology testing.
"Phase I" clinical trials: Testing of compounds in humans for safety
and pharmacologic profile in a limited patient population. "Phase
I/II" clinical trials: Testing of compounds in patients for safety and
preliminary efficacy in a relatively limited patient population.
"Phase II" clinical trials: Testing of compounds in patients for
safety and efficacy in a relatively limited patient population. "Phase
III" clinical trials: Expanded controlled and uncontrolled trials of
compounds in patients to evaluate the overall benefit-risk
relationship of the drug and to provide an adequate basis for
physician labeling (required to file a NDA or a MAA).
(2) Schering-Plough has worldwide distribution rights, except the United
States, Japan and certain other countries. See "-- Strategic
Alliances."
(3) Zeneca has marketing and distribution rights in Denmark, Finland,
Iceland, Ireland, Italy, the Netherlands, Portugal, Sweden and the
United Kingdom. Prodesfarma, S.A. has marketing and distribution
rights in Spain, Belgium and Luxembourg. TORREX Pharma G.m.b.H. has
marketing and distribution rights in Austria, the Czech Republic,
Hungary, Poland and Slovenia. Gamida-MedEquip Limited has marketing
and distribution rights in Israel. Bayer has marketing and
distribution rights in Canada. See "-- Strategic Alliances."
30
<PAGE>
DOXIL
Doxorubicin is a widely prescribed anthracycline antibiotic used for the
treatment of many different forms of cancer, including breast and ovarian
cancer, leukemias, sarcomas and Hodgkin's disease. Though effective in
treating these and other cancers, doxorubicin may produce irreversible
myocardial toxicity, manifested in its most severe form by life-threatening
congestive heart failure. The risk of developing congestive heart failure
increases with increasing total cumulative doses of doxorubicin in excess of
450 mg/m/2/. Doxorubicin also causes suppression of white blood cell
production, which may be dose limiting, as well as toxicities such as nausea
and vomiting and hair loss. It is believed that the initial rapid uptake by
the tissues (both diseased and healthy) of doxorubicin is a major contributing
factor to its toxicities, in particular cardiotoxicity. DOXIL, a long-
circulating STEALTH liposome formulation of doxorubicin, is designed to reduce
the toxicities of doxorubicin by sequestering the drug in the liposomes until
it reaches the tumor site (see "-- Technology"), thereby significantly
reducing rapid drug uptake by and concentration in healthy tissues. The
Company conducted a study comparing the cardiotoxicity of DOXIL in 10 KS
patients receiving cumulative doses of doxorubicin encapsulated in STEALTH
liposomes (DOXIL) ranging from 400 mg/m/2/ to greater than 800 mg/m/2/ to a
matched control group of cancer patients treated with the same cumulative
amount of unencapsulated doxorubicin. Data from this preliminary study suggest
that DOXIL may cause significantly less cardiotoxicity than unencapsulated
doxorubicin.
DOXIL for Treating KS
People with AIDS have an increased incidence of developing certain cancers.
The most common cancer in this group is KS, a tumor that occurs only rarely in
the general population. The most characteristic features of KS are disfiguring
soft nodules or tumors (usually reddish purple or brown). Such tumors
frequently occur on the surface of the skin, including the face, feet or legs,
and can cause painful swelling or limit mobility. Less frequently, KS involves
vital organs such as the lung where it may cause shortness of breath, and the
gastrointestinal tract where it may cause internal bleeding.
Prior to approval of DOXIL, the most common alternatives for KS treatment
were interferon and two or three drug combinations. Interferon is effective
only for people who have less advanced forms of AIDS. Interferon is associated
with side effects such as fever and flu-like symptoms. If KS patients were no
longer responsive to interferon, they were commonly treated with the same
chemotherapy agents that are used for other types of cancers. The drugs used
most commonly for KS include generic doxorubicin, bleomycin, and vincristine
in combination ("ABV") or bleomycin and vincristine in combination ("BV").
Combination chemotherapy can result in side effects such as neutropenia
(decrease in white blood cells), nausea, vomiting, hair loss, rash, numbness
and tingling of the hands and feet and increased susceptibility to bleeding
because of a reduction in platelets. People with AIDS are often more sensitive
to the side effects of chemotherapy than non-HIV patients, and this is often
manifested as an increased incidence of infection or bleeding when
chemotherapy is given. For this reason, the doses of these drugs must
frequently be reduced in order to limit side effects.
In November 1995, SEQUUS received marketing clearance from the FDA for the
use of DOXIL in treating KS patients whose KS has progressed on prior
chemotherapy or in patients who are intolerant to such therapy. In December
1995, the Company launched DOXIL in the United States, using its own marketing
and sales force, and achieved domestic sales of approximately $20.9 million in
1996. The marketing clearance for DOXIL was provided in accordance with the
FDA's procedures for Accelerated Approval of New Drugs for Serious or Life
Threatening Illnesses. Accelerated approval regulations require that an
applicant study an investigational drug following product launch to verify and
describe the drug's clinical benefit. The FDA has acknowledged the Company's
commitment to a post-marketing clinical trial designed to meet accelerated
approval requirements and the Company has initiated this trial. Under FDA
accelerated approval regulations, the FDA may withdraw approval following
product launch if the Company fails to show due diligence in conducting post-
marketing studies or if these studies fail to demonstrate clinical benefit to
the FDA's satisfaction.
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<PAGE>
The pivotal trial used by SEQUUS to support the New Drug Application ("NDA")
for refractory KS included 383 patients treated with DOXIL as single-agent
therapy at a dose of 20 mg/m2 every three weeks. A subset of 77 patients with
advanced KS, 49 of whom had received prior doxorubicin therapy, were
identified as refractory. The tumor responses in this group of refractory
patients were 27% or 48%, depending on the method of assessment used. Based on
the FDA's review and assessment of 42 of the 77 refractory patients, 48%
achieved a response (primarily based on flattening of at least 50% of the
previously raised lesions), 26% had stable disease, and 26% had disease
progression. The Company also included in the NDA safety data on 705 patients,
which showed that DOXIL was generally well tolerated with manageable side
effects.
In June 1996, the Company received marketing authorization for DOXIL under
the tradename CAELYX in the 15 member states of the EU for both first-line and
second-line treatment of KS in patients with low CD4 counts and extensive
mucocutaneous (skin and mucous membrane) or visceral disease. The drug may be
used as first-line systemic chemotherapy, or as second-line chemotherapy, in
KS patients with disease that has progressed with, or in patients who are
intolerant to, prior combination chemotherapy comprising at least two of the
following agents: a Vinca alkaloid, bleomycin, and doxorubicin (or other
anthracycline). In September 1996, the Company announced that it had entered
into a distribution agreement with Schering-Plough under which Schering-Plough
is marketing and selling CAELYX worldwide, except for the United States, Japan
and certain other countries. Schering-Plough is conducting pricing discussions
with the appropriate agencies in those European countries where pricing
approval is required. The EU countries covered by the marketing authorization
are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United
Kingdom. See "-- DOXIL for Treating Solid Tumors."
In support of the European marketing authorization, SEQUUS completed two
trials of DOXIL as first line therapy in KS patients. A total of 258 patients
were enrolled in one trial comparing DOXIL against ABV. Of the 239 evaluable
patients, 46.2% of DOXIL patients responded to therapy as compared with 25.6%
of ABV patients. A total of 241 patients were enrolled in the second trial
comparing DOXIL against BV. Of the 218 evaluable patients, 58.7% of DOXIL
patients responded to therapy as compared with 23.3% of BV patients.
The Company's regulatory clearances to market DOXIL in the United States for
refractory KS and in certain European countries for first-line and refractory
KS were based on extensive clinical data. In 1996, the Company submitted data
from its two randomized clinical trials to the FDA to obtain clearance to
market DOXIL as a first-line therapy. The FDA has informed the Company that it
would require additional information that addresses the methodology of
assessing the response rates seen in the trials in order to approve DOXIL for
a first-line indication. The Company is currently re-analyzing its existing
clinical data, analyzing data not previously submitted, and considering
expanding ongoing trials, if necessary, to support a first-line indication.
There can be no assurance that the Company will provide such data to the FDA
or that any such submission would result in clearance for a KS first-line
indication.
DOXIL for Treating Solid Tumors
Many solid tumors are treated by surgery, radiation, chemotherapy or a
combination of these therapies. When used appropriately, chemotherapy can
relieve suffering and sometimes prolong life. However, only a very small
percentage of patients with cancer are cured by the use of chemotherapy alone,
although their lives may be extended or the quality of life improved. This is
especially true for common solid tumors such as cancer of the lung, breast,
ovary and colon. However, these patient benefits are often offset by the
considerable toxicity associated with chemotherapy drugs. The side effects
include increased susceptibility to infection due to decreased white blood
cells, nausea, vomiting, hair loss, rash, numbness and tingling of the hands
and feet and increased susceptibility to bleeding due to reduction in
platelets. In almost all cases in which chemotherapy is effective a
combination of drugs is used. Generally drugs are used in combination that
have been shown to be effective individually and have non-overlapping
toxicities. Because of the limited benefits of chemotherapy and severe
toxicities, market opportunities exist for drugs that are more effective, less
toxic or both.
32
<PAGE>
Pursuant to the distribution agreement between the Company and Schering-
Plough, the clinical development of DOXIL for the treatment of solid tumors is
being planned by a joint development team of SEQUUS and Schering-Plough
personnel. In addition, Schering-Plough will be responsible for conducting
certain clinical trials in Europe and the United States.
The Company is conducting a number of solid tumor trials. The clinical
results reported are preliminary and may not be indicative of results that may
be obtained in additional clinical trials. There can be no assurance that the
Company will submit NDAs based on the following clinical data or future
clinical data, or that, if submitted, any NDA will be approved. As used below,
a "response" is a reduction in the size of a lesion or tumor by at least 50%
and includes a "complete" response (no measurable tumor remaining).
. Ovarian Cancer--Ovarian cancer is the fifth most common cancer in women
in the United States according to the American Cancer Society, which
estimated that the incidence in the United States was approximately
26,700 in 1996. Chemotherapy is used both in the post-surgical setting
to prevent recurrence and to treat advanced disease. The Company has
completed an open label, multi-centered Phase II study in patients with
advanced ovarian cancer who had failed previous therapy with both
platinum and paclitaxel. Of the 35 patients in the study, nine patients
(26%) achieved a response. The median progression free interval was 5.7
months, and the median survival was 11 months (with a range of 1.5 to
24+ months). Thirteen patients experienced mucositis (mouth sores) and
palmar-plantar erythema (reddening of the skin, occasional swelling and
pain in the hands, feet and other pressure points, and, infrequently,
loss of superficial skin). The Company is currently conducting
confirmatory Phase II trials in the United States and Europe. The
Company has initiated one of two planned multi-center, randomized Phase
III trials in patients with ovarian cancer who have relapsed from prior
therapy.
. Breast Cancer--Breast cancer is the most common cancer in women in the
United States according to the American Cancer Society, which estimated
that the incidence in the United States was approximately 184,300 in
1996. Standard therapy may involve a mastectomy (removal of the mammary
gland), a lumpectomy (removal of the tumor) and radiation therapy and
chemotherapy, or some combination of these. Among solid tumors, breast
cancer is generally considered one of the most responsive to
chemotherapy. The Company has completed a Phase II multi-center trial in
the U.K. in patients with metastatic breast cancer and a high tumor
burden using doses of single-agent DOXIL ranging between 45-60 mg/m/2/
at intervals of three to four weeks. Most of these patients had not
received prior therapy, but 28 had received adjuvant chemotherapy before
entering the Company's trial for metastatic breast cancer. The response
rate in 54 evaluable patients was 32%. This response rate is nearly
identical to that obtained with single agent doxorubicin or epirubicin
in a British randomized trial comparing doxorubicin, epirubicin and
mitoxantrone in a similar patient population. Based on this data, the
Company has decided to conduct additional clinical trials. The Company
has completed another trial in patients with refractory breast cancer,
including patients whose disease had progressed on mitoxantrone.
Patients with tumors resistant to mitoxantrone are usually unresponsive
to doxorubicin. In this trial, however, six of 16 patients (37.5%) had
clinical benefit and objective evidence of tumor shrinkage, and two
additional patients (12.5%) had a true partial response (reduction in
the size of the tumor by at least 50%.) The toxicities were similar to
those seen in the ovarian cancer trial. Palmar-plantar erythema was
substantially reduced with longer intervals between treatments. The
Company is conducting additional clinical trials in breast cancer
patients.
. Combination Chemotherapy--While most cancers are not cured with single
agent therapy, durable clinical responses are often achieved with
combination therapy. Drugs with different mechanisms of action and those
which target different phases of the cell cycle are often combined in an
attempt to achieve greater activity than that seen with either drug
alone. Such drugs should have non-overlapping toxicities, so that a
healthy organ system, with rapidly dividing cells (such as the bone
marrow), is not exposed to multiple insults and subsequent toxicities.
In addition, many cancer cells are drug resistant as a result of either
de novo (intrinsic) or acquired multidrug resistance. In such
33
<PAGE>
cases, diminished intracellular drug accumulation is evident, and with
the use of more than one drug in combination, a broader range of
coverage of resistant cell lines is provided, and the development of new
resistant cells lines may be slowed or prevented. A number of Phase I/II
studies of DOXIL in combination with paclitaxel, docetaxel, vinorelbine,
gemcitabine, cyclophosphamide, cisplatin, carboplatin, or topotecan are
either underway or planned.
DOXIL has been studied in several hundred patients with many types of solid
tumors, including those listed above. The side effect from doxorubicin that
limits the amount of drug that may be given, and thus limits the amount of
drug that can reach the tumor, is suppression of the patient's white blood
cell count. For this reason, it is standard medical practice to reduce the
dose of doxorubicin whenever a patient demonstrates very low white blood cell
counts during treatment. In addition, since most of the drugs used to treat
cancer have a similar effect on the white blood cell count, the dose of each
drug must be reduced when several drugs are used together. Based on
preliminary clinical trial results, the Company believes that there is
relatively less depression of the white blood cell counts from treatment with
DOXIL compared to doxorubicin. Instead, the side effects that limit how much
DOXIL can be given are mucositis and palmar-plantar erythema. The Company
believes that this difference in the principal toxicity from using DOXIL
compared to doxorubicin reflects the change in distribution of DOXIL with
relatively less going to the bone marrow where white blood cells are made and
more distributed to other areas of the body while concentrating on the tumor.
Because of the long circulation time of DOXIL, the Company believes variations
in palmar-plantar erythema seen in individual patients may be controlled by
increasing the time period between doses rather than by reducing dose. The
Company believes DOXIL is also associated with less hair loss, nausea and
vomiting than might be expected with a conventional dose schedule of
doxorubicin.
AMPHOTEC
Systemic fungal infections are serious illnesses with high mortality rates,
which occur primarily in patients whose immune systems have been compromised.
In addition to its prevalence in people with AIDS, the incidence of such
infections is increasing with the more aggressive use of chemotherapeutics for
cancer and immune-suppressive drugs for organ transplants. While over 80,000
species of fungi have been identified, relatively few are known to infect
humans. However, invasive fungal infections in immunocompromised patients are
life-threatening. Among the most common systemic fungal infections that may
infect these patients include candidiasis, aspergillosis, histoplasmosis, and
cryptococcal meningitis. Invasive aspergillosis is generally considered to be
one of the most difficult fungal infections to treat.
In practice, physicians often begin antifungal therapy when a patient has a
fever that has failed to respond to antibiotics (a "fever of unknown origin"
or "FUO") before a specific fungus can be identified. This is because fungi
grow slowly in the laboratory. Knowledge about which specific fungus has been
treated usually comes some time after treatment has begun, if at all, and this
is true for most clinical trials of antifungal therapy as well.
Currently, amphotericin B is the standard treatment for patients with severe
fungal infections that do not respond to other drugs, and its use is
widespread. Unlike newer compounds, such as Diflucan, which suppress growth of
fungal infections, amphotericin B kills the fungus. Drugs that suppress growth
of fungal infections depend on the body's immune system to kill the fungus.
This may not be possible if the immune system has been suppressed by
chemotherapy or the disease process. As a result, amphotericin B is considered
to be the most powerful antifungal drug available and is used when other
compounds fail. However, amphotericin B has a number of serious side effects,
the most significant of which is renal toxicity. Patients with severe
infections requiring extensive treatment are at particular risk of developing
renal failure as a result of high cumulative doses of amphotericin B. In many
cases, treatment with amphotericin B must be discontinued because of renal
impairment, leaving the patient with the risk of further fungal infection.
34
<PAGE>
AMPHOTEC is a novel lipid-based formulation of generic amphotericin B which
the FDA cleared for marketing in November 1996 for the treatment of invasive
aspergillosis in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B in effective doses and in
patients where prior systemic antifungal therapy has failed. The Company
believes that AMPHOTEC provides effective therapy while reducing the dose-
limiting toxicities typically associated with conventional amphotericin B.
SEQUUS is further developing AMPHOTEC to treat additional systemic fungal
infections that often afflict immunocompromised patients, such as solid organ
and bone marrow transplant patients receiving immunosuppressant therapy,
people with AIDS, and cancer patients receiving chemotherapy or radiation
treatment.
AMPHOTEC, a one-for-one molecular complex of amphotericin B and cholesteryl
sulfate, is designed to be quickly removed from the bloodstream by macrophage
cells (part of the immune system) that line ducts in the liver, spleen and
other organs. The Company believes that this rapid sequestration of AMPHOTEC
in macrophage cells reduces the amount of drug that enters the kidneys in
toxic levels thereby significantly reducing renal toxicity. Once in the liver
cells, the amphotericin B-cholesteryl sulfate discs are broken apart by
intracellular enzymes and "free" amphotericin B molecules are gradually re-
released into the bloodstream.
SEQUUS commenced marketing AMPHOTEC in the United States in December 1996
directly through its 42-person sales team. The product is supplied in 50 mg
and 100 mg vials as a lyophilized powder, which is readily reconstituted with
sterile water in a matter of seconds and is stable upon reconstitution.
AMPHOTEC is stable at room temperature (59-86(degrees)F) for approximately two
years. The Company believes that AMPHOTEC has significant competitive
advantages in the United States market when compared to other lipid-based
amphotericin B products. These advantages include AMPHOTEC's clinical profile;
its lower approved dosage requirement, which results in a lower cost per
patient day; the availability of two vial sizes, which reduces waste; the
absence of the necessity for filtration or refrigeration; its pharmaceutically
elegant formulation; and the lack of any negative interaction between AMPHOTEC
and cyclosporine in transplant patients who must receive cyclosporine to keep
the body from rejecting the transplanted organ.
AMPHOTEC, known internationally as AMPHOCIL, is also available in 18
countries outside of the United States for the treatment of aspergillosis,
candidiasis and other systemic fungal infections in patients who are
refractory to or intolerant of amphotericin B. AMPHOCIL is available in
Argentina, Austria, Brazil, the Czech Republic, Denmark, Finland, Iceland,
Ireland, Israel, Italy, the Netherlands, Russia, Singapore, Slovakia,
Slovenia, Sweden, Turkey and the United Kingdom. The Company has entered into
distribution agreements covering a number of these countries and intends to
pursue distribution arrangements with other strategic partners for other
territories in which it has obtained or is currently pursuing marketing
authorization. To date, the Company has only experienced limited sales of
AMPHOCIL in Europe. MAAs for AMPHOCIL are under assessment in a number of
countries, including other European countries, except in Norway and Germany,
where the MAA has been withdrawn and in France, Spain, Greece and Luxembourg
where the MAA, reviewed in September 1995, was not approved. The Company and
its distribution partners will continue to work with certain of the non-
approving countries to meet their requirements for approval, if possible. If
approvals are received, SEQUUS and its distribution partners intend to
negotiate pricing in each of these countries, which the Company believes will
take up to six to 12 months following marketing approval. There can be no
assurance that marketing approval will be received for AMPHOCIL in any of
these countries. See "-- Strategic Alliances" and "-- Government Regulation."
35
<PAGE>
Results of AMPHOTEC Clinical Trials
The Company is pursuing the further clinical development of AMPHOTEC for a
variety of life-threatening fungal infections. The clinical results reported
are preliminary and may not be indicative of results that may be obtained in
additional clinical trials. There can be no assurance that the Company will
submit NDAs based on the following clinical data or future clinical data, or
that, if submitted, any NDA will be approved.
Aspergillosis. In a retrospective, historical controlled study involving 343
patients with proven or probable invasive aspergillosis infections, 82
patients treated with AMPHOTEC were compared to a cohort of 261 patients at
six cancer or transplant centers, who had been treated with amphotericin B.
The majority of the patients in both groups had aspergillosis infections in
the lung. The data indicated that in a study with an historical control
AMPHOTEC has superior efficacy (49% vs. 23%) to amphotericin B in patients
with proven or probable aspergillosis, and that the AMPHOTEC-treated group had
a higher survival rate at 120 days (50% vs. 28%) than the control group
receiving amphotericin B. Of the amphotericin B patients, 43% developed renal
toxicity during therapy while in the AMPHOTEC treatment group, the renal
toxicity rate was 8%. SEQUUS is conducting a Phase III double-blind,
randomized study comparing AMPHOTEC with amphotericin B in treating patients
with first-line aspergillosis infections.
Bone Marrow Transplant Patients. Data from a Phase I dose-escalation
clinical trial in 76 bone marrow transplant patients with invasive fungal
infections indicate that AMPHOTEC is safe at doses up to 7.5 mg/kg per day
with demonstrated antifungal activity, no appreciable renal toxicity and
manageable infusion-related side effects. In this study, the investigator
reported a response rate of 55% across all dose levels and infections.
Fever of Unknown Origin (Febrile Neutropenia). Data from a double-blind,
randomized multi-center clinical trial comparing AMPHOTEC with conventional
amphotericin B in the empiric treatment of febrile neutropenic patients
indicate that AMPHOTEC was equally effective and substantially less toxic to
the kidney, as compared to conventional amphotericin B, the standard therapy,
in treating this patient population. The data also showed that AMPHOTEC had a
renal safety advantage over amphotericin B when used in conjunction with
common anti-rejection therapy (cyclosporine or tacrolimus) in both adults and
children. This is clinically important because cyclosporine and tacrolimus are
known to have renal toxicity and are widely used in transplant patients, a
group which is at substantial risk of developing life threatening fungal
infections. The Company is currently conducting a Phase III clinical trial in
patients with febrile neutropenia, comparing AMPHOTEC with amphotericin B.
On-Going Clinical Studies. The Company is conducting an extensive clinical
development program for AMPHOTEC, including a Phase III double blind study in
patients with aspergillosis comparing AMPHOTEC with amphotericin B and a Phase
III trial in FUO. There can be no assurance that the Company will complete any
of the clinical trials currently in progress, that the results of such trials,
if completed, will demonstrate the safety and efficacy of AMPHOTEC in treating
other fungal diseases, or that any additional NDA supplements filed by the
Company will be accepted or approved by the FDA.
STEALTH Cisplatin (SPI-077)
Cisplatin is a widely used cytotoxic drug for the treatment of many types of
cancers, including lung, ovarian, head and neck, bladder, melanoma,
testicular, cervical and gastrointestinal. The tumors that respond to
cisplatin are usually relatively insensitive to doxorubicin and vice versa.
Although cisplatin is one of the most active single agents available, its
clinical utility is limited by a range of potentially serious and irreversible
toxicities. These toxicities include bone marrow suppression, nausea and
vomiting, kidney damage and nerve damage. Special precautions to address these
toxicities can include administration of fluids (hydration) and diuretics, and
hospitalization of patients is often required, adding significant cost to
cisplatin therapy. The Company has developed a STEALTH liposome formulation of
cisplatin, SPI-077. The Company has conducted multiple studies in in vivo
laboratory models. In summary, the Company believes the unpublished results of
these studies show: (i) as with DOXIL, this formulation avoids immune
detection, resulting in a significantly longer circulation time than
cisplatin, (ii) SPI-077 causes less kidney toxicity than comparable
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doses of cisplatin in such models, and (iii) SPI-077 has shown meaningful
anti-tumor activity and was more effective than cisplatin in producing a
prolonged response to treatment, with persistent inhibition of tumor growth.
The Company filed an Investigational New Drug application for SPI-077 in
October 1996 and initiated a Phase I safety study of SPI-077 in cancer
patients in December 1996. The Phase I study is focused on determining the
maximum tolerated dose of SPI-077 and establishing the toxicity profile of
SPI-077 in patients with advanced malignancies not amenable to other cancer
treatment. See "-- Patents and Trade Secrets."
The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at various
stages of development may not receive regulatory approval, reach the market or
achieve widespread use for a number of reasons. For example, DOXIL is being
clinically tested in various types of solid tumors. The Company's clinical
data in treatment of solid tumors are derived from a limited number of
patients and are not necessarily predictive of future results obtained in
subsequent clinical trials. Moreover, even when a drug does demonstrate
activity, it may not be sufficiently efficacious to replace existing
therapies. There can be no assurance that the Company's research and
development efforts will be successful, that any given product will be
approved by appropriate regulatory authorities or that any product candidate
under development will be safe, effective or capable of being manufactured in
commercial quantities at an economical cost, will not infringe the proprietary
rights of others or will achieve market acceptance. There are a number of
challenges the Company must address successfully to develop commercial
products in each of its development programs. The Company's potential products
will require significant additional research and development efforts,
including process development and significant additional clinical testing,
prior to any commercial use. There can be no assurance that the Company will
successfully address any of these technological challenges, or others that may
arise in the course of development. In addition, the Company may not have
sufficient resources to commercialize new products successfully.
Successful product development requires, among other things, the design and
completion of clinical trials. The rate of completion of the Company's
clinical trials is dependent upon, among other factors, the rate of patient
enrollment. The Company is dependent on third parties, including hospitals and
physicians to conduct clinical trials. In addition, the Company is reliant on
Schering-Plough to conduct certain clinical trials for DOXIL. The Company and
Schering-Plough face intense competition from other companies developing
cancer treatments to enroll a limited number of eligible cancer patients in
clinical trials for oncology products. Delays in planned patient enrollment
may result in increased costs and delays. If the Company is unable to
successfully complete its clinical trials, its business, financial condition
and results of operations could be materially adversely affected.
RESEARCH AND DEVELOPMENT
The primary focus of the Company's ongoing product development and research
efforts is to capitalize on the STEALTH liposome technology. This includes
identifying additional therapeutic drugs that can be formulated using the
existing technology and creating advanced applications by attaching
therapeutics to the outside of the STEALTH liposome to expand its possible
applications. The Company is conducting exploratory programs with other
companies and, in some cases, is dependent upon these companies for their
technologies. The following is a summary of the Company's additional research
and development projects:
Liposome-CD4 Technology (SPI-119). The Company has obtained exclusive
worldwide rights to a proprietary liposome-CD4 technology as a potential
HIV/AIDS therapeutic. CD4 is a protein on the surface of T-cells to which the
HIV virus binds in order to infect the cell and replicate. HIV replicates in
T-cells, but in order to enter T-cells the virus must first bind to CD4.
Theoretically, CD4 injected into the blood stream might also bind HIV and, in
this way, prevent the virus from attaching to the T-cells where it can do
damage. Earlier attempts to accomplish this result have not been successful
because unencapsulated CD4 loses its critical three dimensional structure and
also does not accumulate in the lymphatic system. The CD4-liposome complex
behaves as a cell that can bind HIV; existing data indicate that the Company's
STEALTH liposomes accumulate in peripheral lymphatic tissues, such as regional
lymph nodes. Based on preclinical studies, the Company has undertaken
formulation of the liposome-CD4 product.
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STEALTH Quinolones (SPI-850). Although quinolone antibiotics are active
against a broad spectrum of bacterial infections, including life-threatening
respiratory tract infections, they must be administered two to four times a
day. A long circulating quinolone antibiotic encapsulated in STEALTH liposomes
could be administered once a day, or possibly even less often, permitting
easier administration outside of the hospital. The Company has formulated and
is currently conducting preliminary studies of SPI-850 which is designed to
reduce the frequency of dosing and concentrate the drug at sites of infection,
thereby improving efficacy.
Radiosensitizers (SPI-40). Indium is a radioactive substance. When it is
encapsulated in liposomes, the distribution of liposomes in the patient can be
traced. Studies in cancer patients have shown that indium administered in a
STEALTH liposome concentrates in tumor tissue. Radiosensitizing agents may
increase the responsiveness of tumors to the therapeutic effects of
radiotherapy. However, to be effective these agents must concentrate in tumors
to a greater extent than in normal tissues, and the agents must stay in the
tumor until the dose of radiotherapy has been administered. The Company
believes that STEALTH liposomes may be an effective way to deliver
radiosensitizers. The Company has formulated and tested two radiosensitizing
agents in preclinical models.
Additional Research Programs. The Company is conducting research in the
fields of small molecule, peptide and gene delivery using STEALTH liposomes.
Currently, three approaches are being investigated for the intravenous
delivery of genetic material to patients: (i) inject "naked" DNA (genetic
material), (ii) use a viral vector to deliver the DNA, and (iii) encapsulate
DNA in liposomes. The Company is investigating the use of STEALTH liposomes to
encapsulate and deliver DNA to tumors and other sites of disease.
A segment of the biotechnology industry is focusing on the development of
small molecules that may inhibit specific activities within a cell. While
potentially medically useful, small molecules are typically cleared from the
body before reaching the target cells. The Company is developing technology to
bind small molecules to the PEG on STEALTH liposomes for use in the
intravenous delivery of small molecules.
The Company's research and development expenses for 1994, 1995 and 1996 were
$25.4 million, $22.7 million and $27.7 million, respectively. Such expenses
encompassed all of the Company's product development programs, including
DOXIL, AMPHOTEC and SPI-077 as well as research projects such as CD4
liposomes, radiosensitizers and gene delivery.
MARKETING AND SALES
As of January 1, 1997, SEQUUS employed a sales and sales management team of
42 professionals to market DOXIL and AMPHOTEC. This team is experienced in the
sale of pharmaceutical products to physicians, hospitals and clinics,
including managed care providers, and in facilitating reimbursement with
third-party payors. The sales force is deployed in major metropolitan areas
for oncology and infectious disease products. In the first full year of
operations, the sales team sold approximately $20.9 million of DOXIL in the
United States and launched AMPHOTEC. However, the Company faces significant
competition for oncology sales professionals and the loss of certain key sales
personnel could adversely impact the sales effort and have a material adverse
effect on the Company's business, financial condition and results of
operations.
Outside of the United States, the Company's strategy is to establish
marketing and distribution agreements with pharmaceutical companies, agents or
distributors. Pursuant to this strategy, the Company has entered into a
distribution agreement with Schering-Plough for the distribution of CAELYX in
most major markets outside the United States (except Japan) and has entered
into distribution agreements with a number of corporate partners, agents and
distributors, including Zeneca and Bayer, covering the marketing and
distribution of AMPHOCIL in various international markets. The Company's
future sales of CAELYX and AMPHOCIL outside of the United States will depend
to a large extent on the marketing efforts of its distribution partners, the
continuation of the distribution arrangements, market acceptance of products,
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availability of third party reimbursement, as well as the timing of additional
approvals, including pricing approvals, in other countries, if any. If
Schering-Plough or any other distributor were to terminate its agreement with
the Company or be unsuccessful in meeting its sales objectives, the Company's
business, financial condition and results of operations could be materially
adversely affected. There can be no assurance that the Company will be able to
successfully market its products through its direct sales force, partners,
agents, or at all. See "-- Strategic Alliances" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
MANUFACTURING AND PRODUCTION
The Company's internal manufacturing capabilities are limited to producing
products for preclinical development. The Company is dependent on Ben Venue to
manufacture commercial-scale quantities of AMPHOTEC and DOXIL sufficient to
meet the Company's forecasted requirements for research and for commercial
production pursuant to supply agreements. SEQUUS has developed production
technologies for AMPHOTEC and DOXIL which it employs at Ben Venue, a United
States-based contract manufacturer of injectable drug products. Although the
FDA has approved Ben Venue's facility, processes and procedures for DOXIL and
AMPHOTEC, there can be no assurance that Ben Venue and the Company will
continue to meet FDA or product specification standards for the manufacture of
DOXIL and AMPHOTEC or that the Company's manufacturing requirements can be met
in a consistent and timely manner. Only a limited number of contract
manufacturers are capable of manufacturing AMPHOTEC and DOXIL, and any
alternative manufacturer would require regulatory approval to manufacture the
product which would likely take several months. The Company is in the process
of identifying an alternative manufacturer, but to date has not sought
approval of an alternative manufacturer for its products. The Company has in
the past experienced batch failures in the manufacturing process. Any batch
failures in the future could result in a material increase in cost of goods
sold or in the Company's inability to deliver products on a timely basis. In
addition, the Company may be unable to obtain sufficient contract
manufacturing capacity due to competing demands on the contract manufacturer's
capacity or other reasons. In the event of any interruption of supply from the
contract manufacturer due to regulatory reasons, significant batch failures,
capacity constraints or other causes, there can be no assurance that the
Company could make alternative manufacturing arrangements on a timely basis,
if at all. Such an interruption would have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Government Regulation."
SEQUUS devotes considerable resources to developing manufacturing
technologies and process controls for its products to achieve and maintain
regulatory approval, suitable shelf-life, stability and ease of use. Such
activities include scaling up production methods, developing quality control
systems, establishing batch-to-batch reproducibility, testing sterilization
methods, establishing reliable sources of raw materials and synthesizing new
proprietary raw materials. Generally, the equipment used in the Company's
processing technologies is commercially available in industrial sizes and is
currently used in pharmaceutical industry operations.
In the future, SEQUUS may elect to manufacture some or all of its products
internally in lieu of using third-party contract manufacturers. However, the
Company does not currently have a commercial-scale manufacturing facility and,
as a result, an election by the Company to pursue in-house manufacturing would
require the commitment of significant capital and other resources. The Company
currently has no plans to develop a commercial manufacturing facility in-
house. The Company has produced and will continue to endeavor to produce
certain of its products in quantities sufficient for clinical trials in
compliance with the FDA's Good Manufacturing Practices ("GMPs"). However,
SEQUUS expects to continue to use contract manufacturers for final processing
and packaging of the clinical supplies that SEQUUS itself produces.
On February 15, 1994, the Company entered into a five-year, sole-source
supply agreement with A.L. Laboratories, Inc. ("A.L. Labs") to supply the
Company with amphotericin B for AMPHOTEC. Under the agreement the Company is
required to purchase its forecasted three months requirements. The agreement
may be automatically renewed for one-year periods unless either party provides
the other party with six
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months notice prior to the expiration of the current term. The Company agreed
to indemnify A.L. Labs for certain liabilities.
On September 27, 1994, the Company entered into a five-year, principal-
source supply agreement with Meiji Seika Pharma International Ltd. ("Meiji
Seika") to supply the Company with doxorubicin for DOXIL. Under the agreement
the Company is required to purchase in yen its forecasted three months
requirements. The agreement may be automatically renewed for one-year periods
unless either party provides the other party with six months notice prior to
the expiration of the current term. The Company agreed to indemnify Meiji
Seika for certain liabilities.
Although the Company has supply agreements in place with the suppliers of
its key raw materials, including amphotericin B and doxorubicin HCl, the
number of alternative qualified suppliers of key raw materials required for
the manufacture of AMPHOTEC and DOXIL is limited. The disqualification or loss
of a sole-source supplier could have a material adverse effect on the Company
because of a delay or inability in obtaining and qualifying an alternate
supplier and the costs and lost revenues associated with such delays and in
finding and qualifying an alternate supplier. Regulatory requirements
applicable to pharmaceutical products tend to make the substitution of
suppliers costly and time consuming. The unavailability of adequate commercial
quantities, the loss of a supplier's regulatory approval, the inability to
develop alternative sources, a reduction or interruption in supply or a
significant increase in the price of materials could impair the Company's
ability to manufacture and market its products which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
STRATEGIC ALLIANCES
The Company's strategy for the development, clinical trials, manufacturing
and commercialization of certain of its products includes maintaining and
entering into various strategic alliances with corporate partners, licensors
and others. In addition to the strategic alliances described below, the
Company intends to continue to evaluate arrangements for the in-licensing of
technology and the distribution of AMPHOTEC and DOXIL. There can be no
assurance that the Company will be able to maintain existing strategic
alliances, negotiate strategic alliances in the future on acceptable terms, if
at all, or that any such strategic alliances will be successful. There can be
no assurance that any of the Company's present or future strategic partners
will devote sufficient resources to marketing the Company's products or
satisfying its obligations to the Company.
Schering-Plough
In September 1996, SEQUUS announced it entered into a distribution agreement
with Schering-Plough. Under the multi-year agreement, Schering-Plough has
obtained exclusive rights to distribute, market and sell CAELYX worldwide,
except for the United States, Japan and certain other countries. Under the
terms of the agreement, SEQUUS will receive payments for product sales to
Schering-Plough. In addition, SEQUUS and Schering-Plough will jointly develop
a worldwide clinical plan for investigating the use of CAELYX in the treatment
of solid tumors. Each party will undertake clinical trials in specific
indications, coordinated by a joint development team. As part of the
agreement, Schering-Plough will conduct certain clinical trials for oncology
indications, will apply for regulatory approval in the Schering-Plough
territories for all new indications, and will assist with pharmacoeconomic
studies.
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International Distribution of AMPHOCIL
The Company has entered into a number of arrangements with distributors and
agents for the marketing and distribution of its AMPHOCIL product in
international markets. In certain instances, the distributor is also assisting
the Company in preparing regulatory filings and, in countries where marketing
clearance has been granted, obtaining pricing approvals. The Company has
granted distribution rights to the following parties for the respective
territories: Zeneca in Denmark, Finland, Iceland, Ireland, Italy, the
Netherlands, Portugal, Sweden and the U.K.; Prodesfarma, S.A. in Spain,
Belgium and Luxembourg; TORREX Pharma G.m.b.H. in Austria, the Czech Republic,
Hungary, Poland and Slovenia; Gamida-MedEquip Limited in Israel; and Bayer in
Canada.
In-Licensing of Technology
The Company has entered into licensing agreements with third parties
covering proprietary technologies used in the production of the Company's
products. Under these agreements, the Company is obligated to pay royalties
upon product sales and to make other payments. The Company is currently in
discussions with one of its licensors regarding the interpretation of the
financial terms of a license agreement. Such agreements also contain
provisions requiring the Company to pursue market development for the licensed
technologies in order for the Company to maintain its license rights. There
can be no assurance that the Company will fulfill its obligations under any of
these agreements and any such failure could result in the loss of the
Company's rights under the agreement.
PATENTS AND TRADE SECRETS
SEQUUS currently owns or controls 58 United States patents, which expire at
various times between 1998 and 2013, including seven claiming various aspects
of the Company's long-circulating STEALTH liposomes, which expire at various
times between 2006 and 2013. SEQUUS has filed numerous patent applications on
inventions claiming specific liposome compositions and methods of use,
liposome processing methods, drug/lipid compositions, and surface-modified
liposomes and methods. SEQUUS has also filed corresponding foreign patent
applications with respect to certain of its key technologies and owns or
controls foreign counterpart applications and issued patents in various
countries with respect to its most important United States patents and pending
applications. SEQUUS intends to file additional patent applications, when
appropriate, relating to improvements in its technologies and other specific
inventions and products that it develops.
There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. A
substantial number of patents relating to liposomes have been issued to, or
are controlled by, other public and private entities, including academic
institutions. In addition, others, including competitors of SEQUUS, may have
filed applications for, or may have been issued patents or may obtain
additional patents and proprietary rights relating to products or processes
competitive with those of SEQUUS. The patent positions of pharmaceutical,
biopharmaceutical, biotechnology and drug delivery companies, including
SEQUUS, are uncertain and involve complex legal and factual issues.
Additionally, the coverage claimed in a patent application can be
significantly reduced before the patent is issued. As a consequence, the
Company does not know whether any of its patent applications will result in
the issuance of patents or whether any of the Company's existing patents will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first inventor of inventions covered
by its pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to
participate in interference proceedings to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. There can be no
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assurance that any patents owned or controlled by the Company will protect
SEQUUS against infringement litigation or afford commercially significant
protection of the Company's technology. Almost none of the Company's patents
has been tested in court to determine their validity and scope. Moreover, the
patent laws of foreign countries differ from those of the United States and
the degree of protection, if any, afforded by foreign patents may, therefore,
be different.
In prior litigation in the Patents County Court in the U.K., a suit brought
by NeXstar alleging that the Company's anticancer drug, DOXIL, infringes
NeXstar's EPO Patent No. 0,179,444 was settled by the parties dropping their
respective claims against one another. The U.K. Patent Court dismissed all
claims in the case with prejudice.
The Company has a practice of monitoring patents and other developments in
the liposome field. To the extent that the Company becomes aware of patents of
other parties which the Company's processes or products might infringe, it is
the Company's practice to seek review of such patents by the Company's patent
counsel. With respect to DOXIL, the Company is aware of TLC's United States
Patent No. 5,077,056 relating to the loading of therapeutic drugs into
liposomes. The Company's patent counsel has rendered an opinion that its DOXIL
product would not infringe any valid claim of this patent. The Company is also
aware of recently issued United States Patent No. 5,562,925 (the "925 Patent")
covering therapeutic cisplatin compositions held by Research Corporation
Technologies Inc., which the Company believes has been licensed exclusively to
Bristol-Myers. The Company's patent counsel has rendered an opinion that its
STEALTH cisplatin formulation would not infringe any valid claims of the 925
Patent. The Company is also aware of TLC's United States Patent No. 5,008,050
relating to reducing liposome size by extrusion, and NeXstar's United States
Patent No. 5,435,989 relating to targeting of liposomes to solid tumors. The
Company's patent counsel has rendered an opinion that DOXIL would not infringe
any valid claim of either of these patents. The Company is also aware of
United States Patent Nos. 4,426,330 and 4,534,899 assigned to Lipid
Specialties, Inc., relating to conjugates of phospholipids and
polyethyleneglycol. The Company's patent counsel has rendered an opinion that
DOXIL would not infringe any valid claims of these patents.
In November 1991, SEQUUS received a letter from TLC bringing to the
Company's attention TLC's United States Patent Number 5,059,591 for "Reduced
Toxicity" (the "591 Patent") containing claims directed to amphotericin
B/sterol compositions and their method of use. Subsequently, the Company's
patent counsel delivered an opinion to the Company that, among other things,
AMPHOTEC does not infringe any valid claim of the 591 Patent. The Company has
not received any further written correspondence with respect to this issue.
However, no assurance can be given that TLC will not make a claim against
SEQUUS with respect to the 591 Patent, which could have a material adverse
effect on the Company's ability to commercialize AMPHOTEC.
Even if the Company's patent counsel renders advice that the Company's
products do not infringe any valid claim under such patents, there can be no
assurance that any third party will not commence litigation to enforce such
patents or that the Company will not incur substantial expense, or that it
would prevail, in any patent litigation.
The Company has been required to defend itself in patent litigation in the
past and the uncertainties inherent in any other lawsuit that may be commenced
in the future with respect to any alleged patent infringement by the Company
make the outcome of any such litigation difficult to predict. The Company may
decide to pay a royalty or make other concessions to settle a patent dispute.
In the event of litigation, there can be no assurance that the Company will be
successful. A judgment adverse to the Company in any such litigation could
materially adversely affect the Company's business, financial condition and
results of operations, and the expense of such litigation may be substantial
whether or not the Company is successful.
The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and other technologies. Although
SEQUUS has entered into confidentiality agreements with its employees,
consultants, representatives and other business associates, there can be no
assurance that trade secrets and know-how will remain undisclosed or that
similar trade secrets or know-how will not be independently developed by
others.
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GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant consideration in all aspects of the clinical
development, production and marketing of the Company's products and in its on-
going research and development activities. In order to clinically test,
produce and sell products for human therapeutic use, mandatory procedures and
safety standards established by the FDA and comparable agencies in foreign
countries must be followed. SEQUUS prepares and files regulatory documents
required to begin clinical trials, recruits and monitors clinical
investigators, analyzes and synthesizes clinical trial data and prepares and
files documents requesting approval to sell pharmaceutical products. Whether
undertaken by SEQUUS or an agent or collaborator of SEQUUS, the regulatory
approval process for new products generally takes several years and involves
the expenditure of substantial resources. There can be no assurance that any
such approvals will be granted on a timely basis, if at all.
The standard process required by the FDA before a pharmaceutical agent may
be marketed in the United States includes: (i) laboratory and preclinical
tests, (ii) submission to the FDA of an application for use of an
investigational new drug, which must become effective before clinical trials
may commence, (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug in its intended application, (iv)
submission to the FDA of a NDA with respect to a drug or a Product License
Application ("PLA") and an Establishment License Application ("ELA") with
respect to a biologic, and (v) FDA approval of the NDA or PLA/ELA prior to any
commercial sale or shipment of the drug or biologic. In addition to obtaining
FDA approval for each product, each domestic drug manufacturing establishment
must be registered or licensed by the FDA. Domestic and foreign manufacturing
establishments are subject to inspections by the FDA and by other federal,
state and local agencies and must comply with GMPs as appropriate for
production. If a product is approved under the FDA procedures for Accelerated
Approval of New Drugs for Serious or Life-Threatening Illnesses, such approval
is subject to the additional requirement that, following product launch, a
company continue to study the drug to verify and describe its clinical
benefit. Under these FDA Accelerated Approval Procedures, the FDA may withdraw
approval if the company fails to show due diligence in conducting post-
marketing clinical trials or if these clinical trials fail to demonstrate
clinical benefit to the FDA's satisfaction.
Clinical trials are typically conducted in three sequential phases, which
phases may overlap. In Phase I, the initial introduction of a drug to humans,
the drug is tested for safety (adverse effects), dosage tolerance, absorption,
distribution, metabolism and excretion. Phase II involves studies in a limited
patient population to determine the efficacy of the drug for specific targeted
indications, dosage tolerance and optimal dosage, and possible adverse effects
and safety risks. When a product is found to show clinical effectiveness and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to evaluate further its clinical efficacy and to test further
for safety within an expanded patient population at geographically dispersed
clinical study sites.
There can be no assurance that, after the results of the Phase III clinical
trials have been announced, the FDA will not disagree with the design of the
Phase III clinical trial protocols. In addition, the FDA inspects and reviews
clinical trial sites, informed consent forms, data from the clinical trial
sites, including case report forms and record keeping procedures, and the
performance of the protocols by clinical trial personnel to determine
compliance with good clinical practice. The FDA also examines whether there
was bias in the conduct of clinical trials. The conduct of clinical trials is
complex and difficult, especially in Phase III. There can be no assurance that
the design or performance of the Phase III clinical trial protocols will be
successful.
Upon accepting a company's NDA for filing, the FDA generally convenes an
advisory committee to review clinical trial results and make a non-binding
recommendation concerning the drug's approval. After considering the advisory
committee recommendation and other information, the FDA may or may not issue
an approvable letter. This letter sets out the specific terms and conditions
that the company must satisfy in order to receive final FDA approval to
market.
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Even if regulatory approvals for the Company's product candidates are
obtained, the Company, its products and the facilities used for manufacturing
the Company's products are subject to continual review and periodic
inspection. Each United States drug manufacturing establishment must be
registered with the FDA. Domestic manufacturing establishments are subject to
biannual inspections by the FDA and must comply with the FDA's GMP
regulations. To supply drug products for use in the United States, foreign
manufacturing establishments must comply with the FDA's GMP regulations and
are subject to periodic inspection by the FDA or by regulatory authorities in
those countries under reciprocal agreements with the FDA. In complying with
GMP regulations, manufacturers must expend funds, time and effort in the area
of production and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. If violations of
applicable regulations are noted during these inspections, the Company may be
restrained from continued marketing of the product manufactured until such
violations are corrected.
Labeling and promotional activities are regulated by the FDA. The Company
must also report certain adverse events involving its drugs to the agency
under regulations issued by the FDA. The FDA may require post-marketing
testing and surveillance programs to monitor a drug's efficacy and side
effects. Results of the post-marketing programs may prevent or limit the
further marketing of a product.
Failure to comply with applicable requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant approvals, withdrawal of approvals and criminal
prosecution of the Company and employees.
Sales of pharmaceutical products outside of the United States are subject to
regulatory requirements that vary widely from country to country and that
often include approval of the price at which a product may be sold. In the EU
countries, a company may seek product marketing authorization in other member
countries with the sponsorship of the country which first granted marketing
approval under procedures of the Committee on Proprietary and Medicinal
Products ("CPMP"). Since the CPMP is an advisory committee, its vote is not
binding on member countries.
SEQUUS is also subject to regulation under numerous federal, state and local
laws regarding, among other things, occupational safety, laboratory practices,
the use and handling of radioisotopes and hazardous chemicals, prevention of
illness and injury, environmental protection and hazardous substance control.
The Company's research and development involves the controlled use of
hazardous materials and chemical compounds. There can be no assurance that the
Company's safety procedures for handling and disposing of such materials will
comply with the standards prescribed by federal, state and local regulations
or that it will not be subject to the risk of accidental contamination or
injury from these materials. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
materially adversely affect the Company.
The Company's business may be materially adversely affected by the
continuing efforts of worldwide governmental and third-party payors to contain
or reduce the costs of health care in general and drugs in particular. For
example, in most international markets, including markets the Company is
seeking to enter, pricing of prescription pharmaceuticals is subject to
government price controls. In these markets, once marketing approval is
received, pricing negotiation could take another six to 12 months or longer.
In the United States, there has been, and there may continue to be, federal
and state proposals to implement similar government price controls. In
addition, an increasing emphasis on managed care and consolidation of hospital
purchasing in the United States has and will continue to put pressure on
pharmaceutical pricing. Such proposals, if adopted, and such initiatives could
decrease the price that the Company receives for any current or future
products and thereby have a material adverse effect on the Company's business,
financial condition and results of operations. Further, to the extent that
such proposals or initiatives have a material adverse effect on pharmaceutical
companies that are collaborators or prospective collaborators for certain of
the Company's
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products, the Company's ability to commercialize its products may be
materially adversely affected. In addition, price competition may result from
competing product sales, attempts to gain market share or introductory pricing
programs, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's ability to commercialize DOXIL, AMPHOTEC and other products
may depend in part on the extent to which reimbursement for such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, and third-party payors are increasingly challenging the prices
charged for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any of the
Company's products. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting both coverage and the
level of reimbursement for new therapeutic products, and by refusing, in some
cases, to provide coverage or reimbursement for indications as to which the
FDA has not granted marketing clearance. Moreover, reimbursement may be denied
even for FDA-approved indications. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's products, the Company's business, financial condition and results of
operations would be materially adversely affected.
COMPETITION
Generally, competition in the pharmaceutical field is based on such factors
as product performance, safety, acceptance by doctors, patient compliance,
available reimbursement, patent protection, ease of use, price and marketing
efforts. The Company believes that earlier entry into a market is an advantage
for a new drug, but it also believes that clinical benefits and
pharmacoeconomics are important to a product's success.
The Company's current and potential products compete with existing and new
drugs offered by or under development by pharmaceutical, biopharmaceutical and
biotechnology companies. Many of these companies, both in the United States
and in international markets, are developing products based on improved drug
delivery technologies and novel therapeutics for the treatment of cancer,
infectious diseases and other indications targeted by the Company. Some of
these companies are active in liposome and lipid-based research and product
development and many have financial and technical resources and production and
marketing capabilities substantially greater than those of the Company. In
addition, many of these companies have significantly greater experience than
the Company in preclinical and clinical development activities, in obtaining
regulatory approval, and in manufacturing and marketing biopharmaceutical
products.
A number of large pharmaceutical companies, including Bristol-Myers and
Pfizer Inc., have established strong market positions for oncology and
infectious diseases. For example, AMPHOTEC competes with traditional
amphotericin B therapy, which is currently produced and marketed by Bristol-
Myers and others. The Company also faces competition from two companies
specializing in liposome drug delivery, NeXstar and TLC, both of which have
received regulatory approvals for products competitive with the Company's
products. In some cases, the competing liposomal products have been able to
obtain significant market share in certain territories by being the first to
market, have been introduced at lower prices than the Company's competing
products, or have received marketing clearance covering a broader range of
indications than the Company's competing products. For example, TLC recently
received FDA clearance to market its amphotericin B lipid formulation for
treating a broader range of indications than the indications for which
AMPHOTEC has received marketing clearance.
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SEQUUS believes that competition in pharmaceutical products and in drug
delivery will continue to be intense as new products enter the market and
advanced technologies become available for drug discovery and development.
Existing products or new products developed by the Company's competitors may
be more effective, or be more effectively marketed and sold, than any that
have been or may be developed by the Company. Competitive products may render
the Company's technology and products obsolete or noncompetitive prior to the
Company's recovery of research, development or commercialization expenses
incurred with respect to any such products which could have a material adverse
effect on the Company's business, financial condition or results of
operations.
EMPLOYEES
As of December 31, 1996, SEQUUS had 247 full-time employees, of whom 31 hold
Ph.D. or M.D. degrees, 151 employees are engaged in research, development,
clinical and regulatory affairs and pilot manufacturing, 60 employees are
engaged in sales and marketing and 36 work primarily in finance, human
resources and administration. The Company from time to time also hires
temporary employees and consultants in all areas of the Company's operations.
The Company's success depends largely upon its ability to attract and retain
qualified personnel in the research, development and commercialization of
pharmaceutical products. The Company faces competition for such personnel from
other companies, academic institutions and other organizations. There can be
no assurance that the Company will be successful in hiring or retaining such
personnel.
None of the Company's employees is represented by a union, and SEQUUS
considers its relations with its employees to be good.
FACILITIES
As of December 31, 1996, the Company leased approximately 140,609 square
feet of laboratory, office and warehouse space in Menlo Park, California under
leases that expire in April 2003 and approximately 4,000 square feet of office
space in London under a lease that expires in December 2003. Rent expense for
1996 was approximately $1,358,000.
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings. See "-- Patents and Trade
Secrets."
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MANAGEMENT
Information with respect to the executive officers and directors of the
Company as of January 31, 1997 is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
I. Craig Henderson, M.D., Chairman of the Board and Chief Executive
F.A.C.P. ....................... 55 Officer
L. Scott Minick.................. 45 President, Chief Operating Officer and Director
Edward F. Schnipper, M.D. ....... 48 Senior Vice President and Medical Director
Senior Vice President for Research and
Joseph J. Vallner, Ph.D. ........ 50 Development
David A. DeLong.................. 42 Vice President of Sales
Marc J. Gurwith, M.D., J.D. ..... 57 Vice President and Associate Medical Director
Anthony A. Huang, Ph.D. ......... 44 Vice President for Product Development
Francis J. Martin, Ph.D. ........ 48 Vice President and Chief Scientific Officer
Sally A. Davenport............... 61 Secretary
Donald J. Stewart................ 40 Vice President for Finance and Treasurer
Peter K. Working, Ph.D. ......... 48 Vice President for Preclinical Research
Robert G. Faris(1)(2)............ 58 Director
Richard C.E. Morgan(1)(2)........ 52 Director
E. Donnall Thomas, M.D.(1)(2).... 76 Director
</TABLE>
- --------
(1) Member of the Compensation and Plan Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
The Company's By-laws authorize the Board of Directors to set the number of
directors, which is currently fixed at five.
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected. Officers are appointed to serve,
subject to the discretion of the Board of Directors, until their successors
are appointed.
I. Craig Henderson, M.D. has been Chief Executive Officer of the Company
since June 1995 and Chairman of the Board since July 1995 and has served as a
director of the Company since July 1993. Since July 1995, Dr. Henderson has
been an Adjunct Professor of Medicine at University of California, San
Francisco. From 1992 until July 1995, he served as Professor of Medicine,
Chief of Medical Oncology and Director of Clinical Cancer Programs at the
University of California, San Francisco. From 1989 to 1992 he served as a
member and, for most of this time, as Chairman of the Oncologic Drugs Advisory
Committee of the FDA. From 1974 to 1992, Dr. Henderson held an academic
appointment at Harvard Medical School, most recently as Associate Professor of
Medicine. Dr. Henderson founded the Breast Evaluation Center at the Dana-
Farber Cancer Institute in 1980 and served as its director until 1992. He
received an M.D. degree from Columbia University.
L. Scott Minick has been President and Chief Operating Officer of the
Company since June 1995 and a director of the Company since July 1995. From
1994 to 1995, he served as a director, Interim President and Chief Executive
Officer of OncoTherapeutics, Inc. Before that, Mr. Minick was a director,
President and Chief Executive Officer of LXR Biotechnology, Inc. From 1981 to
1993, he was an executive of Baxter Healthcare, Inc., most recently as
President of the Pacific Rim/Latin America business unit of Baxter
Diagnostics. Mr. Minick received an M.B.A. degree from Northwestern
University.
Edward F. Schnipper, M.D. joined the Company in January 1996 as Senior Vice
President and Medical Director. Prior to joining the Company, Dr. Schnipper
held several executive and management positions at Hoffmann-LaRoche ("Roche")
including Vice President in Clinical Operations; Vice President, Professional
Development and Training; and Director, Clinical Development,
Hematology/Oncology. Dr. Schnipper originally joined Roche in 1983 as a
Research Physician. While at Roche, Dr. Schnipper had academic
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appointments in Medicine and Medical Genetics and Microbiology at the Robert
Wood Johnson Medical School. Prior to this, Dr. Schnipper had a private
medical practice from 1985 to 1990. Dr. Schnipper received his M.D. degree
from the Georgetown University School of Medicine, Washington, D.C. and
subsequently held fellowships in Hematology at the New York University School
of Medicine, and in Medical Oncology at Memorial Sloan-Kettering Cancer
Center.
Joseph J. Vallner, Ph.D. joined the Company in February 1992 as Vice
President for Development and was appointed Senior Vice President for Research
and Development in April 1995. From 1986 to 1992, Dr. Vallner was Director,
Corporate Technology Transfer, of Syntex. While at Syntex, he also performed
various pharmaceutical development functions ranging from drug design and
development to responsibility for regulatory filings with the FDA. Before
joining Syntex, Dr. Vallner was a Group Leader with G.D. Searle, where he
supervised pharmaceutical formulation development and development of new drug
delivery systems. From 1974 to 1984, Dr. Vallner was Associate Professor of
Pharmaceutics at the University of Georgia. Dr. Vallner received a Ph.D. in
Pharmaceutics from the University of Wisconsin.
David A. DeLong joined the Company in September 1992 as AMPHOCIL
International Product Director and was appointed Senior Director, Sales in
April 1995 and Vice President of Sales in June 1996. Prior to joining the
Company, Mr. DeLong was employed by Genentech, Inc. from 1985 to 1992 where he
served in various sales and marketing management positions, most recently as
Activase Product Manager.
Marc J. Gurwith, M.D., J.D. joined the Company in January 1995 as Vice
President and Associate Medical Director. Prior to joining the Company, Dr.
Gurwith was employed by Boehringer Mannheim Pharmaceuticals, most recently as
Vice President of Medical and Scientific Affairs and previously as Senior
Director of Clinical Research. In addition to over 10 years of pharmaceutical
industry experience, Dr. Gurwith has over 20 years experience in teaching and
consultation in the area of infectious disease control and therapy. Dr.
Gurwith received his M.D. degree from Harvard Medical School and his J.D.
degree from Temple University School of Law.
Anthony H. Huang, Ph.D. has been Vice President of Product Development of
the Company since April 1995. He has served in various technical capacities
with the Company for the last 14 years. Before joining the Company, he was a
Research Investigator at Oak Ridge National Laboratory in Oak Ridge,
Tennessee. Dr. Huang received a Ph.D. degree in Pharmacology from the
University of California, San Francisco.
Francis J. Martin, Ph.D. was appointed Vice President and Chief Scientific
Officer of the Company in July 1994. From October 1986 he served as Vice
President for Research and Principal Scientist, with responsibility for
guiding and coordinating the Company's internal and extramural research
activities for STEALTH liposome products. From 1981 to 1986, Dr. Martin served
the Company in various capacities, including Director of Liposome Research and
Formulations and was the Technical Director of the Company's former joint
venture, Cooper-Lipotech. Dr. Martin received a Ph.D. degree in Biochemistry
from Northwestern University.
Sally A. Davenport is a Company founder and has served as the the Company's
Corporate Secretary since the Company's inception. She has been responsible
for various administrative and corporate functions since 1981. Ms. Davenport
received a B.S. degree in Technical Journalism from Iowa State University.
Donald J. Stewart joined the Company in 1984 as Treasurer and Controller and
was appointed Vice President for Finance in April 1995. Previously, he was
Comptroller at SoftCom, Inc. and a certified public accountant with Arthur
Young & Company. Mr. Stewart received an M.B.A. from Santa Clara University.
Peter K. Working, Ph.D., D.A.B.T., has been Vice President of Preclinical
Research at the Company since April 1995. From 1994 to 1995, he served as
Senior Director of Pharmacology and Toxicology, and from 1992 to 1994 as
Director of Pharmacology and Toxicology of the Company. From 1988 to 1992, Dr.
Working was a
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Senior Experimental Toxicologist at Genentech, Inc. From 1984 to 1988, he was
a Staff Scientist in the Department of Cellular and Molecular Toxicology at
the Chemistry Industry Institute of Toxicology in Research Triangle Park,
North Carolina, where he was a Post-Doctoral Fellow from 1982 to 1984. He was
board-certified in toxicology in 1989. Dr. Working received a Ph.D. degree in
Human Anatomy from the University of California at Davis.
Robert G. Faris has served as a director of the Company since March 1985.
Since 1990, he has been President, Chief Executive Officer and a director of
the Polish American Enterprise Fund, which invests United States government
funds in Poland. From 1971 to 1987, he served as President of Alan Patricof
Associates, Inc., an investment advisor to venture capital partnerships, and
from 1987 to 1990, Mr. Faris was a private investor.
Richard C.E. Morgan has served as a director of the Company since May 30,
1990. Since January 1996, Mr. Morgan has been a partner of Jackson Hole
Management Inc., a venture capital firm which is the sucessor company to the
Asset Management Division of Wolfensohn Partners, L.P. Since 1986, he has been
a general partner of Wolfensohn Partners L.P., a venture capital limited
partnership, and the general partner of Wolfensohn Associates L.P. From 1984
to 1986, he served as an executive of James D. Wolfensohn, Inc., and from 1977
to 1984, he served as General Manager of The Schroder Strategy Group and
director of J. Henry Schroder Wagg & Co. Ltd. (London). He is a director of
Lasertechnics, Inc., a printing systems company, Celgene Corporation, a
biotechnology company, Quidel Corporation, a medical diagnostics company, and
Indigo N.V., a printing systems company.
E. Donnall Thomas, M.D. has served as a director of the Company since May
27, 1993. Dr. Thomas serves as Chairman of the Scientific Advisory Committee
of Cell Therapeutics, Inc. He is also Professor Emeritus of Medicine,
University of Washington School of Medicine in Seattle and a member of the
Fred Hutchinson Cancer Research Center in Seattle. Dr. Thomas previously
served, from 1974 to 1989, as Director of Medical Oncology and Director of
Clinical Research Programs at the Fred Hutchinson Cancer Research Center and,
from 1963 to 1985, he headed the Division of Oncology at the University of
Washington School of Medicine in Seattle. Dr. Thomas received the Nobel Prize
in Medicine and the Presidential Medal of Science in 1990. He received an M.D.
degree from Harvard Medical School.
49
<PAGE>
DESCRIPTION OF PREFERRED STOCK
The following is a summary of the terms of the Preferred Stock offered
hereby. This summary is not intended to be complete and is subject to and
qualified in its entirety by reference to the Certificate of the Powers,
Designations, Preferences and Rights of the Preferred Stock (the "Certificate
of Designation") to be filed with the Secretary of State of the State of
Delaware amending the Company's Certificate of Incorporation and setting forth
the rights, preferences and limitations of the Preferred Stock, a form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Whenever particular Sections or defined terms of the
Certificate of Designation are referred to herein, such Sections or defined
terms are incorporated by reference herein.
The Board of Directors has the authority, without further action by the
stockholders, to issue from time to time 4,000,000 shares of undesignated
preferred stock in one or more series and to fix the number of shares,
designations, preferences, powers, and relative, participating, optional or
other rights and the qualifications or restrictions thereof. The rights,
preferences and limitations of different series of preferred stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions, and
purchase funds and other matters.
The shares of the Preferred Stock, when issued and sold for the
consideration herein contemplated, will be duly and validly issued, fully paid
and nonassessable and the holders thereof will have no preemptive rights in
connection therewith. The Preferred Stock will not be subject to any sinking
fund or other obligation of the Company to redeem or retire the Preferred
Stock. Unless earlier converted, exchanged or redeemed by the Company, the
Preferred Stock will have a perpetual maturity. Any Preferred Stock converted,
exchanged or redeemed or otherwise acquired by the Company will, upon
cancellation of such shares, have the status of authorized but unissued
preferred stock subject to reissuance by the Board of Directors as Preferred
Stock or as shares of preferred stock of any one or more other series.
(Section 6)
DIVIDENDS
Holders of the Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors, out of the funds of the Company legally
available therefor, cash dividends at an annual rate of $ per share of
Preferred Stock, payable in equal quarterly installments on March 1, June 1,
September 1 and December 1, commencing June 1, 1997 (and, in the case of any
accrued but unpaid dividends, at such additional times and for such interim
periods, if any, as determined by the Board of Directors). Dividends on the
Preferred Stock will be cumulative from the date of original issuance, and
will be payable to holders of record as they appear on the stock books of the
Company on such record dates, which shall be not more than 60 days nor less
than 10 days preceding the payment dates, as shall be fixed by the Board of
Directors. (Section 3(a)) Holders of shares of Preferred Stock called for
redemption on a redemption date falling between a dividend payment record date
and the dividend payment date shall, in lieu of receiving such dividend on the
dividend date fixed therefor, receive such dividend payment together with all
other accrued and unpaid dividends on the date fixed for redemption (unless
such holders convert such shares in accordance with the Certificate of
Designation). Dividends payable on the Preferred Stock for any period greater
or less than a full dividend period will be computed on the basis of a 360-day
year consisting of twelve 30-day months. Accrued but unpaid dividends will not
bear interest. (Section 3(b))
If dividends are not paid in full on the Preferred Stock and any other
preferred stock ranking on a parity as to dividends with the Preferred Stock,
all dividends declared upon shares of Preferred Stock and such other preferred
stock will be declared pro rata so that in all cases the amount of dividends
declared per share on the Preferred Stock and such other preferred stock bear
to each other the same ratio that accrued and unpaid dividends per share on
the shares of the Preferred Stock and such other preferred stock bear to each
other. (Section 3(c)) Except as set forth above, unless full cumulative
dividends on the Preferred Stock have been paid and funds set aside therefor,
dividends (other than dividends paid solely in Common Stock, other stock
ranking junior as to dividends to the Preferred Stock or rights to acquire the
foregoing) may not be paid or
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<PAGE>
declared and set aside for payment and other distribution may not be made on
the Common Stock or any other stock of the Company ranking junior to or on a
parity with the Preferred Stock as to dividends nor may any Common Stock or
any other stock of the Company ranking junior to or on a parity with the
Preferred Stock as to dividends be redeemed, repurchased or otherwise acquired
for any consideration by the Company (except for repurchases from employees
and consultants and by the conversion into or exchange for stock of the
Company ranking junior to the Preferred Stock as to dividends). (Sections 3(d)
and (e))
Under Delaware law, dividends or distributions to stockholders may be made
only from the surplus of the Company or, in certain situations, from the net
profits for the current fiscal year or the fiscal year before which the
dividend or distribution is declared. The Company's ability to pay dividends
in the future will depend upon its financial results, liquidity and financial
condition.
CONVERSION RIGHTS
Each share of Preferred Stock will be convertible at the option of the
holder at any time after 90 days following the date of this Prospectus into
such number of shares of Common Stock determined by dividing the liquidation
preference set forth on the cover of this Prospectus by a conversion price of
$ (initially equivalent to approximately shares of Common
Stock for each share of Preferred Stock), subject to adjustment as described
below. No adjustment will be made on conversion of any share of Preferred
Stock for dividends accrued or unpaid thereon or for dividends on any Common
Stock issued. The Company is not required to issue fractional shares of Common
Stock upon conversion of Preferred Stock and, in lieu thereof, will pay a cash
adjustment based upon the market price of the Common Stock on the last Trading
Day (determined as provided in the Certificate of Designation) prior to the
date of conversion. (Section 7(c)) In the case of Preferred Stock called for
redemption, conversion rights will expire at the close of business on the next
business day preceding the date fixed for redemption, unless the Company
defaults in payment of the redemption price. (Section 7(b))
The right of conversion attaching to each share of Preferred Stock may be
exercised by the holder by delivering the certificate representing such share
of Preferred Stock at the specific office of the transfer agent, accompanied
by a duly signed and completed notice of conversion. The conversion date shall
be the date on which the certificate of such share of Preferred Stock and the
duly signed and completed notice of conversion have been delivered to the
transfer agent. (Section 7(b)) A holder delivering a certificate of such share
of Preferred Stock for conversion will not be required to pay any taxes or
duties payable in respect of the issue or delivery of Common Stock on
conversion, but will be required to pay any tax or duty which may be payable
in respect of any transfer involved in the issue or delivery of the Common
Stock in a name other than the holder of the Preferred Stock. Certificates
representing shares of Common Stock will not be issued or delivered unless all
taxes and duties, if any, payable by the holder have been paid. (Section 7(f))
The conversion price is subject to adjustment upon certain events, including
(i) the issuance of Common Stock as a dividend or distribution on Common Stock
of the Company; (ii) certain subdivisions and combinations of the Common
Stock; (iii) the issuance to all holders of Common Stock of certain rights or
warrants to purchase Common Stock at less than the current market price of the
Common Stock; (iv) the dividend or other distribution to all holders of Common
Stock of shares of capital stock of the Company (other than Common Stock) or
evidences of indebtedness of the Company or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to
above or paid exclusively in cash); (v) dividends or other distributions
consisting exclusively of cash (excluding any cash portion of distributions
referred to in clause (iv)) to all holders of Common Stock to the extent that
such distributions, combined together with (A) all other such all-cash
distributions made within the preceding 12 months in respect of which no
adjustment has been made plus (B) any cash and the fair market value of other
consideration payable in respect of any tender offers by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 10% of the Company's
market capitalization (being the product of the then current market price of
the Common Stock times the number of shares of Common Stock outstanding) on
the record date for such distribution; (vi) the purchase
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of Common Stock pursuant to a tender offer made by the Company or any of its
subsidiaries to the extent that the same involves an aggregate consideration
that, together with (X) any cash and the fair market value of any other
consideration payable in any other tender offer by the Company or any of its
subsidiaries for Common Stock expiring within the 12 months preceding such
tender offer in respect of which no adjustment has been made plus (Y) the
aggregate amount of any such all-cash distributions referred to in clause (v)
above to all holders of Common Stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have been
made, exceeds 10% of the Company's market capitalization on the expiration of
such tender offer; and (vii) payment in respect of a tender offer or exchange
offer by a person other than the Company or any subsidiary of the Company in
which, as of the closing of the offer, the Board of Directors is not
recommending rejection of the offer. The Company is entitled, in lieu of
making certain adjustments under clause (v) above, to provide that, subject to
satisfying certain conditions, upon conversion of the Preferred Stock, the
holders of the Preferred Stock will receive, in addition to the Common Stock
issuable upon conversion of such Preferred Stock, the amount of such
distribution referred to in clause (v). The adjustment referred to in clause
(vii) above will only be made if the tender offer or exchange offer is for an
amount which increases that person's ownership of Common Stock to more than
25% of the total shares of Common Stock outstanding, and only if the cash and
value of any other consideration included in such payment per share of Common
Stock exceeds the current market price per share of Common Stock on the
business day next succeeding the last date on which tenders or exchanges may
be made pursuant to such tender or exchange. The adjustment referred to in
clause (vii) above will not be made, however, if, as of the closing of the
offer, the offering documents with respect to such offer disclose a plan or an
intention to cause the Company to engage in any consolidation with, merger
into, or transfer of all or substantially all of its properties to any other
corporation organized under the laws of the United States or any political
subdivision thereof or therein, provided that each share of Preferred Stock
remain outstanding or unaffected or converted into or exchanged for
convertible exchangeable preferred stock of the successor corporation having
powers, preferences and rights identical to the Preferred Stock. (Sections
7(d)(i) through (vii))
The Certificate of Designation provides that if the Company implements a
stockholder rights plan, such rights plan must provide that upon conversion of
the Preferred Stock the holders will receive, in addition to the Common Stock
issuable upon such conversion, such rights, whether or not such rights have
separated from the Common Stock at the time of such conversion. (Section
7(d)(iv))
The Company from time to time may, to the extent permitted by law, reduce
the conversion price of the Preferred Stock by any amount for any period of at
least 20 days, in which case the Company shall give at least 15 days' notice
of such decrease, if the Board of Directors has made a determination that such
decrease would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in
the conversion price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights
to acquire stock) or from any event treated as such for income tax purposes.
(Section 7(e)) See "Certain Federal Income Tax Considerations."
If any transaction shall occur (including, without limitation (a) any
recapitalization or reclassification of shares of Common Stock (other than a
change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination of Common Stock),
(b) any consolidation of the Company with, or merger of the Company into, any
other person, or any merger of another person into the Company (other than a
merger that does not result in a reclassification, conversion, exchange or
cancellation of Common Stock), (c) any sale, transfer or lease of all or
substantially all of the assets of the Company or (d) any compulsory share
exchange) pursuant to which either shares of Common Stock shall be converted
into the right to receive other securities, cash or other property, or, in the
case of a sale or transfer of all or substantially all of the assets of the
Company, the holders of Common Stock shall be entitled to receive other
securities, cash or other property, then appropriate provision shall be made
so that the holder of each share of Preferred Stock then outstanding shall
have the right thereafter to convert such Preferred Stock only into: (x) in
the case of any such transaction that does not constitute a Common Stock
Fundamental
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Change (as defined below) and subject to funds being legally available for
such purpose under applicable law at the time of such conversion, the kind and
amount of the securities, cash or other property that would have been
receivable upon such recapitalization, reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares
of Common Stock issuable upon conversion of such Preferred Stock immediately
prior to such recapitalization, reclassification, consolidation, merger, sale,
transfer or share exchange, after giving effect, in the case of any Non-Stock
Fundamental Change (as defined below), to any adjustment in the conversion
price in accordance with clause (i) of the following paragraph, and (y) in the
case of any such transaction that constitutes a Common Stock Fundamental
Change, common stock of the kind received by holders of Common Stock as a
result of such Common Stock Fundamental Change in an amount determined in
accordance with clause (ii) of the following paragraph. The company formed by
such consolidation or resulting from such merger or that acquires such assets
or that acquires the Company's shares, as the case may be, shall make
provisions in its certificate or articles of incorporation or other
constituent document to establish such right. Such certificate or articles of
incorporation or other constituent document shall provide for adjustments
that, for events subsequent to the effective date of such certificate or
articles of incorporation or other constituent document, shall be as nearly
equivalent as may be practicable to the relevant adjustments provided for in
the preceding paragraphs and in this paragraph.
Notwithstanding any other provisions in the preceding paragraphs to the
contrary, if any Fundamental Change (as defined below) occurs, then the
conversion price in effect will be adjusted immediately after such Fundamental
Change as follows:
(i) in the case of a Non-Stock Fundamental Change, the conversion price
of the Preferred Stock immediately following such Non-Stock Fundamental
Change shall be the lower of (A) the conversion price in effect immediately
prior to such Non-Stock Fundamental Change, but after giving effect to any
other prior adjustments effected pursuant to the preceding paragraphs, and
(B) the product of (1) the greater of the Applicable Price (as defined
below) and the then applicable Reference Market Price (as defined below)
and (2) a fraction, the numerator of which is $50 and the denominator of
which is (x) the amount of the redemption price for one share of Preferred
Stock if the redemption date were the date of such Non-Stock Fundamental
Change (or the date of the period commencing on the first date of original
issuance of the Preferred Stock and to March 1, 1998 or the twelve-month
periods commencing March 1, 1998 and March 1, 1999, the product of %, %
and %, respectively, times $50) plus (y) any then-accrued and unpaid
distributions on one share of Preferred Stock; and
(ii) in the case of a Common Stock Fundamental Change, the conversion
price of the Preferred Stock immediately following such Common Stock
Fundamental Change shall be the conversion price in effect immediately
prior to such Common Stock Fundamental Change, but after giving effect to
any other prior adjustments effected pursuant to the preceding paragraphs,
multiplied by a fraction, the numerator of which is the Purchaser Stock
Price (as defined below) and the denominator of which is the Applicable
Price; provided, however, that in the event of a Common Stock Fundamental
Change in which (A) 100% of the value of the consideration received by a
holder of Common Stock is common stock of the successor, acquiror or other
third party (and cash, if any, paid with respect to any fractional
interests in such common stock resulting from such Common Stock Fundamental
Change) and (B) all of the Common Stock shall have been exchanged for,
converted into or acquired for, common stock of the successor, acquiror or
other third party (and any cash with respect to fractional interests), the
conversion price of the Preferred Stock immediately following such Common
Stock Fundamental Change shall be the conversion price in effect
immediately prior to such Common Stock Fundamental Change multiplied by a
fraction, the numerator of which is one (1) and the denominator of which is
the number of shares of common stock of the successor, acquiror or other
third party received by a holder of one share of Common Stock as a result
of such Common Stock Fundamental Change.
Depending upon whether a Fundamental Change is a Non-Stock Fundamental
Change or a Common Stock Fundamental Change, a holder may receive
significantly different consideration upon conversion. In the event of a Non-
Stock Fundamental Change, the holder has the right to convert Preferred Stock
into the
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kind and amount of the shares of stock and other securities or property or
assets (including cash), except as otherwise provided above, as is determined
by the number of shares of Common Stock receivable upon conversion at the
conversion price as adjusted in accordance with clause (i) of the preceding
paragraph. However, in the event of a Common Stock Fundamental Change in which
less than 100% of the value of the consideration received by a holder of
Common Stock is common stock of the successor, acquiror or other third party,
a holder of Preferred Stock who converts such Preferred Stock following the
Common Stock Fundamental Change will receive consideration in the form of such
common stock only, whereas a holder who converted such Preferred Stock prior
to the Common Stock Fundamental Change would have received consideration in
the form of such common stock as well as any other securities or assets (which
may include cash) issuable upon conversion of such Preferred Stock immediately
prior to such Common Stock Fundamental Change.
The term "Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of Common Stock receive only cash, the
amount of cash received by a holder of one share of Common Stock and (ii) in
the event of any other Fundamental Change, the average of the daily Closing
Price (determined as provided in the Certificate of Designation) for one share
of Common Stock during the 10 Trading Days immediately prior to the record
date for the determination of the holders of Common Stock entitled to receive
cash, securities, property or other assets in connection with such Fundamental
Change or, if there is no such record date, prior to the date upon which the
holders of Common Stock shall have the right to receive such cash, securities,
property or other assets.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock that, for the 10 Trading Days immediately prior
to such Fundamental Change, has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on Nasdaq National Market, provided, however, that a Fundamental Change
shall not be a Common Stock Fundamental Change unless either (i) the Company
continues to exist after the occurrence of such Fundamental Change and the
outstanding Preferred Stock continues to exist as outstanding Preferred Stock,
or (ii) not later than the occurrence of such Fundamental Change, the
outstanding Preferred Stock is converted into or exchanged for shares of
convertible preferred stock or debentures of a corporation succeeding to the
business of the Company, which convertible preferred stock has powers,
preferences and relative, participating, optional or other rights, and
qualifications, limitations and restrictions substantially similar to those of
the Preferred Stock and which debentures have terms substantially similar to
those of the Debentures.
The term "Fundamental Change" means the occurrence of any transaction or
event or series of transactions or events pursuant to which all or
substantially all of the Common Stock shall be exchanged for, converted into,
acquired for or shall constitute solely the right to receive cash, securities,
property or other assets (whether by means of an exchange offer, liquidation,
tender, offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise); provided, however, in the case of any such
series of transactions or events, for purposes of adjustment of the conversion
price, such Fundamental Change shall be deemed to have occurred when
substantially all of the Common Stock shall have been exchanged for, converted
into or acquired for, or shall constitute solely the right to receive, such
cash, securities, property or other assets, but the adjustment shall be based
upon the consideration that the holders of the Common Stock received in the
transaction or event as a result of which more than 50% of the Common Stock
shall have been exchanged for, converted into or acquired for, or shall
constitute solely the right to receive, such cash, securities, property or
other assets.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchase Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the daily Closing Price for one share of
the common stock received by holders of the Common
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Stock in such Common Stock Fundamental Change during the 10 Trading Days
immediately prior to the date fixed for the determination of the holders of
the Common Stock entitled to receive such common stock or, if there is no such
date, prior to the date upon which the holders of the Common Stock shall have
the right to receive such common stock.
The term "Reference Market Price" shall initially mean $ (which is an
amount equal to 66 2/3% of the reported last sale price for Company Common
Stock on the Nasdaq National Market on the date of this Prospectus) and, in
the event of any adjustment to the conversion price other than as a result of
a Fundamental Change, the Reference Market Price shall also be adjusted so
that the ratio of the Reference Market Price to the conversion price after
giving effect to any such adjustment shall always be the same as the ratio of
the initial Reference Market Price to the initial conversion price of $
per share.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then
in effect; provided that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. Except as stated above, the conversion price will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase any of the
foregoing.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, before any distribution of assets is made to
holders of Common Stock or any other stock of the Company ranking junior to
the shares of Preferred Stock upon liquidation, dissolution or winding up, the
holders of Preferred Stock shall receive a liquidation preference of $50 per
share and shall be entitled to receive all accrued and unpaid dividends
through the date of distribution, and the holders of any class or series of
preferred stock ranking on a parity with the Preferred Stock as to
liquidation, dissolution or winding up shall be entitled to receive the full
respective liquidation preferences (including any premium), to which they are
entitled and shall receive all accrued and unpaid dividends with respect to
their respective shares through and including the date of distribution. If,
upon such a voluntary or involuntary liquidation, dissolution or winding up of
the Company, the assets of the Company are insufficient to pay in full the
amounts described above as payable with respect to the Preferred Stock and any
class or series of preferred stock of the Company ranking on a parity with the
Preferred Stock as to liquidation, dissolution or winding up, the holders of
the Preferred Stock and of such other class or series of preferred stock will
share ratably in any such distributions of assets of the Company first in
proportion to their respective liquidation preferences until such preferences
are paid in full, and then in proportion to their respective amounts of
accrued but unpaid dividends. After payment of any such liquidating preference
and accrued dividends, the shares of Preferred Stock will not be entitled to
any further participation in any distribution of assets by the Company.
Neither the sale of all or substantially all of the assets of the Company, nor
the merger or consolidation of the Company into or with any other corporation,
nor any liquidation, dissolution, winding up or reorganization of the Company
immediately followed by reincorporation of another corporation, will be deemed
to be a liquidation, dissolution or winding up of the Company.
OPTIONAL REDEMPTION
The Preferred Stock will not be redeemable prior to March 2, 2000. At any
time on or after that date the shares of Preferred Stock may be redeemed at
the Company's option, out of funds legally available therefor, on at least 20
but not more than 60 days notice, as a whole or from time to time in part, at
the following redemption prices per share (expressed as a percentage of the
$50 liquidation preference thereof), plus in each case, an amount equal to
accrued and unpaid dividends, if any, up to but excluding the date fixed for
redemption, whether or not earned or declared. (Section 5(a))
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If redeemed during the 12-month period beginning March 1 (beginning March 2,
2000 and ending on February 28, 2001, in the case of the first such period):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000......................................................... %
2001.........................................................
2002.........................................................
2003.........................................................
2004.........................................................
2005.........................................................
2006.........................................................
</TABLE>
and 100% at March 1, 2007.
If fewer than all of the shares of Preferred Stock are to be redeemed, the
shares to be redeemed shall be selected by lot or pro rata or in some other
equitable manner determined by the Company in its sole discretion. On and
after the date fixed for redemption, provided that the redemption price
(including any accrued and unpaid dividends to but excluding the date fixed
for redemption) has been duly paid or provided for, dividends shall cease to
accrue on the Preferred Stock called for redemption, such shares shall no
longer be deemed to be outstanding and all rights of the holders of such
shares as stockholders of the Company shall cease, except the right to receive
the monies payable upon such redemption, without interest thereon, upon
surrender of the certificates evidencing such shares. (Section 5(c))
EXCHANGE PROVISIONS
The Preferred Stock is exchangeable in whole, but not in part, at the option
of the Company, for Debentures on any dividend payment date beginning on March
1, 1998 at the rate of $50 principal amount of Debentures for each share of
Preferred Stock outstanding at the time of exchange; provided that the
Debentures will be issuable in denominations of $1,000 and integral multiples
thereof. See "Description of Debentures." If the exchange results in an amount
of Debentures that is not an integral multiple of $1,000, the amount in excess
of the closest integral multiple of $1,000 will be paid in cash by the
Company. The Company will mail written notice of its intention to exchange to
each holder of record of the Preferred Stock not less than 30 nor more than 60
days prior to the date fixed for exchange.
Upon the date fixed for exchange of Preferred Stock for Debentures (the
"Exchange Date"), the rights of holders of Preferred Stock as stockholders of
the Company shall cease and their shares of Preferred Stock no longer will be
deemed outstanding and will represent only the right to receive the Debentures
and any accrued and unpaid dividends, without interest thereon. (Section
11(c)) If full cumulative dividends on the Preferred Stock have not been paid
to the Exchange Date, or funds set aside to provide for payment in full of
such dividends, the Company may not exercise its option to exchange the
Preferred Stock for the Debentures. (Section 11(f)) The exchange of Preferred
Stock for Debentures will be a taxable event and, therefore, may result in tax
liability for the holder exchanging such stock without any correlative cash
payment to such holder. See "Certain Federal Income Tax Considerations."
VOTING RIGHTS
The holders of the Preferred Stock will have no voting rights except as
described below or as required by law. In exercising any such vote, each
outstanding share of Preferred Stock will be entitled to one vote, excluding
shares held by the Company or any affiliate of the Company, which shares shall
have no voting rights. (Section 10(a))
Whenever dividends on the Preferred Stock or on any outstanding shares of
preferred stock ranking on a parity as to dividends with the Preferred Stock
have not been paid in an aggregate amount equal to at least six
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quarterly dividends on such shares (whether or not consecutive), the number of
members of the Board of Directors will be increased by two, and the holders of
the Preferred Stock, voting separately as a class, with the holders of
preferred stock ranking on parity as to dividends with the Preferred Stock on
which like voting rights have been conferred and are exercisable, without
regard to series, will be entitled to elect such two additional directors at
any meeting of stockholders at which directors are to be elected held during
the period such dividends remain in arrears. Such voting rights will terminate
when all such accrued and unpaid dividends have been declared and paid or set
apart for payment. The terms of office of all directors so elected will
terminate immediately upon the termination of such voting rights. (Section
10(b))
In addition, so long as any Preferred Stock is outstanding, the Company may
not, without the affirmative vote or consent of the holders of at least 66
2/3% (unless a higher percentage shall then be required by applicable law) of
all outstanding shares of Preferred Stock, voting separately as a class with
the holders of preferred stock ranking on parity as to dividends with the
Preferred Stock on which like voting rights have been conferred and are
exercisable, without regard to series, (i) amend, alter or repeal any
provision of the Company's Certificate of Incorporation (including, without
limitation, the Certificate of Designation) or Bylaws so as to affect
adversely the relative rights, preferences, qualifications, limitations or
restrictions of the Preferred Stock or, (ii) create, authorize or issue, or
reclassify any authorized stock of the Company into, or increase the
authorized amount of, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase, any shares of any series
or class of stock that ranks senior to or on a parity with the Preferred Stock
as to dividends or distributions of assets upon liquidation, dissolution or
winding up of the stock, and so long as any Preferred Stock is outstanding,
the Company may not, without the affirmative vote or consent of the holders of
at least 66 2/3% (unless a higher percentage shall then be required by
applicable law) of all outstanding shares of Preferred Stock, voting
separately as a class with the holders of preferred stock ranking on parity as
to dividends with the Preferred Stock on which like voting rights have been
conferred and are exercisable, without regard to series, enter into a share
exchange that affects the Preferred Stock, consolidate with or merge into
another entity, or permit another entity to consolidate with or merge into the
Company, unless in each such case each share of Preferred Stock remains
outstanding and unaffected or is converted into or exchanged for convertible
preferred stock of the surviving entity having powers, preferences and
relative, participating, optional or other rights and qualifications and
restrictions thereof identical to that of a share of Preferred Stock (except
for changes that do not affect the holders of the Preferred Stock adversely).
(Section 10(c))
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services will act as transfer agent and registrar
for the Preferred Stock.
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DESCRIPTION OF DEBENTURES
If the Company elects to issue Debentures in exchange for the Preferred
Stock, the Debentures will be issued under an Indenture, dated as of ,
1997 (the "Indenture"), between the Company and Chemical Trust Company of
California, as trustee (the "Trustee"), at a rate of $50 principal amount of
Debentures for each share of Preferred Stock so exchanged. The Indenture will
be substantially in the form filed as an exhibit to the Registration Statement
of which this Prospectus is a part, with such changes as may be required by
law or usage. The following descriptions of certain provisions of the
Indenture and the Debentures are intended as summaries only and are qualified
in their entirety by reference to the Indenture and the Debentures, including
the definitions therein of certain terms. Whenever particular sections and
defined terms of the Indenture or the Debentures are referred to herein, such
sections and defined terms are to be incorporated by reference herein. As used
in this Description of Debentures, the "Company" refers only to SEQUUS
Pharmaceuticals, Inc. and does not, unless the context otherwise indicates,
include any of its subsidiaries.
The Debentures will be general, unsecured, subordinated obligations of the
Company, limited to an aggregate principal amount equal to the aggregate
liquidation value of the Preferred Stock then outstanding (excluding accrued
and unpaid dividends payable upon liquidation) and will mature on March 1,
2007, unless earlier converted by a holder thereof or redeemed at the option
of the Company.
The Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000.
(Section 2.3) No service charge will be made for any registration of transfer
or exchange of the Debentures, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
with any such transaction. (Section 2.5)
Principal of, premium, if any, and interest on the Debentures will be
payable, the transfer of Debentures will be registrable, and the Debentures
may be presented for conversion at the office of the Company maintained by the
Company for such purposes in New York, New York, which shall initially be an
office or agency of the Trustee in New York, New York. (Section 2.5)
The Company may, but is not required to, apply for listing of the Debentures
on the Nasdaq Stock Market. However, trading of the Debentures is expected to
take place mostly in the over-the-counter market. No assurance can be given,
however, as to the liquidity of or trading markets for the Debentures.
The Indenture does not contain any restrictions on the payment of dividends
or the repurchase of securities of the Company or any financial covenants.
INTEREST
The Debentures, if issued, will bear interest at the rate of % per annum
from the date of issuance, or from the most recent interest payment date to
which interest has been paid or provided for, payable semiannually on March 1
and September 1 of each year to the person in whose name the Debenture (or any
predecessor Debenture) is registered at the close of business on the preceding
February 15 and August 15, respectively. Interest will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Interest may, at
the Company's option, be paid by check mailed to such holders, provided that a
holder of Debentures with an aggregate principal amount in excess of
$2,000,000 will be paid by wire transfer in immediately available funds at the
election of such holder.
CONVERSION RIGHTS
Each Debenture will be converted at the option of the holder at any time
after the date of issuance of the Debentures and on or prior to maturity,
subject to prior redemption, into such number of shares of Common Stock
determined by dividing the principal amount of such Debenture by a conversion
price of $ , subject to adjustment as described below. Except as otherwise
set forth herein, the conversion rights
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<PAGE>
of holders of Debentures will be identical to the conversion rights granted to
them as holders of the Preferred Stock. See "Description of Preferred Stock--
Conversion Rights." If Debentures are converted after a record date for the
payment of interest and prior to (but excluding) the next succeeding interest
payment date, such Debentures (other than Debentures called for redemption and
a notice of redemption has been sent by the Company pursuant to the Indenture)
must be accompanied by funds equal to the interest payable on such succeeding
interest payment date on the principal amount so converted. The Company is not
required to issue fractional shares of Common Stock upon conversion of
Debentures, and, in lieu thereof, will pay a cash adjustment based upon the
market price of the Common Stock on the last Trading Day prior to the date of
conversion. (Section 15.3) In the case of Debentures called for redemption,
conversion rights will expire at the close of business on the business day
preceding the date fixed for redemption, unless the Company defaults in
payment of the redemption price. (Section 15.1)
The right of conversion attaching to any Debenture may be exercised by the
holder by delivering the Debenture at the specified office of a conversion
agent, accompanied by a duly signed and completed notice of conversion,
together with any funds that may be required as described in the preceding
paragraph. The conversion date shall be the date on which the Debenture, the
duly signed and completed notice of conversion and any funds that may be
required as described in the preceding paragraph shall have been so delivered.
(Section 15.2) A holder delivering a Debenture for conversion will not be
required to pay any taxes or duties payable in respect of the issue or
delivery of Common Stock on conversion, but will be required to pay any tax or
duty which may be payable in respect of any transfer involved in the issue or
delivery of the Common Stock in a name other than the holder of the Debenture.
Certificates representing shares of Common Stock will not be issued or
delivered unless all taxes and duties, if any, payable by the holder have been
paid. (Section 15.7)
SUBORDINATION
The indebtedness evidenced by the Debentures is subordinated to the extent
provided in the Indenture to the prior payment in full of all Senior
Indebtedness (as defined below). (Section 4.1) Upon any distribution of assets
of the Company upon any dissolution, winding up, liquidation or
reorganization, the payment of the principal of, or premium, if any, and
interest on the Debentures is to be subordinated to the extent provided in the
Indenture in right of payment to the prior payment in full of all Senior
Indebtedness (except that holders of Debentures may receive securities that
are subordinated at least to the same extent as the Debentures are
subordinated to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness).
In the event of the acceleration of the maturity of any Debentures as a
result of an Event of Default (as defined), the holders of all Senior
Indebtedness will first be entitled to receive payment in full in cash of all
amounts due or to become due thereon before the holders of the Debentures will
be entitled to receive any payment for the principal of or premium, if any,
interest on, or other obligations in respect of, the Debentures (except that
holders of Debentures may receive securities that are subordinated at least to
the same extent as the Debentures are subordinated to Senior Indebtedness and
any securities issued in exchange for Senior Indebtedness). The Indenture will
further require that the Company will promptly notify holders of Senior
Indebtedness if payment of the Debentures is accelerated because of an Event
of Default.
The Company also may not make any payment for the principal of or premium,
if any, interest on, or other obligations in respect of, the Debentures
(except that holders of Debentures may receive securities that are
subordinated at least to the same extent as the Debentures are subordinated to
Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness) if (i) a default in the payment of the principal of, premium, if
any, interest, rent or other obligations in respect of Senior Indebtedness
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to Designated Senior
Indebtedness that permits holders of the Designated Senior Indebtedness as to
which such default relates to accelerate its maturity and the Trustee receives
a notice of such default (a "Payment Blockage Notice") from the Company or
other person permitted to give such notice under the Indenture. Payments on
the Indenture may and shall be resumed (a) in the case of a payment default,
upon the date on which such default is cured or waived and (b) in case of any
other default, the earlier of the date on which
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such other default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Senior Indebtedness is accelerated. No new period of payment blockage may be
commenced under clause (ii) above unless and until (i) 365 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice and
(ii) all scheduled payments of principal, premium, if any, and interest on the
Debentures that have come due have been paid in full in cash. No default
(other than a payment default) that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice.
By reason of the subordination provisions described above, in the event of
the Company's bankruptcy, dissolution or reorganization, holders of Senior
Indebtedness may receive more, ratably, and holders of the Debentures may
receive less, ratably than the other creditors of the Company. Such
subordination will not prevent the occurrence of any Event of Default under
the Indenture.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, rent under, and any other amounts payable on or in or in respect of any
Indebtedness of the Company (including, without limitation, any interest
accruing after the filing of a petition by or against the Company under any
bankruptcy law, whether or not allowed as a claim after such filing in any
proceeding under such bankruptcy law), whether outstanding on the date of the
Indenture or thereafter created, incurred, assumed, guaranteed or in effect
guaranteed by the Company (including all deferrals, renewals, extensions or
refundings of, or amendments, modifications or supplements to the foregoing);
provided, however, that Senior Indebtedness does not include (v) Indebtedness
evidenced by the Debentures, (w) any liability for federal, state local or
other taxes owed or owing by the Company, (x) Indebtedness of the Company to
any subsidiary of the Company, (y) any trade payables of the Company incurred
in the ordinary course of business, and (z) any indebtedness in which the
instrument creating or evidencing the same or the assumption or thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such Indebtedness shall not be senior in right of payment to, or
is pari passu with, or is subordinated or junior to, the Debentures.
"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i) (a) for borrowed money, (b) evidenced by
a note, debenture, bond or other written instrument, (c) under a lease
required to be capitalized on the balance sheet of the lessee under generally
accepted accounting principles or under any lease or related document
(including a purchase agreement) that provides that the Company is
contractually obligated to purchase or cause a third party to purchase and
thereby guarantee a minimum residual value of the lease property to the lessor
and the obligations of the Company under such lease or related document to
purchase or to cause a third party to purchase such leased property, (d) in
respect of letters of credit, bank guarantees or bankers' acceptances
(including reimbursement obligations with respect to any of the foregoing),
(e) with respect to Indebtedness secured by a mortgage, pledge, lien,
encumbrance, charge or adverse claim affecting title in an encumbrance to
which the property or assets of such person are subject, whether or not the
obligation secured thereby shall have been assumed by or shall otherwise be
such person's legal liability, (f) in respect of the balance of deferred and
unpaid purchase price of any property or assets, (g) under interest rate or
currency swap agreements, cap, floor and collar agreements, spot and forward
contracts and similar agreements and arrangements; (ii) with respect to any
obligation of others of the type described in the preceding clause (i) or
under clause (iii) below assumed by or guaranteed in any manner by such person
or in effect guaranteed by such person through an agreement to purchase
(including, without limitation, "take or pay" and similar arrangements),
contingent or otherwise (and the obligations of such person under any such
assumptions, guarantees or other such arrangements); and (iii) any and all
Indebtedness constituting deferrals, renewals, extensions, refinancings and
refundings of, or amendments, modifications or supplements to, any of the
foregoing.
"Designated Senior Indebtedness" means any particular Senior Indebtedness in
which the instrument creating or evidencing the same or the assumption or
guarantee thereof (or related agreements or documents to which the Company is
a party) expressly provides that such indebtedness shall be "Designated Senior
Indebtedness" for purposes of the Indenture (provided that such instrument,
agreement or other document may place limitations and conditions on the right
of such Senior Indebtedness to exercise the rights of Designated Senior
Indebtedness).
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In the event that, notwithstanding for foregoing, the Trustee or any holder
of Debentures receives any payment or distribution of assets of the Company of
any kind in contravention of any of the terms of the Indenture, whether in
cash, property or securities, including, without limitation, by way of set-off
or otherwise, in respect of the Debentures before all Senior Indebtedness is
paid in full, then such payment or distribution will be held by the recipient
in trust for the benefit of the holders of Senior Indebtedness of the Company,
and will be immediately paid over or delivered to the holders of Senior
Indebtedness of the Company or their representative or representatives to the
extent necessary to make payment in full of all Senior Indebtedness of the
Company remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness of the Company. (Section 4.2)
As of December 31, 1996, the Company did not have outstanding any
indebtedness that would have constituted Senior Indebtedness. The Indenture
will not limit the amount of additional indebtedness, including Senior
Indebtedness, which the Company can create, incur, assume or guarantee, nor
will the Indenture limit the amount of indebtedness which any subsidiary of
the Company can create, incur, assume or guarantee.
OPTIONAL REDEMPTION
The Debentures are not redeemable at the option of the Company prior to
March 2, 2000. At any time on or after that date, the Debentures may be
redeemed at the Company's option on at least 20 but not more than 60 days
notice, as a whole or from time to time in part, at the following prices
(expressed in percentages of the principal amount), together with accrued
interest to, but excluding, the date fixed for redemption; provided that if a
redemption date is an interest payment date, the semi-annual payment of
interest becoming due on such date shall be payable to the holders of record
as of the relevant record date.
If redeemed during the 12-month period beginning March 1 (beginning March 2,
2000 and ending on February 28, 2001, in the case of the first such period).
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000......................................................... %
2001.........................................................
2002.........................................................
2003.........................................................
2004.........................................................
2005.........................................................
2006.........................................................
</TABLE>
and 100% at March 1, 2007.
If fewer than all the Debentures are to be redeemed, the Trustee will select
the Debentures to be redeemed in principal amounts of $1,000 or multiples
thereof by lot or, in its discretion, on a pro rata basis. If any Debenture is
to be redeemed in part only, a new Debenture or Debentures in principal amount
equal to the unredeemed principal portion thereof will be issued. If a portion
of a holder's Debentures is selected for partial redemption and such holder
converts a portion of such Debentures, such converted portion shall be deemed
to be taken from the portion selected for redemption.
No sinking fund is provided for the Debentures.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being: (i) a default in
payment of the principal of, or premium, if any, on the Debentures (whether or
not such payment is prohibited by the subordination
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provisions of the Indenture); (ii) default for 30 days in payment of any
installment of interest on the Debentures (whether or not such payment is
prohibited by the subordination provisions of the Indenture); (iii) default by
the Company for 45 days after notice given in accordance with the Indenture in
the observance or performance of any other covenants in the Indenture; (iv)
failure of the Company to make any payment at maturity, including any
applicable grace period, in respect of Indebtedness in an amount of in excess
of $5,000,000 and continuance of such failure of 30 days after notice given in
accordance with the Indenture; (v) default by the Company with respect to any
Indebtedness, which default results in the acceleration of Indebtedness in an
aggregate amount of in excess of $5,000,000 without such Indebtedness having
been discharged or such acceleration having been rescinded, or annulled for 30
days after notice given in accordance with the Indenture; or (vi) certain
events involving bankruptcy, insolvency or reorganization of the Company.
(Section 7.1)
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of a default, give to the registered holders of the Debentures
notice of all uncured defaults known to it, but the Trustee shall be protected
in withholding such notice if it in good faith determines that the withholding
of such notice is in the best interest to such registered holders, except in
the case of a default in the payment of the principal of, or premium, if any,
or interest on, any of the Debentures when due or in the payment of any
redemption obligation. (Section 7.8)
The Indenture provides that if an Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Debentures then outstanding may declare the principal
of and premium, if any, on the Debentures to be due and payable immediately,
but if the Company shall cure all defaults (except the nonpayment of interest
on, premium, if any, and principal of any Debentures which shall have become
due by acceleration) and certain other conditions are met, such declaration
may be canceled and past defaults may be waived by the holders of a majority
in principal amount of Debentures then outstanding. If an Event of Default
resulting from certain events of bankruptcy, insolvency or reorganization were
to occur, all unpaid principal of and accrued interest on the outstanding
Debentures will become due and payable immediately without any declaration or
other act on the part of the Trustee or any holders of Debentures, subject to
certain limitations. (Section 7.1)
The Indenture provides that the holders of a majority in principal amount of
the outstanding Debentures may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee, subject to certain limitations specified in
the Indenture. (Section 7.7) Before proceeding to exercise any right or power
under the Indenture at the direction of such holders, the Trustee shall be
entitled to receive from such holders reasonable security or indemnity against
the costs, expenses and liabilities which might be incurred by it in complying
with any such direction. The right of a holder to institute a proceeding with
respect to the Indenture is subject to certain conditions precedent, including
the written notice by such holder of an Event of Default and an offer to
indemnify to the Trustee, along with the written request by the holders of not
less than 25% in aggregate principal amount of the outstanding Debentures,
that such a proceeding be instituted, but the holder has an absolute right to
institute suit for the enforcement of payment of the principal of, and
premium, if any, and interest on, such holder's Debentures when due and to
convert such Debentures. (Section 7.4)
The holders of not less than a majority in aggregate principal amount of the
outstanding Debentures may on behalf of the holders of all Debentures waive
any past defaults, except (i) a default in payment of the principal of, or
premium, if any, or interest on, any Debenture when due, (ii) a failure by the
Company to convert any Debentures into Common Stock or (iii) in respect of
certain provisions of the Indenture which cannot be modified or amended
without the consent of the holder of each outstanding Debenture affected
thereby.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
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LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey
or transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another person or group of affiliated persons, unless (i) either (a) the
Company is the surviving entity or (b) the resulting, surviving or transferee
entity is a corporation organized under the laws of the United States, any
state thereof or the District of Columbia and expressly assumes by written
agreement all of the obligations of the Company in connection with the
Debentures and the Indenture; (ii) no default or Event of Default shall exist
or shall occur immediately after giving effect on a pro forma basis to such
transaction; and (iii) certain other conditions are satisfied.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority in principal
amount of the Debentures at the time outstanding, to modify the Indenture or
any supplemental indenture or the rights of the holders of the Debenture,
except that no such modification shall (i) extend the fixed maturity of any
Debenture, reduce the rate or extend the time for payment of interest thereon,
reduce the principal amount thereof or premium, if any, thereon, reduce any
amount payable upon redemption thereof, impair or adversely affect the right
of a holder to institute suit for the payment thereof, change the currency in
which the Debentures are payable, or impair or change in any respect adverse
to the holder of the Debentures the right to convert the Debentures into
Common Stock subject to the terms set forth in the Indenture or modify the
provisions of the Indenture with respect to the subordination of the
Debentures in a manner adverse to the holders of the Debentures, without the
consent of the holder of each Debenture so affected, or (ii) reduce the
aforesaid percentage of Debentures, without the consent of the holders of all
of the Debentures then outstanding.
TAXATION OF DEBENTURES
See "Certain Federal Income Tax Considerations" for a discussion of certain
federal tax considerations which will apply to holders of Debentures.
GOVERNING LAW
The Indenture and the Debentures will be governed by, and construed in
accordance with, the laws of the State of New York. (Section 16.4)
CONCERNING THE TRUSTEE
Chemical Trust Company of California, the Trustee under the Indenture, has
been appointed by the Company as the initial paying agent, conversion agent,
registrar and custodian with regard to the Debentures. An affiliate of the
Trustee is the transfer agent for the Company's Common Stock. The Company may
maintain deposit accounts and conduct other banking transactions with the
Trustee or its affiliates in the ordinary course of business, and the Trustee
and its affiliates may from time to time in the future provide banking and
other services to the Company in the ordinary course of their business.
During the existence of an Event of Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree and
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. (Section 8.1) The
Indenture contains limitations of the rights of the Trustee, should it become
a creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claim or
otherwise. (Section 8.8)
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences of
acquiring and owning the Preferred Stock and the Debentures. Heller Ehrman
White & McAuliffe has acted as the Company's tax counsel; in its opinion, the
summary is accurate in all material respects. Tax consequences are not
addressed that result from the special tax status or particular circumstances
of holders including, for example, banks, insurance companies, regulated
investment companies, personal holding companies, corporations subject to the
alternative minimum tax, and tax-exempt entities. Not addressed are the
consequences under state, local and foreign tax laws. Also not addressed are
tax consequences to subsequent holders of Preferred Stock and Debentures. The
summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, court decisions, and Internal Revenue Service
("IRS") rulings now in effect, all of which are subject to change, possibly
with retroactive effect. The summary assumes that Preferred Stock and
Debentures will be held as "capital assets" as defined in the Code.
Prospective purchasers are advised to consult their own tax advisors regarding
the tax consequences of acquiring, holding, or disposing of the Preferred
Stock or Debentures in light of their own investment circumstances.
DIVIDENDS ON PREFERRED STOCK
Distributions with respect to the Preferred Stock will constitute dividends
to the extent that the Company has current or accumulated earnings and profits
for federal income tax purposes. Dividends paid to corporations will generally
be eligible for the dividends-received deduction under section 243 of the
Code, subject to the limitations contained in sections 246 and 246A of the
Code.
In general, the dividends-received deduction is available only if the stock
in respect of which the dividends are paid is held for at least 46 days, or at
least 91 days in the case of a dividend paid with respect to preferred stock
and which is attributable to a period or periods aggregating more than 366
days. A taxpayer's holding period for these purposes is reduced by periods
during which the taxpayer's risk of loss with respect to the stock is
considered diminished by reason of the existence of options, contracts to sell
or other similar transactions. It is possible that the IRS would argue that
days during which the Company's redemption right is outstanding or,
alternatively, is "in the money" are not included in the taxpayer's holding
period for these purposes. The dividends-received deduction will not be
available to the extent that the taxpayer is under an obligations to make
related payments with respect to positions in substantially similar or related
property. The dividends-received deduction is limited to specified percentages
of the holder's taxable income and may be reduced or eliminated if the holder
has indebtedness "directly attributable to [its] investment" in the stock.
Prospective corporate purchasers of Preferred Stock should consult their own
tax advisors to determine whether these limitations might apply to them.
If distributions with respect to the shares of Preferred Stock exceed the
Company's current and accumulated earnings and profits, the excess will be
applied against and reduce the holder's tax basis in the Preferred Stock. Any
amount in excess of the amount of the dividend and the amount applied against
basis will be treated as capital gain.
EXTRAORDINARY DIVIDENDS
If a corporate holder of Preferred Stock receives an "extraordinary
dividend" from the Company with respect to stock which it has not held for two
years on the dividend announcement date, the basis of the Preferred Stock will
be reduced (but not below zero) by the portion of the dividend which is not
taxable because of the dividends-received deduction. If, because of the
limitation on reducing basis below zero, any amount of the non-taxable portion
of an extraordinary dividend has not been applied to reduce basis, such amount
will be treated as gain from the sale or exchange of stock when such stock is
disposed of. An "extraordinary dividend" on the Preferred Stock would include
a dividend that (i) equals or exceeds 5% of the holder's adjusted tax basis in
the stock, treating all dividends having ex-dividend dates within an 85-day
period as one dividend, or (ii) exceeds 20% of the holder's adjusted tax basis
in the stock, treating all dividends
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having ex-dividend dates within a 365-day period as one dividend. A holder may
elect to use the fair market value of the stock rather than its adjusted basis
for purposes of applying the 5% or 20% limitation if the holder is able to
establish such fair market value to the satisfaction of the IRS. An
"extraordinary dividend" would also include any amount treated as a dividend
in the case of a redemption of the Preferred Stock that is non-pro rata as to
all stockholders, without regard to the period the holder held the stock.
Special rules apply with respect to "qualified preferred dividends." A
qualified preferred dividend is any fixed dividend payable with respect to
preferred stock which (i) provides for fixed preferred dividends payable no
less often than annually and (ii) is not in arrears as to dividends when
acquired, provided the actual rate of return, as determined under section
1059(e)(3) of the Code, on such stock does not exceed 15%. Where a qualified
preferred dividend exceeds the 5% or 20% limitation described above, the
extraordinary dividend rules will not apply if the taxpayer holds the stock
for more than five years. If the taxpayer disposes of the stock before it has
been held for more than five years, the aggregate reduction in basis will not
exceed the excess of the qualified preferred dividends paid on such stock
during the period held by the taxpayer over the qualified preferred dividends
that would have been paid during such period on the basis of the stated rate
of return as determined under section 1059(e)(3) of the Code. The length of
time that a taxpayer is deemed to have held stock for this purpose is
determined under principles similar to those applicable for purposes of the
dividends-received deduction discussed above.
REDEMPTION PREMIUM
If (a) preferred stock is, like the Preferred Stock, redeemable only at the
issuer's option, (b) the facts and circumstances on the issue date indicate
that redemption is more likely than not to occur, and (c) the redemption price
of the preferred stock as of the most likely redemption date exceeds the issue
price (so that there is a "redemption premium"), then the redemption premium
may be taxable as a dividend to the extent of the issuing corporation's
current or accumulated earnings and profits over the period from issuance to
the most likely redemption date. If a redemption premium is subject to the
foregoing treatment, a holder of the Preferred Stock would take the amount of
the premium into income under an economic accrual method similar to the method
described under "Original Issue Discount" below. Under applicable Treasury
Regulations, a redemption premium is not subject to the foregoing treatment if
it will be paid "as a result of changes in economic or market conditions over
which neither the issuer nor the holder has legal or practical control" and is
"solely in the nature of a penalty for premature redemption." The Company
believes that any payment of redemption premium by it will be "solely in the
nature of a penalty for premature redemption" within the meaning of the
Regulations. The Regulations also provide a "safe harbor," pursuant to which
redemption will not be treated as likely to occur, as to a given holder, if:
(x) the issuer and the holder are not "related" under certain tests prescribed
by the Code, (y) the issuer is not effectively required or compelled by any
plan, arrangement, or agreement to redeem the stock, and (z) redemption would
not reduce the yield of the stock. The Company expects that the Preferred
Stock will qualify for the "safe harbor." Because the foregoing tests are
based upon an evaluation of all facts and circumstances surrounding the
issuance and redemption of preferred stock, the conclusion cannot be entirely
certain; however, it is the Company's belief that no part of the premium
payable upon redemption of the Preferred Stock will be treated as a
constructive dividend to the holders of the Preferred Stock. It is possible,
however, that upon an actual redemption, the redemption premium would,
together with the other redemption proceeds, be treated as a dividend for
federal income tax purposes. See "Redemption for Cash" below.
REDEMPTION FOR CASH
A redemption of shares of Preferred Stock by the Company for cash will be
treated as a distribution taxable as a dividend (and, possibly, an
"extraordinary dividend"--see above) to redeeming stockholders to the extent
of the Company's current or accumulated earnings and profits unless the
redemption (a) results in a "complete termination" of the stockholder's
interest in the Company (within the meaning of section 302(b)(3) of the Code),
(b) is "substantially disproportionate" (within the meaning of section
302(b)(2)) with respect to the holder, or (c) is "not essentially equivalent
to a dividend" (within the meaning of section
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302(b)(1)). Based upon published IRS rulings, the redemption of a
stockholder's Preferred Stock for cash will be treated as "not essentially
equivalent to a dividend" if, taking into account the constructive ownership
rules, (1) the stockholder does not own shares of any other class in the
Company, either directly or by attribution, and (2) there is a meaningful
reduction in the holder's proportionate interest in the Company. In
determining whether any of these tests has been met, shares considered to be
owned by the holder by reason of the constructive ownership rules set forth in
section 318 of the Code, as well as shares actually owned, will be taken into
account. If any of the foregoing tests is met, the redemption of shares of
Preferred Stock for cash will result in taxable gain or loss equal to the
difference between the amount of cash received (except cash attributable to
accrued, unpaid, declared dividends, which will be taxable as a dividend
described above) and the holder's tax basis in the redeemed shares. Any such
gain or loss will be capital gain or loss and will be long-term capital gain
or loss if the holding period exceeds one year. It is possible that the IRS
would argue that the holding period of Preferred Stock does not begin so long
as the Company's redemption right is outstanding.
EXCHANGE FOR DEBENTURES
An exchange of shares of Preferred Stock for Debentures would also be
subject to the rules of section 302 of the Code described above. Since a
holder of Debentures will be treated under the constructive ownership rules as
owning the Common Stock into which the Debentures are convertible, the
exchange would not by itself satisfy the "complete termination" test or the
"substantially disproportionate" test described above. The "not essentially
equivalent to a dividend" test could be met only if the exchange were regarded
as resulting in a reduction in the holder's proportionate interest in the
Company. If none of these tests is met, the fair market value of the
Debentures received upon the exchange will be taxable as a dividend (and,
possibly, an "extraordinary dividend"--see above) to the extent of the
Company's current or accumulated earnings and profits. Prospective purchasers
should consult their own tax advisors regarding satisfaction of the section
302 tests in their particular circumstances, including the possibility that a
sale of a part of the holder's Preferred Stock or the Debentures received
might be regarded as reducing the holder's interest in the Company, thereby
satisfying one of the tests of section 302(b); in such a case, the stockholder
would recognize capital gain or loss on the exchange. Such gain or loss would
be long-term capital gain or loss if the holding period exceeds one year. It
is possible that the IRS would argue that the holding period of Preferred
Stock does not begin so long as the Company's redemption right is outstanding.
The installment method will not be available for reporting such gain in the
event that the Preferred Stock, the Debentures, or the Common Stock into which
the Debentures are convertible are traded or readily tradable on an
established securities market.
If a redemption does not satisfy any of the tests of section 302(b) and the
fair market value of the Debentures exceeds the Company's current and
accumulated earnings and profits, the excess would be treated as a return of
capital to the extent of the holder's tax basis in the Preferred Stock. Any
amount in excess of the amount of the dividend and the return of capital would
be treated as capital gain. If the holder retains any stock in the Company,
the remaining tax basis in the Preferred Stock will be transferred to the
retained stock. If the holder retains no stock in the Company, it is unclear
whether the remaining tax basis in the Preferred Stock would be transferred to
the Debentures or would be lost.
ORIGINAL ISSUE DISCOUNT AND PREMIUM ON DEBENTURES
Stated interest on the Debentures will be includable in income in accordance
with the holder's method of accounting. There is also a risk that the
Debentures will be treated as having original issue discount taxable as
interest income as discussed below.
If the Preferred Stock is exchanged for Debentures at a time when the stated
redemption price at maturity of the Debentures exceeds their issue price by an
amount equal to or greater than one-fourth of one
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percent of the stated redemption price at maturity multiplied by the number of
complete years to maturity, the Debentures will be treated as having original
issue discount equal to the entire amount of such excess. In the event the
Debentures are traded on an established securities market on or within ten
days after their issue date, the issue price of the Debentures will be their
fair market value as determined as of the first trading date after their issue
date. If the Debentures are not traded on an established securities market at
the time of the exchange, but the Preferred Stock is so traded, the issue
price of the Debentures will be the fair market value of the Preferred Stock
at the time of the exchange. In the event that neither the Preferred Stock nor
the Debentures are traded on an established securities market, the issue price
of the Debentures will be their stated principal amount, assuming that the
Debentures bear "adequate stated interest" within the meaning of section 1274
of the Code. If the Debentures do not bear adequate stated interest, the issue
price will be equal to their "imputed principal amount" as determined under
1274 of the Code.
A holder of a Debenture would generally be required to include in gross
income (irrespective of the holder's method of accounting) a portion of the
original issue discount for each year during which it holds the Debenture even
though the cash to which such income is attributable would not be received
until maturity or redemption of the Debenture. The amount of any original
issue discount included in income for each year would be calculated under a
constant yield to maturity formula that would result in the allocation of less
original issue discount to the early years of the term of the Debenture and
more original issue discount to later years.
If the Preferred Stock is exchanged for Debentures whose issue price exceeds
the amount payable at the maturity (or earlier call date, if appropriate),
such excess (excluding the amount thereof attributable to the conversion
feature) will be deductible by the holder of the Debentures as amortizable
bond premium over the term of the Debentures (taking into account earlier call
dates, as appropriate), under a yield to maturity formula, if an election by
the taxpayer under section 171 of the Code is in effect or is made. Such
election would apply to all obligations owned or subsequently acquired by the
taxpayer. Except as may otherwise be provided in future regulations, the
amortizable bond premium will be treated as an offset to interest income on
the Debentures rather than as a separate deduction item.
REDEMPTION OR SALE OF DEBENTURES
Generally a redemption or sale of the Debentures will result in taxable gain
or loss equal to the difference between the amount of cash and fair market
value of other property received and the holder's tax basis in the Debentures.
To the extent that the amount received is attributable to accrued interest,
however, that amount will be taxed as ordinary income. The tax basis of a
holder who received the Debentures in exchange for shares of Preferred Stock
will generally be equal to the fair market value of the Debentures at the time
of exchange plus any original issue discount included in the holder's income
or minus any premium previously allowed as an offset to interest income on the
Debentures. Such gain or loss will be capital gain or loss and will be long-
term gain or loss if the holding period for the Debentures exceeds one year.
If the Debentures are issued with original issue discount and the Company
were found to have had an intention at the time the Debentures were issued to
call them before maturity, any gain realized on a sale, exchange or redemption
of Debentures prior to maturity would be considered ordinary income to the
extent of any unamortized original issue discount for the period remaining to
the stated maturity of the Debentures. The Company cannot predict whether it
would have an intention, when and if the Debentures are issued, to call the
Debentures before their maturity.
CONVERSION OF PREFERRED STOCK OR DEBENTURES INTO COMMON STOCK
No gain or loss will generally be recognized upon conversion of shares of
Preferred Stock or Debentures into shares of Common Stock, except with respect
to any cash paid in lieu of fractional shares of Common Stock, which will
result in gain or loss to the extent of the difference between the cash paid
and the basis of the Preferred Stock or Debentures allocable to the fractional
shares. Additionally, if the conversion takes place
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when there is a dividend arrearage on the Preferred Stock and the fair market
value of the Common Stock exceeds the issue price of the Preferred Stock, a
portion of the Common Stock received might be treated as a dividend
distribution, taxable as ordinary income. Assuming the conversion is not
treated as resulting in the payment of a dividend, the tax basis of the Common
Stock received upon conversion will be equal to the tax basis of the shares of
Preferred Stock or the Debentures converted (less the amount of basis
allocable to any fractional share of Common Stock for which cash is received),
and the holding period of the Common Stock will include the holding period of
the Shares of Preferred Stock or the Debentures converted. The tax basis of
any Common Stock treated as a dividend will be equal to its fair market value
on the date of the distribution.
ADJUSTMENT OF CONVERSION PRICE
Holders of Preferred Stock or Debentures may be deemed to have received
constructive distributions where the conversion ratio is adjusted to reflect
property distributions with respect to Common Stock into which such Preferred
Stock or Debentures are convertible. Adjustments to the conversion price made
pursuant to a bona fide reasonable adjustment formula which has the effect of
preventing the dilution of the interest of the holders of the Preferred Stock
or Debentures, however, will generally not be considered to result in a
constructive distribution of stock. Certain of the possible adjustments
provided in the Preferred Stock and the Debentures may not qualify as being
pursuant to a bona fide reasonable adjustment formula. If such adjustments
were made, the holders of Preferred Stock or Debentures might be deemed to
have received constructive distribution taxable as dividends.
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable Treasury
regulations, a holder of Preferred Stock, Debentures or Common Stock may be
subject to backup withholding at the rate of 31% with respect to dividends or
interest paid on, original issue discount accrued with respect to, or the
proceeds of a sale, exchange or redemption of Preferred Stock, Debentures or
Common Stock, unless (a) such holder is a corporation or comes within certain
other exempt categories and when required demonstrates this fact or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. The amount of any backup
withholding from a payment to a holder will be allowed as a credit against the
holder's federal income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the IRS.
SPECIAL TAX RULES APPLICABLE TO FOREIGN HOLDERS
For purposes of the following discussion, a "United States Alien Holder" is
any holder who, for United States federal income tax purposes, is a
nonresident alien, a foreign corporation, a nonresident alien fiduciary of a
foreign estate or trust, or a foreign partnership.
Income received by a United States Alien Holder in the form of dividends on
Preferred Stock or Common Stock or interest and original issue discount on the
Debentures will be subject to a United States federal withholding tax at a 30%
rate upon the actual payment of the dividends, interest or original issue
discount except as described below and except where an applicable tax treaty
provides for the reduction or elimination of such withholding tax. However, a
United States Alien Holder generally will be taxable in the same manner as a
United States corporation or resident with respect to such income if it is
effectively connected with the conduct of a trade or business in the United
States. Such effectively connected income received by a United States Alien
Holder that is a corporation may in certain circumstances be subject to an
additional "branch profits tax" at a 30% rate, or if applicable, a lower-
treaty rate.
Payments of interest and original issue discount on the Debentures received
by a United States Alien Holder will not be subject to United States federal
withholding tax provided that (a) the Alien Holder does
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not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, (b) the holder
is not a controlled foreign corporation that is related to the Company through
stock ownership, and (c) either (1) the beneficial owner of the Debenture,
under penalties of perjury, provides the Company or its agent with its name
and address and certifies that it is not a United States person or (2) a
securities clearing organization, bank, or other financial institution that
holds customer's securities in the ordinary course of its trade or business (a
"financial institution") certifies to the Company or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes to the
Company or its agent a copy thereof.
A United States Alien Holder generally will not be subject to Unites States
federal income or withholding tax on gain realized on the sale or exchange of
Preferred Stock, Common Stock, or Debentures unless (i) the holder is an
individual who is present in the United States for 183 days or more during the
taxable year and as to whom such gain is from United States sources or (ii)
the gain is effectively connected with a United States trade or business of
the holder. Upon a redemption of the Preferred Stock for a cash or Debentures,
the Company may be required to withhold tax on the entire amount of the
proceeds at a 30% rate or lower treaty rate applicable to dividends. In the
case of an exchange of Preferred Stock for Debentures, this would result in a
United States Alien Holder receiving a reduced principal amount of Debentures.
Dividends paid to United States Alien Holders outside the United States that
are subject to the withholding tax described above will generally be exempt
from United States backup withholding tax and United States information
reporting requirements, other than reporting of dividend payments for purposes
of the withholding tax noted above. Backup withholding and information
reporting generally will not apply to payments of interest if the
certification described above is received, provided the payor does not have
actual knowledge that the holder is a United States person. The payor of the
dividends may generally rely on a payee's address outside the United States in
determining that the regular withholding tax discussed above applies and
consequently that the backup withholding provisions do not apply.
The payment of the proceeds of the sale of Preferred Stock, Common Stock or
Debentures to or through the United States office of a broker will be subject
to information reporting and possible backup withholding at a rate of 31%
unless the owner certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the sale of Preferred Stock, Common Stock or Debentures to or through the
foreign office of a broker generally will not be subject to this backup
withholding tax. In the case of the payment of proceeds from the disposition
of Preferred Stock, Common Stock or Debentures through a foreign office of a
broker that is a United States person or a "United States related person,"
existing regulations require information reporting on the payment unless the
broker has documentary evidence in its files that the owner is a non-United
States person and the broker has no actual knowledge to the contrary. For this
purpose, a "United States related person" is (i) a "controlled foreign
corporation" for United States federal income tax purposes, or (ii) a foreign
person 50% or more of whose gross income from all sources for a specified
period is derived from activities that are effectively connected with the
conduct of a United States trade or business. While regulations currently in
effect reserve on the question of whether reportable payments made through
foreign offices of a broker that is a United States person or "United States
related person" will be subject to backup withholding, proposed regulations
state that backup withholding will not apply to such payments absent actual
knowledge that the payee is a United States person. Any amounts withheld under
the backup withholding rules from a payment to a United States Alien Holder
will be allowed as a refund or a credit against such United States Alien
Holder's United States federal income tax, provided that the required
information is furnished to the IRS.
69
<PAGE>
DESCRIPTION OF COMMON STOCK
The Company has authority to issue 45,000,000 shares of Common Stock, par
value $0.0001 per share. As of December 31, 1996, there were 29,660,319 shares
of Common Stock issued and outstanding. As of December 31, 1996, the Company
had outstanding options to purchase 4,068,188 shares of Common Stock at a
weighted average exercise price of $9.67 per share, warrants to purchase
525,000 shares of Common Stock at an exercise price of $4.25 per share expiring
in March 1997, warrants to purchase 759,385 shares of Common Stock at an
exercise price of $7.43 per share expiring in May 1999 and warrants to purchase
687,638 shares of Common Stock at an exercise price of $7.43 per share expiring
in April 1998.
The holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders, including the election of directors.
Stockholders are not entitled to cumulative voting rights, and, accordingly,
the holders of a majority of the shares voting for the election of directors
can elect the entire Board if they choose to do so and, in that event, the
holders of the remaining shares will not be able to elect any person to the
Board of Directors.
The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors, in its
discretion, from funds legally available thereof and subject to prior dividend
rights of holders of any shares of preferred stock of the Company which may be
outstanding. Upon liquidation or dissolution of the Company subject to prior
liquidation rights of the holders of preferred stock of the Company, the
holders of Common Stock are entitled to receive on a pro rata basis the
remaining assets of the Company available for distribution. Holders of Common
Stock have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to such
shares.
ChaseMellon Shareholder Services acts as transfer agent and registrar for the
Common Stock.
70
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Dillon, Read & Co. Inc. and Punk, Ziegel &
Knoell, L.P. (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the
Company the numbers of shares of Preferred Stock set forth opposite their
names below at a purchase price of $ per share plus accrued dividends, if
any, from , 1997 to the date of payment and delivery. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC..................................
Dillon, Read & Co. Inc.............................................
Punk, Ziegel & Knoell, L.P. .......................................
---------
Total............................................................ 1,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Preferred Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $ per share, of
which $ may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 150,000
additional shares of Preferred Stock at a purchase price of $ per share plus
accrued dividends, if any, from , 1997 to the date of payment and delivery.
To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Preferred
Stock to be purchased by it shown in the above table represents as a
percentage of the 1,000,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 1,000,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
Each executive officer and certain directors of the Company have agreed with
the Underwriters for a period of 90 days after the date of the Underwriting
Agreement (the "Lock-Up Period"), subject to certain exceptions, not to offer
to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock, or any securities convertible
into or exchangeable for shares of Common Stock now owned or hereafter
acquired directly by such holders or with respect to which they have or
hereafter acquire the power of disposition, without the prior written consent
of Robertson, Stephens & Company LLC which may, in its sole discretion and at
any time or from time to time, without notice, release all or any portion of
the securities subject to lock-up agreements. In addition, the Company has
agreed that during the Lock-Up Period, the Company will not, without the prior
written consent of Robertson, Stephens & Company LLC,
71
<PAGE>
subject to certain exceptions, issue, sell, contract to sell, or otherwise
dispose of, any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into, exercisable for
or exchangeable for shares of Common Stock other than the issuance of Common
Stock upon the exercise of outstanding options and under the existing employee
stock purchase plan and the Company's issuance of options under existing
employee stock option plans.
The offering price for the Preferred Stock has been determined by
negotiations among the Company and the Representatives.
LEGAL MATTERS
The statements included in the Prospectus under the caption "Certain Federal
Income Tax Consequence" have been reviewed by, and the validity of the shares
of Preferred Stock offered hereby is being passed upon for the Company by
Heller Ehrman White & McAuliffe, Palo Alto, California. Certain legal matters
relating to the offering will be passed upon for the Underwriters by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The financial statements of SEQUUS Pharmaceuticals, Inc. at December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The portions of this Prospectus entitled "Risk Factors -- Uncertainties
Regarding Patents and Trade Secrets" and "Business -- Patents and Trade
Secrets," insofar as they constitute a summary of matters of law, have been
reviewed and approved by Dehlinger & Associates, patent counsel for SEQUUS, as
experts in patent law.
72
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SEQUUS Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of SEQUUS Pharmaceuticals,
Inc. as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
of our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SEQUUS Pharmaceuticals,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 27, 1997
F-2
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 6,770 $ 9,997
Short-term marketable investments...................... 43,506 22,949
Trade accounts receivable, net of allowance for bad
debts of $178 in 1995 and $504 in 1996................ 1,642 8,972
Inventories............................................ 1,105 5,697
Prepaid expenses and other current assets.............. 949 1,601
--------- ---------
Total current assets..................................... 53,972 49,216
Net equipment and improvements........................... 3,591 5,564
Other assets............................................. 245 188
--------- ---------
Total assets............................................. $ 57,808 $ 54,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 2,773 $ 4,539
Accrued compensation................................... 2,310 3,149
Accrued clinical costs................................. 1,664 1,014
Other accrued liabilities.............................. 746 1,939
Deferred revenue....................................... 716 --
--------- ---------
Total current liabilities................................ 8,209 10,641
Commitments
Stockholders' equity:
Preferred stock, par value $0.01; 4,000,000 shares
authorized, issuable in series; 437,200 shares of
Series A issued and outstanding in 1995 and no shares
of Series A issued and outstanding in 1996............. 4 --
Common stock, par value $0.0001; 45,000,000 shares
authorized, 26,283,026 shares issued and outstanding in
1995 and 29,660,319 in 1996............................ 3 3
Additional paid-in capital.............................. 183,019 194,948
Accumulated deficit..................................... (133,427) (150,624)
--------- ---------
Total stockholders' equity............................. 49,599 44,327
--------- ---------
Total liabilities and stockholders' equity............. $ 57,808 $ 54,968
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales.................................. $ 3,664 $ 1,907 $ 25,462
Royalties and fees............................. 91 109 7,461
-------- -------- --------
Total revenues................................... 3,755 2,016 32,923
Expenses:
Cost of goods sold............................. 916 511 3,990
Research and development....................... 25,378 22,651 27,652
Selling, general and administrative............ 7,622 13,856 20,302
-------- -------- --------
Total expenses................................... 33,916 37,018 51,944
-------- -------- --------
Loss from operations............................. (30,161) (35,002) (19,021)
Interest income.................................. 976 1,406 1,844
-------- -------- --------
Net loss......................................... $(29,185) $(33,596) $(17,177)
======== ======== ========
Net loss per share............................... $ (1.54) $ (1.54) $ (.59)
======== ======== ========
Common shares used in the calculation of net loss
per share....................................... 18,978 21,831 28,937
</TABLE>
See accompanying notes.
F-4
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
SERIES A
PREFERRED
STOCK COMMON STOCK ADDITIONAL TOTAL
------------- ------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... -- $-- 18,875 $ 2 $109,984 $ (70,668) $ 39,318
Shares issued for
contribution to 401(k)
Plan................... -- -- 15 -- 124 -- 124
Shares issued under the
Employee Stock Purchase
Plan................... -- -- 45 -- 265 -- 265
Exercise of stock
options................ -- -- 161 -- 428 -- 428
Change in valuation
allowance for
available-for-sale
securities............. -- -- -- -- -- (12) (12)
Net loss................ -- -- -- -- -- (29,185) (29,185)
---- --- ------ --- -------- --------- --------
Balance at December 31,
1994................... -- -- 19,096 2 110,801 (99,865) 10,938
Shares issued for
contribution to 401(k)
Plan................... -- -- 24 -- 157 -- 157
Shares issued under the
Employee Stock Purchase
Plan................... -- -- 49 -- 281 -- 281
Exercise of warrants.... -- -- 22 -- 91 -- 91
Exercise of stock
options................ -- -- 239 -- 813 -- 813
Sale of Preferred Stock
in secondary offering,
net of issuance costs
of $986................ 480 4 -- -- 11,010 -- 11,014
Sale of Units in
secondary offering, net
of issuance costs of
$771................... -- -- 2,224 -- 14,275 -- 14,275
Sale of Common Stock in
secondary offering, net
of issuance costs of
$828................... -- -- 4,485 1 45,591 -- 45,592
Conversion of Preferred
Stock.................. (43) -- 144 -- -- -- --
Change in valuation
allowance for
available-for-sale
securities............. -- -- -- -- -- 34 34
Net loss................ -- -- -- -- -- (33,596) (33,596)
---- --- ------ --- -------- --------- --------
Balance at December 31,
1995................... 437 4 26,283 3 183,019 (133,427) 49,599
Shares issued for
contribution to 401(k)
Plan................... -- -- 12 -- 174 -- 174
Shares issued under the
Employee Stock Purchase
Plan................... -- -- 83 -- 628 -- 628
Exercise of warrants.... -- -- 1,179 -- 6,514 -- 6,514
Exercise of stock
options................ -- -- 601 -- 4,149 -- 4,149
Common Stock issued in
exchange for research &
development license.... -- -- 30 -- 460 -- 460
Conversion of Preferred
Stock.................. (437) (4) 1,472 -- 4 -- --
Change in valuation
allowance for
available-for-sale
securities............. -- -- -- -- -- (20) (20)
Net loss................ -- -- -- -- -- (17,177) (17,177)
---- --- ------ --- -------- --------- --------
Balance at December 31,
1996................... -- $-- 29,660 $ 3 $194,948 $(150,624) $ 44,327
==== === ====== === ======== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
STATEMENT OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(29,185) $(33,596) $(17,177)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,902 1,957 1,767
Issuance of common stock to 401(k) plan........ 124 157 174
Issuance of common stock in exchange for
research and development technology license... -- -- 460
Changes in operating assets and liabilities:
Trade accounts receivable.................... 1,242 (1,578) (7,330)
Inventories.................................. (138) (547) (4,592)
Prepaid expenses and other current assets.... 197 194 (652)
Other assets................................. 136 (7) (44)
Accounts payable............................. 292 1,187 1,766
Accrued compensation......................... (53) 1,513 839
Accrued clinical costs....................... 1,041 (2,290) (650)
Other accrued liabilities.................... 137 (177) 1,193
Deferred revenue............................. -- 716 (716)
-------- -------- --------
Net cash used in operating activities.......... (24,305) (32,471) (24,962)
Cash flows from investing activities:
Available-for-sale securities:
Purchases.................................... (13,512) (106,013) (90,207)
Sales........................................ 26,329 30,843 45,127
Maturities................................... 14,467 38,507 65,617
Capital expenditures, net...................... (1,279) (1,610) (3,639)
-------- -------- --------
Net cash provided by (used in) investing
activities.................................... 26,005 (38,273) 16,898
Cash flows from financing activities:
Issuance of common stock....................... 693 61,052 11,291
Issuance of preferred stock.................... -- 11,014 --
Principal payments under capital lease
obligation.................................... (18) -- --
-------- -------- --------
Net cash provided by financing activities...... 675 72,066 11,291
-------- -------- --------
Net increase in cash and cash equivalents........ 2,375 1,322 3,227
Cash and cash equivalents, beginning of the year. 3,073 5,448 6,770
-------- -------- --------
Cash and cash equivalents, end of the year....... $ 5,448 $ 6,770 $ 9,997
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
SEQUUS Pharmaceuticals, Inc. ("SEQUUS", the "Company") is engaged in the
development, manufacture, marketing and sale of proprietary liposome and
lipid-based products primarily to treat cancer and certain fungal infections.
SEQUUS' strategic emphasis is on injectable pharmaceutical products designed
to improve the efficacy and reduce the toxicity of selected existing and new
drugs used to treat cancer and infectious diseases. SEQUUS distributes DOXIL
and AMPHOTEC in the United States through distributors and the same products
under the tradenames of CAELYX and AMPHOCIL, respectively, in various
countries outside the United States through corporate alliances, distribution
agreements and various agents. The Company's key raw materials are acquired
from a limited number of vendors and a single third party manufactures all of
the Company's finished goods.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Loss Per Share
Loss per share is computed using the weighted average number of common
shares outstanding during each period. Common Stock equivalents, consisting of
preferred stock, stock options and warrants, are excluded from the computation
as their effect is anti-dilutive.
Cash and Cash Equivalents and Marketable Investments
The Company considers all highly liquid investments with maturities of three
months or less from the date of purchase to be cash equivalents. Short-term
investments consist of investments with original maturities greater than three
months, but less than one year.
The Company invests its excess cash principally in U.S. Treasury Bills and
high-grade investment paper. The Company maintains its cash, cash equivalents
and marketable investments in several different instruments with various banks
and brokerage houses. The diversification of risk is consistent with Company
policy to maintain liquidity and ensure the safety of principal.
The Company accounts for its marketable investments under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. During 1995 and 1996, all
investments were classified as available-for-sale securities and are carried
at fair value, with the unrealized gains and losses reported as a component of
accumulated deficit. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities are
included in interest income.
F-7
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
GROSS
UNREALIZED
------------
ESTIMATED
AMORTIZED FAIR
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
----------------- --------- ----- ------ ---------
<S> <C> <C> <C> <C>
U.S. government securities..................... $20,234 $15 $(10) $20,239
U.S. corporate securities...................... 10,314 8 -- 10,322
Foreign corporate debt securities.............. 12,936 9 -- 12,945
------- --- ---- -------
$43,484 $32 $(10) $43,506
======= === ==== =======
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C> <C> <C> <C>
U.S. government securities..................... $ 7,434 1 $ (1) $ 7,434
U.S. corporate securities...................... 7,399 1 -- 7,400
Foreign corporate debt securities.............. 8,114 1 -- 8,115
------- --- ---- -------
$22,947 $ 3 $ (1) $22,949
======= === ==== =======
</TABLE>
All of these securities mature within one year. The gross realized gains and
losses on sales of available-for-sale securities during the years ended
December 31, 1994, 1995 and 1996 were not significant.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-
out) or market. The inventory detail is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Raw materials............................................... $ 898 $2,801
Work-in-process............................................. 68 2,223
Finished goods.............................................. 139 673
------ ------
$1,105 $5,697
====== ======
</TABLE>
Equipment and Improvements
Equipment is recorded at cost and depreciated on a straight-line basis over
estimated useful lives of three to seven years. Leasehold improvements are
recorded at cost and amortized over the remaining term of the lease, or useful
life of the asset, whichever is less. The equipment and improvements detail is
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Office and laboratory equipment......................... $ 7,805 $10,397
Leasehold improvements.................................. 4,066 5,104
------- -------
11,871 15,501
Accumulated depreciation and amortization............... (8,280) (9,937)
------- -------
$ 3,591 $ 5,564
======= =======
</TABLE>
F-8
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition and Concentration of Credit Risk
The Company recognizes product sales upon shipment to customers. The Company
defers appropriate amounts based on historical sales return experience.
Royalties are recognized as revenue based on licensed product sales. Fees
and milestone payments are recognized as earned as specified in terms set
forth in the related agreements.
The Company sells its products to distributors in the United States and
Europe. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. For the years ended December 31, 1994
and 1995, one customer represented $3,300,000 and $785,000 of product sales,
respectively. Another customer contributed $91,000 and $109,000 to royalties
and fees for the years ended December 31, 1994 and 1995, respectively. No
single customer accounted for 10% or more of product sales in 1996.
Clinical Costs
Clinical costs include costs associated with preclinical testing of
compounds for safety and efficacy, clinical trials and company-funded research
performed by third parties. Clinical trials costs are recognized as research
and development expense as the contractually-specified patient services are
performed.
Advertising Expenses
The Company accounts for advertising costs as an expense in the period in
which they are incurred. Advertising expenses were $109,000 and $606,000 for
the years ended December 31, 1995 and 1996, respectively. Such amounts were
immaterial in 1994.
Stock Based Compensation
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
which the Company adopted in 1996, the Company has elected to follow
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issue to
Employees" ("APB 25") and related interpretations in accounting for its
employee stock option plans. Under APB 25, if the exercise price of the
Company's employee stock options equals or exceeds the fair value of the
underlying stock on the date of grant as determined by the Company's Board of
Directors, no compensation expense is recognized. See Note 5 for pro forma
disclosures required by SFAS 123.
Financial Statement Presentation
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. COLLABORATIVE AGREEMENTS
In August 1996, the Company entered into a distribution agreement with
Schering-Plough and, in partial consideration for distribution rights,
received from Schering-Plough a one-time upfront payment of $5.3 million. The
Company recognized $7.3 million in upfront fees and payments for the
achievement of certain targets and events during 1996. Under the multi-year
agreement, Schering-Plough has obtained exclusive rights to distribute, market
and sell CAELYX worldwide, except for the United States, Japan and certain
other countries. Under the terms of the agreement, SEQUUS will receive
payments for product sales to Schering-Plough. In addition, SEQUUS and
Schering-Plough will jointly develop a worldwide clinical plan for
investigating the use of CAELYX in the treatment of solid tumors. Each party
will undertake clinical trials in specific indications, coordinated by a joint
development team. As part of the agreement, Schering-Plough will
F-9
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
conduct certain clinical trials for oncology indications, will apply for
regulatory approval in the Schering-Plough territories for all new
indications, and will assist with pharmacoeconomic studies. The agreement also
calls for potential additional payments to the Company totaling $27 million
based on the achievement of certain product development milestones and events.
In July 1996, the Company obtained an exclusive sub-license to certain
technologies held by Sheffield Medical Technologies, Inc. In return for the
sub-license the Company issued 29,798 shares of its Common Stock with a fair
market value of approximately $500,000, less issuance costs of $40,000. The
fair market value of the Common Stock was charged to research and development
expense in the accompanying statement of operations in 1996. If certain
targets are achieved, the Company may also be obligated to pay milestone
payments and royalties on future product sales, if any, which utilize the sub-
licensed technology.
In August 1993, the Company signed a distribution agreement with Zeneca
under which Zeneca was to market and sell AMPHOCIL in most European countries.
In March 1994, SEQUUS and Zeneca announced the expansion of their August 1993
agreement to cover additional markets. In July 1996, SEQUUS announced that it
had reacquired from Zeneca all international marketing and distribution rights
for AMPHOCIL except for nine European countries to which Zeneca had retained
such rights (Denmark, Finland, Iceland, Ireland, Italy, the Netherlands,
Portugal, Sweden and the U.K.). In exchange for the return to SEQUUS of
marketing and distribution rights throughout the rest of the world, SEQUUS
agreed to restructure certain future milestone payments specified in the
original agreement, adjust the pricing terms for AMPHOCIL to provide greater
competitive flexibility, and exchange certain inventory held by Zeneca.
The Company also has entered into various other distribution agreements with
international pharmaceutical companies to exclusively distribute AMPHOCIL in
specific countries.
3. COMMITMENTS
The Company leases its facility and certain equipment under operating
leases. Rent expense under these leases was $856,000, $852,000, and $1,813,000
for the years ended December 31, 1994, 1995 and 1996, respectively. Rent
expense is being recognized on a straight-line basis over the lease term of
the facility lease which has scheduled rental payment increases.
Minimum annual rental commitments under all operating leases at December 31,
1996, including a new lease signed subsequent to December 31, 1996, total
$1,781,000 in 1997, $1,853,000 in 1998, $1,844,000 in 1999, $1,670,000 in
2000, $1,613,000 in 2001 and $2,149,000 thereafter.
The Company has entered into multiple year supply agreements with two
vendors which supply key raw materials. Under the agreements the Company is
required to purchase its forecasted three months requirement as provided to
the vendors.
4. STOCKHOLDERS' EQUITY
On March 31, and April 13, 1995, the Company raised an aggregate of $11
million of equity capital with the sale of 480,000 shares of Series A
Convertible Reset Preferred Stock ("Convertible Reset Preferred Stock")
together with warrants to purchase 808,320 shares of Common Stock. Each share
of Convertible Reset Preferred Stock was convertible into Common Stock at an
initial conversion price of $7.425 per share of Common Stock (effectively
3.367 shares of common stock for each share of preferred stock). During 1995,
43,200 shares of Convertible Reset Preferred Stock were converted into 144,106
shares of common stock. On February 2, 1996 the Company elected to convert the
remaining 437,200 shares of Convertible Reset
F-10
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock into 1,472,052 shares of Common Stock. The conversion was
completed in April 1996. During 1996, 120,682 warrants to purchase Common
Stock were exercised. As of December 31, 1996, warrants to purchase 687,638
shares of Common Stock remain outstanding and expire in April 1998.
On May 25, 1995, the Company raised net proceeds of $14.3 million through a
private placement of Units. Each Unit consisted of one share of Common Stock
and a warrant to purchase one-half share of Common Stock at an exercise price
per share of $7.4328. The warrants are only exercisable if the Common Stock
portion of the Unit is held for one year by the initial Unit purchaser. The
price per Unit was $6.7571. Under the terms of this financing, the investors
also receive the first right to negotiate with the Company to participate in
the commercial development of the Company's anticancer product, DOXIL, in
Brunei, China, Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and Thailand.
The right to negotiate has expired. During 1996, 352,460 warrants to purchase
Common Stock were exercised. As of December 31, 1996, warrants to purchase
759,385 shares of Common Stock remain outstanding and expire in May 1999.
In March 1991, the Company issued in a private placement (the "1991
Financing") 1,252,143 units (each, a "Unit," collectively, the "Units") at a
price of $7.00 per unit. Each Unit consisted of two shares of Common Stock and
a six-year warrant to purchase an additional share of Common Stock at an
exercise price of $4.25 per share. Gross proceeds to the Company were
$8,750,000. In addition to the sale of the Units, the Company paid a fee and
issued a six year warrant to purchase 125,000 shares of Common Stock to
Oppenheimer & Co., Inc. for its role as placement agent in connection with the
1991 Financing. During 1996, 705,714 warrants to purchase Common Stock were
exercised. As of December 31, 1996, warrants to purchase 525,000 shares of
Common Stock remain outstanding and expire in March 1997.
On October 24, 1995 and November 24, 1995, the Company raised an aggregate
net proceeds of $45.6 million through the sale of 4,485,000 of Common Stock in
a public offering.
As of December 31, 1996, approximately 7,000,000 shares of Common Stock were
reserved for future issuance under the Company's 401(k) Plan, stock option
plans, employee stock purchase plan and for the exercise of warrants.
5. STOCK OPTIONS PLAN AND STOCK PURCHASE PLAN
401(k) Plan
The Company has a 401(k) Plan under which it may make employer contributions
at the discretion of the Board of Directors, but no such contributions are
required. The Board also has the discretion to determine the amount of any
employer contribution. The Company has reserved 138,000 shares for issuance
under the Plan. For the years ended December 31, 1994, 1995 and 1996, the
Company contributed Common Stock to the Plan valued at approximately $124,000,
$157,000 and $174,000, respectively.
Stock Compensation Plans
Under the 1987 Employee Stock Option Plan, as amended, and 1987 Consultant
Stock Plan, as amended, (the "Plans") the Company is authorized to issue
either incentive or non-qualified stock options to its employees and
consultants to purchase up to 5,000,000 shares of common stock. Generally,
options granted under the Plan become exercisable over periods of six months
to four years and for a period ranging from three to seven months after
termination of employment or consulting arrangement, and all expire ten years
from the date of grant. The stock delivered upon exercise of any option under
these Plans may be subject to repurchase (subject to determination by the
Board of Directors) upon ceasing employment or consulting relationship with
the company. The Company's right of repurchase generally expires over a period
of three to
F-11
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
five years. The exercise price of non-qualified stock options may not be less
than 85 percent of the fair market value of the stock on the date of grant.
The Company granted options to purchase 16,000 and 30,000 shares of Common
Stock under the 1987 Consultant Sock Plan during 1995 and 1996, respectively.
The fair value of these options are immaterial.
Under the 1990 Director Stock Option Plan (the "Director Plan"), the Company
is authorized to grant non-qualified options to its non-employee directors for
up to 600,000 shares of Common Stock. Each eligible director is entitled to
receive an initial grant to purchase 25,000 shares; and, on the first
anniversary of the initial grant, each eligible director then in office is
entitled to receive a grant to purchase 12,500 shares. Upon each annual grant
date, an option to purchase an additional 5,000 shares of Common Stock will be
granted to each non-employee director plus an option to purchase an additional
2,500 shares to each such director who also serves on one or more committees
of the Board. All options under the Director Plan have an exercise price not
less than the fair market value on the date of grant. Options granted before
March 8, 1996 were immediately exercisable upon the grant, and initial options
granted on or after March 8, 1996 vest ratably over four years. Each annual
grant granted on or after March 8, 1996 vest ratably one year from the date of
grant. The right to exercise generally expires upon the earlier of ten years
from the date of grant or one year after a non-employee director's termination
as a non-employee director. The Company granted options to purchase 37,500
shares of Common Stock in 1996 (none in 1995).
Activities under the above mentioned stock option plans are as follows
(amounts in thousands, except per share information):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
OPTIONS WEIGHTED
AVAILABLE NUMBER OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
--------- --------- ------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31,
1993................... 804 2,759 $ 1.12-$20.00 $9.28
Granted................. (1,599) 1,599 $ 6.50-$ 9.25 7.00
Forfeited............... 1,185 (1,185) $ 1.88-$20.00 13.58
Exercised............... -- (161) $ 1.12-$ 8.88 2.66
------ ------
Balance, December 31,
1994................... 390 3,012 $ 1.12-$18.88 6.73
Additional authorized... 2,150 --
Granted................. (1,427) 1,427 $ 6.25-$13.50 8.95
Forfeited............... 230 (230) $ 6.75-$12.50 7.84
Exercised............... -- (239) $ 1.12-$14.00 3.67
------ ------
Balance, December 31,
1995.................... 1,343 3,970 $ 1.12-$18.88 7.73
Granted................. (927) 927 $14.50-$21.75 16.26
Forfeited............... 210 (210) $ 6.75-$18.88 10.92
Exercised............... -- (601) $ 1.12-$13.50 6.39
------ ------
Balance, December 31,
1996.................... 626 4,086 $ 1.12-$21.75 $9.67
====== ======
</TABLE>
No shares purchased under the option plans are subject to repurchase at
December 31, 1995. All options were granted at fair market value.
F-12
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The options outstanding at December 31, 1996 have been segregated into
ranges for additional disclosure as follows (options amounts are recorded in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------------
WEIGHTED-
AVERAGE OPTIONS
OPTIONS REMAINING CURRENTLY
OUTSTANDING AT CONTRACTUAL WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF DECEMBER 31, LIFE AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 (IN YEARS) EXERCISE PRICE 1996 EXERCISE PRICE
- --------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.12-$ 2.24........... 175 3.00 $ 1.82 175 $ 1.82
$ 5.25-$ 7.75........... 1,622 6.73 $ 6.78 1,182 $ 6.72
$ 8.00-$11.75........... 1,102 7.74 $ 8.76 564 $ 8.62
$12.25-$18.13........... 1,007 9.26 $14.73 93 $14.58
$18.63-$21.75........... 180 8.75 $21.01 38 $18.63
----- -----
4,086 7.55 $ 9.67 2,052 $ 7.37
===== =====
</TABLE>
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan is administered by the Board of
Directors, and the Company has reserved for sale under the plan 250,000 shares
of Common Stock. Employees who own less than 5% of the total outstanding
Common Stock of the Company are eligible to participate in the plan, which
provides for the option to purchase a defined number of shares at 85% of the
lower of the fair market value of the stock at the enrollment or purchase
date. At December 31, 1996, approximately 212,000 shares of Common Stock had
been issued under this plan.
Pro Forma Information
As of December 31, 1996, the Company has four stock-based compensation
plans, which are described above. The Company has elected to follow APB 25 and
related interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
SFAS 123 requires use of option valuation models that were not developed for
use in valuing employee stock options and employee stock purchase plans. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employer stock purchase plan and employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model for the multiple option approach with the following weighted-
average assumptions for 1995 and 1996, respectively: risk-free interest rate
of between 5.5% and 5.8% and between 5.6% and 6.3%; volatility factor of the
expected market price of the Company's Common Stock of .74 for both years; a
weighted-average expected life of the option of between .5 and 2.5 years for
both years and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options and employee stock purchase plan
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially
F-13
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
affect the fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options and the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period.
The Company's historical and pro forma information follows (in thousands,
except for net loss per share information):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Net loss
Historical........................................ $33,596 $17,177
Pro Forma......................................... $35,849 $22,121
Net loss per share
Historical........................................ $ (1.54) $ (0.59)
Pro Forma......................................... $ (1.64) $ (0.76)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully realized until 1997.
6. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
As of December 31, 1996, the Company has Federal and California net
operating loss carryforwards ("NOLs") of approximately $99.0 million and $10.0
million, respectively. The Company also has Federal and California research
and development tax credit carryforwards of approximately $4.9 million and
$3.4 million, respectively. The Federal NOLs expire as follows (in thousands):
<TABLE>
<CAPTION>
YEAR(S) ENDING FEDERAL NOL
DECEMBER 31 EXPIRING
-------------- -----------
<S> <C>
1997-2000................................................... $ 2,500
2001-2011................................................... 96,500
-------
$99,000
=======
</TABLE>
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar California provisions. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.
The Federal net operating loss carryforward differs from the accumulated
deficit principally due to timing differences in the recognition of certain
revenue and expense items for financial and federal tax reporting purposes,
consisting primarily of capitalized research and development costs and stock
option deductions.
F-14
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's current deferred tax assets for
federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 31,370 $ 33,200
Capitalized research and development..................... 15,090 19,800
Research credits......................................... 5,840 7,200
Other, net............................................... 2,770 2,400
Valuation allowance...................................... (55,070) (62,600)
-------- --------
Total................................................ $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by approximately $12,750,000 in 1994,
$15,250,000 in 1995 and $7,530,000 in 1996. Approximately $3,000,000 of the
valuation allowance for deferred tax assets relates to benefits of stock
option deductions which, when recognized, will be allocated directly to
contributed capital.
7. SUBSEQUENT EVENTS (UNAUDITED)
On February 3, 1997, the Company's Board of Directors authorized the filing
of a registration statement with the Securities and Exchange Commission
permitting the Company to sell approximately 1,150,000 shares of Convertible
Exchangeable Preferred Stock to the public.
F-15
<PAGE>
[LOGO OF SEQUUS PHARMACEUTICALS, INC.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts are estimated except the
SEC Registration Fee, NASD Filing Fee and NASDAQ Listing Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Fee.......................... $ 17,425
NASD Filing Fee................................................. 6,250
NASDAQ Listing Fee.............................................. 6,750
Transfer Agent Fee.............................................. 12,100
Trustee Fee..................................................... 6,000
Printing and Engraving.......................................... 100,000
Legal Fees and Expenses......................................... 125,000
Accounting Fees................................................. 75,000
Blue Sky Fees and Expenses...................................... 3,000
Miscellaneous................................................... 23,475
--------
TOTAL......................................................... $375,000
========
</TABLE>
- --------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICER
Section 145 of the Delaware General Corporation Law, under which the
Registrant is incorporated, permits indemnifications of directors, officers,
employees and agents of a corporation under certain conditions and subject to
certain limitations.
Articles NINTH and TENTH of the Registrant's Restated Certificate of
Incorporation provides as follows:
"NINTH: A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which
the director derived any improper personal benefit. If the Delaware General
Corporation Law is amended hereafter to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited
to the fullest extent permitted by the Delaware General Corporation Law, as
so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or
modification.
TENTH:
A. RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("proceeding"), by reason of the
fact that he or she or a person of whom he or she is the legal
representative, is or was a director or officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director or officer, employee or agent of another corporation, or of a
partnership, joint
II-1
<PAGE>
venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or
in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended, (but, in the case of any such
amendment, only to the extent that such amendment permits the corporation
to provide broader indemnification rights than said Law permitted the
corporation to provide prior to such amendment) against all expenses,
liability and loss including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement
reasonably incurred or suffered by such person in connection therewith and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his
or her heirs, executors and administrators; provided, however, that the
corporation shall indemnify any such person seeking indemnity in connection
with an action, suit or proceeding (or part thereof) initiated by such
person only if such action, suit or proceeding (or part thereof) was
authorized by the board of directors of the corporation. Such right shall
be a contract right and shall include the right to be paid by the
corporation expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that the payment of such
expenses incurred by a director or officer of the corporation in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in
advance of the final disposition of such proceeding, shall be made only
upon delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
B. RIGHT OF CLAIMANT TO BRING SUIT
If a claim under Paragraph A of Article TENTH is not paid in full by the
corporation within ninety (90) days after a written claim has been received
by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid
also the expenses of prosecuting such claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition
where the required undertaking, if any, has been tendered to this
corporation) that the claimant has not met the standards of conduct which
make it permissible under the Delaware General Corporation Law for the
corporation to indemnify the claimant for the amount claimed, and the
burden of proving that such standards were met shall be on the claimant.
Neither the failure of the corporation (including its board of directors,
independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification
of the claimant is proper in the circumstances because he or she has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the corporation (including
its board of directors, independent legal counsel, or its stockholders)
that the claimant has not met such applicable standard of conduct, shall be
a defense to the action or create a presumption that claimant has not met
the applicable standard of conduct.
C. NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by Paragraphs A and B of Article TENTH
shall not be exclusive of any other right which such persons may have or
hereafter acquire under any statute, provision of the Restated Certificate
of Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
D. INSURANCE
The corporation may maintain insurance, at its expense, to protect itself
and any such director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the corporation
would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company, as amended
3.2 Form of Certificate of Designation of Preferred Stock
3.3 Form of Stock Certificate for Preferred Stock of the Company
3.4 Bylaws of the Company, as amended (1)
4.1 Form of Indenture between the Company and Chemical Trust Company of
California, as Trustee
4.2 Form of Debenture (included in Exhibit 4.1)
5.1 Opinion of Heller Ehrman White & McAuliffe
8.1 Tax Opinion of Heller Ehrman White & McAuliffe
12.1 Statement Regarding Computation of Ratios
Consent of Heller Ehrman White & McAuliffe (contained in opinion
23.1 filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Accountants
23.3 Consent of Dehlinger & Associates
24.1 Power of Attorney (see page II-4)
25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 33-13332).
ITEM 17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 and (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
B. Insofar as indemnifications for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions described in Item 15 of Form S-3, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, such Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Menlo Park, State of California on February 5,
1997.
SEQUUS PHARMACEUTICALS, INC.
By /s/ I. Craig Henderson
___________________________________
I. Craig Henderson,
Chairman of the Board and Chief
Executive Officer
EACH person whose signature appears below constitutes and appoints I. Craig
Henderson, L. Scott Minick and Sally A. Davenport his true and lawful
attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-
effective amendments) to the Registration Statement, and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under
the Securities Act of 1933, as amended and all post-effective amendments
thereto, and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, each acting alone, or his or her substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by each of the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ I. Craig Henderson Chairman of the Board and February 5, 1997
_________________________________ Chief Executive Officer
I. Craig Henderson (Principal
Executive Officer)
/s/ L. Scott Minick President, Chief February 5, 1997
_________________________________ Operating Officer and
L. Scott Minick Director
/s/ Donald J. Stewart Vice President, Finance February 5, 1997
_________________________________ and Treasurer
Donald J. Stewart (Principal Financial
and Accounting Officer)
/s/ Robert G. Faris Director February 5, 1997
_________________________________
Robert G. Faris
/s/ E. Donnall Thomas Director February 5, 1997
_________________________________
E. Donnall Thomas
/s/ Richard C.E. Morgan Director February 5, 1997
_________________________________
Richard C.E. Morgan
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company, as amended
3.2 Form of Certificate of Designation of Preferred Stock
3.3 Form of Stock Certificate for Preferred Stock of the Company
3.4 Bylaws of the Company, as amended (1)
4.1 Form of Indenture between the Company and Chemical Trust Company of
California, as Trustee
4.2 Form of Debenture (included in Exhibit 4.1)
5.1 Opinion of Heller Ehrman White & McAuliffe
8.1 Tax Opinion of Heller Ehrman White & McAuliffe
12.1 Statement Regarding Computation of Ratios
Consent of Heller Ehrman White & McAuliffe (contained in opinion
23.1 filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Accountants
23.3 Consent of Dehlinger & Associates
24.1 Power of Attorney (see page II-4)
25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedule
</TABLE>
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(1) Incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 33-13332).
<PAGE>
EXHIBIT 1.1
____________ SHARES(1)
SEQUUS PHARMACEUTICALS, INC.
$____ CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
UNDERWRITING AGREEMENT
----------------------
____________, 1997
ROBERTSON, STEPHENS & COMPANY LLC
DILLON, READ & CO. INC.
PUNK, ZIEGEL & KNOELL, L.P.
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Sequus Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
addresses you as the Representatives of each of the persons, firms and
corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. Description of Shares. The Company proposes to issue and sell _________
---------------------
shares of its authorized and unissued $____ Convertible Exchangeable Preferred
Stock, $0.01 par value, (the "Firm Shares") to the several Underwriters. The
Company also proposes to grant to the Underwriters an option to purchase up to
________ additional shares of the Company's $____ Convertible Exchangeable
Preferred Stock, $0.01 par value, (the "Option Shares"), as provided in Section
7 hereof. As used in this Agreement, the term "Shares" shall include the Firm
Shares and the Option Shares. All shares of $____ Convertible Exchangeable
Preferred Stock, $0.01 par value, of the Company to be outstanding after giving
effect to the sales contemplated hereby, including the Shares, are hereinafter
referred to as "Preferred Stock".
The Preferred Stock is convertible into shares of the Company's Common
Stock, par value $0.0001 per share (the "Common Stock"), upon the terms and
subject to the conditions set forth in the Certificate of the Powers,
Designations, Preferences and Rights of the Preferred Stock relating thereto
(the "Certificate of Designation"), the form of which has been filed as an
exhibit to the Registration Statement referred to below. The Preferred Stock is
exchangeable at the Company's option on any dividend payment date beginning
March 1, 1998 for the Company's __% Convertible Subordinated Debentures due 2007
(the "Debentures"). The Debentures, if issued, will be issued pursuant to an
indenture (the "Indenture") between the Company and Chemical Trust Company of
California, as trustee (the "Trustee"), the form of which has been filed as an
exhibit to the Registration Statement referred to below. In accordance with
their respective terms, the Preferred Stock and the Debentures, if issued, will
be convertible at the option of the holder into newly issued shares (the
"Conversion Shares") of the Company's Common Stock. The Shares, the Debentures
and the Conversion Shares are sometimes referred to herein as the "Securities,"
and are more fully described in the Registration Statement referred to below.
- --------------
(1) Plus an option to purchase up to _________ additional shares from the
Company to cover over-allotments.
<PAGE>
2. Representations, Warranties and Agreements of the Company.
---------------------------------------------------------
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-3 (File No. 333-_____) with
respect to the Securities, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses"), including all documents
incorporated by reference therein, and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
The Company and the transactions contemplated by this Agreement meet the
requirements for using Form S-3 under the Act.
If the registration statement relating to the Securities has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Securities has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
--------
however, that if in reliance on Rule 434 of the Rules and Regulations and with
- -------
the consent of Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Securities that differs from the prospectus referred to in
the immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
-2-
<PAGE>
Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement. Any reference to the Registration Statement or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date
of the Registration Statement or the Prospectus, as the case may be, and any
reference to any amendment or supplement to the Registration Statement or the
Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which, upon filing, are incorporated by reference therein, as required by
paragraph (b) of Item 12 of Form S-3. As used in this Agreement, the term
"Incorporated Documents" means the documents which at the time are incorporated
by reference in the Registration Statement, the Prospectus or any amendment or
supplement thereto.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus or instituted proceedings for that purpose,
and each such Preliminary Prospectus has conformed in all material respects to
the requirements of the Act and the Rules and Regulations and, as of its date,
has not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
and on any later date on which Option Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations and the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") and the applicable rules and regulations thereunder, (ii) the
Registration Statement, and any amendments or supplements thereto, did not and
will not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (iii) the Prospectus, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
-------- -------
contained in this subparagraph (b) shall apply to information contained in or
omitted from the Registration Statement or Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
The Incorporated Documents heretofore filed, when they were filed (or, if
any amendment with respect to any such document was filed, when such amendment
was filed), conformed in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission thereunder; any
further Incorporated Documents so filed will, when they are filed, conform in
all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder; no such document when it was filed
(or, if an amendment with respect to any such document was filed, when such
amendment was filed), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and no such further amendment will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company;
no proceeding has been instituted in any such jurisdiction, revoking, limiting
or curtailing, or seeking to revoke, limit or curtail, such power and authority
or qualification; the Company is in possession of and operating in compliance
with all authorizations, licenses, certificates, consents, orders and permits
from state, federal and other regulatory authorities that are material to the
conduct of its business, all of which are valid and in full force and effect;
the Company is not in violation of its respective charter or bylaws or in
default in the performance or observance of
-3-
<PAGE>
any material obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company is a party
or by which it or its properties may be bound; the Company is conducting
business in compliance with all applicable laws, rules and regulations of the
jurisdiction in which it is conducting business which are material to the
conduct of its business, including, without limitation, the applicable laws,
rules and regulations of the United States Food and Drug Administration
("USFDA"); and the Company is not in material violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or over its properties of which it has knowledge. The Company does not
own or control, directly or indirectly, any corporation, association or other
entity.
(d) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and is a valid
and binding agreement on the part of the Company, enforceable in accordance with
its terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. The execution, delivery and performance of this Agreement, the
Certificate of Designation and the Indenture by the Company and the consummation
of the transactions contemplated hereby and thereby (including the issuance and
sale of the Shares, the issuance and delivery of the Conversion Shares, and the
issuance of the Debentures upon exchange of the Shares), will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company is a party or by which its properties may be bound, (ii) the charter or
bylaws of the Company, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or over its
properties. No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or over its properties is required for the
execution, delivery and performance of this Agreement, the Certificate of
Designation and the Indenture by the Company and the consummation of the
transactions contemplated hereby and thereby (including the issuance and sale of
the Shares, the issuance and delivery of the Conversion Shares, and the issuance
of the Debentures upon exchange of the Shares), except such as may be required
under the Act, the Exchange Act or under state or other securities or Blue Sky
laws, all of which requirements have been satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's knowledge,
threatened action, suit, claim or proceeding against the Company, or any of its
officers or any of its properties, assets or rights before any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or otherwise which (i) might result in any material adverse change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company or might materially and adversely affect its
properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated hereby or (iii) is required to be disclosed in the
Registration Statement or Prospectus and is not so disclosed; and there are no
agreements, contracts, leases or documents of the Company of a character
required to be described or referred to in the Registration Statement or
Prospectus or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document by the Act or the Rules and
Regulations or by the Exchange Act or the rules and regulations of the
Commission thereunder which have not been accurately described in all material
respects in the Registration Statement or Prospectus or any Incorporated
Document or filed as exhibits to the Registration Statement or any Incorporated
Document.
(f) All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption "Capitalization"
and conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus and any Incorporated
Document (and such statements correctly state the substance of the instruments
defining the capitalization of the Company); the Firm Shares and the Option
Shares have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company against
payment therefor in accordance with the terms of this Agreement, will be duly
and validly issued and fully paid and
-4-
<PAGE>
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; the Conversion Shares have
been duly authorized and reserved for issuance upon such conversion and, when
issued and delivered in accordance with the terms of the Certificate of
Designation or Indenture, as applicable, will be duly and validly issued and
fully paid and nonassessable and will conform to the description of the Common
Stock in the Prospectus; no preemptive right, co-sale right, registration right,
right of first refusal or other similar right exists with respect to any of the
Firm Shares or Option Shares or the issuance and sale thereof or with respect to
the Conversion Shares other than those that have been expressly waived prior to
the date hereof and those that will automatically expire upon and will not apply
to the consummation of the transactions contemplated on or before the Closing
Date; the Debentures to be issued upon exchange of the Shares have been duly
authorized and, when issued and delivered in exchange for the Shares in
accordance with the terms of the Certificate of Designation and the Indenture,
will be valid and binding obligations of the Company, entitled to the benefits
of the Indenture, and enforceable in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles, and the
Debentures will conform to the description of the Debentures contained in the
Prospectus. No further approval or authorization of any stockholder, the Board
of Directors of the Company or others is required for the issuance and sale or
transfer of the Shares or the issuance of the Conversion Shares or the issuance
of Debentures in exchange for the Shares except as may be required under the
Act, the Exchange Act, or under state or other securities or Blue Sky laws or
rules and regulations of the National Association of Securities Dealers, Inc.
("NASD") governing underwriting compensation arrangements. Except as disclosed
in the Prospectus and the financial statements of the Company, and the related
notes thereto, included or incorporated by reference in the Prospectus, the
Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations. The description of the Company's warrants and stock option plan,
stock purchase plan, 401(k) plan and other plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth or
incorporated by reference in the Prospectus accurately and fairly presents the
information required to be shown with respect to such warrants, plans,
arrangements, options and rights.
(g) The Indenture has been duly authorized and duly qualified under the
Trust Indenture Act, and, when executed and delivered by the Company and the
Trustee, will be a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles.
(h) Ernst & Young, LLP, which has examined the financial statements of the
Company, together with the related schedules and notes, as of December 31, 1995
and 1996 and for each of the years in the three (3) years ended December 31,
1996 filed with the Commission as a part of or incorporated by reference into
the Registration Statement, which are included or incorporated by reference in
the Prospectus, are independent accountants within the meaning of the Act and
the Rules and Regulations; the audited financial statements of the Company,
together with the related schedules and notes, and the unaudited financial
information, forming part of the Registration Statement and Prospectus, fairly
present the financial position and the results of operations of the Company at
the respective dates and for the respective periods to which they apply; and all
audited financial statements of the Company, together with the related schedules
and notes, and the unaudited financial information, filed with the Commission as
part of or incorporated by reference into the Registration Statement, have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data
included or incorporated by reference in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included or incorporated by
reference in the Registration Statement.
(i) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (i) any material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company, (ii) any transaction that is
material to the Company, except transactions entered into in the ordinary course
of business, (iii) any obligation, direct or contingent, that is material to the
Company, incurred by the Company, except obligations incurred in the ordinary
course of business, (iv) any change in the capital stock or outstanding
indebtedness of the Company that is material to the Company, (v) any dividend or
-5-
<PAGE>
distribution of any kind declared, paid or made on the capital stock of the
Company, or (vi) any loss or damage (whether or not insured) to the property of
the Company which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
(j) Except as set forth in the Registration Statement and Prospectus and
any Incorporated Document, (i) the Company has good and marketable title to all
properties and assets described in the Registration Statement and Prospectus and
any Incorporated Document as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest, other than such as
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company,
(ii) the agreements to which the Company is a party described in the
Registration Statement and Prospectus and any Incorporated Document are valid
agreements, enforceable by the Company (as applicable), except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to the best
of the Company's knowledge, the other contracting party or parties thereto are
not in material breach or material default under any of such agreements, and
(iii) the Company has valid and enforceable leases for all properties described
in the Registration Statement and Prospectus and any Incorporated Document as
leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and Prospectus and
any Incorporated Document, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be conducted.
(k) The Company has timely filed all necessary federal, state and foreign
income and franchise tax returns and have paid all taxes shown thereon as due,
and there is no tax deficiency that has been or, to the best of the Company's
knowledge, might be asserted against the Company that might have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company; and all tax liabilities are
adequately provided for on the books of the Company.
(l) The Company maintains insurance with insurers of recognized financial
responsibility of the types and in the amounts generally deemed adequate to
conduct its business and consistent with insurance coverage maintained by
companies of a similar size and stage of development in a similar business
including, but not limited to, insurance covering real and personal property
owned or leased by the Company against theft, damage, destruction, acts of
vandalism, liability and all other risks customarily insured against, all of
which insurance is in full force and effect; the Company has not been refused
any insurance coverage sought or applied for; and the Company does not have any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
(m) To the best of Company's knowledge, no labor disturbance by the
employees of the Company exists or is imminent; and the Company is not aware of
any existing or imminent labor disturbance by the employees of any of its
principal suppliers or customers, that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company. No collective bargaining
agreement exists with any of the Company's employees and, to the best of the
Company's knowledge, no such agreement is imminent.
(n) The Company owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names and copyrights which are necessary to conduct its business as
described in the Registration Statement and Prospectus and any Incorporated
Document; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company; the Company, except as disclosed
in the Prospectus, has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, nor has any knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, singly or in the
-6-
<PAGE>
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(o) The Preferred Stock has been approved for quotation on The Nasdaq
National Market, subject to official notice of issuance, under the symbol
"SEQUP".
(p) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed on The Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the NASD is contemplating terminating such
registration or listing.
(q) The Company has been advised concerning the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and
has in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(r) The Company has not distributed and will not distribute prior to the
later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(s) The Company has not at any time during the last five (5) years (i)
made any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(t) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock or Preferred
Stock to facilitate the sale or resale of the Shares.
(u) All officers and certain directors of the Company have agreed in
writing that they will not, for a period of 90 days from the date that the
Registration Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Disposition") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock (collectively, "Lock-Up Securities") now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or stockholders of such person,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction, or (iii) with the prior written consent of Robertson,
Stephens & Company LLC. The foregoing restriction has been expressly agreed to
preclude the holder of the Lock-Up Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Lock-Up Securities during the Lock-up Period, even if
such Lock-Up Securities would be disposed of by someone other than such holder.
Such prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Lock-Up Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from the Lock-Up Securities. Furthermore, such
person has also agreed and consented to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the Lock-Up Securities
held by such person except in compliance with this restriction. The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the agreements pursuant to which
its officers and directors have agreed to such or similar restrictions (the
"Lock-up Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants
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<PAGE>
that it will not release any of its officers and directors from any Lock-up
Agreements currently existing or hereafter effected without the prior written
consent of Robertson, Stephens & Company LLC.
(v) Except as set forth in the Registration Statement and Prospectus and
any Incorporated Document, (i) to the best of the Company's knowledge, the
Company is in material compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus and any Incorporated Document, (iii) the Company has not performed
any acts which may require it to make future material capital expenditures to
comply with Environmental Laws and the costs and liabilities associated with
compliance with Environmental Laws as they apply to the business conducted by
the Company will not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company, and (iv) no property which is owned, leased or occupied by the Company
has been designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et
--
seq.), or otherwise designated as a contaminated site under applicable state or
- ----
local law.
(w) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(x) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus and any
Incorporated Document.
(y) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
3. Purchase, Sale and Delivery of Securities. On the basis of the
-----------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company at a purchase price of $_____ per share plus accrued
dividends, if any, from ____ 1997 to the date of payment and delivery, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be purchased by
the Underwriters pursuant to this Section 3 shall be made against receipt of a
wire transfer reference number issued by the Federal Reserve System evidencing
payment of the purchase price therefor by the several Underwriters by wire
transfer of immediately available funds, to an account specified in writing by
the Company, at the offices of Heller Ehrman White & McAuliffe, 525 University
Avenue, Palo Alto, California, 94301 (or at such other place as may be agreed
upon among the Representatives and the Company), at 7:00 A.M., San Francisco
time (a) on the third (3rd) full business day following the first day that
Shares are traded, (b) if this Agreement is executed and delivered after 1:30
P.M., San Francisco time, the fourth (4th) full business day following the day
that this Agreement is executed and delivered or (c) at such other time and date
not later than seven (7) full business days following the first day that Shares
are traded as the Representatives and the Company may determine (or at such time
and date to which payment and delivery shall have been postponed pursuant to
Section 10 hereof), such time and date of payment and delivery being herein
called the "Closing Date;" provided, however, that if the Company has not made
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available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you
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<PAGE>
may reasonably request for checking at least one (1) full business day prior to
the Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), on the inside front
cover concerning stabilization and over-allotment by the Underwriters, and under
the second paragraph under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitutes the only information furnished by
the Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement or any Incorporated Document, and you,
on behalf of the respective Underwriters, represent and warrant to the Company
that the statements made therein do not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the several
---------------------------------
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material
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<PAGE>
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading; in
case any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Securities, it will prepare promptly upon request, but at the
expense of such Underwriter, such amendment or amendments to the Registration
Statement and such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Act; and it will
file no amendment or supplement to the Registration Statement or Prospectus or
the Incorporated Documents, or, prior to the end of the period of time in which
a prospectus relating to the Shares is required to be delivered under the Act,
file any document which upon filing becomes an Incorporated Document, which
shall not previously have been submitted to you a reasonable time prior to the
proposed filing thereof or to which you shall reasonably object in writing,
subject, however, to compliance with the Act and the Rules and Regulations, the
Exchange Act and the rules and regulations of the Commission thereunder and the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive notice or
obtain knowledge, of the issuance of any stop order by the Commission suspending
the effectiveness of the Registration Statement or of the initiation or threat
of any proceeding for that purpose; and it will promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal at the
earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares, the
Conversion Shares and the Debentures issuable upon exchange of the Securities,
for offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Securities, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under Rule
434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, and the Incorporated Documents (three of which will include all
exhibits), all in such quantities as you may from time to time reasonably
request. Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the Company shall provide to you copies of a
Preliminary Prospectus updated in all respects through the date specified by you
in such quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders as
soon as practicable, but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof or until the
Company is no longer subject to the reporting requirements of Sections 13 or
15(d) of the Exchange Act, if shorter, the Company will furnish to its
stockholders as soon as practicable after the end of each respective period,
annual reports (including financial statements audited by independent certified
public accountants) and unaudited quarterly reports of operations for each of
the first three quarters of the fiscal year, and will furnish to you and the
other several Underwriters hereunder, upon request (i) concurrently with
furnishing such reports to its stockholders, statements of operations of the
Company for each of the first three (3) quarters in the form furnished to the
Company's stockholders, (ii) concurrently with furnishing to its stockholders, a
balance sheet of the Company as of the end of such fiscal year, together with
statements of operations, of stockholders' equity, and of cash flows of the
Company for such fiscal year, accompanied by a copy of the certificate or report
thereon of independent certified public accountants, (iii) as soon as they are
available, copies of all reports (financial or other) mailed to
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<PAGE>
stockholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company, or its affairs which was generally
released to stockholders or prepared by the Company, and (vi) any additional
information of a public nature concerning the Company, or its business which you
may reasonably request. During such five (5) year period, if the Company shall
have active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and such
subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the Shares
being sold by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for its Preferred Stock.
(i) If the transactions contemplated hereby are not consummated by reason
of any failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed hereunder or to fulfill any condition of
the Underwriters' obligations hereunder, or if the Company shall terminate this
Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall
terminate this Agreement pursuant to Section 11(b)(i), the Company will
reimburse the several Underwriters for all out-of-pocket expenses (including
fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in
investigating or preparing to market or marketing the Securities.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the prior
written consent of Robertson, Stephens & Company LLC, effect the Disposition of,
directly or indirectly, any Lock-Up Securities other than the sale of the Firm
Shares and the Option Shares hereunder and the Company's issuance of options or
Common Stock under the Company's presently authorized compensation plans.
5. Expenses.
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(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and the Incorporated Documents and any
amendments or supplements thereto; the printing of this Agreement, the Agreement
Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky
Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and
Power of Attorney, and any instruments related to any of the foregoing; the
issuance and delivery of the Shares hereunder to the several Underwriters,
including transfer taxes, if any, the cost of all certificates representing the
Shares, the Conversion Shares and the Debentures issuable upon exchange of the
Shares, and transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's independent
certified public accountants; the cost of furnishing to the several Underwriters
copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectus and the Prospectus and the Incorporated Documents, and
any amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and fees and disbursements of Underwriters'
Counsel in connection with such NASD filings and Blue Sky qualifications); the
fees and expenses of the transfer agent and transfer agent's counsel in
connection with the Certificate of Designation and the Shares; the fees and
expenses of the Trustee and Trustee's counsel in connection with the Indenture
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<PAGE>
and the Debentures; the cost of printing the Indenture; any fees charged by
securities rating services for rating the Debentures; and all other expenses
directly incurred by the Company in connection with the performance of their
obligations hereunder.
(ii) In addition to its other obligations under Section 8(a) hereof,
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding described in Section 8(a)
hereof, it will reimburse the Underwriters on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 8(b) hereof, the
Underwriters severally and not jointly agree that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(b) hereof, they will reimburse the Company on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company shall promptly return such payment to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in Sections 5(a)(ii) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 8(d) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the several
---------------------------------------
Underwriters to purchase and pay for the Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later than
2:00 P.M., San Francisco time, on the date following the date of this Agreement,
or such later date and time as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission,
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<PAGE>
and any request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or any Incorporated Document or
otherwise) shall have been complied with to the satisfaction of Underwriters'
Counsel.
(b) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Certificate of
Designation, the Indenture, the Debentures issuable in exchange for the Shares,
the Conversion Shares, the form of Registration Statement and the Prospectus,
and the registration, authorization, issue, sale and delivery of the Securities,
shall have been reasonably satisfactory to Underwriters' Counsel, and such
counsel shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus; and
(d) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of Heller Ehrman White & McAuliffe, counsel for the Company, dated the
Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) The Company has the corporate power and corporate authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein;
(v) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable, and, to such counsel's knowledge, will not have been issued
in violation of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right.
(vi) The Conversion Shares have been duly authorized and reserved for
issuance upon such conversion and, when issued and delivered in accordance with
the terms of the Certificate of Designation or Indenture, as the case may be,
will be duly and validly issued and fully paid and nonassessable and the
issuance of such Conversion Shares are not subject to any preemptive right, co-
sale right, registration right, right of first refusal or other similar right.
Furthermore, such Conversion Shares will conform to the description of the
Common Stock in the Prospectus.
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<PAGE>
(vii) The Debentures have been duly authorized and, when issued and
delivered in exchange for the Shares in accordance with the terms of the
Certificate of Designation and the Indenture, will be valid and binding
obligations of the Company, entitled to the benefits of the Indenture, and
enforceable in accordance with their terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the Debentures will conform to the description of
the Debentures contained in the Prospectus.
(viii) The Indenture has been duly authorized and duly qualified
under the Trust Indenture Act, and, when executed and delivered by the Company
and the Trustee, will be a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the Indenture conforms to the description
contained in the Prospectus;
(ix) The Company has the corporate power and corporate authority to
enter into this Agreement, the Indenture and the Debentures and to execute and
file the Certificate of Designation with the Secretary of State of the State of
Delaware, to issue, sell and deliver to the Underwriters the Shares to be issued
and sold by it hereunder, and to perform its obligations under this Agreement,
the Certificate of Designation, the Indenture, the Shares and the Debentures;
(x) This Agreement and the Indenture have been duly authorized by all
necessary corporate action on the part of the Company and have been duly
executed and delivered by the Company and, assuming due authorization, execution
and delivery by you and the Trustee, as applicable, each is a valid and binding
agreement of the Company, enforceable in accordance with its terms, except
insofar as indemnification provisions may be limited by applicable law and
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles; the Certificate of
Designation has been duly authorized by all necessary corporate action on the
part of the Company and has been duly executed and filed with the Secretary of
State of the State of Delaware;
(xi) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act;
(xii) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations and the Trust Indenture Act and
the applicable rules and regulations thereunder; and each of the Incorporated
Documents (other than the financial statements (including supporting schedules)
and the financial data derived therefrom as to which such counsel need express
no opinion) complied when filed pursuant to the Exchange Act as to form in all
material respects with the requirements of the Act and the Rules and Regulations
and the Exchange Act and the applicable rules and regulations of the Commission
thereunder;
(xiii) The terms and provisions of the Common Stock of the Company,
the terms and provisions of the Preferred Stock and the Certificate of
Designation and the terms and provisions of the Debentures and the Indenture
conform in all material respects to the description thereof contained in the
Prospectus;
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<PAGE>
(xiv) The statements in the Prospectus under the captions
"Description of Preferred Stock," "Description of Debentures," "Description of
Capital Stock" and "Certain Federal Income Tax Consequences," insofar as such
statements constitute a summary of the legal matters, documents or proceedings
referred to therein, have been reviewed by such counsel and fairly present the
information called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(xv) The description in the Registration Statement and the Prospectus
of the charter and bylaws of the Company and of statutes is accurate and fairly
presents the information required to be presented by the Act and the applicable
Rules and Regulations;
(xvi) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document which are not described or
referred to therein or filed as required;
(xvii) Neither the execution and delivery nor the performance (other
than the performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) of the Agreement, the Certificate
of Designation and the Indenture by the Company nor the consummation of the
transactions contemplated hereby and thereby (including the issuance and sale of
the Shares, the issuance and delivery of the Conversion Shares, and the issuance
of the Debentures upon exchange of the Securities) (i) conflicts with any
provision of the Certificate of Incorporation or Bylaws of the Company, (ii)
violates any law applicable to the Company or (iii) results in a breach or
violation of, or constitutes a default under, any term of the agreement or
instrument filed as an exhibit to the Registration Statement or to any
Incorporated Documents, any order, writ or decree of any court, governmental
agency or body of which such counsel has knowledge.
(xviii) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company, or over any of its properties or operations is
necessary in connection with the consummation by the Company of the transactions
contemplated, except such as may be required under state or other securities or
Blue Sky laws in connection with the purchase and the distribution of the Shares
by the Underwriters;
(xix) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character required to
be disclosed in the Registration Statement or the Prospectus or any Incorporated
Document by the Act or the Rules and Regulations or by the Exchange Act or the
applicable rules and regulations of the Commission thereunder, other than those
described therein;
(xx) To such counsel's knowledge, the Company is not presently (a) in
violation of its respective charter or bylaws, or (b) to such counsel's
knowledge, any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company, or over any of its properties or
operations; and
(xxi) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus and any Incorporated Document, no holders
of Common Stock or other securities of the Company have registration rights with
respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of Common
Stock or other securities, because of the filing of the Registration Statement
by the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time following
notification
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<PAGE>
of the Company's intent to file the Registration Statement or have included
securities in the Registration Statement pursuant to the exercise of and in full
satisfaction of such rights.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto and any Incorporated Document, when such documents became
effective or were filed with the Commission (other than the financial statements
including supporting schedules and other financial and statistical information
derived therefrom, as to which such counsel need express no comment) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Registration Statement, the
Prospectus and any amendment or supplement thereto and any Incorporated Document
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. Such
counsel shall also state that the conditions for the use of Form S-3 set forth
in the General Instructions thereto have been satisfied.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of California and
State of Delaware upon opinions of local or special counsel, and as to questions
of fact upon representations or certificates of officers of the Company, and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) Dehlinger & Associates ("Dehlinger"), outside patent counsel for
the Company, shall have expertised the statements set forth in the Prospectus
under the caption "Risk Factors -- Patents and Trade Secrets" and "Business --
Patents and Trade Secrets". In addition, you shall have received on the Closing
Date and on any later date on which Option Shares are purchased, as the case may
be, the following opinion of Dehlinger, dated the Closing Date or such later
date on which Option Shares are to be purchased, addressed to the Underwriters
and with reproduced copies or signed counterparts thereof for each of the
Underwriters, stating that such counsel is familiar with the technology used by
the Company, its business and the manner of its technology's use thereof and has
read the Registration Statement and the Prospectus, including particularly the
portions of the Registration Statement and the Prospectus referring to patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names, copyrights or other proprietary information or materials (herein
called Intellectual Property Rights) and to the effect that:
(i) Such counsel has no reason to believe that the Registration
Statement or the Prospectus (a) contains any untrue statement of a material
fact with respect to Intellectual Property Rights owned or used by the Company,
or the manner of its use thereof, or any allegation on the part of any person
that the Company is infringing any Intellectual Property Rights of any such
person or (b) omits to state any material fact relating to Intellectual Property
Rights owned or used by the Company, or the manner of its use thereof, or any
allegation of which such counsel has knowledge, that is required to be stated in
the Registration Statement or the Prospectus or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(ii) To the best of such counsel's knowledge, and other than as set
forth in the Prospectus, the Company has not received notice of any claims of
infringement of any Intellectual Property Rights;
(iii) To the best of such counsel's knowledge, there are no legal or
governmental proceedings relating to any Intellectual Property Rights owned or
used by the Company
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<PAGE>
pending against the Company, or any thirty party; there are no legal or
governmental proceedings relating to a third party's Intellectual Property
Rights pending against the Company, and no such proceedings are threatened or
contemplated by governmental authorities or others;
(iv) Such counsel does not know of any contracts or other documents
relating to the Intellectual Property Rights of the Company of a character
required to be filed as an exhibit to the Registration Statement or required to
be described in the Registration Statement or the Prospectus that are not filed
or described as required;
(v) To the best of such counsel's knowledge, the Company is not
infringing or otherwise violating any valid Intellectual Property Rights of
others and there are no infringements by others of any Intellectual Property
Rights owned or used by the Company which, in the judgment of such counsel,
could affect materially the use thereof by the Company.
(vi) To the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all necessary Intellectual
Property Rights to conduct the business now being or proposed to be conducted by
the Company as described in the Prospectus; and
(vii) Such statements in the Registration Statement and Prospectus as
the Underwriters' counsel shall have reasonably determined relate to
intellectual Property Rights (including, without limitation, all statements
under the captions "Risk Factors--Patents and Trade Secrets" and "Business--
Patents and Trade Secrets"), insofar as such statements constitute summaries of
matters of law, are accurate and complete statements or summaries of such
matters of law set forth therein.
(viii) As to each patent and patent application listed in Exhibit 1
thereto, there is an assignment by each of the named inventors to the Company.
The assignments by the named inventors have been submitted to the United States
Patent and Trademark Office ("USPTO") and those assignments have been recorded
in the USPTO's title records.
(ix) The Company's U.S. patent applications listed on Exhibit 1
thereto have been prepared and filed in the USPTO in a form and with
accompanying papers that are acceptable to the USPTO for the purposes of
according each such application a filing date and serial number, and of placing
each such application in condition for eventual examination on the merits as to
patentability. For each such U.S. application an Official Filing Receipt has
been received from the USPTO. As to each of such applications, such counsel is
not aware of any material defect of form in preparation or filing.
(x) As to each of the Company's foreign patents and patent
applications based on the United States patents or applications listed on
Exhibit 1 thereto, the applications have either (a) been submitted as Patent
Cooperation Treaty applications, for subsequent filing in one or more designated
countries, or (b) been submitted to patent firms in the respective foreign
countries with instructions to file the applications in patent offices of those
countries, in each case, naming the Company as the owner of record. In each such
application, written confirmation has been received that the application has, in
fact, been accepted for filing by such patent offices. There is no assurance
that the patent offices of the respective countries will not reject the claims
of the foreign patent applications as being unpatentable, or that any claims
will be allowed without amendment, nor is there any assurance that those patent
offices will ultimately conclude that the foreign patent applications meet all
requirements for patentability.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Wilson Sonsini Goodrich & Rosati in form and substance satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement, the Certificate of Designation, the
Indenture, the Shares, the Conversion Shares, the Debentures and the
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transactions contemplated hereby and thereby as you may reasonably require, and
the Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in the letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter that are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to or
for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their examination of the balance sheet of
the Company as of December 31, 1995 and 1996 and related statements of
operations, stockholders' equity, and cash flows for the twelve (12) months
ended December 31, 1994, 1995 and 1996, (iii) state that in the course of such
review, nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, and
(iv) address other matters agreed upon by Ernst & Young LLP and you. In
addition, you shall have received from Ernst & Young LLP a letter addressed to
the Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as of December 31, 1996, did not disclose
any weaknesses in internal controls that they considered to be material
weaknesses.
(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
or President and Chief Operating Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later date on which Option Shares are to be purchased, as the case may be, and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto and the Incorporated Documents, when such Incorporated Documents became
effective or were filed with the Commission, contained all material information
required to be included therein by the Act and the Rules and Regulations or the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all material
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<PAGE>
respects conformed to the requirements of the Act and the Rules and Regulations
or the Exchange Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, the Registration Statement, and any amendment or
supplement thereto and the Incorporated Documents, did not and do not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company or any change which
would adversely affect the power or ability of the Company to perform its
obligations under this Agreement or the Indenture, (b) any transaction that is
material to the Company, except transactions entered into in the ordinary course
of business, (c) any obligation, direct or contingent, that is material to the
Company, incurred by the Company, except obligations incurred in the ordinary
course of business, (d) any change in the capital stock or outstanding
indebtedness of the Company that is material to the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or (f) any loss or damage (whether or not insured) to the property of
the Company which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
(i) The Company shall have obtained and delivered to you an agreement
from all officers and certain directors of the Company, in writing prior to the
date hereof that such persons will not, during the Lock-up Period, effect the
Disposition of any Lock-Up Securities now owned or hereafter acquired directly
by such person or with respect to which such person has or hereafter acquires
the power of disposition, otherwise than (i) as a bona fide gift or gifts,
provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or stockholders of such person,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction, or (iii) with the prior written consent of Robertson,
Stephens & Company LLC. The foregoing restriction shall have been expressly
agreed to preclude the holder of the Lock-Up Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a Disposition of Lock-Up Securities during the Lock-up Period,
even if such Lock-Up Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would include,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Lock-Up Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from the Securities.
Furthermore, such person will have also agreed and consented to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Lock-Up Securities held by such person except in compliance with
this restriction.
(j) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request, including certificates of
officers of the Company as to the accuracy of the representations and warranties
of the Company herein, as to the performance by the Company of its obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
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7. Option Shares.
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(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of ________ Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise of such option as
the number of Firm Shares purchased by such Underwriter (set forth in Schedule A
hereto) bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the Representatives
in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against receipt of a wire transfer
reference number issued by the Federal Reserve System evidencing payment of the
purchase price therefor by the several Underwriters by wire transfer of
immediately available funds to an account specified in writing by the Company.
Such delivery and payment shall take place at the offices of Heller Ehrman White
& McAuliffe, 525 University Avenue, Palo Alto, California, 94301 or at such
other place as may be agreed upon among the Representatives and the Company (i)
on the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to the Closing
Date, or (ii) on a date which shall not be later than the third (3rd) full
business day following the date the Company receives written notice of the
exercise of such option, if such notice is received by the Company less than two
(2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
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limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, including any Incorporated
Document, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
-------- -------
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any such amendment or supplement thereto, in reliance upon, and
in conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof and, provided further, that the indemnity agreement
-------- -------
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act, the Exchange Act or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon (i) any breach of any representation, warranty, agreement
or covenant of such Underwriter herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, including any Incorporated
Document, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 8, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party
-21-
<PAGE>
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
-------- -------
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a) or 8(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
--------
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the initial public
offering price, and the Company are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
- -------- -------
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has been otherwise required to pay and (ii) no person guilty of
a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(d)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter
-22-
<PAGE>
within the meaning of the Act or the Exchange Act, or by or on behalf of the
Company or any of its officers, directors or controlling persons within the
meaning of the Act or the Exchange Act, and shall survive the delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company shall not be liable
to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i)
6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Securities, or the time at which the Shares are
first generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
-23-
<PAGE>
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform any agreement on its part
to be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including, without
limitation, any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (ii) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Securities, or (v) if there shall have been
an outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 4(i), 5 and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel with a copy to Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050,
telecopier number (415) 493-6811, Attention: Alan K. Austin; if sent to the
Company, such notice shall be mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to 960 Hamilton Court, Menlo
Park, California 94025, telecopier number (415) 323-9106, Attention: I. Craig
Henderson, Chief Executive Officer with a copy to Heller Ehrman White &
McAuliffe, 525 University Avenue, Palo Alto, California, 94301, telecopier
number (415) 324-0638, Attention: Richard Friedman.
13. Parties. This Agreement shall inure to the benefit of and be
-------
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
or entity, other than the parties hereto and their respective executors,
administrators, successors and assigns, and the controlling persons within the
meaning of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim in respect of
this Agreement or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
-24-
<PAGE>
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you jointly or by Robertson, Stephens & Company LLC on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
--------------
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several
------------
counterparts, each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
SEQUUS PHARMACEUTICALS, INC.
By
--------------------------------------------
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
DILLON, READ & CO. INC.
PUNK, ZIEGEL & KNOELL, L.P.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By
----------------------------------------------------
Authorized Signatory
-25-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ -----------
<S> <C>
Robertson, Stephens & Company LLC..............
Dillon, Read & Co. Inc. .......................
Punk, Ziegel & Knoell, L.P.....................
-----------
Total.....................................
===========
</TABLE>
-1-
<PAGE>
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
LIPOSOME TECHNOLOGY, INC.
Liposome Technology, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows: The original name
of the corporation was Liposome Technology (Delaware), Inc. The original
Certificate of Incorporation of this corporation was filed with the Delaware
Secretary of State on February 13, 1987.
1. This Restated Certificate of Incorporation restates and further amends
the Certificate of Incorporation of this corporation to read as set forth
herein.
2. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby further amended and restated to read in full as follows:
FIRST: The name of this corporation is LIPOSOME TECHNOLOGY, INC.
-----
SECOND: The address of its registered office in the State of Delaware is
------
15 East North Street, Dover, Delaware 19901, County of Kent. The name of its
registered agent at such address in Incorporating Services, Ltd.
THIRD: The nature of the business or purposes to be conducted or promoted
-----
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of capital stock which
------
the corporation shall have authority to issue is Thirty Nine Million
(39,000,000) shares, comprised of Thirty Five Million (35,000,000) shares of
Common Stock with a par value of One One-Hundredth of One Cent ($.0001) per
share (the "Common Shares") and Four Million (4,000,000) shares of Preferred
Stock with a par value of One Cent ($.01) per share (the "Preferred Shares").
Common Shares. Subject in all cases to ARTICLE FIFTH, a
-------------
statement of the designations, preferences, voting powers (or no voting
powers), relative, participating, optional or other special rights and
privileges and the qualifications, limitations and restrictions of the Common
Shares is as follows:
4.1 Voting Rights. Except as otherwise provided by law, the
-------------
holders of Common Shares shall have one vote for each Common Share on all
matters submitted to a vote of the holders of this corporation's Common
Shares.
<PAGE>
4.2 Distributions. The holders of Common Shares shall receive,
-------------
out of any funds legally available therefore, distributions as declared
thereon by the board of directors of this corporation. For purposes of this
Restated Certificate of Incorporation, unless the context otherwise requires,
distribution shall mean the transfer of cash or property to any holder of
Common Shares without consideration, whether by way of dividend or otherwise,
payable other than in Common Shares of this corporation; provided, however,
that a repurchase of Common Shares shall not be deemed a distribution.
FIFTH: The Preferred Shares may be issued in one or more series at such
-----
time or times and for such consideration or considerations as the board of
directors may determine. Each series shall be so designated as to distinguish
the shares thereof from the shares of all other series and classes. Except as
may be expressly provided in this Restated Certificate of Incorporation,
including any certificate of designations for a series of Preferred Shares,
different series of Preferred Shares shall not be construed to constitute
different classes of shares for the purpose of voting by classes.
The board of directors is expressly authorized, subject to the
limitations prescribed by law and the provisions of this Restated Certificate
of Incorporation, to provide for the issuance of all or any of the Preferred
Shares in one or more series, each with such designations, preferences, voting
powers (or no voting powers), relative, participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions
adopted by the board of directors to create such series, and a certificate of
designations setting forth a copy of said resolution or resolutions shall be
filed in accordance with the General Corporation Law of the State of Delaware.
The authority of the board of directors with respect to each such series shall
include without limitation of the foregoing the right to specify the number of
shares of each such series and to authorize an increase or decrease in such
number of shares and the right to provide that the shares of each such series
may be: (i) subject to redemption at such time or times and at such price or
prices; (ii) entitled to receive dividends (which may be cumulative or non-
cumulative) at such rates, on such conditions, and at such times, and payable
in preference to, or in such relation to, the dividends payable on any other
class or classes or any other series; (iii) entitled to such rights upon the
dissolution of, or upon any distribution of the assets of, the corporation;
(iv) convertible into, or exchangeable for, shares of any other class or
classes of stock, or of any other series of the same or any other class or
classes of stock of the corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any, on the issuance of additional shares of such series
or shares of any other series of Preferred Shares; or (vi) entitled to such
other preferences, powers, qualifications, rights and privileges, all as the
board of directors may deem
-2-
<PAGE>
advisable and as are not inconsistent with law and the provisions of this
Restated Certificate of Incorporation.
SIXTH: The corporation is to have perpetual existence.
-----
SEVENTH: In furtherance and not in limitation of the powers conferred by
-------
the laws of the State of Delaware:
A. The board of directors of the corporation is expressly
authorized:
(i) To make, alter or repeal the by-laws of the
corporation.
(ii) To authorize and cause to be executed mortgages and
liens upon the real and personal property of the corporation.
(iii) To set apart out of any of the funds of the
corporation available for dividends a reserve or reserves for any proper
purpose and to abolish any such reserve in the manner in which it was created.
(iv) By a majority of the whole board, to designate one
or more committees, each committee to consist of one or more of the directors
of the corporation. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member of
any committee. The by-laws may provide that in the absence or disqualification
of a member of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unanimously appoint another member of the board of directors to
act at the meeting in the place of any such absent or disqualified member. Any
such committee, to the extent provided in the resolution of the board of
directors, or in the by-laws of the corporation, shall have and may exercise
all the powers and authority of the board of directors in the management of
the business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Restated Certificate of Incorporation (except that a committee may, to the
extent authorized in the resolution or resolutions providing for the issuance
of shares of stock adopted by the board of directors as provided in Section
151(a) of the General Corporation Law of the State of Delaware, fix any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
of any other series of the same or any other class or classes of stock of the
corporation), adopting an agreement of merger or consolidation under Sections
251 or 252 of the General Corporation Law of the State of Delaware,
recommending to the stockholders the sale, lease or exchange, of all or
substantially
-3-
<PAGE>
all of the corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
by-laws of the corporation; and, unless the resolution or by-laws expressly so
provide, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware.
(v) When and as authorized by the stockholders in
accordance with statute, to sell, lease or exchange all or substantially all
of the property and assets of the corporation, including its good will and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or property
including shares of stock in, and/or other securities of, any other
corporation or corporations, as its board of directors shall deem expedient
and for the best interests of the corporation.
B. Elections of directors need not be by written ballot unless
the by-laws of the corporation shall so provide.
C. The books of the corporation may be kept at such place
within or without the State of Delaware as the by-laws of the corporation may
provide or as may be designated from time to time by the board of directors of
the corporation.
EIGHTH: Whenever a compromise or arrangement is proposed between this
------
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
NINTH: A director of the corporation shall not be personally liable to the
-----
corporation or its stockholders for
-4-
<PAGE>
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived any improper personal benefit. If the Delaware
General Corporation Law is amended hereafter to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or modification.
TENTH:
-----
A. RIGHT OF INDEMNIFICATION
------------------------
Each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative ("proceeding"), by reason of
the fact that he or she or a person of whom he or she is the legal
representative, is or was a director or officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director or officer, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or
agent or in any other capacity while serving as a director, officer, employee
or agent, shall be indemnified and held harmless by the corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended, (but, in the case of any such amendment,
only to the extent that such amendment permits the corporation to provide
broader indemnification rights than said Law permitted the corporation to
provide prior to such amendment) against all expenses, liability and loss
including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered
by such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the corporation shall indemnify any such person
- -------- -------
seeking indemnity in connection with an action, suit or proceeding (or part
thereof) initiated by such person only if such action, suit or proceeding (or
part thereof) was authorized by the board of directors of the corporation.
Such right shall be a contract
-5-
<PAGE>
right and shall include the right to be paid by the corporation expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that the payment of such expenses incurred by a director or
- -------- -------
officer of the corporation in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such person
while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of such proceeding,
shall be made only upon delivery to the corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it
should be determined ultimately that such director or officer is not entitled to
be indemnified under this Section or otherwise.
B. RIGHT OF CLAIMANT TO BRING SUIT
-------------------------------
If a claim under Paragraph A of Article TENTH is not paid in full by
the corporation within ninety (90) days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expenses of prosecuting such claim. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where the
required undertaking, if any, has been tendered to this corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the corporation to indemnify the
claimant for the amount claimed, and the burden of proving that such standards
were met shall be on the claimant. Neither the failure of the corporation
(including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the
corporation (including its board of directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that
claimant has not met the applicable standard of conduct.
C. NON-EXCLUSIVITY OF RIGHTS
-------------------------
The rights conferred on any person by Paragraphs A and B of Article
TENTH shall not be exclusive of any other right which such persons may have or
hereafter acquire under any statute, provision of the Restated Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
-6-
<PAGE>
D. INSURANCE
---------
The corporation may maintain insurance, at its expense, to protect
itself and any such director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the corporation
would have the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law.
ELEVENTH: The corporation reserves the right to amend or repeal any
--------
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon a
stockholder herein are granted subject to this reservation.
3. This Restated Certificate of Incorporation was duly adopted by the
stockholders at the corporation's annual meeting of stockholders in accordance
with the applicable provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Liposome Technology, Inc. has caused this
certificate to be signed by its officer duly authorized, and attested by its
Secretary, this 28th day of June, 1991.
LIPOSOME TECHNOLOGY, INC.
By: /s/ Nicolaos V. Arvanitidis
-----------------------------
Nicolaos V. Arvanitidis
Chairman of the Board and Chief Executive
Officer
ATTEST:
By: /s/ Sally A. Davenport
---------------------------
Sally A. Davenport
Secretary
-7-
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
OF
SEQUUS PHARMACEUTICALS, INC.,
a Delaware corporation
INTO
LIPOSOME TECHNOLOGY, INC.,
a Delaware corporation
IT IS HEREBY CERTIFIED THAT:
1. LIPOSOME TECHNOLOGY, INC., (the "Corporation") is a business
corporation of the State of Delaware.
2. The Corporation is the owner of all of the outstanding shares of
the stock of SEQUUS PHARMACEUTICALS, INC. (the "Subsidiary"), which is also a
business corporation of the State of Delaware.
3. On June 6, 1995, the Board of Directors of the Corporation
adopted the following resolutions to merge the Subsidiary into the Corporation
pursuant to Section 253 of the General Corporation Law of the State of Delaware
and in connection with this merger to change the corporate name of the
Corporation to SEQUUS Pharmaceuticals, Inc.:
WHEREAS, the Board of Directors of Liposome Technology, Inc. (the
"Company") deems it to be in the best interest of the Company to cause the
formation of a wholly-owned subsidiary of the Company to be named SEQUUS
Pharmaceuticals, Inc. (the "Subsidiary"), as a Delaware corporation:
WHEREAS, the Board of Directors of the Company deems it to be in
the best interest of the Company to merge the Subsidiary with and into the
Company;
WHEREAS, the Board of Directors of the Company deems it to be in
the best interest of the Company to change its name to SEQUUS
Pharmaceuticals, Inc. upon the merger of the Subsidiary with and into the
Company;
NOW, THEREFORE, BE IT RESOLVED, that the officers of the Company
take all actions necessary to form SEQUUS Pharmaceuticals, Inc. as a
wholly-owned subsidiary of the Company;
RESOLVED FURTHER, that after formation of the Subsidiary, the
Subsidiary be merged with and into the Company, and that all of the estate,
property, rights,
<PAGE>
privileges, powers and franchises of the Subsidiary be vested in and held
and enjoyed by the Company as fully and entirely and without change or
diminution as the same were before held and enjoyed by the Subsidiary in
its name;
RESOLVED FURTHER, that the Company shall assume all of the
liabilities and obligations of the Subsidiary;
RESOLVED FURTHER, that, by virtue of the merger and without any
action on the part of the holder thereof, each issued and outstanding share
of capital stock of the Subsidiary shall be cancelled and no consideration
issued in respect thereof;
RESOLVED FURTHER, that, by virtue of the merger and without any
action on the part of the holders thereof, each issued and outstanding
share of capital stock of the Company shall remain unchanged and continue
to be such issued and outstanding share of capital stock of the Company;
RESOLVED FURTHER, that the Company change its name to SEQUUS
Pharmaceuticals, Inc. upon the merger of the Subsidiary with and into the
Company;
RESOLVED FURTHER, that this Company shall cause to be executed
and filed and/or recorded the documents prescribed by the laws of the State
of Delaware and by the laws of any other appropriate jurisdiction and will
cause to be performed all necessary acts within the State of Delaware and
within any other appropriate jurisdiction for the purpose of effecting the
foregoing resolutions;
RESOLVED FURTHER, that the officers of the Company be, and each
of them, singly and not jointly, hereby is, authorized and directed, in the
name and on behalf of the Company, to take any action and to execute and
deliver any instrument, document, certificate or agreement appropriate or
desirable to carry out the intent and purposes of the foregoing
resolutions, and such action, execution and delivery have been authorized
by the Board of Directors of the Company, to be conclusively evidenced by
either the taking of any such action or the execution and delivery of any
such instrument; and
RESOLVED FURTHER, that the authority and power given under the
foregoing resolutions shall be deemed retroactive and any and all acts
authorized thereunder performed prior to adoption of these resolutions be
and they hereby are, in all respects, ratified, confirmed and approved.
-2-
<PAGE>
Executed as of June 26, 1995.
LIPOSOME TECHNOLOGY, INC.,
a Delaware corporation
By: /s/ Sally A. Davenport
-------------------------------
Sally A. Davenport, Secretary
By: /s/ Donald J. Stewart
-------------------------------
Donald J. Stewart,
Vice President, Finance
-3-
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF SEQUUS PHARMACEUTICALS, INC.
SEQUUS Pharmaceuticals, Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows: The original
name of the corporation was Liposome Technology (Delaware), Inc. The original
Certificate of Incorporation of this corporation was filed with the Delaware
Secretary of State on February 13, 1987.
1. This Certificate of Amendment of Certificate of Incorporation amends
the Certificate of Incorporation of this corporation as set forth herein.
2. The first sentence of Section 4 of the Certificate of Incorporation of
this corporation is hereby deleted and replaced with the following:
"The total number of shares of all classes of capital stock which the
corporation shall have authority to issue is Forty-Nine Million (49,000,000)
shares comprised of Forty-Five Million (45,000,000) shares of Common Stock with
a par value of One One-Hundredth of One Cent ($.0001) per share (the "Common
Shares") and Four Million (4,000,000) shares of Preferred Stock with a par value
of One Cent ($.01) per share (the "Preferred Shares").
3. This Certificate of Amendment of Certificate of Incorporation was duly
adopted by the stockholders at the corporation's annual meeting of stockholders
in accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said SEQUUS Pharmaceuticals, Inc. has caused this
certificate to be signed by its officer duly authorized, and attested by its
Secretary, this 12th day of September, 1995.
SEQUUS PHARMACEUTICALS, INC.
By: /s/ I. Craig Henderson
----------------------------
I. Craig Henderson
Chief Executive Officer
and Chairman of the Board
ATTEST:
By:/s/ Sally A. Davenport
------------------------
Sally A. Davenport
Secretary
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE
$___ CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
($0.01 Par Value)
(Cumulative Dividend, Liquidation Preference $50 per Share)
OF
SEQUUS PHARMACEUTICALS, INC.
--------------------------------------
Pursuant to Section 151(g) of the General Corporation Law
of the State of Delaware
--------------------------------------
THE UNDERSIGNED, being, respectively, the President and the Secretary of
SEQUUS Pharmaceuticals, Inc., a Delaware corporation (the "Company"), DO HEREBY
CERTIFY that, pursuant to the provisions of Section 151(g) of the General
Corporation Law of the State of Delaware, the following resolutions were duly
adopted by the Board of Directors of the Company and pursuant to authority
conferred upon the Board of Directors by the provisions of the Certificate of
Incorporation of the Company, as amended (the "Certificate of Incorporation"),
the Board of Directors of the Company, at a meeting duly held on February 3,
1997, adopted resolutions fixing the relative powers, preferences, rights,
qualifications, limitations and restrictions of such stock. These resolutions
are as follows:
"RESOLVED, that pursuant to authority expressly granted to and vested in
the Board of Directors of the Company by the provisions of the Certificate of
Incorporation, the issuance of a series of preferred stock, par value $0.01 per
share, which shall consist of up to 1,150,000 of the 4,000,000 shares of
preferred stock which the Company now has authority to issue, be, and the same
hereby is, authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional and other special rights,
and the qualifications, limitations and restrictions thereof (in addition to
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, set forth in the Certificate of Incorporation which may be applicable
to the preferred stock of this series) as follows:
1. Number of Shares and Designation. 1,150,000 shares of the preferred
--------------------------------
stock, par value $0.01 per share, of the Company are hereby constituted as a
series of the preferred stock designated as $___ Convertible Exchangeable
Preferred Stock (the "Preferred Stock").
<PAGE>
2. Definitions. For purposes of the Preferred Stock, in addition to those
-----------
terms otherwise defined herein, the following terms shall have the meanings
indicated:
"Affiliate" of any specified person shall mean any other person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For the purposes of this
definition, "control," when used with respect to any specified person means
the power to direct or cause the direction of the management and policies of
such person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Applicable Price" shall have the meaning specified in Section 7(j).
"Board of Directors" shall mean the Board of Directors of the Company
or a committee of such Board duly authorized to act for it hereunder.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors and to be in full force and effect on the date of
such certification, and delivered to the Transfer Agent.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which the banking institutions in The City of New
York are authorized or obligated by law or executive order to close or be
closed.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean any stock of any class of the Company which
has no preference in respect of dividends or of amounts payable in the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Company and which is not subject to redemption by the Company. Subject to the
provisions of Section 7(e), however, shares issuable on conversion of the
Preferred Stock shall include only shares of the class designated as common
stock of the Company at the date hereof or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which
have no preference in respect of dividends or of amounts payable in the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Company and which are not subject to redemption by the Company; provided that
--------
if at any time there shall be more than one such resulting class, the shares
of each such class then so issuable shall be substantially in the proportion
which the total number of shares of such class resulting from all such
reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.
"Common Stock Fundamental Change" shall have the meaning specified in
Section 7(j).
"Company" shall mean SEQUUS Pharmaceuticals, Inc., a Delaware
corporation, and, shall include its successors and assigns.
"Conversion Price" shall have the meaning specified in Section 7(a).
<PAGE>
"Debentures" shall mean the Company's ___% Convertible Subordinated
Debentures due 2007, issued under an Indenture, dated as of __________, 1997,
between the Company and Chemical Trust Company of California, as trustee.
"Dividend Payment Date" shall have the meaning specified in Section
3(a).
"Dividend Payment Record Date" shall have the meaning specified in
Section 3(a).
"Dividend Periods" shall mean quarterly dividend periods commencing on
the first day of March, June, September and December of each year and ending
on and including the day preceding the first day of the next succeeding
Dividend Period (other than the initial Dividend Period which shall commence
on the Issue Date and end on and include May 31, 1997).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exchange Date" shall have the meaning specified in Section 10(b).
"Fundamental Change" shall have the meaning specified in Section 7(j).
"holder," "holder of shares of Preferred Stock," or "holder of the
Preferred Stock," as applied to any share of Preferred Stock, or other similar
terms (but excluding the term "beneficial holder"), shall mean any person in
whose name at the time a particular share of Preferred Stock is registered on
the Company's stock records, which shall include the books of the Transfer Agent
in respect of the Company and any stock transfer books of the Company.
"Issue Date" shall mean the first date on which shares of the Preferred
Stock are issued.
"Officers' Certificate", when used with respect to the Company, shall
mean a certificate signed by (a) one of the President, the Chief Executive
Officer, Executive or Senior Vice President or any Vice President (whether or
not designated by a number or numbers or word added before or after the title
"Vice President") and (b) by one of the Treasurer or any Assistant Treasurer,
Secretary or any Assistant Secretary or Controller of the Company, which is
delivered to the Transfer Agent.
"Non-Stock Fundamental Change" shall have the meaning specified in
Section 7(j).
"Purchase Stock Price" shall have the meaning specified in Section
7(j).
"person" shall mean a corporation, an association, a partnership, an
individual, a joint venture, a joint stock company, a trust, an unincorporated
organization or a government or an agency or a political subdivision thereof.
"Reference Market Price" shall have the meaning specified in Section
7(j).
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock which ordinarily
has voting power for the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.
"Trading Day" has the meaning specified in Section 7(d)(viii).
"Transfer Agent" means ChaseMellon Shareholder Services or such other
agent or agents of the Company as may be designated by the Board of Directors
of the Company as the transfer agent for the Preferred Stock.
The definitions of certain other terms are specified in Section 7.
3. Dividends. (a) Holders of the Preferred Stock are entitled to
---------
receive, when, as and if declared by the Board of Directors, out of the funds
of the Company legally available therefor, cash dividends at the annual rate
of $___ per share of Preferred Stock, payable in equal quarterly installments
on March 1, June 1, September 1 and December 1 (each a "Dividend Payment
Date"), commencing June 1, 1997 (and, in the case of any accrued but unpaid
dividends, at such additional times and for such interim periods, if any, as
determined by the Board of Directors). If June 1, 1997 or any other Dividend
Payment Date shall be on a day other than a Business Day, then the Dividend
Payment Date shall be on the next succeeding Business Day. Dividends on the
Preferred Stock will be cumulative from the Issue Date, whether or not in any
Dividend Period or Periods there shall be funds of the Company legally
available for the payment of such dividends and whether or not such dividends
are declared, and will be payable to holders of record as they appear on the
stock books of the Company on such record dates (each such date, a "Dividend
Payment Record Date"), which shall be not more than 60 days nor less than 10
days preceding the Dividend Payment Dates thereof, as shall be fixed by the
Board of Directors. Dividends on the Preferred Stock shall accrue (whether or
not declared) on a daily basis from the Issue Date, and accrued dividends for
each Dividend Period shall accumulate to the extent not paid on the Dividend
Payment Date first following the Dividend Period for which they accrue. As
used herein, the term "accrued" with respect to dividends includes both
accrued and accumulated dividends.
(b) The amount of dividends payable for each full Dividend Period for
the Preferred Stock shall be computed by dividing the annual dividend rate by
four (rounded down to the nearest cent). The amount of dividends payable for
the initial Dividend Period on the Preferred Stock, or any other period
shorter or longer than a full Dividend Period on the Preferred Stock shall be
computed on the basis of a 360-day year consisting of twelve 30-day months.
Holders of shares of Preferred Stock called for redemption on a redemption
date falling between the close of business on a Dividend Payment Record Date
and the opening of business on the corresponding Dividend Payment Date shall,
in lieu of receiving such dividend on the Dividend Payment Date fixed
therefor, receive such dividend payment together with all other accrued and
unpaid dividends on the date fixed for
<PAGE>
redemption (unless such holder converts such shares in accordance with Section
7 hereof). Holders of shares of Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of cumulative
dividends, as herein provided. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
the Preferred Stock which may be in arrears.
(c) So long as any shares of Preferred Stock are outstanding, no
dividends, except as described in the next succeeding sentence, shall be
declared or paid or set apart for payment on any class or series of stock of the
Company ranking, as to dividends, on a parity with the Preferred Stock, for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the Preferred Stock for all Dividend Periods
terminating on or prior to the applicable Dividend Payment Date, or setting
apart for payment, of such dividends on such parity stock. When dividends are
not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, upon the shares of Preferred Stock and any other class or series of
stock ranking on a parity as to dividends with Preferred Stock, all dividends
declared upon shares of Preferred Stock and all dividends declared upon such
other stock shall be declared pro rata so that the amounts of dividends per
share declared on the Preferred Stock and such other stock shall in all cases
bear to each other the same ratio that accrued dividends per share on the shares
of Preferred Stock and on such other stock bear to each other.
(d) So long as any shares of the Preferred Stock are outstanding, no
other stock of the Company ranking on a parity with the Preferred Stock as to
dividends or upon liquidation, dissolution or winding up shall be redeemed,
purchased or otherwise acquired for any consideration (or any monies be paid
to or made available for a sinking fund or otherwise for the purchase or
redemption of any shares of any such stock) by the Company (except for
repurchases from employees and consultants) unless (i) the full cumulative
dividends, if any, accrued on all outstanding shares of Preferred Stock shall
have been paid or set apart for payment for all past Dividend Periods and (ii)
sufficient funds shall have been set apart for the payment of the dividend for
the current Dividend Period with respect to the Preferred Stock.
(e) So long as any shares of the Preferred Stock are outstanding, no
dividends (other than dividends or distributions paid in shares of, or options,
warrants or rights to subscribe for or purchase shares of, Common Stock or other
stock ranking junior to the Preferred Stock, as to dividends and upon
liquidation, dissolution or winding up) shall be declared or paid or set apart
for payment and no other distribution shall be declared or made or set apart for
payment, in each case upon the Common Stock or any other stock of the Company
ranking junior to the Preferred Stock as to dividends or upon liquidation,
dissolution or winding up, nor shall any Common Stock nor any other such stock
of the Company ranking junior to the Preferred Stock as to dividends or upon
liquidation, dissolution or winding up be redeemed, purchased or otherwise
acquired for any consideration (or any monies be paid to or made available for a
sinking fund or otherwise for the purchase or redemption of any shares of any
such stock) by the Company (except by conversion into or exchange for stock of
the Company ranking junior to the Preferred Stock as to dividends and upon
liquidation, dissolution or winding up) unless, in each case (i) the full
cumulative dividends, if any, accrued on all outstanding shares of Preferred
Stock and any other stock of the Company ranking on a parity with the Preferred
Stock as to dividends shall have been paid or set apart for payment for all past
Dividend Periods and all past
<PAGE>
dividend periods with respect to such other stock and (ii) sufficient funds
shall have been set apart for the payment of the dividend for the current
Dividend Period with respect to the Preferred Stock and for the current
dividend period with respect to any other stock of the company ranking on a
parity with the Preferred Stock as to dividends.
4. Liquidation Preference. (a) In the event of any voluntary or
----------------------
involuntary dissolution, liquidation or winding up of the Company (for the
purposes of this Section 4, a "Liquidation"), before any distribution of
assets shall be made to the holders of Common Stock or the holders of any
other stock of the Company that ranks junior to the Preferred Stock upon
Liquidation, the holder of each share of Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Company available for
distribution to its stockholders, an amount equal to liquidation preference of
$50 per share plus all dividends accrued and unpaid on such share up to the
date of distribution of the assets of the Company to the holders of Preferred
Stock, and the holders of any class or series of preferred stock ranking on a
parity with the Preferred Stock as to Liquidation shall be entitled to receive
the full respective liquidation preferences (including any premium) to which
they are entitled and shall receive all accrued and unpaid dividends with
respect to their respective shares through and including the date of
distribution.
(b) If upon any Liquidation of the Company, the assets available for
distribution to the holders of Preferred Stock and any other stock of the
Company ranking on a parity with the Preferred Stock upon Liquidation which
shall then be outstanding shall be insufficient to pay the holders of all
outstanding shares of Preferred Stock and all other such parity stock the full
amounts (including all dividends accrued and unpaid) of the liquidating
distribution to which they shall be entitled, then the holders of each series of
such stock will share ratably in any such distribution of assets first in
proportion to their respective liquidation preferences until such preferences
are paid in full, and then in proportion to their respective amounts of accrued
but unpaid dividends. After payment of any such liquidating preference and
accrued dividends, the holders of shares of the Preferred Stock will not be
entitled to any further participation in any distribution of assets by the
Company.
(c) For purposes of this Section 4, a Liquidation shall not include (i)
any consolidation or merger of the Company with or into any other corporation,
(ii) any liquidation, dissolution, winding up or reorganization of the Company
immediately followed by reincorporation of another corporation or (iii) a sale
or other disposition of all or substantially all of the Company's assets to
another corporation unless in connection therewith the Liquidation of the
Company is specifically approved.
(d) The holder of any shares of Preferred Stock shall not be entitled to
receive any payment owed for such shares under this Section 4 until such holder
shall cause to be delivered to the Company (i) the certificate(s) representing
such shares of Preferred Stock and (ii) transfer instrument(s) satisfactory to
the Company and sufficient to transfer such shares of Preferred Stock to the
Company free of any adverse interest. No interest shall accrue on any payment
upon Liquidation after the due date thereof.
5. Redemption at the Option of the Company. (a) Preferred Stock may
---------------------------------------
not be redeemed by the Company prior to March 2, 2000, on or after which the
Company, at its option, may redeem
<PAGE>
the shares of Preferred Stock, in whole or in part, out of funds legally
available therefor, at any time or from time to time, subject to the notice
provisions and provisions for partial redemption described below, during the
period beginning on March 1 of the years shown below (March 2 in the case of
2000 and ending on February 28, 2001 in the case of the first such period), at
the following redemption prices per share plus an amount equal to accrued and
unpaid dividends, if any, to (but excluding) the date fixed for redemption,
whether or not earned or declared:
Year Price
----------- ----------
2000 %
2001
2002
2003
2004
2005
2006
and 100% at March 1, 2007 and thereafter.
(b) In case the Company shall desire to exercise the right to redeem the
shares of Preferred Stock, in whole or in part, pursuant to Section 5(a), it
shall fix a date for redemption, and it, or at its request (which must be
received by the Transfer Agent at least ten (10) Business Days prior to the date
the Transfer Agent is requested to give notice as described below unless a
shorter period is agreed to by the Transfer Agent), the Transfer Agent in the
name of and at the expense of the Company, shall mail or cause to be mailed a
notice of such redemption at least twenty (20) and not more than sixty (60) days
prior the date fixed for redemption to the holders of the shares of Preferred
Stock so to be redeemed at their last addresses as the same appear on the
Company's stock records (provided that if the Company shall give such notice, it
--------
shall also give such notice, and notice of the shares of Preferred Stock to be
redeemed, to the Transfer Agent). Such mailing shall be by first class mail.
The notice if mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives such
notice. In any case, failure to give such notice by mail or any defect in the
notice to the holder of any share of Preferred Stock designated for redemption
shall not affect the validity of the proceedings for the redemption of any other
share of Preferred Stock.
Each such notice of redemption shall specify the number of shares of
Preferred Stock to be redeemed, the date fixed for redemption, the redemption
price at which such shares of Preferred Stock are to be redeemed, the place or
places of payment, that payment will be made upon presentation and surrender of
certificate or certificates representing such shares of Preferred Stock, that
dividends accrued to (but excluding) the date fixed for redemption will be paid
as specified in said notice, and that on and after said date dividends thereon
or on the portion thereof to be redeemed will cease to accrue. Such notice
shall also state the current Conversion Price and the date on which the right to
convert such shares of Preferred Stock into Common Stock will expire.
On or prior to the redemption date specified in the notice of redemption
given as provided in this Section 5(b), the Company will deposit with a bank
or trust company having an agency in the
<PAGE>
Borough of Manhattan, City of New York and having a combined capital and
surplus of at least $50,000,000 (the "Deposit Bank") an amount of money
sufficient to redeem on the redemption date all the shares of Preferred Stock
so called for redemption (other than those theretofore surrendered for
conversion into Common Stock) at the appropriate redemption price, together
with accrued dividends to (but excluding) the date fixed for redemption;
provided that if such payment is made on the redemption date it must be
- --------
received by the Deposit Bank by 10:00 a.m. New York City time, on such date.
If any shares of Preferred Stock called for redemption is converted pursuant
hereto, any money deposited with the Deposit Bank or so segregated and held in
trust for the redemption of such shares of Preferred Stock shall be paid to
the Company upon its request, or, if then held by the Company shall be
discharged from such trust.
If fewer than all the outstanding shares of Preferred Stock are to be
redeemed, shares to be redeemed shall be selected by the Company from
outstanding shares of Preferred Stock not previously called for redemption by
lot or pro rata (as near as may be) or by any other equitable method determined
by the Company in its sole discretion.
(c) If notice of redemption has been given as above provided, on and
after the fixed for redemption date (unless the Company shall default in the
payment of the redemption price, together with accrued and unpaid dividends to
(but excluding) said date), dividends on such shares of Preferred Stock so
called for redemption shall cease to accrue and such shares of Preferred Stock
shall be deemed no longer outstanding and the holders thereof shall have no
right in respect of such shares of Preferred Stock except the right to receive
the redemption price thereof and accrued and unpaid dividends to (but
excluding) the date fixed for redemption, without interest thereon. On
presentation and surrender of certificate or certificates representing such
shares of Preferred Stock at a place of payment in said notice specified, such
shares of Preferred Stock to be redeemed shall be redeemed by the Company at
the applicable redemption price, together with dividends accrued thereon to
(but excluding) the date fixed for redemption; provided that, if the
--------
applicable redemption date is a Dividend Payment Date, the quarterly payment
of dividends becoming due on such date shall be payable to the holders of such
shares of Preferred Stock registered as such on the relevant record date
subject to the terms and provisions of Section 3.
If fewer than all the shares of Preferred Stock represented by any
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(d) In connection with any redemption of Preferred Stock, the Company
may arrange for the purchase and conversion of any Preferred Stock by an
agreement with one or more investment bankers or other purchasers to purchase
such Preferred Stock by paying to the Deposit Bank in trust for the holders of
Preferred Stock, on or before the date fixed for redemption, an amount not
less than the applicable redemption price, together with dividends accrued to
(but excluding) the date fixed for redemption, of such Preferred Stock.
Notwithstanding anything to the contrary contained in this Section 5, the
obligation of the Company to pay the redemption price of such Preferred Stock,
together with dividends accrued to (but excluding) the date fixed for
redemption, shall be deemed to be satisfied and discharged to the extent such
amount is so paid by such purchasers. If such an agreement is entered into, a
copy of which will be filed with the Deposit Bank prior to the date fixed for
redemption, any certificate representing the Preferred Stock so converted not
duly surrendered for
<PAGE>
conversion by the holders thereof may, at the option of the Company, be
deemed, to the fullest extent permitted by law, acquired by such purchasers
from such holders and (notwithstanding anything to the contrary contained in
Section 7) surrendered by such purchasers for conversion, all as of
immediately prior to the close of business on the date fixed for redemption
(and the right to convert any such Preferred Stock shall be deemed to have
been extended through such time), subject to payment of the above amount as
aforesaid. At the direction of the Company, the Deposit Bank shall hold and
dispose of any such amount paid to it in the same manner as it would monies
deposited with it by the Company for the redemption of Preferred Stock.
6. Shares to be Retired. Any share of Preferred Stock converted,
--------------------
redeemed or otherwise acquired by the Company shall be retired and canceled and
shall upon cancellation be restored to the status of authorized but unissued
shares of preferred stock, subject to reissuance by the Board of Directors as
Preferred Stock or as shares of preferred stock of one or more other series.
7. Conversion. Holders of shares of Preferred Stock shall have the right
----------
to convert all or a portion of such shares (including fractions of such shares)
into shares of Common Stock, as follows:
(a) Subject to and upon compliance with the provisions of this Section 7,
a holder of shares of Preferred Stock shall have the right, at his option, at
any time after 90 days following the Issue Date (except that, with respect to
shares of Preferred Stock which shall be called for redemption, such right shall
terminate at the close of business on the next Business Day preceding the date
fixed for redemption of such shares of Preferred Stock unless the Company shall
default in payment due upon redemption thereof) to convert any of such shares
(or a portion thereof) into that number of fully paid and non-assessable shares
of Common Stock (as such shares shall then be constituted) obtained by
dividing $50.00 by $ ___ (the "Conversion Price"), as adjusted in accordance
with this Section 7, by surrender of certificate or certificates representing
such share of Preferred Stock so to be converted in the manner provided in
Section 7(b). If a part of a share of Preferred Stock is converted, then the
Company will convert such share into the appropriate number of shares of
Common Stock (subject to Section 7(c)) and issue a certificate representing a
fractional share of Preferred Stock evidencing the remaining interest of such
holder. A holder of the Preferred Stock is not entitled to any rights of a
holder of Common Stock until such holder has converted his Preferred Stock to
Common Stock, and only to the extent such Preferred Stock is deemed to have
been converted to Common Stock under this Section 7.
(b) In order to exercise the conversion right, the holder of the Preferred
Stock to be converted shall surrender certificate or certificates representing
the number of shares to be so converted, duly endorsed, at an office or agency
of the Transfer Agent in the Borough of Manhattan, City of New York, and shall
give written notice of conversion to the office or agency that the holder elects
to convert such number of shares of Preferred Stock specified in said notice.
Such notice shall also state the name or names (with address) in which the
certificate or certificates for shares of Common Stock which shall be of Common
Stock issuable on such conversion shall be issued, and shall be accompanied by
transfer taxes, if required pursuant to Section 7(h). Each such share of
Preferred Stock surrendered for conversion shall, unless the shares of Common
Stock issuable on conversion are to be issued in the same name in which such
share of Preferred Stock is registered, be
<PAGE>
duly endorsed by, or be accompanied by instruments of transfer in form
satisfactory to the Company duly executed by, the holder or his duly authorized
attorney.
As promptly as practicable after satisfaction of the requirements for
conversion set forth above, if shares of Common Stock issuable on conversion are
to be issued in a name other than that in which such share of Preferred Stock to
be converted is registered (as if such transfer were a transfer of the share of
Preferred Stock so converted), the Company shall issue and shall deliver to such
holder at the office or agency of the Transfer Agent in the Borough of
Manhattan, City of New York, certificate or certificates representing the number
of shares of Common Stock issuable upon the conversion of such share of
Preferred Stock or a portion thereof in accordance with the provisions of this
Section 7 and a check or cash in respect of any fractional interest in respect
of a share of Common Stock arising upon such conversion, as provided in Section
7(c) (which payment, if any, shall be paid no later than five Business Days
after satisfaction of the requirements for conversion set forth above).
Each conversion shall be deemed to have been effected on the date on which
the requirements set forth above in this Section 7(b) have been satisfied as to
such share of Preferred Stock so converted, and the person in whose name any
certificate or certificates for the shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become on said date the holder of
record of the shares represented thereby; provided, however, that any such
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surrender on any date when the stock transfer books of the Company shall be
closed shall constitute the person in whose name the certificates are to be
issued as the record holder thereof for all purposes on the next succeeding day
on which such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which certificate or certificates
representing such shares of Preferred Stock shall be surrendered. All shares of
Common Stock delivered upon conversion of the Preferred Stock will, upon
delivery, be duly authorized, validly issued and fully paid and nonassessable.
No adjustment shall be made for dividend accrued or unpaid on any Preferred
Stock converted or for dividends on any shares of Common Stock issued upon the
conversion of such Preferred Stock as provided in this Section 7.
(c) In connection with the conversion of any shares of Preferred Stock, a
portion of such shares may be converted; however no fractional shares of Common
Stock or scrip representing fractional shares shall be issued upon conversion of
the Preferred Stock. If any fractional share of stock otherwise would be
issuable upon the conversion of the Preferred Stock, the Company shall make an
adjustment therefor in cash at the current market value thereof to the holder of
the Preferred Stock. The current market value of a share of Common Stock shall
be the Closing Price on the first Trading Day immediately preceding the day on
which the Preferred Stock (or a specified portion thereof) are deemed to have
been converted and such Closing Price shall be determined as provided in Section
7(d)(viii). If more than one share (or fraction thereof) shall be surrendered
for conversion at one time by the same holder, the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the basis of
the aggregate number of shares of Preferred Stock so surrendered.
<PAGE>
(d) The Conversion Price shall be adjusted from time to time by the
Company as follows:
(i) In case the Company shall hereafter pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock, the Conversion Price in effect at the opening of business on
the date following the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the Record Date (as defined in Section 7(d)(viii)) fixed for
such determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution, such reduction to become effective immediately after the
opening of business on the day following the Record Date. If any dividend
or distribution of the type described in this Section 7(d)(i) is declared
but not so paid or made, the Conversion Price shall again be adjusted to
the Conversion Price which would then be in effect if such dividend or
distribution had not been declared.
(ii) In case the Company shall issue rights or warrants to all holders of
its outstanding shares of Common Stock entitling them (for a period
expiring within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share
less than the Current Market Price (as defined in Section 7(d)(viii)) on
the Record Date fixed for the determination of stockholders entitled to
receive such rights or warrants, the Conversion Price shall be adjusted so
that the same shall equal the price determined by multiplying the
Conversion Price in effect at the opening of business on the date after
such Record Date by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding at the close of business on the
Record Date plus the number of shares which the aggregate offering price of
the total number of shares so offered would purchase at such Current Market
Price, and of which the denominator shall be the number of shares of Common
Stock outstanding on the close of business on the Record Date plus the
total number of additional shares of Common Stock so offered for
subscription or purchase. Such adjustment shall become effective
immediately after the opening of business on the day following the Record
Date fixed for determination of stockholders entitled to receive such
rights or warrants. To the extent that shares of Common Stock are not
delivered pursuant to such rights or warrants, upon the expiration or
termination of such rights or warrants the Conversion Price shall be
readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made on
the basis of delivery of only the number of shares of Common Stock actually
delivered. In the event that such rights or warrants are not so issued,
the Conversion Price shall again be adjusted to be the Conversion Price
which would then be in effect if such date fixed for the determination of
stockholders entitled to receive such rights or warrants had not been
fixed. In determining whether any rights or warrants entitle the holders
to subscribe for or purchase shares of Common Stock at less than such
Current Market Price, and in determining the aggregate offering price of
such shares of Common Stock, there shall be taken into account any
consideration received for such rights or warrants, the value of such
consideration, if other than cash, to be determined by the Board of
Directors.
<PAGE>
(iii) In case the outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in
effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and
conversely, in case outstanding shares of Common Stock shall be combined
into a smaller number of shares of Common Stock, the Conversion Price in
effect at the opening of business on the day following the day upon which
such combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(iv) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any class of capital stock of the
Company (other than any dividends or distributions to which Section 7(d)(i)
applies) or evidences of its indebtedness, cash or other assets (including
securities, but excluding (1) any rights or warrants referred to in Section
7(d)(ii) or (2) dividends and distributions paid exclusively in cash (the
foregoing hereinafter in this Section 7(d)(iv) called the "Securities")),
then, in each such case, the Conversion Price shall be reduced so that the
same shall be equal to the price determined by multiplying the Conversion
Price in effect immediately prior to the close of business on the Record
Date (as defined in Section 7(d)(viii)) with respect to such distribution
by a fraction of which the numerator shall be the Current Market Price
(determined as provided in Section 7(d)(viii)) on such date less the fair
market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a Board Resolution) on such date of
the portion of the Securities so distributed applicable to one share of
Common Stock and the denominator shall be such Current Market Price, such
reduction to become effective immediately prior to the opening of business
on the day following the Record Date; provided, however, that in the event
-------- -------
the then fair market value (as so determined) of the portion of the
Securities so distributed applicable to one share of Common Stock is equal
to or greater than the Current Market Price on the Record Date, in lieu of
the foregoing adjustment, adequate provision shall be made so that each
holder of the Preferred Stock shall have the right to receive upon
conversion of the Preferred Stock (or any portion thereof) the amount of
Securities such holder would have received had such holder converted such
Preferred Stock (or portion thereof) immediately prior to such Record Date.
In the event that such dividend or distribution is not so paid or made, the
Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such dividend or distribution had not been
declared. If the Board of Directors determines the fair market value of
any distribution for purposes of this Section 7(d)(iv) by reference to the
actual or when issued trading market for any securities comprising all or
part of such distribution, it must in doing so consider the prices in such
market over the same period (the "Reference Period") used in computing the
Current Market Price pursuant to Section 7(d)(viii) to the extent possible,
unless the Board of Directors in a board resolution determines in good
faith that determining the fair market value during the Reference Period
would not be in the best interest of the holder of the Preferred Stock.
In the event that the Company implements a new stockholders' rights plan (a
"Rights Plan"), such Rights Plan shall provide that upon conversion of the
Preferred Stock the holders will
<PAGE>
receive, in addition to the Common Stock issuable upon such conversion, the
rights, whether or not such rights have separated from Common Stock at the
time of the conversion.
Rights or warrants distributed by the Company to all holders of Common
Stock entitling the holders thereof to subscribe for or purchase shares of
the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a
specified event or events ("Trigger Event"): (i) are deemed to be
transferred with such shares of Common Stock; (ii) are not exercisable; and
(iii) are also issued in respect of future issuances of Common Stock, shall
be deemed not to have been distributed for purposes of this Section
7(d)(iv) (and no adjustment to the Conversion Price under this Section
7(d)(iv) will be required) until the occurrence of the earliest Trigger
Event. If such right or warrant is subject to subsequent events, upon the
occurrence of which such right or warrant shall become exercisable to
purchase different securities, evidences of indebtedness or other assets or
entitle the holder to purchase a different number or amount of the
foregoing or to purchase any of the foregoing at a different purchase
price, then the occurrence of each such event shall be deemed to be the
date of issuance and record date with respect to a new right or warrant
(and a termination or expiration of the existing right or warrant without
exercise by the holder thereof). In addition, in the event of any
distribution (or deemed distribution) of rights or warrants, or any Trigger
Event or other event (of the type described in the preceding sentence) with
respect thereto, that resulted in an adjustment to the Conversion Price
under this Section 7(d)(iv), (1) in the case of any such rights or warrants
which shall all have been redeemed or repurchased without exercise by any
holders thereof, the Conversion Price shall be readjusted upon such final
redemption or repurchase to give effect to such distribution or Trigger
Event, as the case may be, as though it were a cash distribution, equal to
the per share redemption or repurchase price received by a holder of Common
Stock with respect to such rights or warrants (assuming such holder had
retained such rights or warrants), made to all holders of Common Stock as
of the date of such redemption or repurchase, and (2) in the case of such
rights or warrants all of which shall have expired or been terminated
without exercise, the Conversion Price shall be readjusted as if such
rights and warrants had never been issued.
For purposes of this Section 7(d)(iv) and Sections 7(d)(i) and (ii), any
dividend or distribution to which this Section 7(d)(iv) is applicable that
also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which Section 7(d)(ii) applies
(or both), shall be deemed instead to be (1) a dividend or distribution of
the evidences of indebtedness, assets, shares of capital stock, rights or
warrants other than such shares of Common Stock or rights or warrants to
which Section 7(d)(ii) applies (and any Conversion Price reduction required
by this Section 7(d)(iv) with respect to such dividend or distribution
shall then be made) immediately followed by (2) a dividend or distribution
of such shares of Common Stock or such rights or warrants (and any further
Conversion Price reduction required by Sections 7(d)(i) and (ii) with
respect to such dividend or distribution shall then be made, except (A) the
Record Date of such dividend or distribution shall be substituted as "the
date fixed for the
<PAGE>
determination of stockholders entitled to receive such dividend or other
distribution", "Record Date fixed for such determination" and "Record Date"
within the meaning of Section 7(d)(i) and as "the date fixed for the
determination of stockholders entitled to receive such rights or warrants",
"the Record Date fixed for the determination of the stockholders entitled
to receive such rights or warrants" and "such Record Date" within the
meaning of Section 7(d)(ii) and (B) any shares of Common Stock included in
such dividend or distribution shall not be deemed "outstanding at the close
of business on the date fixed for such determination" within the meaning of
Section 7(d)(i).
(v) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock cash (excluding any cash that is distributed
upon a merger or consolidation to which Section 7(e) applies or as part of
a distribution referred to in Section 7(d)(iv)), in an aggregate amount
that, combined together with (1) the aggregate amount of any other such
distributions to all holders of its Common Stock made exclusively in cash
within the twelve (12) months preceding the date of payment of such
distribution, and in respect of which no adjustment pursuant to this
Section 7(d)(v) has been made, and (2) the aggregate of any cash plus the
fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) of
consideration payable in respect of any tender offer by the Company or any
of its subsidiaries for all or any portion of the Common Stock concluded
within the twelve (12) months preceding the date of payment of such
distribution, and in respect of which no adjustment pursuant to Section
7(d)(vi) has been made, exceeds 10.0% of the product of the Current Market
Price (determined as provided in Section 7(d)(viii)) on the Record Date
with respect to such distribution times the number of shares of Common
Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date, the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying
the Conversion Price in effect immediately prior to the close of business
on such Record Date by a fraction (i) the numerator of which shall be equal
to the Current Market Price on the Record Date less an amount equal to the
quotient of (x) the excess of such combined amount over such 10.0% and (y)
the number of shares of Common Stock outstanding on the Record Date and
(ii) the denominator of which shall be equal to the Current Market Price on
such date, provided, however, that in the event the portion of the cash so
distributed applicable to one share of Common Stock is equal to or greater
than the Current Market Price of the Common Stock on the Record Date, in
lieu of the foregoing adjustment, adequate provision shall be made so that
each holder of the Preferred Stock shall have the right to receive upon
conversion of shares of Preferred Stock the amount of cash such holder
would have received had such holder converted such shares immediately prior
to such Record Date. In the event that such dividend or distribution is not
so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such dividend or
distribution had not been declared. Any cash distribution to all holders
of Common Stock as to which the Company makes the election permitted by
Section 7(d)(xiv) and as to which the Company has complied with the
requirements of such Section shall be treated as not having been made for
all purposes of this Section 7(d)(v).
(vi) In case a tender offer made by the Company or any of Subsidiary for
all or any portion of the Common Stock shall expire and such tender offer
(as amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the tender offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined by the
Board of
<PAGE>
Directors, whose determination shall be conclusive and described in a Board
Resolution) that combined together with (1) the aggregate of the cash plus
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution), as
of the expiration of such tender offer, of consideration payable in respect
of any other tender offers, by the Company or any of its subsidiaries for
all or any portion of the Common Stock expiring within the twelve (12)
months preceding the expiration of such tender offer and in respect of
which no adjustment pursuant to this Section 7(d)(vi) has been made and (2)
the aggregate amount of any distributions to all holders of the Company's
Common Stock made exclusively in cash within twelve (12) months preceding
the expiration of such tender offer and in respect of which no adjustment
pursuant to Section 7(d)(v) has been made, exceeds 10.0% of the product of
the Current Market Price (determined as provided in Section 7(d)(viii)) as
of the last time (the "Expiration Time") tenders could have been made
pursuant to such tender offer (as it may be amended) times the number of
shares of Common Stock outstanding (including any tendered shares) on the
Expiration Time, then, and in each such case, immediately prior to the
opening of business on the day after the date of the Expiration Time, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
to close of business on the date of the Expiration Time by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding (including any tendered shares) on the Expiration Time
multiplied by the Current Market Price of the Common Stock on the Trading
Day next succeeding the Expiration Time and the denominator shall be the
sum of (x) the fair market value (determined as aforesaid) of the aggregate
consideration payable to stockholders based on the acceptance (up to any
maximum specified in the terms of the tender offer) of all shares validly
tendered and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) on the Expiration Time and the
Current Market Price of the Common Stock on the Trading Day next succeeding
the Expiration Time, such reduction (if any) to become effective
immediately prior to the opening of business on the day following the
Expiration Time. In the event that the Company is obligated to purchase
shares pursuant to any such tender offer, but the Company is permanently
prevented by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be adjusted to be
the Conversion Price which would then be in effect if such tender offer had
not been made. If the application of this Section 7(d)(vi) to any tender
offer would result in an increase in the Conversion Price, no adjustment
shall be made for such tender offer under this Section 7(d)(vi). Any cash
distribution to all holders of Common Stock as to which the Company has
made the election permitted by Section 7(d)(xiv) and as to which the
Company has complied with the requirements of such Section shall be treated
as not having been made for all purposes of this Section 7(d)(vi).
(vii) In case of a tender or exchange offer made by a person other than the
Company or any Subsidiary for an amount which increases the offeror's
ownership of Common Stock to more than 25% of the Common Stock outstanding
and shall involve the payment by such person of consideration per share of
Common Stock having a fair market value (as determined by the Board of
Directors, whose determination shall be conclusive, and described in a
resolution of
<PAGE>
the Board of Directors at the last time (the "Expiration Time") tenders or
exchanges may be made pursuant to such tender or exchange offer (as it
shall have been amended)) that exceeds the Current Market Price of the
Common Stock on the Trading Day next succeeding the Expiration Time, and in
which, as of the Expiration Time the Board of Directors is not recommending
rejection of the offer, the Conversion Price shall be reduced so that the
same shall equal the price determined by multiplying the Conversion Price
in effect immediately prior to the Expiration Time by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding
(including any tendered or exchanged shares) on the Expiration Time
multiplied by the current Market Price of the Common Stock on the Trading
Day next succeeding the Expiration Time and the denominator shall be the
sum of (x) the fair market value (determined as aforesaid) of the aggregate
consideration payable to stockholders based on the acceptance (up to any
maximum specified in the terms of the tender or exchange offer) of all
shares validly tendered or exchanged and not withdrawn as of the Expiration
Time (the shares deemed so accepted, up to any such maximum, being referred
to as the "Purchased Shares") and (y) the product of the number of shares
of Common Stock outstanding (less any Purchased Shares) on the Expiration
Time and the current Market Price of the Common Stock on the Trading Day
next succeeding the Expiration Time, such reduction to become effective
immediately prior to the opening of business on the day following the
Expiration Time. In the event that such person is obligated to purchase
shares pursuant to any such tender or exchange offer, but such person is
permanently prevented by applicable law from effecting any such purchases
or all such purchases are rescinded, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
tender or exchange offer had not been made. Notwithstanding the foregoing,
the adjustment described in this Section 7(d)(vii) shall not be made if, as
of the Expiration Time, the offering documents with respect to such offer
disclose a plan or intention to cause the Company to engage in any
consolidation or merger of the Company with or into any other corporation
or corporations (whether or not affiliated with the Company), or successive
consolidations or mergers in which the Company or its successor or
successors shall be a party or parties, or any sale, conveyance or lease
(or successive sales, conveyances or leases) of all or substantially all of
the property of the Company, to any other corporation (whether or not
affiliated with the Company), authorized to acquire and operate the same
and which shall be organized under the laws of the United States of
America, any state thereof or the District of Columbia; provided, however,
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each share of Preferred Stock shall remain outstanding or unaffected or
shall be converted into or exchanged for convertible exchangeable preferred
stock of the corporation (if other than the Company) formed by such
consolidation, or into which the Company shall have been merged, or by the
corporation which shall have acquired or leased such property having
powers, preferences and relative participating, optional and other rights,
and qualifications, limitations and restrictions thereof identical to a
share of Preferred Stock, except for changes that do not affect the holders
of the Preferred Stock adversely.
(viii) For purposes of this Section 7, the following terms shall have the
meaning indicated:
(1) "Closing Price" with respect to any securities on any day shall
mean the closing sale price regular way on such day or, in case no such
sale takes place on such day, the average of the reported closing bid and
asked prices, regular way, in each case on the Nasdaq
<PAGE>
National Market or New York Stock Exchange, as applicable, or, if such
security is not listed or admitted to trading on such National Market or
Exchange, on the principal national security exchange or quotation system
on which such security is quoted or listed or admitted to trading, or, if
not quoted or listed or admitted to trading on any national securities
exchange or quotation system, the average of the closing bid and asked
prices of such security on the over-the-counter market on the day in
question as reported by the National Quotation Bureau Incorporated, or a
similar generally accepted reporting service, or if not so available, in
such manner as furnished by any New York Stock Exchange member firm
selected from time to time by the Board of Directors for that purpose, or a
price determined in good faith by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution.
(2) "Current Market Price" shall mean the average of the daily
Closing Prices per share of Common Stock for the ten (10) consecutive
Trading Days immediately prior to the date in question; provided, however,
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that (1) if the "ex" date (as hereinafter defined) for any event (other
than the issuance or distribution or Fundamental Change requiring such
computation) that requires an adjustment to the Conversion Price pursuant
to Section 7(d)(i), (ii), (iii), (iv), (v), (vi) or (vii) occurs during
such ten (10) consecutive Trading Days, the Closing Price for each Trading
Day prior to the "ex" date for such other event shall be adjusted by
multiplying such Closing Price by the same fraction by which the Conversion
Price is so required to be adjusted as a result of such other event, (2) if
the "ex" date for any event (other than the issuance or distribution or
Fundamental Change requiring such computation) that requires an adjustment
to the Conversion Price pursuant to Section 7(d)(i), (ii), (iii), (iv),
(v), (vi) or (vii) occurs on or after the "ex" date for the issuance or
distribution or Fundamental Change requiring such computation and prior to
the day in question, the Closing Price for each Trading Day on and after
the "ex" date for such other event shall be adjusted by multiplying such
Closing Price by the reciprocal of the fraction by which the Conversion
Price is so required to be adjusted as a result of such other event, and
(3) if the "ex" date for the issuance, distribution or Fundamental Change
requiring such computation is prior to the day in question, after taking
into account any adjustment required pursuant to clause (1) or (2) of this
proviso, the Closing Price for each Trading Day on or after such "ex" date
shall be adjusted by adding thereto the amount of any cash and the fair
market value (as determined by the Board of Directors in a manner
consistent with any determination of such value for purposes of Section
7(d)(iv), (vi) or (vii) whose determination shall be conclusive and
described in a Board Resolution) of the evidences of indebtedness, shares
of capital stock or assets being distributed applicable to one share of
Common Stock as of the close of business on the day before such "ex" date.
For purposes of any computation under Sections 7(d)(vi) or (vii), the
Current Market Price of the Common Stock on any date shall be deemed to be
the average of the daily Closing Prices per share of Common Stock for such
day and the next two succeeding Trading Days; provided, however, that if
-------- -------
the "ex" date for any event (other than the tender offer requiring such
computation) that requires an adjustment to the Conversion Price pursuant
to Section 7(d)(i), (ii), (iii), (iv), (v), (vi) or (vii) occurs on or
after the Expiration Time for the tender or exchange offer requiring such
computation and prior to the day in question, the Closing Price for each
Trading Day on and after the "ex" date for such other event shall be
adjusted by multiplying such Closing Price by the reciprocal of the
<PAGE>
fraction by which the Conversion Price is so required to be adjusted as a
result of such other event. For purposes of this paragraph, the term "ex"
date, (1) when used with respect to any issuance or distribution or
Fundamental Change, means the first date on which the Common Stock trades
regular way on the relevant exchange or in the relevant market from which
the Closing Price was obtained without the right to receive such issuance
or distribution, (2) when used with respect to any subdivision or
combination of shares of Common Stock, means the first date on which the
Common Stock trades regular way on such exchange or in such market after
the time at which such subdivision or combination becomes effective, and
(3) when used with respect to any tender or exchange offer means the first
date on which the Common Stock trades regular way on such exchange or in
such market after the Expiration Time of such offer. Notwithstanding the
foregoing, whenever successive adjustments to the Conversion Price are
called for pursuant to this Section 7(d), such adjustments shall be made to
the Current Market Price as may be necessary or appropriate to effectuate
the intent of this Section 7(d) and to avoid unjust or inequitable results
as determined in good faith by the Board of Directors.
(3) "fair market value" shall mean the amount which a willing buyer
would pay a willing seller in an arm's length transaction.
(4) "Record Date" shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common
Stock have the right to receive any cash, securities or other property or
in which the Common Stock (or other applicable security) is exchanged for
or converted into any combination of cash, securities or other property,
the date fixed for determination of stockholders entitled to receive such
cash, securities or other property (whether such date is fixed by the Board
of Directors or by statute, contract or otherwise).
(5) "Trading Day" shall mean (x) if the applicable security is listed
or admitted for trading on the New York Stock Exchange or another national
security exchange, a day on which the New York Stock Exchange or another
national security exchange is open for business or (y) if the applicable
security is quoted on the Nasdaq National Market, a day on which trades may
be made thereon or (z) if the applicable security is not so listed,
admitted for trading or quoted, any day other than a Saturday or Sunday or
a day on which banking institutions in the State of New York are authorized
or obligated by law or executive order to close.
(ix) The Company may make such reductions in the Conversion Price, in
addition to those required by Sections 7(d)(i), (ii), (iii), (iv), (v),
(vi) and (vii), as the Board of Directors considers to be advisable to
avoid or diminish any income tax to holders of Common Stock or rights to
purchase Common stock resulting from any dividend or distribution of stock
(or rights to acquire stock) or from any event treated as such for income
tax purposes.
To the extent permitted by applicable law, the Company from time to time
may reduce the Conversion Price by any amount for any period of time if the
period is at least twenty (20) days, the reduction is irrevocable during
the period and the Board of Directors shall have
<PAGE>
made a determination that such reduction would be in the best interests of
the Company, which determination shall be conclusive and described in a
Board Resolution. Whenever the Conversion Price is reduced pursuant to the
preceding sentence, the Company shall mail to each holder of the Preferred
Stock at his last address appearing on the Company's stock records a notice
of the reduction at least fifteen (15) days prior to the date the reduced
Conversion Price takes effect, and such notice shall state the reduced
Conversion Price and the period during which it will be in effect.
(x) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in such
price; provided, however, that any adjustments which by reason of this
-------- -------
Section 7(d)(x) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under
Section 7 shall be made by the Company and shall be made to the nearest
cent or to the nearest one hundredth of a share, as the case may be. No
adjustment need be made for a change in the par value or no par value of
the Common Stock.
(xi) Whenever the Conversion Price is adjusted as herein provided, the
Company shall promptly file with the Transfer Agent an Officers'
Certificate setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Conversion Price setting forth the
adjusted Conversion Price and the date on which each adjustment becomes
effective and shall mail such notice of such adjustment of the Conversion
Price to each holder of the Preferred Stock at his last address appearing
on the Company's stock records, within twenty (20) days of the effective
date of such adjustment. Failure to deliver such notice shall not effect
the legality or validity of any such adjustment.
(xii) In any case in which this Section 7(d) provides that an adjustment
shall become effective immediately after a Record Date for an event, the
Company may defer until the occurrence of such event (i) issuing to the
holder of any share of Preferred Stock converted after such Record Date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such
event over and above the Common Stock issuable upon such conversion before
giving effect to such adjustment and (ii) paying to such holder of
Preferred Stock any amount in cash in lieu of any fraction pursuant to
Section 7(c).
(xiii) For purposes of this Section 7(d), the number of shares of Common
Stock at any time outstanding shall not include shares held in the treasury
of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The
Company will not pay any dividend or make any distribution on shares of
Common Stock held in the treasury of the Company.
(xiv) In lieu of making any adjustment to the Conversion Price pursuant to
Section 7(d)(v), the Company may elect to reserve an amount of cash for
distribution to the holders of the Preferred Stock upon the conversion of
the Preferred Stock so that any such holder
<PAGE>
converting Preferred Stock will receive upon such conversion, in addition
to the shares of Common Stock and other items to which such holder is
entitled, the full amount of cash which such holder would have received if
such holder had, immediately prior to the Record Date for such distribution
of cash, converted its Preferred Stock into Common Stock, together with any
interest accrued with respect to such amount, in accordance with this
Section 7(d)(xiv). The Company may make such election by providing an
Officers' Certificate to the Transfer Agent to such effect on or prior to
the payment date for any such distribution and depositing with the Deposit
Bank (as defined in Section 5(b)) on or prior to such date an amount of
cash equal to the aggregate amount the holders of the Preferred Stock would
have received if such holders had, immediately prior to the Record Date for
such distribution, converted all of the Preferred Stock into Common Stock,
with irrevocable instructions and authority to the Deposit Bank that such
funds be applied in the manner set forth in this Section 7(d)(xiv). The
Company shall instruct the Deposit Bank to invest any such funds so
deposited in marketable obligations issued or fully guaranteed by the
United States government with a maturity not more than three (3) months
from the date of issuance. Upon conversion of the Preferred Stock by a
holder, the holder will be entitled to receive, in addition to the Common
Stock issuable upon conversion, an amount of cash equal to the amount such
holder would have received if such holder had, immediately prior to the
Record Date for such distribution, converted its Preferred Stock into
Common Stock, along with such holder's pro rata share of any accrued
interest earned as a consequence of the investment of such funds. Promptly
after making an election pursuant to this Section 7(d)(xiv), the Company
shall give or shall cause to be given notice to all holders of the
Preferred Stock of such election, which notice shall state the amount of
cash such holders shall be entitled to receive (excluding interest) upon
conversion of the Preferred Stock as a consequence of the Company having
made such election.
(e) In the event that the Company shall be a party to any transaction
(including, without limitation (a) any recapitalization or reclassification of
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination of Common Stock), (b) any consolidation of the Company with, or
merger of the Company into, any other person, or any merger of another person
into the Company (other than a merger that does not result in a
reclassification, conversion, exchange or cancellation of Common Stock), (c) any
sale, transfer or lease of all or substantially all of the assets of the Company
or (d) any compulsory share exchange) pursuant to which either shares of Common
Stock shall be converted into the right to receive other securities, cash or
other property, or, in the case of a sale or transfer of all or substantially
all of the assets of the Company, the holders of Common Stock shall be entitled
to receive other securities, cash or other property, then appropriate provision
shall be made so that the holder of each share of Preferred Stock then
outstanding shall have the right thereafter to convert such Preferred Stock only
into: (x) in the case of any such transaction that does not constitute a Common
Stock Fundamental Change (as defined in Section 7(j)) and subject to funds being
legally available for such purpose under applicable law at the time of such
conversion, the kind and amount of the securities, cash or other property that
would have been receivable upon such recapitalization, reclassification,
consolidation, merger, sale, transfer or share exchange by a holder of the
number of shares of Common Stock issuable upon conversion of such Preferred
Security immediately prior to such recapitalization, reclassification,
consolidation, merger, sale, transfer or share exchange, after
<PAGE>
giving effect, in the case of any Non-Stock Fundamental Change (as defined in
Section 7(j)), to any adjustment in the Conversion Price in accordance with
Section 7(i)(i), and (y) in the case of any such transaction that constitutes a
Common Stock Fundamental Change, common stock of the kind received by holders of
Common Stock as a result of such Common Stock Fundamental Change in an amount
determined in accordance with Section 7(i)(ii). The company formed by such
consolidation or resulting from such merger or that acquires such assets or that
acquires the Company's shares, as the case may be, shall make provisions in its
certificate or articles of incorporation or other constituent document to
establish such right. Such certificate or articles of incorporation or other
constituent document shall provide for adjustments that, for events subsequent
to the effective date of such certificate or articles of incorporation or other
constituent document, shall be as nearly equivalent as may be practicable to the
relevant adjustments provided for in this Section 7. The above provisions shall
similarly apply to successive transactions of the type described in this Section
7(e).
(f) The issue of stock certificates representing the shares of Common
Stock on conversions of the Preferred Stock shall be made without charge to the
converting holder of the Preferred Stock for any tax in respect of the issue
thereof. The Company shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of stock
in any name other than the name in which the shares of Preferred Stock with
respect to which such shares of Common Stock are issued are registered, and the
Company shall not be required to issue or deliver any such stock certificate
unless and until the person or persons requesting the issue thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
(g) The Company shall provide, free from preemptive rights, out of its
authorized but unissued shares of Common Stock or shares of Common Stock held in
treasury, sufficient shares of Common Stock to provide for the conversion of the
Preferred Stock from time to time as certificates or certificates representing
such Preferred Stock are presented for conversion.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the shares of Common Stock
issuable upon conversion of the Preferred Stock, the Company will take all
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue shares of such Common Stock at
such adjusted Conversion Price.
The Company covenants that if any shares of Common Stock to be provided for
the purpose of conversion of the Preferred Stock hereunder require registration
with or approval of any governmental authority under any Federal or State law
before such shares may be validly issued upon conversion, the Company will in
good faith and as expeditiously as possible endeavor to secure such registration
or approval, as the case may be.
The Company further covenants that if at any time the Common Stock shall be
listed on the Nasdaq National Market or any other national securities exchange
or automated quotation system the Company will, if permitted by the rules of
such exchange or automated quotation system, list and keep listed, so long as
the Common Stock shall be so listed on such exchange or automated quotation
system, all Common Stock issuable upon conversion of the Preferred Stock.
<PAGE>
(h) In case:
(i) the Company shall declare a dividend (or any other distribution) on
its Common Stock (that would require an adjustment in the Conversion Price
pursuant to Section 7(d)); or
(ii) the Company shall authorize the granting to the holders of its Common
Stock of rights or warrants to subscribe for or purchase any share of any
class or any other rights or warrants; or
(iii) of any reclassification of the Common Stock of the Company (other
than a subdivision or combination of its outstanding Common Stock, or a
change in par value, or from par value to no par value, or from no par
value to par value), or of any consolidation or merger to which the Company
is a party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(iv) of the voluntary or involuntary dissolution, liquidation or winding-
up of the Company;
the Company shall cause to be filed with the Transfer Agent and to be mailed to
each holder of the Preferred Stock at his address appearing on the Company's
stock records, as promptly as possible but in any event at least fifteen days
prior to the applicable date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution or rights or warrants, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distribution or rights are to be determined, or (y) the date on which
such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective or occur, and the date
as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up. Failure to give such notice, or any
defect therein, shall not affect the legality or validity of such dividend,
distribution, reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up.
(i) Notwithstanding any other provisions in this Section 7 to the
contrary, if any Fundamental Change (as defined in Section 7(j)) occurs, then
the Conversion Price in effect with be adjusted immediately after such
Fundamental Change as described below. In addition, in the event of a Common
Stock Fundamental Change, shares of Preferred Stock shall thereafter be
convertible solely into common stock of the kind received by holders of Common
Stock as the result of such Common Stock Fundamental Change.
For purposes of calculating any adjustment to be made pursuant to this
Section 7(i) in the event of a Fundamental Change, immediately after such
Fundamental Change (and for such purposes a Fundamental Change shall be deemed
to occur on the earlier of (a) the occurrence of such Fundamental Change and (b)
the date, if any, fixed for determination of stockholders entitled to receive
the cash, securities, property or other assets distributable in such Fundamental
Change to holders of the Common Stock):
<PAGE>
(i) in the case of a Non-Stock Fundamental Change, the Conversion Price of
the Preferred Stock immediately following such Non-Stock Fundamental Change
shall be the lower of (A) the Conversion Price in effect immediately prior
to such Non-Stock Fundamental Change, but after giving effect to any other
prior adjustments effected pursuant to this Section 7, and (B) the product
of (1) the greater of the Applicable Price (as defined in Section 7(j)) and
the then applicable Reference Market Price (as defined in Section 7(j)) and
(2) a fraction, the numerator of which is $50 and the denominator of which
is (x) the amount of the redemption price for one share of Preferred Stock
if the redemption date were the date of such Non-Stock Fundamental Change
(or the date of the period commencing on the first date of original
issuance of the Preferred Stock and to March 1, 1998 or the twelve-month
periods commencing March 1, 1998 and March 1, 1999, the product of __%, __%
and __%, respectively, times $50) plus (y) any then-accrued and unpaid
distributions on one share of Preferred Stock; and
(ii) in the case of a Common Stock Fundamental Change, the Conversion Price
of the Preferred Stock immediately following such Common Stock Fundamental
Change shall be the Conversion Price in effect immediately prior to such
Common Stock Fundamental Change, but after giving effect to any other prior
adjustments effected pursuant to this Section 7, multiplied by a fraction,
the numerator of which is the Purchaser Stock Price (as defined in Section
7(j)) and the denominator of which is the Applicable Price; provided,
however, that in the event of a Common Stock Fundamental Change in which
(A) 100% of the value of the consideration received by a holder of Common
Stock is common stock of the successor, acquiror or other third party (and
cash, if any, paid with respect to any fractional interests in such common
stock resulting from such Common Stock Fundamental Change) and (B) all of
the Common Stock shall have been exchanged for, converted into or acquired
for, common stock of the successor, acquiror or other third party (and any
cash with respect to fractional interests), the Conversion Price of the
Preferred Stock immediately following such Common Stock Fundamental Change
shall be the Conversion Price in effect immediately prior to such Common
Stock Fundamental Change multiplied by a fraction, the numerator of which
is one (1) and the denominator of which is the number of shares of common
stock of the successor, acquiror or other third party received by a holder
of one share of Common Stock as a result of such Common Stock Fundamental
Change.
(j) The following definitions shall apply to terms used in this Section 7:
(i) The term "Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of Common Stock receive only cash,
the amount of cash received by a holder of one share of Common Stock and
(ii) in the event of any other Fundamental Change, the average of the daily
Closing Price (determined as provided in Section 7(d)(viii)(1)) for one
share of Common Stock during the 10 Trading Days (determined as provided in
the Section 7(d)(viii)(5)) immediately prior to the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Fundamental
Change or, if there is no such record date, prior to the date upon which
the holders of Common Stock shall have the right to
<PAGE>
receive such cash, securities, property or other assets. The Closing Price
on any Trading Day may be subject to adjustment as provided in Section
7(d)(viii).
(ii) The term "Common Stock Fundamental Change" means any Fundamental
Change in which more than 50% of the value (as determined in good faith by
the Board of Directors of the Company) of the consideration received by
holders of Common Stock consists of common stock that, for the 10 Trading
Days immediately prior to such Fundamental Change, has been admitted for
listing or admitted for listing subject to notice of issuance on a national
securities exchange or quoted on Nasdaq National Market, provided, however,
that a Fundamental Change shall not be a Common Stock Fundamental Change
unless either (i) the Company continues to exist after the occurrence of
such Fundamental Change and the outstanding Preferred Stock continues to
exist as outstanding Preferred Stock, or (ii) not later than the occurrence
of such Fundamental Change, the outstanding Preferred Stock is converted
into or exchanged for shares of convertible preferred stock, which
convertible preferred stock has powers, preferences and relative,
participating, optional or other rights, and qualifications, limitations
and restrictions substantially similar to those of the Preferred Stock.
(iii) The term "Fundamental Change" means the occurrence of any
transaction or event or series of transactions or events pursuant to which
all or substantially all of the Common Stock shall be exchanged for,
converted into, acquired for or shall constitute solely the right to
receive cash, securities, property or other assets (whether by means of an
exchange offer, liquidation, tender, offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise); provided,
however, in the case of any such series of transactions or events, for
purposes of adjustment of the Conversion Price, such Fundamental Change
shall be deemed to have occurred when substantially all of the Common Stock
shall have been exchanged for, converted into or acquired for, or shall
constitute solely the right to receive, such cash, securities, property or
other assets, but the adjustment shall be based upon the consideration that
the holders of the Common Stock received in the transaction or event as a
result of which more than 50% of the Common Stock shall have been exchanged
for, converted into or acquired for, or shall constitute solely the right
to receive, such cash, securities, property or other assets.
(iv) The term "Non-Stock Fundamental Change" means any Fundamental Change
other than a Common Stock Fundamental Change.
(v) The term "Purchase Stock Price" means, with respect to any Common
Stock Fundamental Change, the average of the daily Closing Price for one
share of the common stock received by holders of the Common Stock in such
Common Stock Fundamental Change during the 10 Trading Days immediately
prior to the date fixed for the determination of the holders of the Common
Stock entitled to receive such common stock or, if there is no such date,
prior to the date upon which the holders of the Common Stock shall have the
right to receive such common stock.
(vi) The term "Reference Market Price" shall initially mean $_____ (which
is an amount equal to 66-2/3% of the reported last sale price for Common
Stock on the Nasdaq National
<PAGE>
Market on March __, 1997) and, in the event of any adjustment to the
Conversion Price other than as a result of a Fundamental Change, the
Reference Market Price shall also be adjusted so that the ratio of the
Reference Market Price to the Conversion Price after giving effect to any
such adjustment shall always be the same as the ratio of the initial
Reference Market Price to the initial Conversion Price of $ ____ per share.
8. Ranking. Any class or classes of stock of the Company shall be
-------
deemed to rank:
(a) prior to the Preferred Stock, as to dividends or as to distribution of
assets upon liquidation, dissolution or winding up, if the holders of such class
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Preferred Stock.
(b) on a parity with the Preferred Stock, as to dividends or as to
distribution of assets upon liquidation, dissolution or winding up, whether or
not the dividend rates, Dividend Payment Dates or redemption or liquidation
prices per share thereof be different from those of the Preferred Stock, if the
holders of such class of stock and the Preferred Stock shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in proportion to their respective amounts of
accrued and unpaid dividends per share or liquidation prices, without preference
or priority of one over the other; and
(c) junior to the Preferred Stock, as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up, if such
stock shall be Common Stock or if the holder of Preferred Stock shall be
entitled to receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority to the
holders of shares of such stock.
9. Voting Rights. The holders of the Preferred Stock will not have any
-------------
voting rights except as set forth below or as otherwise from time to time
required by law. In connection with any right to vote, each holder of the
Preferred Stock will have one vote for each share of Preferred Stock held. Any
shares of Preferred Stock held by the Company or any entity controlled by the
Company shall not have voting rights hereunder and shall not be counted in
determining the presence of a quorum.
(b) Whenever dividends on the Preferred Stock or on any outstanding shares
of preferred stock ranking on parity as to dividends with the Preferred Stock
shall be in arrears in an aggregate amount equal to at least six quarterly
dividends (whether or not consecutive), (i) the number of members of the Board
of Directors of the Company shall be increased by two, effective as of the time
of election of such directors as hereinafter provided and (ii) the holders of
the Preferred Stock (voting separately as a class with the holders of preferred
stock ranking on parity as to dividends with the Preferred Stock on which like
voting rights have been conferred and are exercisable, without regard to series)
will have the exclusive right to vote for and elect such two additional
directors of the Company at any meeting of stockholders of the Company at which
directors are to be elected held during the period such dividends remain in
arrears. The right of the holders of the Preferred Stock to vote for such two
additional directors shall terminate when all accrued and unpaid dividends on
the
<PAGE>
Preferred Stock and all other affected classes or series of preferred stock
ranking on parity as to dividends with the Preferred Stock have been declared
and paid or set apart for payment. The term of office of all directors so
elected shall terminate immediately upon the termination of the right of the
holders of the Preferred Stock, and the number of directors of the Board of
Directors of the Company shall immediately thereafter be reduced by two.
The foregoing right of the holders of the Preferred Stock with respect to
the election of two directors may be exercised at any annual meeting of
stockholders or at any special meeting of stockholders held for such purpose. If
the right to elect directors shall have accrued to the holders of the Preferred
Stock more than ninety (90) days preceding the date established for the next
annual meeting of stockholders, the President of the Company shall, within
twenty (20) days after the delivery to the Company at its principal office of a
written request for a special meeting signed by the holders of at least 10% of
all outstanding shares of Preferred Stock call a special meeting of the holders
of the Preferred Stock to be held within sixty (60) days after the delivery of
such request for the purpose of electing such additional directors.
The holders of the Preferred Stock voting as a class shall have the right
to remove without cause at any time and replace any directors such holders shall
have elected pursuant to this Section 9.
(c) So long as the Preferred Stock is outstanding, the Company shall not,
without the affirmative vote or consent of the holders of at least 66-2/3%
(unless a higher percentage shall then be required by applicable law) of all
outstanding shares of Preferred Stock voting separately as a class with the
holders of preferred stock ranking on parity as to dividends with the Preferred
Stock on which like voting rights have been conferred and are exercisable,
without regard to series, (i) amend, alter or repeal any provision of the
Certificate of Incorporation (including, without limitation, these resolutions)
or the Bylaws of the Company so as to affect adversely the relative rights,
preferences, qualifications, limitations or restrictions of the Preferred Stock,
or (ii) create, authorize or issue, or reclassify any authorized stock of the
Company into, or increase the authorized amount of, any class or series of the
Company's capital stock ranking senior to the Preferred Stock as to dividends or
as to distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, or any security convertible into
shares of such a class or series, and so long as the Preferred Stock is
outstanding, the Company shall not, without the affirmative vote or consent of
the holders of at least a 66-2/3% majority (unless a higher percentage shall
then be required by applicable law) of all outstanding shares of Preferred Stock
voting separately as a class with the holders of preferred stock ranking on
parity as to dividends with the Preferred Stock on which like voting rights have
been conferred and are exercisable, without regard to series, enter into a share
exchange pursuant to which the Preferred Stock would be exchanged for any other
securities or merge or consolidate with or into any other person or permit any
other person to merge or consolidate with or into the Company, unless in such
case each share of Preferred Stock shall remain outstanding or unaffected or
shall be converted into or exchanged for convertible exchangeable preferred
stock of the surviving entity having powers, preferences and relative
participating, optional and other rights, and qualifications, limitations and
restrictions thereof identical to a share of Preferred Stock, except for changes
that do not affect the holders of the Preferred Stock adversely. A class vote on
the part of the Preferred Stock shall, without limitation, specifically not be
deemed to be required (except as otherwise required by law or resolution of the
Company's Board of Directors) in connection with
<PAGE>
(a) the authorization, issuance or increase in the authorized amount of any
shares of capital stock ranking junior to the Preferred Stock both as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, when
and if issued, including Common Stock; or (b) the authorization, issuance or
increase in the amount of any bonds, mortgages, debentures or other obligations
of the Company (other than those that may be covered by clause (ii) of the
preceding sentence).
10. Exchange. The Preferred Stock shall be exchangeable, in whole but not
--------
in part, at the option of the Company on any Dividend Payment Date beginning
March 1, 1998, for the Debentures at the rate of $50 principal amount of
Debentures for each share of Preferred Stock outstanding at the time of
exchange; provided that the Debentures will be issuable in denominations of
--------
$1,000.00 and integral multiples thereof. If the exchange results in an amount
of Debentures that is not an integral multiple of $1,000, the amount in excess
of the closest integral multiple of $1,000 will be paid in cash by the Company.
(b) The Company will mail to each record holder of the Preferred Stock
written notice of its intention to exchange the Preferred Stock for the
Debentures no less than 30 nor more than 60 days prior to the date of the
exchange (the "Exchange Date"). The notice shall specify the effective date of
the exchange and the place where certificates for shares of the Preferred Stock
are to be surrendered for Debentures and shall state that dividends on Preferred
Stock will cease to accrue on the Exchange Date.
(c) If the Company has caused the Debentures to be authenticated on or
prior to the Exchange Date and has complied with the other provisions of this
Section 10, then, notwithstanding that any certificates for shares of Preferred
Stock have not been surrendered for exchange, on the Exchange Date dividends
shall cease to accrue on the Preferred Stock and at the close of business on the
Exchange Date the holders of the Preferred Stock shall cease to be stockholders
with respect to the Preferred Stock and shall have no interest in or other
claims against the Company by virtue thereof and shall have no voting or other
rights with respect to the Preferred Stock, except the right to receive the
Debentures issuable upon such exchange and the right to accumulated and unpaid
dividends, without interest thereon, upon surrender (and endorsement, if
required by the Company) of their certificates, and the shares evidenced thereby
shall no longer be deemed outstanding for any purpose.
The Company will cause the Debentures to be authenticated on or before the
Exchange Date.
(d) Notwithstanding the foregoing, if notice of exchange has been given
pursuant to this Section 10 and any holder of shares of Preferred Stock shall,
prior to the close of business on the Exchange Date, give written notice to the
Company pursuant to Section 7 of the conversion of any or all of the shares held
by the holder (accompanied by a certificate or certificates for such shares,
duly endorsed or assigned to the Company), then the exchange shall not become
effective as to the shares to be converted and the conversion shall become
effective as provided in Section 7.
<PAGE>
(e) The Debentures will be delivered to the persons entitled thereto upon
surrender to the Company or its agent appointed for that purpose of the
certificates for the shares of Preferred Stock being exchanged therefor.
(f) Notwithstanding the other provisions of this Section 10, if on the
Exchange Date the Company has not paid full cumulative dividends on the
Preferred Stock (or set aside a sum therefor) the Company may not exchange the
Preferred Stock for the Debentures and any notice previously given pursuant to
this Section 10 shall be of no effect.
(g) Prior to the Exchange Date, the Company will comply with any
applicable securities and blue sky laws with respect to the exchange of the
Preferred Stock for the Debentures.
11. Record Holders. The Company and the Transfer Agent may deem and treat
--------------
the record holder of any shares of Preferred Stock as the true and lawful owner
thereof for all purposes and neither the Company nor the Transfer Agent shall be
affected by any notice to the contrary.
12. Notice. Except as may otherwise be provided for herein, all notices
------
referred to herein shall be in writing, and all notices hereunder shall be
deemed to have been given upon receipt, in the case of a notice of conversion
given to the Company as contemplated in Section 7(b) hereof, or, in all other
cases, upon the earlier of receipt of such notice or three Business Days after
the mailing of such notice if sent by registered mail (unless first-class mail
shall be specifically permitted for such notice under the terms of this
Certificate) with postage Prepaid, addressed, if to the Company, to its offices
at 960 Hamilton Court, Menlo Park, California 94025 (Attention: Chief Financial
Officer) or to an agent of the Company designated as permitted by this
certificate, or, if to any holder of the Preferred Stock, to such holder at the
address of such holder of the Preferred Stock as listed in the Company's stock
records or to such other address as the Company or holder, as the case may be,
shall have designated by notice similarly given."
<PAGE>
IN WITNESS WHEREOF, this Certificate has been signed by L. Scott Minick, and
attested to by the Secretary of the Company, all as of the ___ day of March,
1997.
SEQUUS PHARMACEUTICALS, INC.
By: _______________________________
L. Scott Minick, President
Attest:
By: _________________________________
Sally A. Davenport, Secretary
<PAGE>
EXHIBIT 3.3
[Number] [Shares]
PS
PREFERRED STOCK PREFERRED STOCK
SEQUUS PHARMACEUTICALS, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF $_______ CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK, $.01 PAR VALUE PER SHARE, OF
SEQUUS PHARMACEUTICALS, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this certificate properly endorsed. This certificate
shall not be valid until countersigned and registered by the Transfer Agent
and Registrar.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated:
/s/ Sally A. Davenport /s/ Scott Minick
--------------------------- ---------------------------------
Secretary President
[CORPORATE SEAL OF SEQUUS
PHARMACEUTICALS, INC.]
<PAGE>
The corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such requests shall be made to the Corporation's Secretary at the
principal office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, OR DESTROYED THE
CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
____________________________________________________________________
NOTICE OF ELECTION TO CONVERT FOR
(CONVERTIBLE INTO COMMON STOCK) CONVERSION
USE
The undersigned hereby irrevocably elects to convert) ONLY
_________________ shares of $____ Convertible Exchangeable Preferred
Stock, represented by the written certificate into shares of Common
Stock of Sequus Pharmaceuticals, Inc. (as such shares may be
constituted on the conversion date) in accordance with the provisions
of the Articles of Incorporation, as amended, of the Corporation.
Dated _________________
_________________________________________
Signature
_____________________________________________________________________
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT -- ___________ Custodian _______________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _________________________________
(State)
UNIF TRF MIN ACT -- ____________ Custodian (until age ____)
(Cust)
_______________ under Uniform Transfers
(Minor)
to Minors Act ________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________________ hereby sell, assign and
transfer unto
___________________________________________
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
___________________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________________ .
X _____________________________________
X _____________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
_____________________________________________________
AMERICAN BANK NOTE COMPANY FEB 3, 1997 fm
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 048832bk
(562) 989-2333
(FAX) (562) 426-7450 Proof /s/?? NEW
-------
_____________________________________________________
<PAGE>
EXHIBIT 4.1
================================================================================
SEQUUS PHARMACEUTICALS, INC.
CHEMICAL TRUST COMPANY OF CALIFORNIA
as Trustee
INDENTURE
Dated as of ___________________, 1997
___% Convertible Subordinated Debentures due 2007
================================================================================
<PAGE>
CROSS REFERENCE SHEET/*/
_____________________________________
Between
Provisions of Trust Indenture Act of 1939 and Indenture, dated as of _______,
1997, between Sequus Pharmaceuticals, Inc. and _________________________, as
Trustee, providing for __% Convertible Subordinated Debentures due 2007:
<TABLE>
<CAPTION>
Section of the Act Section of Indenture
- ------------------------------- -------------------------------
<S> <C>
310(a)(1) and (2)........ 8.9
310(a)(3) and (4)........ Inapplicable
310(b)................... 8.8 and 8.10(b) and (d)
310(c)................... Inapplicable
311(a)................... 8.13
311(b)................... 8.13
311(c)................... Inapplicable
312(a)................... 6.1 and 6.2(a)
312(b)................... 6.2(b)
312(c)................... 6.2(c)
313(a)................... 6.3(a)
313(b)(1)................ Inapplicable
313(b)(2)................ 6.3(a)
313(c)................... 6.3(a)
313(d)................... 6.3(b)
314(a)................... 6.4
314(b)................... Inapplicable
314(c)(1) and (2)........ 16.5
314(c)(3)................ Inapplicable
314(d)................... Inapplicable
314(e)................... 16.5
314(f)................... Inapplicable
315(a), (c) and (d)...... 8.1
315(b)................... 7.8
315(e)................... 7.9
316(a)(1)................ 7.7
316(a)(2)................ Not required
316(a) (last sentence)... 9.4
316(b)................... 11.2
317(a)................... 7.2
317(b)................... 5.4 and 13.2
318(a)................... 16.8
</TABLE>
- ---------------------------
/*/ This Cross Reference Sheet is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS........................................................... 1
Section 1.1 Definitions...................................... 1
ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF
DEBENTURES.................................................................. 7
Section 2.1 Designation, Amount and Issue of Debentures...... 7
Section 2.2 Form of Debentures............................... 7
Section 2.3 Date and Denomination of Debentures; Payments of
Interest....................................... 8
Section 2.4 Execution of Debentures.......................... 10
Section 2.5 Exchange and Registration of Transfer of
Debentures....................................... 10
Section 2.6 Mutilated, Destroyed, Lost or Stolen Debentures.. 11
Section 2.7 Temporary Debentures............................. 12
Section 2.8 Cancellation of Debentures Paid, Etc............. 13
ARTICLE III REDEMPTION OF DEBENTURES............................................ 13
Section 3.1 Redemption Prices................................ 13
Section 3.2 Notice of Redemption; Selection of Debentures.... 13
Section 3.3 Payment of Debentures Called for Redemption...... 15
Section 3.4 Conversion Arrangement on Call for Redemption.... 15
ARTICLE IV SUBORDINATION OF DEBENTURES.......................................... 16
Section 4.1 Agreement of Subordination....................... 16
Section 4.2 Payments to Debentureholders..................... 17
Section 4.3 Subrogation of Debentures........................ 19
Section 4.4 Authorization by Debentureholders................ 20
Section 4.5 Notice to Trustee................................ 20
Section 4.6 Trustee's Relation to Senior Indebtedness........ 21
Section 4.7 No Impairment of Subordination................... 22
Section 4.8 Certain Conversions Deemed Payment............... 22
Section 4.9 Article Applicable to Paying Agents.............. 22
Section 4.10 Senior Indebtedness Entitled to Rely. 22
ARTICLE V PARTICULAR COVENANTS OF THE COMPANY................................... 23
Section 5.1 Payment of Principal, Premium and Interest....... 23
Section 5.2 Maintenance of Office or Agency.................. 23
Section 5.3 Appointments to Fill Vacancies in Trustee's
Office......................................... 24
Section 5.4 Provisions as to Paying Agent.................... 24
Section 5.5 Existence........................................ 25
Section 5.6 Maintenance of Properties........................ 25
Section 5.8 Stay, Extension and Usury Laws................... 26
Section 5.9 Compliance Certificate........................... 26
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 5.10 Further Instruments and Acts..................... 26
ARTICLE VI DEBENTUREHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE... 27
Section 6.1 Debentureholders' Lists.......................... 27
Section 6.2 Preservation and Disclosure of Lists............. 27
Section 6.3 Reports by Trustee............................... 27
Section 6.4 Reports by Company............................... 28
ARTICLE VII DEFAULTS AND REMEDIES............................................... 28
Section 7.1 Events of Default................................ 28
Section 7.2 Payments of Debentures on Default; Suit Therefor. 30
Section 7.3 Application of Monies Collected by Trustee....... 32
Section 7.4 Proceedings by Debentureholder................... 33
Section 7.5 Proceedings by Trustee........................... 34
Section 7.6 Remedies Cumulative and Continuing............... 34
Section 7.7 Direction of Proceedings and Waiver of Defaults
by Majority of Debentureholders................ 34
Section 7.8 Notice of Defaults............................... 35
Section 7.9 Undertaking to Pay Costs......................... 35
Section 7.10 Delay or Omission Not Waiver..................... 35
ARTICLE VIII CONCERNING THE TRUSTEE............................................. 36
Section 8.1 Duties and Responsibilities of Trustee........... 36
Section 8.2 Reliance on Documents, Opinions, Etc............. 37
Section 8.3 No Responsibility for Recitals, Etc.............. 38
Section 8.4 Trustee, Paying Agents, Conversion Agents or
Registrar May Own Debentures................... 38
Section 8.5 Monies to Be Held in Trust....................... 38
Section 8.6 Compensation and Expenses of Trustee............. 38
Section 8.7 Officers' Certificate as Evidence................ 39
Section 8.8 Conflicting Interests of Trustee................. 39
Section 8.9 Eligibility of Trustee........................... 39
Section 8.10 Resignation or Removal of Trustee................ 40
Section 8.11 Acceptance by Successor Trustee.................. 41
Section 8.12 Succession by Merger, Etc........................ 42
Section 8.13 Limitation on Rights of Trustee as Creditor...... 42
ARTICLE IX CONCERNING THE DEBENTUREHOLDERS...................................... 42
-ii-
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 9.1 Action by Debentureholders....................... 42
Section 9.2 Proof of Execution by Debentureholders........... 43
Section 9.3 Who Are Deemed Absolute Owners................... 43
Section 9.4 Company-Owned Debentures Disregarded............. 43
Section 9.5 Revocation of Consents; Future Holders Bound..... 44
ARTICLE X DEBENTUREHOLDERS' MEETINGS............................................ 44
Section 10.1 Purpose of Meetings.............................. 44
Section 10.2 Call of Meetings by Trustee...................... 45
Section 10.3 Call of Meetings by Company or Debentureholders.. 45
Section 10.4 Qualifications for Voting........................ 45
Section 10.5 Regulations...................................... 45
Section 10.6 Voting........................................... 46
Section 10.7 No Delay of Rights by Meeting.................... 47
ARTICLE XI SUPPLEMENTAL INDENTURES.............................................. 47
Section 11.1 Supplemental Indentures Without Consent of
Debentureholders............................... 47
Section 11.2 Supplemental Indentures with Consent of
Debentureholders............................... 48
Section 11.3 Effect of Supplemental Indentures................ 49
Section 11.4 Notation on Debentures........................... 49
Section 11.5 Evidence of Compliance of Supplemental Indenture
to Be Furnished Trustee.......................... 49
ARTICLE XII MERGER, SALE OR CONSOLIDATION....................................... 50
Section 12.2 Successor Corporation to Be Substituted.......... 50
ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE............................ 51
Section 13.1 Discharge of Indenture........................... 51
Section 13.2 Deposited Monies to Be Held in Trust by Trustee.. 51
Section 13.3 Paying Agent to Repay Monies Held................ 52
Section 13.4 Return of Unclaimed Monies....................... 52
Section 13.5 Reinstatement 52
ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS..... 52
Section 14.1 Indenture and Debentures Solely Corporate
Obligations.................................... 52
ARTICLE XV CONVERSION OF DEBENTURES............................................. 53
Section 15.1 Right to Convert................................. 53
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 15.2 Exercise of Conversion Privilege; Issuance of
Common Stock on Conversion; No Adjustment for
Interest or Dividends.......................... 53
Section 15.3 Cash Payments in Lieu of Fractional Shares....... 54
Section 15.4 Conversion Price................................. 55
Section 15.5 Adjustment of Conversion Price................... 55
Section 15.6 Reclassification, Consolidation, Merger or Sale.. 65
Section 15.7 Taxes on Shares Issued........................... 66
Section 15.8 Reservation of Shares; Shares to Be Fully Paid;
Listing of Common Stock........................ 67
Section 15.9 Responsibility of Trustee........................ 67
Section 15.10 Notice to Holders Prior to Certain Actions....... 68
Section 15.11 Adjustments to Conversion Price in the Event of
a Fundamental Change........................... 69
ARTICLE XVI MISCELLANEOUS PROVISIONS............................................ 71
Section 16.1 Provisions Binding on Company's Successors....... 71
Section 16.2 Official Acts by Successor Corporation........... 71
Section 16.3 Addresses for Notices, Etc....................... 72
Section 16.4 Governing Law.................................... 72
Section 16.5 Evidence of Compliance with Conditions
Precedent; Certificates to Trustee............. 72
Section 16.6 Legal Holidays................................... 73
Section 16.7 No Security Interest Created..................... 73
Section 16.8 Trust Indenture Act.............................. 73
Section 16.9 Benefits of Indenture............................ 73
Section 16.10 Table of Contents, Headings, Etc. ............... 73
Section 16.11 Authenticating Agent............................. 73
Section 16.12 Execution in Counterparts........................ 74
</TABLE>
-iv-
<PAGE>
INDENTURE dated as of ___________, 1997 between
SEQUUS PHARMACEUTICALS, INC., a Delaware corporation (hereinafter sometimes
called the "Company", as more fully set forth in Section 1.1), and
CHEMICAL TRUST COMPANY OF CALIFORNIA, a ___________ organized under the laws of
California (hereinafter sometimes called the "Trustee", as more fully set forth
in Section 1.1).
W I T N E S S E T H:
WHEREAS, for its lawful corporate purposes, the Company has duly authorized
the issue of its ___% Convertible Subordinated Debentures due 2007 (hereinafter
sometimes called the "Debentures"), in an aggregate principal amount not to
exceed $57,500,000 and, to provide the terms and conditions upon which the
Debentures are to be authenticated, issued and delivered, the Company has duly
authorized the execution and delivery of this Indenture; and
WHEREAS, the Debentures, the certificate of authentication to be borne by
the Debentures, a form of assignment, a form of conversion notice and a
certificate of transfer to be borne by the Debentures are to be substantially in
the forms hereinafter provided for; and
WHEREAS, all acts and things necessary to make the Debentures, when
executed by the Company and authenticated and delivered by the Trustee or a duly
authorized authenticating agent, as in this Indenture provided, the valid,
binding and legal obligations of the Company, and to constitute these presents a
valid agreement according to its terms, have been done and performed, and the
execution of this Indenture and the issue hereunder of the Debentures have in
all respects been duly authorized.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Debentures
are, and are to be, authenticated, issued and delivered, and in consideration of
the premises and of the purchase and acceptance of the Debentures by the holders
thereof, the Company covenants and agrees with the Trustee for the equal and
proportionate benefit of the respective holders from time to time of the
Debentures (except as otherwise provided below), as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. The terms defined in this Section 1.1 (except as
-----------
herein otherwise expressly provided or unless the context otherwise requires)
for all purposes of this Indenture and of any indenture supplemental hereto
shall have the respective meanings specified in this Section 1.1. All other
terms used in this Indenture, which are defined in the Trust Indenture Act or
which are by reference therein defined in the Securities Act (except as herein
otherwise expressly provided or unless the context otherwise requires) shall
have the meanings assigned to such terms in said Trust Indenture Act and in
said Securities Act as in force at the date of the execution of this
Indenture. The words "herein," "hereof," "hereunder," and words of similar
<PAGE>
import refer to this Indenture as a whole and not to any particular Article,
Section or other Subdivision. The terms defined in this Article include the
plural as well as the singular.
Affiliate: The term "Affiliate" of any specified person shall mean any
---------
other person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified person. For the purposes of this
definition, "control," when used with respect to any specified person means the
power to direct or cause the direction of the management and policies of such
person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
Applicable Price: The term "Applicable Price" shall have the meaning
----------------
specified in Section 15.11(b).
Board of Directors: The term "Board of Directors" shall mean the Board of
------------------
Directors of the Company or a committee of such Board duly authorized to act for
it hereunder.
Board Resolution: The term "Board Resolution" means a copy of a resolution
----------------
certified by the Secretary or an Assistant Secretary of the Company to have been
duly adopted by the Board of Directors and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
Business Day: The term "Business Day" means each Monday, Tuesday,
------------
Wednesday, Thursday and Friday which is not a day on which the banking
institutions in The City of New York or the city in which the Corporate Trust
Office is located are authorized or obligated by law or executive order to close
or be closed.
Commission: The term "Commission" shall mean the Securities and Exchange
----------
Commission.
Common Stock: The term "Common Stock" shall mean any stock of any class of
------------
the Company which has no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company and which is not subject to redemption by the Company.
Subject to the provisions of Section 15.6, however, shares issuable on
conversion of Debentures shall include only shares of the class designated as
common stock of the Company at the date of this Indenture or shares of any class
or classes resulting from any reclassification or reclassifications thereof and
which have no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company and which are not subject to redemption by the Company; provided
--------
that if at any time there shall be more than one such resulting class, the
shares of each such class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.
2
<PAGE>
Common Stock Fundamental Change: The term "Common Stock Fundamental
-------------------------------
Change" shall have the meaning specified in Section 15.11(b).
Company: The term "Company" shall mean Sequus Pharmaceuticals, Inc., a
-------
Delaware corporation, and subject to the provisions of Article XII, shall
include its successors and assigns.
Conversion Price: The term "Conversion Price" shall have the meaning
----------------
specified in Section 15.4.
Corporate Trust Office: The term "Corporate Trust Office," or other
----------------------
similar term, shall mean the office of the Trustee at which at any particular
time its corporate trust business shall be principally administered, which
office is, at the date as of which this Indenture is dated, located at
______________________.
Debenture or Debentures: The terms "Debenture" or "Debentures" shall mean
-----------------------
any Debenture or Debentures, as the case may be, authenticated and delivered
under this Indenture.
Debentureholder; holder: The terms "Debentureholder" or "holder" as
-----------------------
applied to any Debenture, or other similar terms (but excluding the term
"beneficial holder"), shall mean any person in whose name at the time a
particular Debenture is registered on the Debenture register.
Debenture register: The term "Debenture register" shall have the meaning
------------------
specified in Section 2.5.
default: The term "default" shall mean any event that is, or after notice
-------
or passage of time, or both, would be, an Event of Default.
Designated Senior Indebtedness: The term "Designated Senior Indebtedness"
------------------------------
means any particular Senior Indebtedness in which the instrument creating or
evidencing the same or the assumption or guarantee thereof (or related
agreements or documents to which the Company is a party) expressly provides that
such Indebtedness shall be "Designated Senior Indebtedness" for purposes of the
Indenture (provided that such instrument, agreement or other document may place
limitations and conditions on the right of such Senior Indebtedness to exercise
the rights of Designated Senior Indebtedness).
Event of Default: The term "Event of Default" shall mean any event
----------------
specified in Section 7.1(a), (b), (c), (d), (e), (f) or (g) continued for the
period of time, if any, and after the giving of notice, if any, therein
designated.
Exchange Act: The term "Exchange Act" means the Securities Exchange Act of
------------
1934, as amended, and the rules and regulations promulgated thereunder.
3
<PAGE>
Exchange Date: The term "Exchange Date" shall mean the date on which the
-------------
Debentures are issued in exchange for the outstanding shares of $____
Convertible Exchangeable Preferred Stock, par value $0.01 per share, of the
Company.
Fundamental Change: The term "Fundamental Change" shall have the meaning
------------------
specified in Section 15.11(b).
Indebtedness: The term "Indebtedness" means, with respect to any person,
------------
all obligations, whether or not contingent, of such person (i) (a) for borrowed
money, (b) evidenced by a note, debenture, bond or other written instrument, (c)
under a lease required to be capitalized on the balance sheet of the lessee
under generally accepted accounting principles or under any lease or related
document (including a purchase agreement) that provides that the Company is
contractually obligated to purchase or cause a third party to purchase and
thereby guarantee a minimum residual value of the lease property to the lessor
and the obligations of the Company under such lease or related document to
purchase or to cause a third party to purchase such leased property, (d) in
respect of letters of credit, bank guarantees or bankers' acceptances (including
reimbursement obligations with respect to any of the foregoing), (e) with
respect to Indebtedness secured by a mortgage, pledge, lien, encumbrance, charge
or adverse claim affecting title in an encumbrance to which the property or
assets of such person are subject, whether or not the obligation secured thereby
shall have been assumed by or shall otherwise be such person's legal liability,
(f) in respect of the balance of deferred and unpaid purchase price of any
property or assets, (g) under interest rate or currency swap agreements, cap,
floor and collar agreements, spot and forward contracts and similar agreements
and arrangements; (ii) with respect to any obligation of others of the type
described in the preceding clause (i) or under clause (iii) below assumed by or
guaranteed in any manner by such person or in effect guaranteed by such person
through an agreement to purchase (including, without limitation, "take or pay"
and similar arrangements), contingent or otherwise (and the obligations of such
person under any such assumptions, guarantees or other such arrangements); and
(iii) any and all Indebtedness constituting deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.
Indenture: The term "Indenture" shall mean this instrument as originally
---------
executed or, if amended or supplemented as herein provided, as so amended or
supplemented.
Instrument: The term "Instrument" shall have the meaning specified in
----------
Section 7.1(f).
Non-Stock Fundamental Change: The term "Non-Stock Fundamental Change"
----------------------------
shall have the meaning specified in Section 15.11(b).
Officers' Certificate: The term "Officers' Certificate", when used with
---------------------
respect to the Company, shall mean a certificate signed by (a) one of the
President, the Chief Executive Officer, Executive or Senior Vice President or
any Vice President (whether or not designated by a number or numbers or word
added before or after the title "Vice President") and (b) by one of the
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Treasurer or any Assistant Treasurer, Secretary or any Assistant Secretary or
Controller of the Company, which is delivered to the Trustee. Each such
certificate shall include the statements provided for in Section 16.5 if and
to the extent required by the provisions of such Section.
Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in
------------------
writing signed by legal counsel, who may be an employee of or counsel to the
Company, or other counsel acceptable to the Trustee, which is delivered to the
Trustee. Each such opinion shall include the statements provided for in Section
16.5 if and to the extent required by the provisions of such Section.
outstanding: The term "outstanding," when used with reference to
-----------
Debentures, shall, subject to the provisions of Section 9.4, mean, as of any
particular time, all Debentures authenticated and delivered by the Trustee under
this Indenture, except
(a) Debentures theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(b) Debentures, or portions thereof, for the payment, or redemption
of which monies in the necessary amount shall have been deposited in trust
with the Trustee or with any paying agent (other than the Company) or shall
have been set aside and segregated in trust by the Company (if the Company
shall act as its own paying agent); provided that if such Debentures are to
--------
be redeemed prior to the maturity thereof, notice of such redemption shall
have been given as provided in Section 3.2, or provision satisfactory to
the Trustee shall have been made for giving such notice;
(c) Debentures in lieu of which, or in substitution for which, other
Debentures shall have been authenticated and delivered pursuant to the
terms of Section 2.6 unless proof satisfactory to the Trustee is presented
that any such Debentures are held by bona fide holders in due course; and
(d) Debentures converted into Common Stock pursuant to Article XV and
Debentures deemed not outstanding pursuant to Section 3.2.
Payment Blockage Notice: The term "Payment Blockage Notice" has the
-----------------------
meaning specified in Section 4.2.
person: The term "person" shall mean a corporation, an association, a
------
partnership, an individual, a joint venture, a joint stock company, a trust, an
unincorporated organization or a government or an agency or a political
subdivision thereof.
Predecessor Debenture: The term "Predecessor Debenture" of any particular
---------------------
Debenture shall mean every previous Debenture evidencing all or a portion of the
same debt as that evidenced by such particular Debenture; and, for the purposes
of this definition, any Debenture
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authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or
stolen Debenture shall be deemed to evidence the same debt as the lost,
destroyed or stolen Debenture that it replaces.
Purchase Stock Price: The term "Purchase Stock Price" shall have the
--------------------
meaning specified in Section 15.11(b).
Reference Marked Price: The term "Reference Marked Price" shall have the
----------------------
meaning specified in Section 15.11(b).
"Representative" means the (a) indenture trustee or other trustee, agent or
--------------
representative for any Senior Indebtedness or (b) with respect to any Senior
Indebtedness that does not have any such trustee, agent or other representative,
(i) in the case of such Senior Indebtedness issued pursuant to an agreement
providing for voting arrangements as among the holders or owners of such Senior
Indebtedness, any holder or owner of such Senior Indebtedness acting with the
consent of the required persons necessary to bind such holders or owners of such
Senior Indebtedness and (ii) in the case of all other such Senior Indebtedness,
the holder or owner of such Senior Indebtedness.
Responsible Officer: The term "Responsible Officer", when used with
-------------------
respect to the Trustee, shall mean an officer of the Trustee assigned to the
Corporate Trust Office, and any officer of the Trustee to whom such matter is
referred to because of his knowledge of and familiarity with the particular
subject.
Securities Act: The term "Securities Act" means the Securities Act of
--------------
1933, as amended, and the rules and regulations promulgated thereunder.
Senior Indebtedness: The term "Senior Indebtedness" means the principal
-------------------
of, premium, if any, and interest on, rent under, and any other amounts payable
on or in or in respect of any Indebtedness of the Company (including,
without limitation, any interest accruing after the filing of a petition by or
against the Company under any bankruptcy law, whether or not allowed as a claim
after such filing in any proceeding under such bankruptcy law), whether
outstanding on the date of the Indenture or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by the Company (including all
deferrals, renewals, extensions or refundings of, or amendments, modifications
or supplements to the foregoing); provided, however, that Senior Indebtedness
-------- -------
does not include (v) Indebtedness evidenced by the Debentures, (w) any liability
for federal, state local or other taxes owed or owing by the Company, (x)
Indebtedness of the Company to any subsidiary of the Company, (y) any trade
payables of the Company incurred in the ordinary course of business, and (z) any
indebtedness in which the instrument creating or evidencing the same or the
assumption or thereof (or related agreements or documents to which the Company
is a party) expressly provides that such Indebtedness shall not be senior in
right of payment to, or is pari passu with, or is subordinated or junior to, the
Debentures.
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Subsidiary: The term "Subsidiary" means a corporation more than 50% of the
----------
outstanding voting stock of which is owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries. For the purposes of this definition, "voting stock" means
stock which ordinarily has voting power for the election of directors, whether
at all times or only so long as no senior class of stock has such voting power
by reason of any contingency.
Trading Day: The term "Trading Day" has the meaning specified in Section
-----------
15.5(h)(5).
Trust Indenture Act: The term "Trust Indenture Act" shall mean the Trust
-------------------
Indenture Act of 1939, as amended, as it was in force at the date of execution
of this Indenture, except as provided in Sections 11.3 and 15.6; provided,
--------
however, that in the event the Trust Indenture Act of 1939 is amended after the
- -------
date hereof, the term "Trust Indenture Act" shall mean, to the extent required
by such amendment, the Trust Indenture Act of 1939 as so amended.
Trustee: The term "Trustee" shall mean Chemical Trust Company of
-------
California and its successors and any corporation resulting from or surviving
any consolidation or merger to which it or its successors may be a party and any
successor trustee at the time serving as successor trustee hereunder.
The definitions of certain other terms are as specified in Article XV.
ARTICLE II
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF DEBENTURES
Section 2.1 Designation, Amount and Issue of Debentures. The Debentures
-------------------------------------------
shall be designated as "___% Convertible Subordinated Debentures due 2007."
Debentures not to exceed the aggregate principal amount of $57,500,000 (except
pursuant to Sections 2.5, 2.6, 3.3 and 15.2) upon the execution of this
Indenture, or from time to time thereafter, may be executed by the Company and
delivered to the Trustee for authentication, and the Trustee shall thereupon
authenticate and deliver said Debentures upon the written order of the Company,
signed by the Company's (a) President, Executive or Senior Vice President or any
Vice President (whether or not designated by a number or numbers or word or
words added before or after the title "Vice President") and (b) Treasurer or
Assistant Treasurer or its Secretary or any Assistant Secretary, without any
further action by the Company hereunder.
Section 2.2 Form of Debentures. The Debentures and the Trustee's
-------------------
certificate of authentication to be borne by such Debentures shall be
substantially in the form set forth in Exhibit A, which is incorporated in and
made a part of this Indenture.
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Any of the Debentures may have such letters, numbers or other marks of
identification and such notations, legends and endorsements as the officers
executing the same may approve (execution thereof to be conclusive evidence of
such approval) and as are not inconsistent with the provisions of this
Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
securities exchange or automated quotation system on which the Debentures may be
listed or designated for issuance, or to conform to usage.
The terms and provisions contained in the form of Debenture attached as
Exhibit A hereto shall constitute, and are hereby expressly made, a part of this
Indenture and to the extent applicable, the Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
Section 2.3 Date and Denomination of Debentures; Payments of Interest.
---------------------------------------------------------
The Debentures shall be issuable in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. Every
Debenture shall be dated the date of its authentication and, except as
provided in this Section, shall bear interest, payable semiannually on March 1
and September 1, of each year, commencing on the first such date after the
Exchange Date, from the most recent date to which interest has been paid or
duly provided for, or if no interest has been paid or duly provided for on the
Debentures, from the Exchange Date, until payment of the principal sum has
been made or fully provided for. Notwithstanding the foregoing, when there is
no existing default in the payment of interest on the Debentures, all
Debentures authenticated by the Trustee after the close of business on the
record date (as defined in this Section 2.3) for any interest payment date
(March 1 or September 1, as the case may be) and prior to such interest
payment date shall be dated the date of authentication but shall bear interest
from such interest payment date, provided, however, that if and to the extent
-------- -------
that the Company shall default in interest due on such interest payment date
then any such Debenture shall bear interest from the March 1 or the September
1, as the case may be, immediately preceding the date of such Debenture to
which interest has been paid or duly provided for or, if no interest has been
paid or duly provided for on the Debentures, from the Exchange Date.
The person in whose name any Debenture (or its Predecessor Debenture) is
registered at the close of business on any record date with respect to any
interest payment date (including any Debenture that is converted after the
record date and on or before the interest payment date) shall be entitled to
receive the interest payable on such interest payment date notwithstanding the
cancellation of such Debenture upon any transfer, exchange or conversion
subsequent to the record date and on or prior to such interest payment date.
Interest may, at the option of the Company, be paid by check mailed to the
address of such person on the registry kept for such purposes; provided that,
--------
with respect to any holder of Debentures with an aggregate principal amount
equal to or in excess of $2,000,000, at the request of such holder in writing to
the Company, interest on such holder's Debentures shall be paid by wire transfer
in immediately available funds in accordance with the wire transfer instruction
supplied by such holder to the Trustee and paying agent (if different from
Trustee). The term "record date" with respect to any
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<PAGE>
interest payment date shall mean the February 15 or August 15 preceding said
March 1 or September 1.
Interest on the Debentures shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Any interest on any Debenture which is payable, but is not punctually paid
or duly provided for, on any said March 1 or September 1 (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Debentureholder
on the relevant record date by virtue of his having been such Debentureholder;
and such Defaulted Interest shall be paid by the Company, at its election in
each case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest
to the persons in whose names the Debentures (or their respective
Predecessor Debentures) are registered at the close of business on a
special record date for the payment of such Defaulted Interest, which shall
be fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest to be paid on each Debenture
and the date of the payment (which shall be not less than twenty-five (25)
days after the receipt by the Trustee of such notice, unless the Trustee
shall consent to an earlier date), and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
to be paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a special record date for
the payment of such Defaulted Interest which shall be not more than fifteen
(15) days and not less than ten (10) days prior to the date of the proposed
payment and not less than ten (10) days after the receipt by the Trustee of
the notice of the proposed payment. The Trustee shall promptly notify the
Company of such special record date and, in the name and at the expense of
the Company, shall cause notice of the proposed payment of such Defaulted
Interest and the special record date therefor to be mailed, first-class
postage prepaid, to each Debentureholder as of such special record date at
his address as it appears in the Debenture register, not less than ten (10)
days prior to such special record date. Notice of the proposed payment of
such Defaulted Interest and the special record date therefor having been so
mailed, such Defaulted Interest shall be paid to the persons in whose names
the Debentures (or their respective Predecessor Debentures) were registered
at the close of business on such special record date and shall no longer be
payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange or automated quotation system on which the Debentures
may be listed or designated for issuance, and upon such notice as may be
required by such exchange or automated quotation system, if, after notice
given by the Company to the Trustee of the proposed
9
<PAGE>
payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.
Section 2.4 Execution of Debentures. The Debentures shall be signed in
-----------------------
the name and on behalf of the Company by the facsimile signature of its
President, its Chief Executive Officer, any of its Executive or Senior Vice
Presidents, or any of its Vice Presidents (whether or not designated by a
number or numbers or word or words added before or after the title "Vice
President") and attested by the facsimile signature of its Secretary or any of
its Assistant Secretaries (which may be printed, engraved or otherwise
reproduced thereon, by facsimile or otherwise). Only such Debentures as shall
bear thereon a certificate of authentication substantially in the form set
forth on the form of Debenture attached as Exhibit A hereto, manually executed
by the Trustee (or an authenticating agent appointed by the Trustee as
provided by Section 16.11), shall be entitled to the benefits of this
Indenture or be valid or obligatory for any purpose. Such certificate by the
Trustee (or such an authenticating agent) upon any Debenture executed by the
Company shall be conclusive evidence that the Debenture so authenticated has
been duly authenticated and delivered hereunder and that the holder is
entitled to the benefits of this Indenture.
In case any officer of the Company who shall have signed any of the
Debentures shall cease to be such officer before the Debentures so signed shall
have been authenticated and delivered by the Trustee, or disposed of by the
Company, such Debentures nevertheless may be authenticated and delivered or
disposed of as though the person who signed such Debentures had not ceased to be
such officer of the Company; and any Debenture may be signed on behalf of the
Company by such persons as, at the actual date of the execution of such
Debenture, shall be the proper officers of the Company, although at the date of
the execution of this Indenture any such person was not such an officer.
Section 2.5 Exchange and Registration of Transfer of Debentures. The
----------------------------------------------------
Company shall cause to be kept at the Corporate Trust Office a register (the
register maintained in such office and in any other office or agency of the
Company designated pursuant to Section 5.2 being herein sometimes collectively
referred to as the "Debenture register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the
registration of Debentures and of transfers of Debentures. Such register shall
be in written form or in any form capable of being converted into written form
within a reasonable period of time. The Trustee is hereby appointed "Debenture
registrar" for the purpose of registering Debentures and transfers of
Debentures as herein provided. The Company may appoint one or more co-
registrars in accordance with Section 5.2.
Upon surrender for registration of transfer of any Debenture to the
Debenture registrar or any co-registrar, and satisfaction of the requirements
for such transfer set forth in this Section 2.5, the Company shall execute, and
the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Debentures of any authorized
denominations and of a like aggregate principal amount.
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<PAGE>
Debentures may be exchanged for other Debentures of any authorized
denominations and of a like aggregate principal amount, upon surrender of the
Debentures to be exchanged at any such office or agency. Whenever any
Debentures are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Debentures which the Debentureholder
making the exchange is entitled to receive, bearing registration numbers not
contemporaneously outstanding.
All Debentures presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company, the Trustee, the Debenture
registrar or any co-registrar) be duly endorsed, or be accompanied by a written
instrument or instruments of transfer in form satisfactory to the Company and
duly executed, by the Debentureholder thereof or his attorney duly authorized in
writing.
No service charge shall be charged to the Debentureholder for any exchange
or registration of transfer of Debentures, but the Company may require payment
of a sum sufficient to cover any tax, assessments or other governmental charges
that may be imposed in connection therewith.
None of the Company, the Trustee, the Debenture registrar or any co-
registrar shall be required to exchange or register a transfer of (a) any
Debentures for a period of fifteen (15) days next preceding any selection of
Debentures to be redeemed or (b) any Debentures called for redemption or, if a
portion of any Debenture is selected or called for redemption, such portion
thereof selected or called for redemption or (c) any Debentures surrendered for
conversion or, if a portion of any Debenture is surrendered for conversion, such
portion thereof surrendered for conversion.
All Debentures issued upon any transfer or exchange of Debentures in
accordance with this Indenture shall be the valid obligations of the Company,
evidencing the same debt, and entitled to the same benefits under this Indenture
as the Debentures surrendered upon such registration of transfer or exchange.
Section 2.6 Mutilated, Destroyed, Lost or Stolen Debentures. In case any
-----------------------------------------------
Debenture shall become mutilated or be destroyed, lost or stolen, the Company in
its discretion may execute, and upon its request the Trustee or an
authenticating agent appointed by the Trustee shall authenticate and deliver, a
new Debenture, bearing a number not contemporaneously outstanding, in exchange
and substitution for the mutilated Debenture, or in lieu of and in substitution
for the Debenture so destroyed, lost or stolen. In every case the applicant for
a substituted Debenture shall furnish to the Company, to the Trustee and, if
applicable, to such authenticating agent such security or indemnity as may be
required by them to save each of them harmless for any loss, liability, cost or
expense caused by or connected with such substitution, and, in every case of
destruction, loss or theft, the applicant shall also furnish to the Company, to
the Trustee and, if applicable, to such authenticating agent evidence to their
satisfaction of the destruction, loss or theft of such Debenture and of the
ownership thereof.
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<PAGE>
The Trustee or such authenticating agent may authenticate any such
substituted Debenture and deliver the same upon the receipt of such security or
indemnity as the Trustee, the Company and, if applicable, such authenticating
agent may require. Upon the issuance of any substituted Debenture, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses connected therewith. In case any Debenture which has matured or is
about to mature or has been called for redemption or is about to be converted
into Common Stock shall become mutilated or be destroyed, lost or stolen, the
Company may, instead of issuing a substitute Debenture, pay or authorize the
payment of or convert or authorize the conversion of the same (without surrender
thereof except in the case of a mutilated Debenture), as the case may be, if the
applicant for such payment or conversion shall furnish to the Company, to the
Trustee and, if applicable, to such authenticating agent such security or
indemnity as may be required by them to save each of them harmless for any loss,
liability, cost or expense caused by or connected with such substitution, and,
in case of destruction, loss or theft, evidence satisfactory to the Company, the
Trustee and, if applicable, any paying agent or conversion agent of the
destruction, loss or theft of such Debenture and of the ownership thereof.
Every substitute Debenture issued pursuant to the provisions of this
Section 2.6 by virtue of the fact that any Debenture is destroyed, lost or
stolen shall constitute an additional contractual obligation of the Company,
whether or not the destroyed, lost or stolen Debenture shall be found at any
time, and shall be entitled to all the benefits of (but shall be subject to all
the limitations set forth in) this Indenture equally and proportionately with
any and all other Debentures duly issued hereunder. To the extent permitted by
law, all Debentures shall be held and owned upon the express condition that the
foregoing provisions are exclusive with respect to the replacement or payment or
conversion of mutilated, destroyed, lost or stolen Debentures and shall preclude
any and all other rights or remedies notwithstanding any law or statute existing
or hereafter enacted to the contrary with respect to the replacement or payment
or conversion of negotiable instruments or other securities without their
surrender.
Section 2.7 Temporary Debentures. Pending the preparation of definitive
--------------------
Debentures, the Company may execute and the Trustee or an authenticating agent
appointed by the Trustee shall, upon written request of the Company,
authenticate and deliver temporary Debentures (printed or lithographed).
Temporary Debentures shall be issuable in any authorized denomination, and
substantially in the form of the definitive Debentures but with such omissions,
insertions and variations as may be appropriate for temporary Debentures, all as
may be determined by the Company. Every such temporary Debenture shall be
executed by the Company and authenticated by the Trustee or such authenticating
agent upon the same conditions and in substantially the same manner, and with
the same effect, as the definitive Debentures. Without unreasonable delay the
Company will execute and deliver to the Trustee or such authenticating agent
definitive Debentures and thereupon any or all temporary Debentures may be
surrendered in exchange therefor, at each office or agency maintained by the
Company pursuant to Section 5.2 and the Trustee or such authenticating agent
shall authenticate and deliver in exchange for such temporary Debentures an
equal aggregate principal amount of definitive Debentures. Such
12
<PAGE>
exchange shall be made by the Company at its own expense and without any
charge therefor. Until so exchanged, the temporary Debentures shall in all
respects be entitled to the same benefits and subject to the same limitations
under this Indenture as definitive Debentures authenticated and delivered
hereunder.
Section 2.8 Cancellation of Debentures Paid, Etc. All Debentures
-------------------------------------
surrendered for the purpose of payment, redemption, conversion, exchange or
registration of transfer, shall, if surrendered to the Company or any paying
agent or any Debenture registrar or any conversion agent, be surrendered to
the Trustee and promptly canceled by it, or, if surrendered to the Trustee,
shall be promptly canceled by it, and no Debentures shall be issued in lieu
thereof except as expressly permitted by any of the provisions of this
Indenture. Upon written instructions of the Company, the Trustee shall destroy
canceled Debentures and, after such destruction, shall deliver a certificate
of such destruction to the Company. If the Company shall acquire any of the
Debentures, such acquisition shall not operate as a redemption or satisfaction
of the indebtedness represented by such Debentures unless and until the same
are delivered to the Trustee for cancellation.
ARTICLE III
REDEMPTION OF DEBENTURES
Section 3.1 Redemption Prices. The Company may, at its option, redeem
-----------------
all or from time to time any part of the Debentures on any date prior to
maturity, upon notice as set forth in Section 3.2, and at the optional
redemption prices set forth in the form of Debenture attached as Exhibit A
hereto, together with accrued interest, if any, to, but excluding, the date
fixed for redemption, provided, however, that no such redemption shall be
-------- -------
effected before March 2, 2000.
Section 3.2 Notice of Redemption; Selection of Debentures. In case the
---------------------------------------------
Company shall desire to exercise the right to redeem all or, as the case may be,
any part of the Debentures pursuant to Section 3.1, it shall fix a date for
redemption, and it, or at its request (which must be received by the Trustee at
least ten (10) Business Days prior to the date the Trustee is requested to give
notice as described below unless a shorter period is agreed to by the Trustee),
the Trustee in the name of and at the expense of the Company, shall mail or
cause to be mailed a notice of such redemption at least twenty (20) and not more
than sixty (60) days prior to the date fixed for redemption to the holders of
Debentures so to be redeemed as a whole or in part at their last addresses as
the same appear on the Debenture register (provided that if the Company shall
--------
give such notice, it shall also give such notice, and notice of the Debentures
to be redeemed, to the Trustee). Such mailing shall be by first class mail.
The notice if mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives such
notice. In any case, failure to give such notice by mail or any defect in the
notice to the holder of any Debenture designated for redemption as a whole or in
part shall not affect the validity of the proceedings for the redemption of any
other Debenture.
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<PAGE>
Each such notice of redemption shall specify the aggregate principal amount
of Debentures to be redeemed, the date fixed for redemption, the redemption
price at which Debentures are to be redeemed, the place or places of payment,
that payment will be made upon presentation and surrender of such Debentures,
that interest accrued to, but excluding, the date fixed for redemption will be
paid as specified in said notice, and that on and after said date interest
thereon or on the portion thereof to be redeemed will cease to accrue. Such
notice shall also state the current Conversion Price and the date on which the
right to convert such Debentures or portions thereof into Common Stock will
expire. If fewer than all the Debentures are to be redeemed, the notice of
redemption shall identify the Debentures to be redeemed. In case any Debenture
is to be redeemed in part only, the notice of redemption shall state the portion
of the principal amount thereof to be redeemed and shall state that on and after
the date fixed for redemption, upon surrender of such Debenture, a new Debenture
or Debentures in principal amount equal to the unredeemed portion thereof will
be issued.
On or prior to the redemption date specified in the notice of redemption
given as provided in this Section 3.2, the Company will deposit with the Trustee
or with one or more paying agents (or, if the Company is acting as its own
paying agent, set aside, segregate and hold in trust as provided in Section 5.4)
an amount of money sufficient to redeem on the redemption date all the
Debentures (or portions thereof) so called for redemption (other than those
theretofore surrendered for conversion into Common Stock) at the appropriate
redemption price, together with accrued interest to, but excluding, the date
fixed for redemption; provided that if such payment is made on the redemption
--------
date it must be received by the Trustee or paying agent, as the case may be, by
10:00 a.m. New York City time, on such date. If any Debenture called for
redemption is converted pursuant hereto, any money deposited with the Trustee or
any paying agent or so segregated and held in trust for the redemption of such
Debenture shall be paid to the Company upon its request, or, if then held by the
Company shall be discharged from such trust. If fewer than all the Debentures
are to be redeemed, the Company will give the Trustee written notice in the form
of an Officers' Certificate not fewer than thirty-five (35) days (or such
shorter period of time as may be acceptable to the Trustee) prior to the
redemption date as to the aggregate principal amount of Debentures to be
redeemed.
If fewer than all the Debentures are to be redeemed, the Trustee shall
select the Debentures or portions thereof to be redeemed (in principal amounts
of $1,000 or integral multiples thereof), by lot or, in its sole discretion, on
a pro rata basis. If any Debenture selected for partial redemption is converted
in part after such selection, the converted portion of such Debenture shall be
deemed (so far as may be) to be the portion to be selected for redemption. The
Debentures (or portions thereof) so selected shall be deemed duly selected for
redemption for all purposes hereof, notwithstanding that any such Debenture is
converted as a whole or in part before the mailing of the notice of redemption.
Upon any redemption of less than all Debentures, the Company and the
Trustee may (but need not) treat as outstanding any Debentures surrendered for
conversion during the period of fifteen (15) days next preceding the mailing of
a notice of redemption and may (but need not)
14
<PAGE>
treat as not outstanding any Debenture authenticated and delivered during such
period in exchange for the unconverted portion of any Debenture converted in
part during such period.
Section 3.3 Payment of Debentures Called for Redemption. If notice of
-------------------------------------------
redemption has been given as above provided, the Debentures or portion of
Debentures with respect to which such notice has been given shall, unless
converted into Common Stock pursuant to the terms hereof, become due and payable
on the date and at the place or places stated in such notice at the applicable
redemption price, together with interest accrued to, but excluding, the date
fixed for redemption, and on and after said date (unless the Company shall
default in the payment of such Debentures at the redemption price, together with
interest accrued to, but excluding, said date) interest on the Debentures or
portion of Debentures so called for redemption shall cease to accrue and such
Debentures shall cease after the close of business on the Business Day next
preceding the date fixed for redemption to be convertible into Common Stock and,
except as provided in Sections 8.5 and 13.4, to be entitled to any benefit or
security under this Indenture, and the holders thereof shall have no right in
respect of such Debentures except the right to receive the redemption price
thereof and unpaid interest to, but excluding, the date fixed for redemption.
On presentation and surrender of such Debentures at a place of payment in said
notice specified, the said Debentures or the specified portions thereof to be
redeemed shall be paid and redeemed by the Company at the applicable redemption
price, together with interest accrued thereon to, but excluding, the date fixed
for redemption; provided that, if the applicable redemption date is an interest
--------
payment date, the semi-annual payment of interest becoming due on such date
shall be payable to the holders of such Debentures registered as such on the
relevant record date subject to the terms and provisions of Section 2.3 hereof.
Upon presentation of any Debenture redeemed in part only, the Company shall
execute and the Trustee shall authenticate and deliver to the holder thereof, at
the expense of the Company, a new Debenture or Debentures, of authorized
denominations, in principal amount equal to the unredeemed portion of the
Debentures so presented.
Notwithstanding the foregoing, the Trustee shall not redeem any Debentures
or mail any notice of optional redemption during the continuance of a default in
payment of interest or premium on the Debentures or of any Event of Default of
which, in the case of any Event of Default other than under Section 7.1(a) or
(b), a Responsible Officer of the Trustee has knowledge. If any Debenture
called for redemption shall not be so paid upon surrender thereof for
redemption, the principal and premium, if any, shall, until paid or duly
provided for, bear interest from the date fixed for redemption at the rate borne
by the Debenture and such Debenture shall remain convertible into Common Stock
until the principal and premium, if any, shall have been paid or duly provided
for.
Section 3.4 Conversion Arrangement on Call for Redemption. In connection
---------------------------------------------
with any redemption of Debentures, the Company may arrange for the purchase and
conversion of any Debentures by an agreement with one or more investment bankers
or other purchasers to purchase such Debentures by paying to the Trustee in
trust for the Debentureholders, on or before
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<PAGE>
the date fixed for redemption, an amount not less than the applicable redemption
price, together with interest accrued to the date fixed for redemption, of such
Debentures. Notwithstanding anything to the contrary contained in this Article
III, the obligation of the Company to pay the redemption price of such
Debentures, together with interest accrued to, but excluding, the date fixed for
redemption, shall be deemed to be satisfied and discharged to the extent such
amount is so paid by such purchasers. If such an agreement is entered into, a
copy of which will be filed with the Trustee prior to the date fixed for
redemption, any Debentures not duly surrendered for conversion by the holders
thereof may, at the option of the Company, be deemed, to the fullest extent
permitted by law, acquired by such purchasers from such holders and
(notwithstanding anything to the contrary contained in Article XV) surrendered
by such purchasers for conversion, all as of immediately prior to the close of
business on the date fixed for redemption (and the right to convert any such
Debentures shall be deemed to have been extended through such time), subject to
payment of the above amount as aforesaid. At the direction of the Company, the
Trustee shall hold and dispose of any such amount paid to it in the same manner
as it would monies deposited with it by the Company for the redemption of
Debentures. Without the Trustee's prior written consent, no arrangement between
the Company and such purchasers for the purchase and conversion of any
Debentures shall increase or otherwise affect any of the powers, duties,
responsibilities or obligations of the Trustee as set forth in this Indenture,
and the Company agrees to indemnify the Trustee from, and hold it harmless
against, any loss, liability or expense arising out of or in connection with any
such arrangement for the purchase and conversion of any Debentures between the
Company and such purchasers to which the Trustee has not consented in writing,
including the costs and expenses incurred by the Trustee in the defense of any
claim or liability arising out of or in connection with the exercise or
performance of any of its powers, duties, responsibilities or obligations under
this Indenture.
ARTICLE IV
SUBORDINATION OF DEBENTURES
Section 4.1 Agreement of Subordination. The Company covenants and agrees,
--------------------------
and each holder of Debentures issued hereunder by his acceptance thereof
likewise covenants and agrees, that all Debentures shall be issued subject to
the provisions of this Article IV; and each person holding any Debenture,
whether upon original issue or upon transfer, assignment or exchange thereof,
accepts and agrees to be bound by such provisions.
The payment of the principal of, premium, if any, and interest on all
Debentures (including, but not limited to, the redemption price with respect to
the Debentures to be redeemed, as provided in this Indenture) issued hereunder
shall, to the extent and in the manner hereinafter set forth, be subordinated
and subject in right of payment to the prior payment in full of all Senior
Indebtedness.
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No provision of this Article IV shall prevent the occurrence of any default
or Event of Default hereunder.
Section 4.2 Payments to Debentureholders. No payment shall be made with
----------------------------
respect to the principal of, or premium, if any, or interest on the Debentures
(including, but not limited to, the redemption price with respect to the
Debentures to be redeemed, as provided in this Indenture), except payments and
distributions made by the Trustee as permitted by the first or second paragraph
of Section 4.5, if:
(a) a default in the payment of principal, premium, interest, rent
or other obligations due on any Senior Indebtedness occurs and is
continuing (or, in the case of Senior Indebtedness for which there is a
period of grace, in the event of such a default that continues beyond the
period of grace, if any, specified in the instrument or lease evidencing
such Senior Indebtedness), unless and until such default shall have been
cured or waived or shall have ceased to exist; or
(b) a default, other than a payment default, on a Designated Senior
Indebtedness occurs and is continuing that then permits holders of such
Designated Senior Indebtedness to accelerate its maturity and the Trustee
receives a notice of the default (a "Payment Blockage Notice") from the
Company or holder or Representative of Designated Senior Indebtedness.
If the Trustee receives any Payment Blockage Notice pursuant to clause (b)
above, no subsequent Payment Blockage Notice shall be effective for purposes of
this Section unless and until (A) at least 365 days shall have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice, and (B) all
scheduled payments of principal, premium, if any, and interest on the Debentures
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage Notice
to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
The Company may and shall resume payments on and distributions in respect
of the Debentures upon the earlier of:
(1) the date upon which the default is cured or waived, or
(2) in the case of a default referred to in clause (ii) above, the earlier
of (x) the date such default is cured or waived and (y) 179 days pass after
notice is received if the maturity of such Designated Senior Indebtedness has
not been accelerated, unless this Article IV otherwise prohibits the payment
or distribution at the time of such payment or distribution.
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Upon any payment by the Company, or distribution of assets of the Company
of any kind or character, whether in cash, property or securities, to creditors
upon any dissolution or winding-up or total or partial liquidation or
reorganization of the Company, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all amounts due or to
become due upon all Senior Indebtedness shall first be paid in full, or payment
thereof provided for in money in accordance with its terms, before any payment
is made on account of the principal (and premium, if any) or interest on the
Debentures (except payments made pursuant to Article XIII from monies deposited
with the Trustee pursuant thereto prior to the happening of such dissolution,
winding-up, liquidation or reorganization or bankruptcy, insolvency,
receivership or other such proceedings); and upon any such dissolution or
winding-up or liquidation or reorganization or bankruptcy, insolvency,
receivership or other such proceedings, any payment by the Company, or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to which the holders of the Debentures or the Trustee
under this Indenture would be entitled, except for the provision of this Article
IV, shall (except as aforesaid) be paid by the Company or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, or by the holders of the Debentures or by the Trustee
under this Indenture if received by them or it, directly to the holders of
Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders or as otherwise required by
law or a court order) or their respective Representative or Representatives, as
their respective interests may appear, to the extent necessary to pay all Senior
Indebtedness in full after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness, before any payment or
distribution is made to the holders of the Debentures or to the Trustee under
this Indenture.
In the event of the acceleration of the Debentures because of an Event of
Default, no payment or distribution shall be made to the Trustee or any holder
of Debentures in respect of the principal of, premium, if any, or interest on
the Debentures (including, but not limited to, the redemption price with respect
to the Debentures called for redemption in accordance with Section 3.2), except
payments and distributions made by the Trustee as permitted by the first or
second paragraph of Section 4.5, until all Senior Indebtedness has been paid in
full in cash or other payment satisfactory to the holders of Senior Indebtedness
or such acceleration is rescinded in accordance with the terms of this
Indenture. If payment of the Debentures is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Indebtedness of
such acceleration.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities (including, without limitation, by way of setoff or
otherwise), prohibited by the foregoing, shall be received by the Trustee under
this Indenture or by any holders of the Debentures before all Senior
Indebtedness is paid in full, or provision is made for such payment in
accordance with its terms, such payment or distribution shall be held by the
recipient or recipients in trust for the benefit of, and shall be paid over or
delivered to, the holders of Senior Indebtedness or their respective
Representative or Representatives, or to the trustee or trustees under any
indenture pursuant to which any
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instruments evidencing any Senior Indebtedness may have been issued, as their
respective interests may appear, as calculated by the Company, for application
to the payment of all Senior Indebtedness remaining unpaid to the extent
necessary to pay all Senior Indebtedness in full in accordance with its terms,
after giving effect to any concurrent payment or distribution (or provision
therefor) to or for the holders of such Senior Indebtedness.
For purposes of this Article IV, the words "cash, property or securities"
shall not be deemed to include shares of stock of the Company as reorganized or
readjusted, or securities of the Company or any other corporation provided for
by a plan of reorganization or readjustment, the payment of which is
subordinated (at least to the extent provided in this Article IV with respect to
the Debentures) to the payment of all Senior Indebtedness which may at the time
be outstanding; provided that (i) the Senior Indebtedness is assumed by the new
--------
corporation, if any, resulting from such reorganization or adjustment, and (ii)
the rights of the holders of Senior Indebtedness (other than leases which are
not assumed by the Company or by the new corporation, as the case may be) are
not, without the consent of such holders, altered by such reorganization or
readjustment. The consolidation of the Company with, or the merger of the
Company into, another corporation or the liquidation or dissolution of the
Company following the conveyance or transfer of its property as an entirety, or
substantially as an entirety, to another corporation upon the terms and
conditions provided for in Article XII shall not be deemed a dissolution,
winding-up, liquidation or reorganization for the purposes of this Section 4.2
if such other corporation shall, as a part of such consolidation, merger,
conveyance or transfer, comply with the conditions stated in Article XII.
Nothing in this Section 4.2 shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 8.6. This Section 4.2 shall be subject to
the further provisions of Section 4.5.
Section 4.3 Subrogation of Debentures. Subject to the payment in full
-------------------------
of all Senior Indebtedness, the rights of the holders of the Debentures shall
be subrogated to the extent of the payments or distributions made to the
holders of such Senior Indebtedness pursuant to the provisions of this Article
IV (equally and ratably with the holders of all indebtedness of the Company
which by its express terms is subordinated to other indebtedness of the
Company to substantially the same extent as the Debentures are subordinated
and is entitled to like rights of subrogation) to the rights of the holders of
Senior Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the
principal of (and premium, if any) and interest on the Debentures shall be
paid in full; and, for the purposes of such subrogation, no payments or
distributions to the holders of the Senior Indebtedness of any cash, property
or securities to which the holders of the Debentures or the Trustee would be
entitled except for the provisions of this Article IV, and no payment over
pursuant to the provisions of this Article IV, to or for the benefit of the
holders of Senior Indebtedness by holders of the Debentures or the Trustee,
shall, as between the Company, its creditors other than holders of Senior
Indebtedness, and the holders of the Debentures, be deemed to be a payment by
the Company to or on account of the Senior Indebtedness; and no payments or
distributions of cash, property or securities to or for the benefit of the
holders of the
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Debentures pursuant to the subrogation provisions of this Article IV, which
would otherwise have been paid to the holders of Senior Indebtedness shall be
deemed to be a payment by the Company to or for the account of the Debentures.
It is understood that the provisions of this Article IV are and are intended
solely for the purposes of defining the relative rights of the holders of the
Debentures, on the one hand, and the holders of the Senior Indebtedness, on the
other hand.
Nothing contained in this Article IV or elsewhere in this Indenture or in
the Debentures is intended to or shall impair, as among the Company, its
creditors other than the holders of Senior Indebtedness, and the holders of the
Debentures, the obligation of the Company, which is absolute and unconditional,
to pay to the holders of the Debentures the principal of (and premium, if any)
and interest on the Debentures as and when the same shall become due and payable
in accordance with their terms, or is intended to or shall affect the relative
rights of the holders of the Debentures and creditors of the Company other than
the holders of the Senior Indebtedness, nor shall anything herein or therein
prevent the Trustee or the holder of any Debenture from exercising all remedies
otherwise permitted by applicable law upon default under this Indenture, subject
to the rights, if any, under this Article IV of the holders of Senior
Indebtedness in respect of cash, property or securities of the Company received
upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company referred to in
this Article IV, the Trustee, subject to the provisions of Section 8.1, and the
holders of the Debentures shall be entitled to rely upon any order or decree
made by any court of competent jurisdiction in which such bankruptcy,
dissolution, winding-up, liquidation or reorganization proceedings are pending,
or a certificate of the receiver, trustee in bankruptcy, liquidating trustee,
agent or other person making such payment or distribution, delivered to the
Trustee or to the holders of the Debentures, for the purpose of ascertaining the
persons entitled to participate in such distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article IV.
Section 4.4 Authorization by Debentureholders. Each holder of a
---------------------------------
Debenture by his acceptance thereof authorizes and directs the Trustee on his
behalf to take such action as may be necessary or appropriate to effectuate
the subordination provided in this Article IV and appoints the Trustee his
attorney-in-fact for any and all such purposes.
Section 4.5 Notice to Trustee. The Company shall give prompt written
-----------------
notice in the form of an Officers' Certificate to a Responsible Officer of the
Trustee and to any paying agent of any fact known to the Company which would
prohibit the making of any payment of monies to or by the Trustee or any
paying agent in respect of the Debentures pursuant to the provisions of this
Article IV. Notwithstanding the provisions of this Article IV or any other
provision of this Indenture, the Trustee shall not be charged with knowledge
of the existence of any Senior Indebtedness or of any default or event of
default with respect to any Senior Indebtedness or of any other facts which
would prohibit the making of any payment of monies to or by the Trustee in
respect of the Debentures pursuant to the provisions of this Article IV,
unless and until a
20
<PAGE>
Responsible Officer of the Trustee shall have received written notice thereof
at the Corporate Trust Office from the Company (in the form of an Officers'
Certificate) or a holder or holders or Representative of Senior Indebtedness
who shall have been certified by the Company or otherwise established to the
reasonable satisfaction of the Trustee to be such holder or Representative;
and before the receipt of any such written notice, the Trustee, subject to the
provisions of Section 8.1, shall be entitled in all respects to assume that no
such facts exist; provided that if on a date at least two (2) Business Days
--------
prior to the date upon which by the terms hereof any such monies may become
payable for any purpose (including, without limitation, the payment of the
principal of, or premium, if any, or interest on any Debenture), the Trustee
shall not have received with respect to such monies the notice provided for in
this Section 4.5, then, anything herein contained to the contrary
notwithstanding, the Trustee shall have full power and authority to receive
such monies and to apply the same to the purpose for which they were received,
and shall not be affected by any notice to the contrary which may be received
by it on or after such prior date.
Notwithstanding anything to the contrary hereinbefore set forth, nothing
shall prevent (a) any payment by the Company or the Trustee to the
Debentureholders of amounts in connection with a redemption of Debentures if (i)
notice of such redemption has been given pursuant to Article III prior to the
receipt by the Trustee of written notice as aforesaid, and (ii) such notice of
redemption is given not earlier than sixty (60) days before the redemption date,
or (b) any payment by the Trustee to the Debentureholders of monies deposited
with it pursuant to Section 13.1.
The Trustee, subject to the provisions of Section 8.1, shall be entitled to
rely on the delivery to it of a written notice by a person representing himself
to be a holder of Senior Indebtedness (or a Representative on behalf of such
holder) to establish that such notice has been given by a holder of Senior
Indebtedness or a Representative on behalf of any such holder or holders. In
the event that the Trustee determines in good faith that further evidence is
required with respect to the right of any person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to this
Article IV, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such person, the extent to which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such person under this Article IV, and if such evidence is not furnished the
Trustee may defer any payment to such person pending judicial determination as
to the right of such person to receive such payment.
Section 4.6 Trustee's Relation to Senior Indebtedness. The Trustee and
-----------------------------------------
any agent of the Company or the Trustee in its individual capacity shall be
entitled to all the rights set forth in this Article IV in respect of any
Senior Indebtedness at any time held by it, to the same extent as any other
holder of Senior Indebtedness, and nothing in Section 8.13 or elsewhere in
this Indenture shall deprive the Trustee or any such agent of any of its
rights as such holder. Nothing in this Article IV shall apply to claims of, or
payments to, the Trustee under or pursuant to Section 8.6.
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With respect to the holders of Senior Indebtedness, the Trustee undertakes
to perform or to observe only such of its covenants and obligations as are
specifically set forth in this Article IV, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness and, subject to the
provisions of Section 4.2 and Section 8.1, the Trustee shall not be liable to
any holder of Senior Indebtedness if it shall pay over or deliver to holders of
Debentures, the Company or any other person money or assets to which any holder
of Senior Indebtedness shall be entitled by virtue of this Article IV or
otherwise.
Section 4.7 No Impairment of Subordination. No right of any present or
------------------------------
future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Indenture, regardless of any knowledge
thereof which any such holder may have or otherwise be charged with.
Section 4.8 Certain Conversions Deemed Payment. For the purposes of this
----------------------------------
Article only, (1) the issuance and delivery of junior securities upon conversion
of Debentures in accordance with Article XV shall not be deemed to constitute a
payment or distribution on account of the principal of (or premium, if any) or
interest on Debentures or on account of the purchase or other acquisition of
Debentures, and (2) the payment, issuance or delivery of cash (except in
satisfaction of fractional shares pursuant to Section 15.3), property or
securities (other than junior securities) upon conversion of a Debenture shall
be deemed to constitute payment on account of the principal of such Debenture.
For the purposes of this Section, the term "junior securities" means (a) shares
of any stock of any class of the Company and (b) securities of the Company which
are subordinated in right of payment to all Senior Indebtedness which may be
outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, the Debentures
are so subordinated as provided in this Article. Nothing contained in this
Article or elsewhere in this Indenture or in the Debentures is intended to or
shall impair, as among the Company, its creditors other than holders of Senior
Indebtedness and the holders of the Debentures, the right, which is absolute and
unconditional, of the holder of any Debenture to convert such Debenture in
accordance with Article XV.
Section 4.9 Article Applicable to Paying Agents. If at any time any
-----------------------------------
paying agent other than the Trustee shall have been appointed by the Company
and be then acting hereunder, the term "Trustee" as used in this Article shall
(unless the context otherwise requires) be construed as extending to and
including such paying agent within its meaning as fully for all intents and
purposes as if such paying agent were named in this Article in addition to or
in place of the Trustee; provided, however, that the first paragraph of
-------- -------
Section 4.5 shall not apply to the Company or any Affiliate of the Company if
it or such Affiliate acts as paying agent.
Section 4.10 Senior Indebtedness Entitled to Rely. The holders of Senior
------------------------------------
Indebtedness (including, without limitation, Designated Senior Indebtedness)
shall have the right to rely upon
22
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this Article IV, and no amendment or modification of the provisions contained
herein shall diminish the rights of such holders unless such holders shall
have agreed in writing thereto.
ARTICLE V
PARTICULAR COVENANTS OF THE COMPANY
Section 5.1 Payment of Principal, Premium and Interest. The Company
------------------------------------------
covenants and agrees that it will duly and punctually pay or cause to be paid
the principal of and premium, if any, and interest on each of the Debentures at
the places, at the respective times and in the manner provided herein and in the
Debentures. Each installment of interest on the Debentures due on any semi-
annual interest payment date may be paid by mailing checks for the interest
payable to or upon the written order of the holders of Debentures entitled
thereto as they shall appear on the registry books of the Company, provided
--------
that, with respect to any holder of Debentures with an aggregate principal
amount equal to or in excess of $2,000,000, at the request of such holder in
writing to the Company, interest on such holder's Debentures shall be paid by
wire transfer in immediately available funds in accordance with the wire
transfer instructions supplied by such holder to the Trustee and paying agent
(if different from Trustee).
Section 5.2 Maintenance of Office or Agency. The Company will maintain in
-------------------------------
the Borough of Manhattan, The City of New York, an office or agency where the
Debentures may be surrendered for registration of transfer or exchange or for
presentation for payment or for conversion or redemption and where notices and
demands to or upon the Company in respect of the Debentures and this Indenture
may be served. The Company will give prompt written notice to the Trustee of
the location, and any change in the location, of such office or agency not
designated or appointed by the Trustee. If at any time the Company shall fail
to maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the Corporate Trust Office [or the office or
agency of the Trustee in the Borough of Manhattan, The City of New York.]
The Company may also from time to time designate one or more other offices
or agencies where the Debentures may be presented or surrendered for any or all
such purposes and may from time to time rescind such designations; provided that
--------
no such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in the Borough of Manhattan, The
City of New York, for such purposes. The Company will give prompt written
notice to the Trustee of any such designation or rescission and of any change
in the location of any such other office or agency.
The Company hereby initially designates the Trustee as paying agent,
Debenture registrar, Custodian and conversion agent and the Corporate Trust
Office and the office or agency of the Trustee in the Borough of Manhattan, The
City of New York (which shall initially be
23
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____________________________) shall be considered as one such office or agency
of the Company for each of the aforesaid purposes.
So long as the Trustee is the Debenture registrar, the Trustee agrees to
mail, or cause to be mailed, the notices set forth in Section 8.10(a) and the
third paragraph of Section 8.11.
Section 5.3 Appointments to Fill Vacancies in Trustee's Office. The
--------------------------------------------------
Company, whenever necessary to avoid or fill a vacancy in the office of
Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so
that there shall at all times be a Trustee hereunder.
Section 5.4 Provisions as to Paying Agent.
-----------------------------
(a) If the Company shall appoint a paying agent other than the
Trustee or if the Trustee shall appoint such a paying agent, it will cause
such paying agent to execute and deliver to the Trustee an instrument in
which such agent shall agree with the Trustee, subject to the provisions of
this Section 5.4:
(1) that it will hold all sums held by it as such agent for
the payment of the principal of and premium, if any, or interest on the
Debentures (whether such sums have been paid to it by the Company or by
any other obligor on the Debentures) in trust for the benefit of the
holders of the Debentures;
(2) that it will give the Trustee notice of any failure by
the Company (or by any other obligor on the Debentures) to make any
payment of the principal of and premium, if any, or interest on the
Debentures when the same shall be due and payable; and
(3) that at any time during the continuance of an Event of
Default, upon request of the Trustee, it will forthwith pay to the
Trustee all sums so held in trust.
The Company shall, on or before each due date of the principal of,
premium, if any, or interest on the Debentures, deposit with the paying
agent a sum sufficient to pay such principal, premium, if any, or interest,
and (unless such paying agent is the Trustee) the Company will promptly
notify the Trustee of any failure to take such action, provided that if
such deposit is made on the due date, such deposit must be received by the
paying agent by 10:00 a.m., New York City time, on such date.
(b) If the Company shall act as its own paying agent, it will,
on or before each due date of the principal of, premium, if any, or
interest on the Debentures, set aside, segregate and hold in trust for
the benefit of the holders of the Debentures a sum sufficient to pay such
principal, premium, if any, or interest so becoming due and will notify
the Trustee of any failure to take such action and of any failure by the
Company (or any other
24
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obligor under the Debentures) to make any payment of the principal of,
premium, if any, or interest on the Debentures when the same shall become
due and payable.
(c) Anything in this Section 5.4 to the contrary
notwithstanding, the Company may, at any time, for the purpose of
obtaining a satisfaction and discharge of this Indenture, or for any
other reason, pay or cause to be paid to the Trustee all sums held in
trust by the Company or any paying agent hereunder as required by this
Section 5.4, such sums to be held by the Trustee upon the trusts herein
contained and upon such payment by the Company or any paying agent to the
Trustee, the Company or such paying agent shall be released from all
further liability with respect to such sums.
(d) Anything in this Section 5.4 to the contrary
notwithstanding, the agreement to hold sums in trust as provided in this
Section 5.4 is subject to Sections 13.3 and 13.4.
Section 5.5 Existence. Subject to Article XII, the Company will do or
---------
cause to be done all things necessary to preserve and keep in full force and
effect its existence, rights (charter and statutory) and franchises; provided,
--------
however, that the Company shall not be required to preserve any such right or
- -------
franchise if the Company shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and that the
loss thereof is not disadvantageous in any material respect to the holders.
Section 5.6 Maintenance of Properties. The Company will cause all
-------------------------
properties used or useful in the conduct of its business or the business of
any Subsidiary to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that nothing in this Section shall
-------- -------
prevent the Company from discontinuing the operation or maintenance of any of
such properties if such discontinuance is, in the judgment of the Company,
desirable in the conduct of its business or the business of any Subsidiary and
not disadvantageous in any material respect to the holders.
Section 5.7 Payment of Taxes and Other Claims. The Company will pay or
---------------------------------
discharge, or cause to be paid or discharged, before the same may become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon the Company or any Subsidiary or upon the income, profits or
property of the Company or any Subsidiary, (ii) all claims for
labor, materials and supplies which, if unpaid, might by law become a lien or
charge upon the property of the Company or any Subsidiary, and (iii) all stamps
and other duties, if any, which may be imposed by the United States or any
political subdivision thereof or therein in connection with the issuance,
transfer, exchange or conversion of any Debentures or with respect to this
Indenture; provided, however, that, in the case of clauses (i) and (ii), the
-------- -------
Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim (A) if the failure to do so
will not, in the aggregate, have a material adverse impact on the Company,
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or (B) if the amount, applicability or validity is being contested in good
faith by appropriate proceedings.
Section 5.8 Stay, Extension and Usury Laws. The Company covenants (to the
------------------------------
extent that it may lawfully do so) that it shall not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay, extension or usury law or other law which would prohibit or forgive
the Company from paying all or any portion of the principal of or interest on
the Debentures as contemplated herein, wherever enacted, now or at any time
hereafter in force, or which may affect the covenants or the performance of this
Indenture; and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that it
will not, by resort to any such law, hinder, delay or impede the execution of
any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law has been enacted.
Section 5.9 Compliance Certificate. The Company shall deliver to the
----------------------
Trustee, within 120 days after the end of each fiscal year of the Company ending
(beginning with the fiscal year in which the Exchange Date falls), an Officers'
Certificate, stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder) and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
The Company will deliver to the Trustee, forthwith upon becoming aware of
any default in the performance or observance of any covenant, agreement or
condition contained in this Indenture, or any Event of Default, an Officers'
Certificate specifying with particularity such default or Event of Default and
further stating what action the Company has taken, is taking or proposes to take
with respect thereto.
Any notice required to be given under this Section 5.9 shall be delivered
to the Trustee at its Corporate Trust Office.
Section 5.10 Further Instruments and Acts. Upon request of the Trustee,
----------------------------
the Company will execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
26
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ARTICLE VI
DEBENTUREHOLDERS' LISTS AND REPORTS BY THE COMPANY
AND THE TRUSTEE
Section 6.1 Debentureholders' Lists. The Company covenants and
-----------------------
agrees that it will furnish or cause to be furnished to the Trustee, semi-
annually, not more than fifteen (15) days after each February 15 and August 15
in each year beginning with the immediately succeeding February 15 or August
15 after the Exchange Date, and at such other times as the Trustee may request
in writing, within thirty (30) days after receipt by the Company of any such
request (or such lesser time as the Trustee may reasonably request in order to
enable it to timely provide any notice to be provided by it hereunder), a list
in such form as the Trustee may reasonably require of the names and addresses
of the holders of Debentures as of a date not more than fifteen (15) days (or
such other date as the Trustee may reasonably request in order to so provide
any such notices) prior to the time such information is furnished, except that
no such list need be furnished so long as the Trustee is acting as Debenture
registrar.
Section 6.2 Preservation and Disclosure of Lists.
------------------------------------
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, all information as to the names and addresses of the
holders of Debentures contained in the most recent list furnished to it as
provided in Section 6.1 or maintained by the Trustee in its capacity as
Debenture registrar, if so acting. The Trustee may destroy any list furnished
to it as provided in Section 6.1 upon receipt of a new list so furnished.
(b) The rights of Debentureholders to communicate with
other holders of Debentures with respect to their rights under this Indenture
or under the Debentures and the corresponding rights and duties of the
Trustee, shall be as provided by the Trust Indenture Act.
(c) Every Debentureholder, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of holders of
Debentures made pursuant to the Trust Indenture Act.
Section 6.3 Reports by Trustee.
------------------
(a) Within 60 days after [May 15] of each year commencing
with the year in which the Exchange Date falls, the Trustee shall transmit to
holders of Debentures such reports dated as of [May 15] of the year in which
such reports are made concerning the Trustee and its actions under this
Indenture as may be required pursuant to the Trust Indenture Act at the times
and in the manner provided pursuant thereto.
27
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(b) A copy of such report shall, at the time of such
transmission to holders of Debentures, be filed by the Trustee with each stock
exchange or automated quotation system upon which the Debentures are listed,
with the Commission and with the Company. The Company will notify the Trustee
when the Debentures are listed on any stock exchange or automated quotation
system and when any such listing is discontinued.
Section 6.4 Reports by Company. The Company shall file with the
------------------
Trustee and the Commission, and transmit to holders of Debentures, such
information, documents and other reports and such summaries thereof, as may be
required pursuant to the Trust Indenture Act at the times and in the manner
provided pursuant to such Act; provided that any such information, documents
--------
or reports required to be filed with the Commission pursuant to Section 13 or
15(d) of the Exchange Act shall be filed with the Trustee within 15 days after
the same is so required to be filed with the Commission.
ARTICLE VII
DEFAULTS AND REMEDIES
Section 7.1 Events of Default. In case one or more of the following
-----------------
Events of Default (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body) shall have occurred and be
continuing:
(a) default in the payment of the principal of and premium,
if any, on any of the Debentures as and when the same shall become due
and payable either at maturity or in connection with any redemption, by
declaration or otherwise, whether or not such payment is prohibited by
the provisions of Article IV; or
(b) default in the payment of any installment of interest,
if any, upon any of the Debentures as and when the same shall become due
and payable, and continuance of such default for a period of thirty (30)
days, whether or not such payment is prohibited by the provisions of
Article IV; or
(c) failure on the part of the Company duly to observe or
perform any other of the covenants or agreements on the part of the
Company in the Debentures or in this Indenture (other than a covenant or
agreement a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with) continued for a period of forty-
five (45) days after the date on which written notice of such failure,
requiring the Company to remedy the same, shall have been given to the
Company by the Trustee, or to the Company and a Responsible Officer of
the Trustee by the holders of at least 25% in
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<PAGE>
aggregate principal amount of the outstanding Debentures at the time
outstanding determined in accordance with Section 9.4; or
(d) failure by the Company to make any payment at maturity,
including any applicable grace period, in respect of Indebtedness, in an
amount in excess of $5,000,000 or the equivalent thereof in any other
currency or composite currency and such failure shall have continued for
thirty (30) days after written notice thereof shall have been given to
the Company by the Trustee or to the Company and a Responsible Officer of
the Trustee or to the Company and a Responsible Officer of the Trustee by
the holders of at least 25% in aggregate principal amount of the
outstanding Debentures at the time outstanding determined in accordance
with Section 9.4; or
(e) a default by the Company with respect to any
Indebtedness which default results in the acceleration of Indebtedness in
an amount in excess of $5,000,000 or the equivalent thereof in any other
currency or composite currency without such Indebtedness having been
discharged or such acceleration having been cured, waived, rescinded or
annulled for a period of thirty (30) days after written notice thereof
shall have been given to the Company by the Trustee by the holders of at
least 25% in aggregate principal amount of the outstanding Debentures at
the time outstanding determined in accordance with Section 9.4; or
(f) the Company shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it
or any substantial part of its property, or shall consent to any such
relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due; or
(g) an involuntary case or other proceeding shall be
commenced against the Company liquidation, reorganization or other relief
with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it
or any substantial part of its property, and such involuntary case or
other proceeding shall remain undismissed and unstayed for a period of
ninety (90) consecutive days;
then, and in each and every such case (other than an Event of Default specified
in Section 7.1(f) or (g)), unless the principal of all of the Debentures shall
have already become due and payable, either the Trustee or the holders of not
less than 25% in aggregate principal amount of the
29
<PAGE>
Debentures then outstanding hereunder determined in accordance with Section
9.4, by notice in writing to the Company (and to the Trustee if given by
Debentureholders), may declare the principal of and premium, if any, on all
the Debentures and the interest accrued thereon to be due and payable
immediately, and upon any such declaration the same shall become and shall be
immediately due and payable, anything in this Indenture or in the Debentures
contained to the contrary notwithstanding. If an Event of Default specified in
Section 7.1(f) or (g) occurs and is continuing, the principal of all the
Debentures and the interest accrued thereon shall be immediately due and
payable. This provision, however, is subject to the conditions that if, at any
time after the principal of the Debentures shall have been so declared due and
payable, and before any judgment or decree for the payment of the monies due
shall have been obtained or entered as hereinafter provided, the Company shall
pay or shall deposit with the Trustee a sum sufficient to pay all matured
installments of interest upon all Debentures and the principal of and premium,
if any, on any and all Debentures which shall have become due otherwise than
by acceleration (with interest on overdue installments of interest (to the
extent that payment of such interest is enforceable under applicable law) and
on such principal and premium, if any, at the rate borne by the Debentures, to
the date of such payment or deposit) and amounts due to the Trustee pursuant
to Section 8.6, and if any and all defaults under this Indenture, other than
the nonpayment of principal of and premium, if any, and accrued interest on
Debentures which shall have become due by acceleration, shall have been cured
or waived pursuant to Section 7.7, then and in every such case the holders of
a majority in aggregate principal amount of the Debentures then outstanding,
by written notice to the Company and to the Trustee, may waive all defaults or
Events of Default and rescind and annul such declaration and its consequences;
but no such waiver or rescission and annulment shall extend to or shall affect
any subsequent default or Event of Default, or shall impair any right
consequent thereon. The Company shall notify the Responsible Officer of the
Trustee, promptly upon becoming aware thereof, of any Event of Default.
In case the Trustee shall have proceeded to enforce any right under this
Indenture and such proceedings shall have been discontinued or abandoned because
of such waiver or rescission and annulment or for any other reason or shall have
been determined adversely to the Trustee, then and in every such case the
Company, the holders of Debentures, and the Trustee shall be restored
respectively to their several positions and rights hereunder, and all rights,
remedies and powers of the Company, the holders of Debentures, and the Trustee
shall continue as though no such proceeding had been instituted.
Section 7.2 Payments of Debentures on Default; Suit Therefor. The Company
------------------------------------------------
covenants that (a) in case default shall be made in the payment by the Company
of any installment of interest upon any of the Debentures as and when the same
shall become due and payable, and such default shall have continued for a period
of thirty (30) days, or (b) in case default shall be made in the payment of the
principal of or premium, if any, on any of the Debentures as and when the same
shall have become due and payable, whether at maturity of the Debentures or in
connection with any redemption, by declaration under this Indenture or
otherwise, then, upon demand of the Trustee, the Company will pay to the
Trustee, for the benefit of the holders of the Debentures, the whole amount that
then shall have become due and payable on all such
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<PAGE>
Debentures for principal and premium, if any, or interest, or both, as the
case may be, with interest upon the overdue principal and premium, if any, and
(to the extent that payment of such interest is enforceable under applicable
law) upon the overdue installments of interest at the rate borne by the
Debentures; and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including reasonable
compensation to the Trustee, its agents, attorneys and counsel, and any
expenses or liabilities incurred by the Trustee hereunder other than through
its negligence or bad faith. Until such demand by the Trustee, the Company may
pay the principal of and premium, if any, and interest on the Debentures to
the registered holders, whether or not the Debentures are overdue.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or any other obligor on the
Debentures and collect in the manner provided by law out of the property of the
Company or any other obligor on the Debentures wherever situated the monies
adjudged or decreed to be payable.
In the case there shall be pending proceedings for the bankruptcy or for
the reorganization of the Company or any other obligor on the Debentures under
Title 11 of the United States Code, or any other applicable law, or in case a
receiver, assignee or trustee in bankruptcy or reorganization, liquidator,
sequestrator or similar official shall have been appointed for or taken
possession of the Company or such other obligor, the property of the Company or
such other obligor, or in the case of any other judicial proceedings relative to
the Company or such other obligor upon the Debentures, or to the creditors or
property of the Company or such other obligor, the Trustee, irrespective of
whether the principal of the Debentures shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand pursuant to the provisions of this Section 7.2, shall
be entitled and empowered, by intervention in such proceedings or otherwise, to
file and prove a claim or claims for the whole amount of principal, premium, if
any, and interest owing and unpaid in respect of the Debentures, and, in case of
any judicial proceedings, to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee and of the Debentureholders allowed in such judicial proceedings
relative to the Company or any other obligor on the Debentures, its or their
creditors, or its or their property, and to collect and receive any monies or
other property payable or deliverable on any such claims, and to distribute the
same after the deduction of any amounts due the Trustee under Section 8.6; and
any receiver, assignee or trustee in bankruptcy or reorganization, liquidator,
custodian or similar official is hereby authorized by each of the
Debentureholders to make such payments to the Trustee, and, in the event that
the Trustee shall consent to the making of such payments directly to the
Debentureholders, to pay to the Trustee any amount due it for reasonable
compensation, expenses, advances and disbursements, including counsel fees
incurred by it up to the date of such distribution. To the extent that such
payment of reasonable compensation, expenses, advances and disbursements out of
the estate in any such proceedings shall be denied for any reason,
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<PAGE>
payment of the same shall be secured by a lien on, and shall be paid out of,
any and all distributions, dividends, monies, securities and other property
which the holders of the Debentures may be entitled to receive in such
proceedings, whether in liquidation or under any plan of reorganization or
arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or adopt on behalf of any Debentureholder any plan of
reorganization or arrangement affecting the Debentures or the rights of any
Debentureholder, or to authorize the Trustee to vote in respect of the claim of
any Debentureholder in any such proceeding; provided, however, that the Trustee
-------- -------
may, on behalf of the Debentureholders, vote for the election of a trustee in
bankruptcy or similar official and may be a member of the creditor's committee
established with respect to such bankruptcy.
All rights of action and of asserting claims under this Indenture, or under
any of the Debentures, may be enforced by the Trustee without the possession of
any of the Debentures, or the production thereof on any trial or other
proceeding relative thereto, and any such suit or proceeding instituted by the
Trustee shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the ratable benefit of the holders of the Debentures.
In any proceedings brought by the Trustee (and in any proceedings involving
the interpretation of any provision of this Indenture to which the Trustee shall
be a party) the Trustee shall be held to represent all the holders of the
Debentures, and it shall not be necessary to make any holders of the Debentures
parties to any such proceedings.
Section 7.3 Application of Monies Collected by Trustee. Any monies
------------------------------------------
collected by the Trustee pursuant to this Article VII shall be applied in the
order following, at the date or dates fixed by the Trustee for the
distribution of such monies, upon presentation of the several Debentures, and
stamping thereon the payment, if only partially paid, and upon surrender
thereof, if fully paid:
First: To the payment of all amounts due the Trustee under Section
8.6;
Second: Subject to the provisions of Article IV, in case the
principal of the outstanding Debentures shall not have become due and be
unpaid, to the payment of interest on the Debentures in default in the
order of the maturity of the installments of such interest, with interest
(to the extent that such interest has been collected by the Trustee) upon
the overdue installments of interest at the rate borne by the Debentures,
such payments to be made ratably to the persons entitled thereto;
Third: Subject to the provisions of Article IV, in case the principal
of the outstanding Debentures shall have become due, by declaration or
otherwise, and be
32
<PAGE>
unpaid, to the payment of the whole amount then owing and unpaid upon the
Debentures for principal and premium, if any, and interest, with interest
on the overdue principal and premium, if any, and (to the extent that
such interest has been collected by the Trustee) upon overdue
installments of interest at the rate borne by the Debentures; and in case
such monies shall be insufficient to pay in full the whole amounts so due
and unpaid upon the Debentures, then to the payment of such principal and
premium, if any, and interest without preference or priority of principal
and premium, if any, over interest, or of interest over principal and
premium, if any, or of any installment of interest over any other
installment of interest, or of any Debenture over any other Debenture,
ratably to the aggregate of such principal and premium, if any, and
accrued and unpaid interest; and
Fourth: Subject to the provisions of Article IV, to the payment of
the remainder, if any, to the Company or any other person lawfully entitled
thereto.
Section 7.4 Proceedings by Debentureholder. No holder of any Debenture
------------------------------
shall have any right by virtue of or by availing of any provision of this
Indenture to institute any suit, action or proceeding in equity or at law upon
or under or with respect to this Indenture, or for the appointment of a
receiver, trustee, liquidator, custodian or other similar official, or for any
other remedy hereunder, unless such holder previously shall have given to the
Trustee written notice of an Event of Default and of the continuance thereof,
as hereinbefore provided, and unless also the holders of not less than 25% in
aggregate principal amount of the Debentures then outstanding shall have made
written request upon the Trustee to institute such action, suit or proceeding
in its own name as Trustee hereunder and shall have offered to the Trustee
such reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred therein or thereby, and the Trustee for sixty (60)
days after its receipt of such notice, request and offer of indemnity, shall
have neglected or refused to institute any such action, suit or proceeding and
no direction inconsistent with such written request shall have been given to
the Trustee pursuant to Section 7.7; it being understood and intended, and
being expressly covenanted by the taker and holder of every Debenture with
every other taker and holder and the Trustee, that no one or more holders of
Debentures shall have any right in any manner whatever by virtue of or by
availing of any provision of this Indenture to affect, disturb or prejudice
the rights of any other holder of Debentures, or to obtain or seek to obtain
priority over or preference to any other such holder, or to enforce any right
under this Indenture, except in the manner herein provided and for the equal,
ratable and common benefit of all holders of Debentures (except as otherwise
provided herein). For the protection and enforcement of this Section 7.4, each
and every Debentureholder and the Trustee shall be entitled to such relief as
can be given either at law or in equity.
Notwithstanding any other provision of this Indenture and any provision of
any Debenture, the right of any holder of any Debenture to receive payment of
the principal of and premium, if any, and interest on such Debenture, on or
after the respective due dates expressed in such Debenture, or to institute suit
for the enforcement of any such payment on or after such respective dates
against the Company shall not be impaired or affected without the consent of
such holder.
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Anything in this Indenture or the Debentures to the contrary
notwithstanding, the holder of any Debenture, without the consent of either the
Trustee or the holder of any other Debenture, in his own behalf and for his own
benefit, may enforce, and may institute and maintain any proceeding suitable to
enforce, his rights of conversion as provided herein.
Section 7.5 Proceedings by Trustee. In case of an Event of Default the
----------------------
Trustee may in its discretion proceed to protect and enforce the rights vested
in it by this Indenture by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any of such rights, either by
suit in equity or by action at law or by proceeding in bankruptcy or otherwise,
whether for the specific enforcement of any covenant or agreement contained in
this Indenture or in aid of the exercise of any power granted in this Indenture,
or to enforce any other legal or equitable right vested in the Trustee by this
Indenture or by law.
Section 7.6 Remedies Cumulative and Continuing. Except as provided in
----------------------------------
Section 2.6, all powers and remedies given by this Article VII to the Trustee or
to the Debentureholders shall, to the extent permitted by law, be deemed
cumulative and not exclusive of any thereof or of any other powers and remedies
available to the Trustee or the holders of the Debentures, by judicial
proceedings or otherwise, to enforce the performance or observance of the
covenants and agreements contained in this Indenture, and no delay or omission
of the Trustee or of any holder of any of the Debentures to exercise any right
or power accruing upon any default or Event of Default occurring and continuing
as aforesaid shall impair any such right or power, or shall be construed to be a
waiver of any such default or any acquiescence therein; and, subject to the
provisions of Section 7.4, every power and remedy given by this Article VII or
by law to the Trustee or to the Debentureholders may be exercised from time to
time, and as often as shall be deemed expedient, by the Trustee or by the
Debentureholders.
Section 7.7 Direction of Proceedings and Waiver of Defaults by Majority of
--------------------------------------------------------------
Debentureholders. The holders of a majority in aggregate principal amount of
- ----------------
the Debentures at the time outstanding determined in accordance with Section 9.4
shall have the right to direct the time, method, and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee; provided, however, that (a) such direction shall
-------- -------
not be in conflict with any rule of law or with this Indenture, and (b) the
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction. The holders of a majority in aggregate
principal amount of the Debentures at the time outstanding determined in
accordance with Section 9.4 may on behalf of the holders of all of the
Debentures waive any past default or Event of Default hereunder and its
consequences except (i) a default in the payment of interest or premium, if any,
on, or the principal of, the Debentures, (ii) a failure by the Company to
convert any Debentures into Common Stock or (iii) a default in respect of a
covenant or provisions hereof which under Article XI cannot be modified or
amended without the consent of the holders of all Debentures then outstanding.
Upon any such waiver the Company, the Trustee and the holders of the Debentures
shall be restored to their former positions and rights hereunder; but no such
waiver shall extend to any subsequent or other default or Event of Default or
impair any right consequent thereon. Whenever any default or Event of
Default hereunder
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shall have been waived as permitted by this Section 7.7, said default or Event
of Default shall for all purposes of the Debentures and this Indenture be
deemed to have been cured and to be not continuing; but no such waiver shall
extend to any subsequent or other default or Event of Default or impair any
right consequent thereon.
Section 7.8 Notice of Defaults. The Trustee shall, within ninety (90)
------------------
days after the occurrence of a default, mail to all Debentureholders, as the
names and addresses of such holders appear upon the Debenture register, notice
of all defaults known to a Responsible Officer, unless such defaults shall
have been cured or waived before the giving of such notice; and provided that,
--------
except in the case of default in the payment of the principal of, or
premium, if any, or interest on any of the Debentures, the Trustee shall be
protected in withholding such notice if and so long as a trust committee of
directors and/or Responsible Officers of the Trustee in good faith determine
that the withholding of such notice is in the interests of the
Debentureholders.
Section 7.9 Undertaking to Pay Costs. All parties to this Indenture
------------------------
agree, and each holder of any Debenture by his acceptance thereof shall be
deemed to have agreed, that any court may, in its discretion, require, in any
suit for the enforcement of any right or remedy under this Indenture, or in
any suit against the Trustee for any action taken or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the
costs of such suit and that such court may in its discretion assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in
such suit, having due regard to the merits and good faith of the claims or
defenses made by such party litigant; provided that the provisions of this
--------
Section 7.9 shall not apply to any suit instituted by the Trustee, to any suit
instituted by any Debentureholder, or group of Debentureholders, holding in
the aggregate more than 10% in principal amount of the Debentures at the time
outstanding determined in accordance with Section 9.4, or to any suit
instituted by any Debentureholder for the enforcement of the payment of the
principal of or premium, if any, or interest on any Debenture (including, but
not limited to, the redemption price with respect to the Debentures being
redeemed, as provided in this Indenture) on or after the due date expressed in
such Debenture or to any suit for the enforcement of the right to convert any
Debenture in accordance with the provisions of Article XV.
Section 7.10 Delay or Omission Not Waiver. No delay or omission of the
----------------------------
Trustee or of any holder of any Debenture to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or any acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee or to the
holders of Debentures may be exercised from time to time, and as often as may be
deemed expedient, by the Trustee or by the holders of Debentures, as the case
may be.
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ARTICLE VIII
CONCERNING THE TRUSTEE
Section 8.1 Duties and Responsibilities of Trustee. The Trustee,
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prior to the occurrence of an Event of Default and after the curing of all
Events of Default which may have occurred, undertakes to perform such duties
and only such duties as are specifically set forth in this Indenture. In case
an Event of Default has occurred (which has not been cured or waived) the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that
(a) prior to the occurrence of an Event of Default and after the
curing or waiving of all Events of Default which may have occurred:
(1) the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Indenture and the
Trust Indenture Act, and the Trustee shall not be liable except for the
performance of such duties and obligations as are specifically set forth
in this Indenture and no implied covenants or obligations shall be read
into this Indenture and the Trust Indenture Act against the Trustee; and
(2) in the absence of bad faith and willful misconduct on the
part of the Trustee, the Trustee may conclusively rely, as to the truth
of the statements and the correctness of the opinions expressed therein,
upon any certificates or opinions furnished to the Trustee and conforming
to the requirements of this Indenture; but, in the case of any such
certificates or opinions which by any provisions hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a
duty to examine the same to determine whether or not they conform to the
requirements of this Indenture;
(b) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer or Officers of the Trustee, unless it
shall be provided that the Trustee was negligent in ascertaining the
pertinent facts;
(c) the Trustee shall not be liable to any Debentureholder with
respect to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the holders of not less than a majority in
principal amount of the Debentures at the time outstanding determined as
provided in Section 9.4 relating to the time, method and place
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of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture; and
(d) whether or not therein provided, every provision of this
Indenture relating to the conduct or affecting the liability of, or
affording protection to, the Trustee shall be subject to the provisions of
this Section.
None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers, if there is reasonable ground for believing that the
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
Section 8.2 Reliance on Documents, Opinions, Etc. Except as otherwise
-------------------------------------
provided in Section 8.1:
(a) the Trustee may rely and shall be protected in acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, note, coupon or other paper or document
believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request, direction, order or demand of the Company
mentioned herein shall be sufficiently evidenced by an Officers'
Certificate (unless other evidence in respect thereof be herein
specifically prescribed); and any resolution of the Board of Directors
may be evidenced to the Trustee by a copy thereof certified by the
Secretary or an Assistant Secretary of the Company;
(c) the Trustee may consult with counsel and any advice or
Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or omitted by it hereunder in
good faith and in accordance with such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request, order
or direction of any of the Debentureholders pursuant to the provisions of
this Indenture, unless such Debentureholders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby;
(e) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or
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investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney; provided,
--------
however, that if the payment within a reasonable time to the Trustee of the
-------
costs, expenses or liabilities likely to be incurred by it in the making of
such investigation is, in the opinion of the Trustee, not reasonably
assured to the Trustee by the security afforded to it by the terms of this
Indenture, the Trustee may require reasonable indemnity from the
Debentureholders against such expenses or liability as a condition to so
proceeding; the reasonable expenses of every such examination shall be paid
by the Company or, if paid by the Trustee or any predecessor Trustee, shall
be repaid by the Company upon demand; and
(f) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents
or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed by it with
due care hereunder.
In no event shall the Trustee be liable for any consequential loss or damage of
any kind whatsoever (including but not limited to lost profits), even if the
Trustee has been advised of the likelihood of such loss or damage and regardless
of the form of action other than through the Trustee's willful misconduct or
gross negligence.
Section 8.3 No Responsibility for Recitals, Etc. The recitals contained
------------------------------------
herein and in the Debentures (except in the Trustee's certificate of
authentication) shall be taken as the statements of the Company, and the Trustee
assumes no responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Debentures. The Trustee shall not be accountable for the use or application by
the Company of any Debentures or the proceeds of any Debentures authenticated
and delivered by the Trustee in conformity with the provisions of this
Indenture.
Section 8.4 Trustee, Paying Agents, Conversion Agents or Registrar May Own
--------------------------------------------------------------
Debentures. The Trustee, any paying agent, any conversion agent or Debenture
- ----------
registrar, in its individual or any other capacity, may become the owner or
pledgee of Debentures with the same rights it would have if it were not Trustee,
paying agent, conversion agent or Debenture registrar.
Section 8.5 Monies to Be Held in Trust. Subject to the provisions of
--------------------------
Section 13.4, all monies received by the Trustee shall, until used or applied
as herein provided, be held in trust for the purposes for which they were
received. Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except
as may be agreed from time to time by the Company and the Trustee.
Section 8.6 Compensation and Expenses of Trustee. The Company covenants
------------------------------------
and agrees to pay to the Trustee from time to time, and the Trustee shall be
entitled to, reasonable compensation for all services rendered by it hereunder
in any capacity (which shall not be limited
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by any provision of law in regard to the compensation of a trustee of an express
trust), and the Company will pay or reimburse the Trustee upon its request for
all reasonable expenses, disbursements and advances reasonably incurred or made
by the Trustee in accordance with any of the provisions of this Indenture
(including the reasonable compensation and the expenses and disbursements of its
counsel and of all persons not regularly in its employ) except any such expense,
disbursement or advance as may arise from its negligence or willful misconduct.
The Company also covenants to indemnify the Trustee in any capacity under this
Indenture and its agents and any authenticating agent for, and to hold them
harmless against, any loss, liability or expense incurred without negligence or
willful misconduct on the part of the Trustee or such agent or authenticating
agent, as the case may be, and arising out of or in connection with the
acceptance or administration of this trust or in any other capacity hereunder,
including the costs and expenses of defending themselves against any claim of
liability in the premises. The obligations of the Company under this Section
8.6 to compensate or indemnify the Trustee and to pay or reimburse the Trustee
for expenses, disbursements and advances shall be secured by a lien prior to
that of the Debentures upon all property and funds held or collected by the
Trustee as such, except, subject to the effect of Sections 4.3 and 7.6, funds
held in trust herewith for the benefit of the holders of particular Debentures
prior to the date of the accrual of such unpaid compensation or indemnifiable
claim. The obligation of the Company under this Section shall survive the
satisfaction and discharge of this Indenture.
When the Trustee and its agents and any authenticating agent incur expenses
or render services after an Event of Default specified in Section 7.1(f) or (g)
occurs, the expenses and the compensation for the services are intended to
constitute expenses of administration under any bankruptcy, insolvency or
similar laws.
Section 8.7 Officers' Certificate as Evidence. Except as otherwise
---------------------------------
provided in Section 8.1, whenever in the administration of the provisions of
this Indenture the Trustee shall deem it necessary or desirable that a matter
be proved or established prior to taking or omitting any action hereunder,
such matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of negligence, willful misconduct,
recklessness and bad faith on the part of the Trustee, be deemed to be
conclusively proved and established by an Officers' Certificate delivered to
the Trustee, and such Officers' Certificate, in the absence of negligence,
willful misconduct, recklessness and bad faith on the part of the Trustee,
shall be full warrant to the Trustee for any action taken or omitted by it
under the provisions of this Indenture upon the faith thereof.
Section 8.8 Conflicting Interests of Trustee. If the Trustee has or shall
--------------------------------
acquire a conflicting interest within the meaning of the Trust Indenture Act,
the Trustee shall either eliminate such interest or resign, to the extent and in
the manner provided by, and subject to the provisions of, the Trust Indenture
Act and this Indenture.
Section 8.9 Eligibility of Trustee. There shall at all times be a Trustee
----------------------
hereunder which shall be a person that is eligible pursuant to the Trust
Indenture Act to act as such and has a
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combined capital and surplus of at least $50,000,000. If such person publishes
reports of condition at least annually, pursuant to law or to the requirements
of any supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such person shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible
in accordance with the provisions of this Section, it shall resign immediately
in the manner and with the effect hereinafter specified in this Article.
Section 8.10 Resignation or Removal of Trustee.
---------------------------------
(a) The Trustee may at any time resign by giving written notice
of such resignation to the Company and by mailing notice thereof to the
holders of Debentures at their addresses as they shall appear on the
Debenture register. Upon receiving such notice of resignation, the
Company shall promptly appoint a successor trustee by written instrument,
in duplicate, executed by order of the Board of Directors, one copy of
which instrument shall be delivered to the resigning Trustee and one copy
to the successor trustee. If no successor trustee shall have been so
appointed and have accepted appointment sixty (60) days after the mailing
of such notice of resignation to the Debentureholders, the resigning
Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee, or any Debentureholder who has been a
bona fide holder of a Debenture or Debentures for at least six months
may, subject to the provisions of Section 7.9, on behalf of himself and
all others similarly situated, petition any such court for the
appointment of a successor trustee. Such court may thereupon, after such
notice, if any, as it may deem proper and prescribe, appoint a successor
trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall fail to comply with Section 8.8 after
written request therefor by the Company or by any Debentureholder who has
been a bona fide holder of a Debenture or Debentures for at least six
months, or
(2) the Trustee shall cease to be eligible in accordance
with the provisions of Section 8.9 and shall fail to resign after written
request therefor by the Company or by any such Debentureholder, or
(3) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed, or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then, in any such case, the
Company may remove the Trustee and appoint a successor trustee by written
instrument, in duplicate, executed by order of the Board of Directors, one
copy of which instrument shall be delivered to the Trustee so removed and
one copy
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to the successor trustee, or, subject to the provisions of Section 7.9, any
Debentureholder who has been a bona fide holder of a Debenture or
Debentures for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor trustee.
(c) The holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may at any time remove the Trustee and
nominate a successor trustee which shall be deemed appointed as successor
trustee unless within ten (10) days after notice to the Company of such
nomination the Company objects thereto, in which case the Trustee so
removed or any Debentureholder, upon the terms and conditions and otherwise
as in Section 8.10(a) provided, may petition any court of competent
jurisdiction for an appointment of a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this Section 8.10
shall become effective upon acceptance of appointment by the successor
trustee as provided in Section 8.11.
Section 8.11 Acceptance by Successor Trustee. Any successor trustee
-------------------------------
appointed as provided in Section 8.10 shall execute, acknowledge and deliver
to the Company and to its predecessor trustee an instrument accepting such
appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, duties and obligations of its predecessor hereunder, with like effect
as if originally named as trustee herein; but, nevertheless, on the written
request of the Company or of the successor trustee, the trustee ceasing to act
shall, upon payment of any amounts then due it pursuant to the provisions of
Section 8.6, execute and deliver an instrument transferring to such successor
trustee all the rights and powers of the trustee so ceasing to act. Upon
request of any such successor trustee, the Company shall execute any and all
instruments in writing for more fully and certainly vesting in and confirming
to such successor trustee all such rights and powers. Any trustee ceasing to
act shall, nevertheless, retain a lien upon all property and funds held or
collected by such trustee as such, except for funds held in trust for the
benefit of holders of particular Debentures, to secure any amounts then due it
pursuant to the provisions of Section 8.6.
No successor trustee shall accept appointment as provided in this Section
8.11 unless at the time of such acceptance such successor trustee shall be
qualified under the provisions of Section 8.8 and be eligible under the
provisions of Section 8.9.
Upon acceptance of appointment by a successor trustee as provided in this
Section 8.11, each of the Company and the former trustee shall mail or cause
to be mailed notice of the succession of such trustee hereunder to the holders
of Debentures at their addresses as they shall appear on the Debenture
register. If the Company fails to mail such notice within ten (10) days
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after acceptance of appointment by the successor trustee, the successor
trustee shall cause such notice to be mailed at the expense of the Company.
Section 8.12 Succession by Merger, Etc. Any corporation or other entity
-------------------------
into which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any corporation or
other entity succeeding to all or substantially all of the trust business of
the Trustee, shall be the successor to the Trustee hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that in the case of any corporation succeeding to all
or substantially all of the trust business of the Trustee such corporation
shall be qualified under the provisions of Section 8.8 and eligible under the
provisions of Section 8.9.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture, any of the Debentures shall have been
authenticated but not delivered, any such successor to the Trustee may adopt the
certificate of authentication of any predecessor trustee or authenticating agent
appointed by such predecessor trustee, and deliver such Debentures so
authenticated; and in case at that time any of the Debentures shall not have
been authenticated, any successor to the Trustee or an authenticating agent
appointed by such successor trustee may authenticate such Debentures either in
the name of any predecessor trustee hereunder or in the name of the successor
trustee; and in all such cases such certificates shall have the full force which
it is anywhere in the Debentures or in this Indenture provided that the
certificate of the Trustee shall have; provided, however, that the right to
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adopt the certificate of authentication of any predecessor Trustee or to
authenticate Debentures in the name of any predecessor Trustee shall apply only
to its successor or successors by merger, conversion or consolidation.
Section 8.13 Limitation on Rights of Trustee as Creditor. If and when the
-------------------------------------------
Trustee shall be or become a creditor of the Company (or any other obligor upon
the Debentures), the Trustee shall be subject to the provisions of the Trust
Indenture Act regarding the collection of the claims against the Company (or any
such other obligor).
ARTICLE IX
CONCERNING THE DEBENTUREHOLDERS
Section 9.1 Action by Debentureholders. Whenever in this Indenture it is
--------------------------
provided that the holders of a specified percentage in aggregate principal
amount of the Debentures may take any action (including the making of any demand
or request, the giving of any notice, consent or waiver or the taking of any
other action), the fact that at the time of taking any such action, the holders
of such specified percentage have joined therein may be evidenced (a) by any
instrument or any number of instruments of similar tenor executed by
Debentureholders in person or by agent or proxy appointed in writing, or (b)
by the record of the holders of Debentures voting in favor
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thereof at any meeting of Debentureholders duly called and held in accordance
with the provisions of Article X, or (c) by a combination of such instrument
or instruments and any such record of such a meeting of Debentureholders.
Whenever the Company or the Trustee solicits the taking of any action by the
holders of the Debentures, the Company or the Trustee may fix in advance of
such solicitation, a date as the record date for determining holders entitled
to take such action. The record date shall be not more than fifteen (15) days
prior to the date of commencement of solicitation of such action.
Section 9.2 Proof of Execution by Debentureholders. Subject to the
--------------------------------------
provisions of Sections 8.1, 8.2 and 10.5, proof of the execution of any
instrument by a Debentureholder or his agent or proxy shall be sufficient if
made in accordance with such reasonable rules and regulations as may be
prescribed by the Trustee or in such manner as shall be satisfactory to the
Trustee. The holding of Debentures shall be proved by the Debenture register or
by a certificate of the Debenture registrar. The record of any
Debentureholders' meeting shall be proved in the manner provided in Section
10.6.
Section 9.3 Who Are Deemed Absolute Owners. The Company, the Trustee, any
------------------------------
paying agent, any conversion agent and any Debenture registrar may deem the
person in whose name such Debenture shall be registered upon the Debenture
register to be, and may treat him as, the absolute owner of such Debenture
(whether or not such Debenture shall be overdue and notwithstanding any notation
of ownership or other writing thereon) for the purpose of receiving payment of
or on account of the principal of, premium, if any, and interest on such
Debenture, for conversion of such Debenture and for all other purposes; and
neither the Company nor the Trustee nor any paying agent nor any conversion
agent nor any Debenture registrar shall be affected by any notice to the
contrary. All such payments so made to any holder for the time being, or upon
his order, shall be valid, and, to the extent of the sum or sums so paid,
effectual to satisfy and discharge the liability for monies payable upon any
such Debenture.
Section 9.4 Company-Owned Debentures Disregarded. In determining
------------------------------------
whether the holders of the requisite aggregate principal amount of Debentures
have concurred in any direction, consent, waiver or other action under this
Indenture, Debentures which are owned by the Company or any other obligor on
the Debentures or by any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or
any other obligor on the Debentures shall be disregarded and deemed not to be
outstanding for the purpose of any such determination; provided that for the
--------
purposes of determining whether the Trustee shall be protected in
relying on any such direction, consent, waiver or other action only Debentures
which a Responsible Officer knows are so owned shall be so disregarded.
Debentures so owned which have been pledged in good faith may be regarded as
outstanding for the purposes of this Section 9.4 if the pledgee shall
establish to the satisfaction of the Trustee the pledgee's right to vote such
Debentures and that the pledgee is not the Company, any other obligor on the
Debentures or a person directly or indirectly controlling or controlled by or
under direct or indirect common control with the Company or any such other
obligor. In the case of a dispute as to such right, any decision by the
Trustee taken upon the advice of counsel shall be full protection
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to the Trustee. Upon request of the Trustee, the Company shall furnish to the
Trustee promptly an Officers' Certificate listing and identifying all
Debentures, if any, known by the Company to be owned or held by or for the
account of any of the above described persons; and, subject to Section 8.1,
the Trustee shall be entitled to accept such Officers' Certificate as
conclusive evidence of the facts therein set forth and of the fact that all
Debentures not listed therein are outstanding for the purpose of any such
determination.
Section 9.5 Revocation of Consents; Future Holders Bound. At any time
--------------------------------------------
prior to (but not after) the evidencing to the Trustee, as provided in Section
9.1, of the taking of any action by the holders of the percentage in aggregate
principal amount of the Debentures specified in this Indenture in connection
with such action, any holder of a Debenture which is shown by the evidence to
be included in the Debentures the holders of which have consented to such
action may, by filing written notice with the Trustee at its Corporate Trust
Office and upon proof of holding as provided in Section 9.2, revoke such
action so far as concerns such Debenture. Except as aforesaid, any such action
taken by the holder of any Debenture shall be conclusive and binding upon such
holder and upon all future holders and owners of such Debenture and of any
Debentures issued in exchange or substitution therefor, irrespective of
whether any notation in regard thereto is made upon such Debenture or any
Debenture issued in exchange or substitution therefor.
ARTICLE X
DEBENTUREHOLDERS' MEETINGS
Section 10.1 Purpose of Meetings. A meeting of Debentureholders may be
-------------------
called at any time and from time to time pursuant to the provisions of this
Article X for any of the following purposes:
(1) to give any notice to the Company or to the Trustee or to
give any directions to the Trustee permitted under this Indenture, or to
consent to the waiving of any default or Event of Default hereunder and
its consequences, or to take any other action authorized to be taken by
Debentureholders pursuant to any of the provisions of Article VII;
(2) to remove the Trustee and nominate a successor trustee
pursuant to the provisions of Article VIII;
(3) to consent to the execution of an indenture or indentures
supplemental hereto pursuant to the provisions of Section 11.2;
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(4) to take any other action authorized to be taken by or on
behalf of the holders of any specified aggregate principal amount of the
Debentures under any other provision of this Indenture or under
applicable law; or
(5) to take any other action authorized by this Indenture or
under applicable law.
Section 10.2 Call of Meetings by Trustee. The Trustee may at any time
---------------------------
call a meeting of Debentureholders to take any action specified in Section
10.1, to be held at such time and at such place in the Borough of Manhattan,
The City of New York, as the Trustee shall determine. Notice of every meeting
of the Debentureholders, setting forth the time and the place of such meeting
and in general terms the action proposed to be taken at such meeting and the
establishment of any record date pursuant to Section 9.1, shall be mailed to
holders of Debentures at their addresses as they shall appear on the Debenture
register. Such notice shall also be mailed to the Company. Such notices shall
be mailed not less than twenty (20) nor more than ninety (90) days prior to
the date fixed for the meeting.
Any meeting of Debentureholders shall be valid without notice if the
holders of all Debentures then outstanding are present in person or by proxy or
if notice is waived before or after the meeting by the holders of all Debentures
outstanding, and if the Company and the Trustee are either present by duly
authorized representatives or have, before or after the meeting, waived notice.
Section 10.3 Call of Meetings by Company or Debentureholders. In case
-----------------------------------------------
at any time the Company, pursuant to a resolution of its Board of Directors,
or the holders of at least 10% in aggregate principal amount of the Debentures
then outstanding, shall have requested the Trustee to call a meeting of
Debentureholders, by written request setting forth in reasonable detail the
action proposed to be taken at the meeting, and the Trustee shall not have
mailed the notice of such meeting within twenty (20) days after receipt of
such request, then the Company or such Debentureholders may determine the time
and the place for such meeting and may call such meeting to take any action
authorized in Section 10.1, by mailing notice thereof as provided in Section
10.2.
Section 10.4 Qualifications for Voting. To be entitled to vote at any
-------------------------
meeting of Debentureholders a person shall (a) be a holder of one or more
Debentures on the record date pertaining to such meeting or (b) be a person
appointed by an instrument in writing as proxy by a holder of one or more
Debentures. The only persons who shall be entitled to be present or to speak
at any meeting of Debentureholders shall be the persons entitled to vote at
such meeting and their counsel and any representatives of the Trustee and its
counsel and any representatives of the Company and its counsel.
Section 10.5 Regulations. Notwithstanding any other provisions of this
-----------
Indenture, the Trustee may make such reasonable regulations as it may deem
advisable for any meeting of
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Debentureholders, in regard to proof of the holding of Debentures and of the
appointment of proxies, and in regard to the appointment and duties of
inspectors of votes, the submission and examination of proxies, certificates and
other evidence of the right to vote, and such other matters concerning the
conduct of the meeting as it shall think fit.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by Debentureholders as provided in Section 10.3, in which case the
Company or the Debentureholders calling the meeting, as the case may be, shall
in like manner appoint a temporary chairman. A permanent chairman and a
permanent secretary of the meeting shall be elected by vote of the holders of a
majority in principal amount of the Debentures represented at the meeting and
entitled to vote at the meeting.
Subject to the provisions of Section 9.4, at any meeting each
Debentureholder or proxyholder shall be entitled to one vote for each $1,000
principal amount of Debentures held or represented by him; provided, however,
-------- -------
that no vote shall be cast or counted at any meeting in respect of any Debenture
challenged as not outstanding and ruled by the chairman of the meeting to be not
outstanding. The chairman of the meeting shall have no right to vote other than
by virtue of Debentures held by him or instruments in writing as aforesaid duly
designating him as the proxy to vote on behalf of other Debentureholders. Any
meeting of Debentureholders duly called pursuant to the provisions of Section
10.2 or 10.3 may be adjourned from time to time by the holders of a majority of
the aggregate principal amount of Debentures represented at the meeting, whether
or not constituting a quorum, and the meeting may be held as so adjourned
without further notice.
Section 10.6 Voting. The vote upon any resolution submitted to any
------
meeting of Debentureholders shall be by written ballot on which shall be
subscribed the signatures of the holders of Debentures or of their
representatives by proxy and the principal amount of the Debentures held or
represented by them. The permanent chairman of the meeting shall appoint two
inspectors of votes who shall count all votes cast at the meeting for or
against any resolution and who shall make and file with the secretary of the
meeting their verified written reports in duplicate of all votes cast at the
meeting. A record in duplicate of the proceedings of each meeting of
Debentureholders shall be prepared by the secretary of the meeting and there
shall be attached to said record the original reports of the inspectors of
votes on any vote by ballot taken thereat and affidavits by one or more
persons having knowledge of the facts setting forth a copy of the notice of
the meeting and showing that said notice was mailed as provided in Section
10.2. The record shall show the principal amount of the Debentures voting in
favor of or against any resolution. The record shall be signed and verified by
the affidavits of the permanent chairman and secretary of the meeting and one
of the duplicates shall be delivered to the Company and the other to the
Trustee to be preserved by the Trustee, the latter to have attached thereto
the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the
matters therein stated.
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Section 10.7 No Delay of Rights by Meeting. Nothing in this Article X
-----------------------------
contained shall be deemed or construed to authorize or permit, by reason of any
call of a meeting of Debentureholders or any rights expressly or impliedly
conferred hereunder to make such call, any hindrance or delay in the exercise of
any right or rights conferred upon or reserved to the Trustee or to the
Debentureholders under any of the provisions of this Indenture or of the
Debentures.
ARTICLE XI
SUPPLEMENTAL INDENTURES
Section 11.1 Supplemental Indentures Without Consent of Debentureholders.
-----------------------------------------------------------
The Company, when authorized by the resolutions of the Board of Directors, and
the Trustee may from time to time and at any time enter into an indenture or
indentures supplemental hereto for one or more of the following purposes:
(a) to make provision with respect to the conversion rights of
the holders of Debentures pursuant to the requirements of Section 15.6;
(b) subject to Article IV, to convey, transfer, assign, mortgage
or pledge to the Trustee as security for the Debentures, any property or
assets;
(c) to evidence the succession of another corporation to the
Company, or successive successions, and the assumption by the successor
corporation of the covenants, agreements and obligations of the Company
pursuant to Article XII;
(d) to add to the covenants of the Company such further
covenants, restrictions or conditions as the Board of Directors and the
Trustee shall consider to be for the benefit of the holders of Debentures,
and to make the occurrence, or the occurrence and continuance, of a default
in any such additional covenants, restrictions or conditions a default or
an Event of Default permitting the enforcement of all or any of the several
remedies provided in this Indenture as herein set forth; provided, however,
-------- -------
that in respect of any such additional covenant, restriction or condition
such supplemental indenture may provide for a particular period of grace
after default (which period may be shorter or longer than that allowed in
the case of other defaults) or may provide for an immediate enforcement
upon such default or may limit the remedies available to the Trustee upon
such default;
(e) to provide for the issuance under this Indenture of
Debentures in coupon form (including Debentures registrable as to principal
only) and to provide for exchangeability of such Debentures with the
Debentures issued hereunder in fully registered form and to make all
appropriate changes for such purpose;
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(f) to cure any ambiguity or to correct or supplement any
provision contained herein or in any supplemental indenture which may be
defective or inconsistent with any other provision contained herein or in
any supplemental indenture, or to make such other provisions in regard to
matters or questions arising under this Indenture which shall not
materially adversely affect the interests of the holders of the Debentures;
(g) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Debentures; or
(h) to modify, eliminate or add to the provisions of this
Indenture to such extent as shall be necessary to effect the qualifications
of this Indenture under the Trust Indenture Act, or under any similar
federal statute hereafter enacted.
The Trustee is hereby authorized to join with the Company in the execution
of any such supplemental indenture, to make any further appropriate agreements
and stipulations which may be therein contained and to accept the conveyance,
transfer and assignment of any property thereunder, but the Trustee shall not be
obligated to, but may in its discretion, enter into any supplemental indenture
which affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this Section
11.1 may be executed by the Company and the Trustee without the consent of the
holders of any of the Debentures at the time outstanding, notwithstanding any of
the provisions of Section 11.2.
Section 11.2 Supplemental Indentures with Consent of Debentureholders.
--------------------------------------------------------
With the consent (evidenced as provided in Article IX) of the holders of not
less than a majority in aggregate principal amount of the Debentures at the time
outstanding (determined in accordance with Section 9.4), the Company, when
authorized by the resolutions of the Board of Directors, and the Trustee may
from time to time and at any time enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or any
supplemental indenture or of modifying in any manner the rights of the holders
of the Debentures; provided, however, that no such supplemental indenture shall
-------- -------
(i) extend the fixed maturity of any Debenture, or reduce the rate or extend the
time of payment of interest thereon, or reduce the principal amount thereof or
premium, if any, thereon, or reduce any amount payable on redemption thereof, or
impair or adversely affect the right of any Debentureholder to institute suit
for the payment thereof, or make the principal thereof or interest or premium,
if any, thereon payable in any coin or currency other than that provided in the
Debentures, or change or impair the right to convert the Debentures into Common
Stock subject to the terms set forth herein, including Section 15.6, or modify
the provisions of this Indenture with respect to the subordination of the
Debentures in a manner adverse to the Debentureholders, without the consent of
the holder of each Debenture so affected, or (ii) reduce the aforesaid
percentage of Debentures, the holders of which are required to consent
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<PAGE>
to any such supplemental indenture, without the consent of the holders of all
Debentures then outstanding.
Upon the request of the Company, accompanied by a copy of the resolutions
of the Board of Directors certified by its Secretary or Assistant Secretary
authorizing the execution of any such supplemental indenture, and upon the
filing with the Trustee of evidence of the consent of Debentureholders as
aforesaid, the Trustee shall join with the Company in the execution of such
supplemental indenture unless such supplemental indenture affects the Trustee's
own rights, duties or immunities under this Indenture or otherwise, in which
case the Trustee may in is discretion, but shall not be obligated to, enter into
such supplemental indenture.
It shall not be necessary for the consent of the Debentureholders under
this Section 11.2 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.
Section 11.3 Effect of Supplemental Indentures. Any supplemental
---------------------------------
indenture executed pursuant to the provisions of this Article XI shall comply
with the Trust Indenture Act, as then in effect. Upon the execution of any
supplemental indenture pursuant to the provisions of this Article XI, this
Indenture shall be and be deemed to be modified and amended in accordance
therewith and the respective rights, limitation of rights, obligations, duties
and immunities under this Indenture of the Trustee, the Company and the holders
of Debentures shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments and all the terms
and conditions of any such supplemental indenture shall be and be deemed to be
part of the terms and conditions of this Indenture for any and all purposes.
Section 11.4 Notation on Debentures. Debentures authenticated and
----------------------
delivered after the execution of any supplemental indenture pursuant to the
provisions of this Article XI may bear a notation in form approved by the
Trustee as to any matter provided for in such supplemental indenture. If the
Company or the Trustee shall so determine, new Debentures so modified as to
conform, in the opinion of the Trustee and the Board of Directors, to any
modification of this Indenture contained in any such supplemental indenture may,
at the Company's expense, be prepared and executed by the Company, authenticated
by the Trustee (or an authenticating agent duly appointed by the Trustee
pursuant to Section 16.11) and delivered in exchange for the Debentures then
outstanding, upon surrender of such Debentures then outstanding.
Section 11.5 Evidence of Compliance of Supplemental Indenture to Be
------------------------------------------------------
Furnished Trustee. The Trustee, subject to the provisions of Sections 8.1 and
- -----------------
8.2, may receive an Officers' Certificate and an Opinion of Counsel as
conclusive evidence that any supplemental indenture executed pursuant hereto
complies with the requirements of this Article XI.
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ARTICLE XII
MERGER, SALE OR CONSOLIDATION
Section 12.1 Limitation on Merger, Sale or Consolidation. The
-------------------------------------------
Company shall not, directly or indirectly, consolidate with or merge with or
into another person or sell, lease, convey or transfer all or substantially all
of its assets (computed on a consolidated basis), whether in a single
transaction or a series of related transactions, to another person or group of
affiliated persons, unless (i) either (A) in the case of a merger or
consolidation, the Company is the surviving entity or (B) the resulting,
surviving or transferee entity is a corporation organized under the laws of the
United States, any state thereof or the District of Columbia and expressly
assumes by supplemental indenture all of the obligations of the Company in
connection with the Debentures and the Indenture; (ii) no default or Event of
Default shall exist or shall occur immediately before or after giving effect on
a pro forma basis to such transaction; and (iii) the Company has delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger, sale, lease, conveyance or transfer and, if a
supplemental indenture is required, such supplemental indenture comply with the
Indenture and that all conditions precedent relating to such transactions have
been satisfied.
Section 12.2 Successor Corporation to Be Substituted. In case of any
---------------------------------------
such consolidation, merger, sale, conveyance or lease and upon the assumption by
the successor corporation, by supplemental indenture, executed and delivered to
the Trustee and satisfactory in form to the Trustee, of the due and punctual
payment of the principal of and premium, if any, and interest on all of the
Debentures and the due and punctual performance of all of the covenants and
conditions of this Indenture to be performed by the Company, such successor
corporation shall succeed to and be substituted for the Company, with the same
effect as if it had been named herein as the party of the first part. Such
successor corporation thereupon may cause to be signed, and may issue either in
its own name or in the name of Sequus Pharmaceuticals, Inc. any or all of the
Debentures issuable hereunder which theretofore shall not have been signed by
the Company and delivered to the Trustee; and, upon the order of such successor
corporation instead of the Company and subject to all the terms, conditions and
limitations in this Indenture prescribed, the Trustee shall authenticate and
shall deliver, or cause to be authenticated and delivered, any Debentures which
previously shall have been signed and delivered by the officers of the Company
to the Trustee for authentication, and any Debentures which such successor
corporation thereafter shall cause to be signed and delivered to the Trustee for
that purpose. All the Debentures so issued shall in all respects have the same
legal rank and benefit under this Indenture as the Debentures theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Debentures had been issued at the date of the execution hereof. In the
event of any such consolidation, merger, sale or conveyance (but not in the
event of such lease), the person named as the "Company" in the first paragraph
of this Indenture, or any successor which shall thereafter have become such in
the manner prescribed in this Article XII and which shall have transferred its
rights and obligations hereunder to another successor in the manner prescribed
in this Article XII, may be dissolved, wound up and liquidated at any time
50
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thereafter and such person shall be released from its liabilities as obligor and
maker of the Debentures and from its obligations under this Indenture.
In case of any such consolidation, merger, sale, conveyance or lease,
such changes in phraseology and form (but not in substance) may be made in the
Debentures thereafter to be issued as may be appropriate.
ARTICLE XIII
SATISFACTION AND DISCHARGE OF INDENTURE
Section 13.1 Discharge of Indenture. When (a) the Company shall
----------------------
deliver to the Trustee for cancellation all Debentures theretofore authenticated
(other than any Debentures which have been destroyed, lost or stolen and in lieu
of or in substitution for which other Debentures shall have been authenticated
and delivered) and not theretofore canceled, or (b) all the Debentures not
theretofore canceled or delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and the
Company shall deposit with the Trustee, in trust, funds sufficient to pay at
maturity or upon redemption of all of the Debentures (other than any Debentures
which shall have been mutilated, destroyed, lost or stolen and in lieu of or in
substitution for which other Debentures shall have been authenticated and
delivered) not theretofore canceled or delivered to the Trustee for
cancellation, including principal and premium, if any, and interest due or to
become due to such date of maturity or redemption date, as the case may be, and
if in either case the Company shall also pay or cause to be paid all other sums
payable hereunder by the Company, then this Indenture shall cease to be of
further effect (except as to (i) remaining rights of registration of transfer,
substitution and exchange and conversion of Debentures, (ii) rights hereunder of
Debentureholders to receive payments of principal of and premium, if any, and
interest on, the Debentures and the other rights, duties and obligations of
Debentureholders, as beneficiaries hereof with respect to the amounts, if any,
so deposited with the Trustee and (iii) the rights, obligations and immunities
of the Trustee hereunder), and the Trustee, on demand of the Company accompanied
by an Officers' Certificate and an Opinion of Counsel as required by Section
16.5 and at the cost and expense of the Company, shall execute proper
instruments acknowledging satisfaction of and discharging this Indenture; the
Company, however, hereby agreeing to reimburse the Trustee for any costs or
expenses thereafter reasonably and properly incurred by the Trustee and to
compensate the Trustee for any services thereafter reasonably and properly
rendered by the Trustee in connection with this Indenture or the Debentures.
Section 13.2 Deposited Monies to Be Held in Trust by Trustee.
-----------------------------------------------
Subject to Section 13.4, all monies deposited with the Trustee pursuant to
Section 13.1 shall be held in trust and applied by it to the payment,
notwithstanding the provisions of Article IV, either directly or through any
paying agent (including the Company if acting as its own paying agent), to the
holders of the particular Debentures for the payment or redemption of which such
monies have
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<PAGE>
been deposited with the Trustee, of all sums due and to become due thereon for
principal and interest and premium, if any.
Section 13.3 Paying Agent to Repay Monies Held. Upon the
---------------------------------
satisfaction and discharge of this Indenture, all monies then held by any paying
agent of the Debentures (other than the Trustee) shall, upon demand of the
Company, be repaid to it or paid to the Trustee, and thereupon such paying agent
shall be released from all further liability with respect to such monies.
Section 13.4 Return of Unclaimed Monies. Subject to the requirements
--------------------------
of applicable law, any monies deposited with or paid to the Trustee for payment
of the principal of, premium, if any, or interest on Debentures and not applied
but remaining unclaimed by the holders of Debentures for two years after the
date upon which the principal of, premium, if any, or interest on such
Debentures, as the case may be, shall have become due and payable, shall be
repaid to the Company by the Trustee on demand and all liability of the Trustee
shall thereupon cease with respect to such monies; and the holder of any of the
Debentures shall thereafter look only to the Company for any payment which such
holder may be entitled to collect unless an applicable abandoned property law
designates another person.
Section 13.5 Reinstatement. If (i) the Trustee or the paying agent
-------------
is unable to apply any money in accordance with Section 13.2 by reason of any
order or judgment of any court or governmental authority enjoining, restraining
or otherwise prohibiting such application and (ii) the holders of at least a
majority in principal amount of the then outstanding Debentures so request by
written notice to the Trustee, the Company's obligations under this Indenture
and the Debentures shall be revived and reinstated as though no deposit had
occurred pursuant to Section 13.1 until such time as the Trustee or the paying
agent is permitted to apply all such money in accordance with Section 13.2;
provided, however, that if the Company makes any payment of interest on or
- -------- -------
principal of any Debenture following the reinstatement of its obligations, the
Company shall be subrogated to the rights of the holders of such Debentures to
receive such payment from the money held by the Trustee or paying agent.
ARTICLE XIV
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
Section 14.1 Indenture and Debentures Solely Corporate Obligations.
-----------------------------------------------------
No recourse for the payment of the principal of or premium, if any, or interest
on any Debenture, or for any claim based thereon or otherwise in respect
thereof, and no recourse under or upon any obligation, covenant or agreement of
the Company in this Indenture or in any supplemental indenture or in any
Debenture, or because of the creation of any indebtedness represented thereby,
shall be had against any incorporator, stockholder, employee, agent, officer or
director or subsidiary, as such,
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past, present or future, of the Company or of any successor corporation, either
directly or through the Company or any successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise; it being expressly understood that all such
liability is hereby expressly waived and released as a condition of, and as a
consideration for, the execution of this Indenture and the issue of the
Debentures.
ARTICLE XV
CONVERSION OF DEBENTURES
Section 15.1 Right to Convert. Subject to and upon compliance with
----------------
the provisions of this Indenture, the holder of any Debenture shall have the
right, at his option, at any time (except that, with respect to any Debenture or
portion of a Debenture which shall be called for redemption, such right shall
terminate, except as provided in the fourth paragraph of Section 15.2, at the
close of business on the next Business Day preceding the date fixed for
redemption of such Debenture or portion of a Debenture unless the Company shall
default in payment due upon redemption thereof) to convert the principal amount
of any such Debenture, or any portion of such principal amount which is $1,000
or an integral multiple thereof, into that number of fully paid and non-
assessable shares of Common Stock (as such shares shall then be constituted)
obtained by dividing the principal amount of the Debenture or portion thereof
surrendered for conversion by the Conversion Price in effect at such time, by
surrender of the Debenture so to be converted in whole or in part in the manner
provided in Section 15.2. A holder of Debentures is not entitled to any rights
of a holder of Common Stock until such holder has converted his Debentures to
Common Stock, and only to the extent such Debentures are deemed to have been
converted to Common Stock under this Article XV.
Section 15.2 Exercise of Conversion Privilege; Issuance of Common
----------------------------------------------------
Stock on Conversion; No Adjustment for Interest or Dividends. In order to
- ------------------------------------------------------------
exercise the conversion privilege with respect to any Debenture, the holder of
any such Debenture to be converted in whole or in part shall surrender such
Debenture, duly endorsed, at an office or agency maintained by the Company
pursuant to Section 5.2, accompanied by the funds, if any, required by the last
paragraph of this Section 15.2, and shall give written notice of conversion in
the form provided on the Debentures (or such other notice which is acceptable to
the Company) to the office or agency that the holder elects to convert such
Debenture or such portion thereof specified in said notice. Such notice shall
also state the name or names (with address) in which the certificate or
certificates for shares of Common Stock which shall be issuable on such
conversion shall be issued, and shall be accompanied by transfer taxes, if
required pursuant to Section 15.7. Each such Debenture surrendered for
conversion shall, unless the shares issuable on conversion are to be issued in
the same name as the registration of such Debenture, be duly endorsed by, or be
accompanied by instruments of transfer in form satisfactory to the Company duly
executed by, the holder or his duly authorized attorney.
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As promptly as practicable after satisfaction of the requirements for
conversion set forth above, if shares issuable on conversion are to be issued in
a name other than that of the Debentureholder (as if such transfer were a
transfer of the Debenture or Debentures (or portion thereof) so converted), the
Company shall issue and shall deliver to such holder at the office or agency
maintained by the Company for such purpose pursuant to Section 5.2, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such Debenture or portion thereof in accordance
with the provisions of this Article and a check or cash in respect of any
fractional interest in respect of a share of Common Stock arising upon such
conversion, as provided in Section 15.3 (which payment, if any, shall be paid no
later than five Business Days after satisfaction of the requirements for
conversion set forth above). In case any Debenture of a denomination greater
than $1,000 shall be surrendered for partial conversion, and subject to Section
2.3, the Company shall execute and the Trustee shall authenticate and deliver to
the holder of the Debenture so surrendered, without charge to him, a new
Debenture or Debentures in authorized denominations in an aggregate principal
amount equal to the unconverted portion of the surrendered Debenture.
Each conversion shall be deemed to have been effected as to any such
Debenture (or portion thereof) on the date on which the requirements set forth
above in this Section 15.2 have been satisfied as to such Debenture (or portion
thereof), and the person in whose name any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become on said date the holder of record of the shares represented thereby;
provided, however, that any such surrender on any date when the stock transfer
- -------- -------
books of the Company shall be closed shall constitute the person in whose name
the certificates are to be issued as the record holder thereof for all purposes
on the next succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Price in effect on the date upon which
such Debenture shall be surrendered.
Any Debenture or portion thereof surrendered for conversion during the
period from the close of business on the record date for any interest payment
date through the close of business on the Business Day next preceding such
interest payment date shall (unless such Debenture or portion thereof being
converted shall have been called for redemption and a notice of redemption has
been sent to the holders of the Debentures pursuant to Section 3.2) be
accompanied by payment, in New York Clearing House funds or other funds
acceptable to the Company, of an amount equal to the interest otherwise payable
on such interest payment date on the principal amount being converted; provided,
--------
however, that no such payment need be made if there shall exist at the time of
- -------
conversion a default in the payment of interest on the Debentures. Except as
provided above in this Section 15.2, no adjustment shall be made for interest
accrued on any Debenture converted or for dividends on any shares issued upon
the conversion of such Debenture as provided in this Article.
Section 15.3 Cash Payments in Lieu of Fractional Shares. No
------------------------------------------
fractional shares of Common Stock or scrip representing fractional shares shall
be issued upon conversion of Debentures. If more than one Debenture shall be
surrendered for conversion at one time by the
54
<PAGE>
same holder, the number of full shares which shall be issuable upon conversion
shall be computed on the basis of the aggregate principal amount of the
Debentures (or specified portions thereof to the extent permitted hereby) so
surrendered for conversion. If any fractional share of stock otherwise would be
issuable upon the conversion of any Debenture or Debentures, the Company shall
make an adjustment therefor in cash at the current market value thereof to the
holder of Debentures. The current market value of a share of Common Stock shall
be the Closing Price on the first Trading Day immediately preceding the day on
which the Debentures (or specified portions thereof) are deemed to have been
converted and such Closing Price shall be determined as provided in Section
15.5(h).
Section 15.4 Conversion Price. The conversion price shall be as
----------------
specified in the form of Debenture (herein called the "Conversion Price")
attached as Exhibit A hereto, subject to adjustment as provided in this Article
XV.
Section 15.5 Adjustment of Conversion Price. The Conversion Price
------------------------------
shall be adjusted from time to time by the Company as follows:
(a) In case the Company shall hereafter pay a dividend or
make a distribution to all holders of the outstanding Common Stock in
shares of Common Stock, the Conversion Price in effect at the opening of
business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall
be reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date (as defined in Section 15.5(h)) fixed
for such determination and the denominator shall be the sum of such number
of shares and the total number of shares constituting such dividend or
other distribution, such reduction to become effective immediately after
the opening of business on the day following the Record Date. If any
dividend or distribution of the type described in this Section 15.5(a) is
declared but not so paid or made, the Conversion Price shall again be
adjusted to the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.
(b) In case the Company shall issue rights or warrants to
all holders of its outstanding shares of Common Stock entitling them (for a
period expiring within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share
less than the Current Market Price (as defined in Section 15.5(h)) on the
Record Date fixed for the determination of stockholders entitled to receive
such rights or warrants, the Conversion Price shall be adjusted so that the
same shall equal the price determined by multiplying the Conversion Price
in effect at the opening of business on the date after such Record Date by
a fraction of which the numerator shall be the number of shares of Common
Stock outstanding at the close of business on the Record Date plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Current Market Price, and of which
the denominator shall
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<PAGE>
be the number of shares of Common Stock outstanding on the close of
business on the Record Date plus the total number of additional shares of
Common Stock so offered for subscription or purchase. Such adjustment
shall become effective immediately after the opening of business on the day
following the Record Date fixed for determination of stockholders entitled
to receive such rights or warrants. To the extent that shares of Common
Stock are not delivered pursuant to such rights or warrants, upon the
expiration or termination of such rights or warrants the Conversion Price
shall be readjusted to the Conversion Price which would then be in effect
had the adjustments made upon the issuance of such rights or warrants been
made on the basis of delivery of only the number of shares of Common Stock
actually delivered. In the event that such rights or warrants are not so
issued, the Conversion Price shall again be adjusted to be the Conversion
Price which would then be in effect if such date fixed for the
determination of stockholders entitled to receive such rights or warrants
had not been fixed. In determining whether any rights or warrants entitle
the holders to subscribe for or purchase shares of Common Stock at less
than such Current Market Price, and in determining the aggregate offering
price of such shares of Common Stock, there shall be taken into account any
consideration received for such rights or warrants, the value of such
consideration, if other than cash, to be determined by the Board of
Directors.
(c) In case the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion
Price in effect at the opening of business on the day following the day
upon which such subdivision becomes effective shall be proportionately
reduced, and conversely, in case outstanding shares of Common Stock shall
be combined into a smaller number of shares of Common Stock, the Conversion
Price in effect at the opening of business on the day following the day
upon which such combination becomes effective shall be proportionately
increased, such reduction or increase, as the case may be, to become
effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.
(d) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock shares of any class of
capital stock of the Company (other than any dividends or distributions to
which Section 15.5(a) applies) or evidences of its indebtedness, cash or
other assets (including securities, but excluding (1) any rights or
warrants referred to in Section 15.5(b) or (2) dividends and distributions
paid exclusively in cash (the foregoing hereinafter in this Section 15.5(d)
called the "Securities")), then, in each such case, the Conversion Price
shall be reduced so that the same shall be equal to the price determined by
multiplying the Conversion Price in effect immediately prior to the close
of business on the Record Date (as defined in Section 15.5(h)) with respect
to such distribution by a fraction of which the numerator shall be the
Current Market Price (determined as provided in Section 15.5(h)) on such
date less the fair market value (as determined by the Board of Directors,
whose determination shall be conclusive and described in a Board
Resolution) on such date of the portion of the Securities so
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<PAGE>
distributed applicable to one share of Common Stock and the denominator
shall be such Current Market Price, such reduction to become effective
immediately prior to the opening of business on the day following the
Record Date; provided, however, that in the event the then fair market
-------- -------
value (as so determined) of the portion of the Securities so distributed
applicable to one share of Common Stock is equal to or greater than the
Current Market Price on the Record Date, in lieu of the foregoing
adjustment, adequate provision shall be made so that each Debentureholder
shall have the right to receive upon conversion of a Debenture (or any
portion thereof) the amount of Securities such holder would have received
had such holder converted such Debenture (or portion thereof) immediately
prior to such Record Date. In the event that such dividend or distribution
is not so paid or made, the Conversion Price shall again be adjusted to be
the Conversion Price which would then be in effect if such dividend or
distribution had not been declared. If the Board of Directors determines
the fair market value of any distribution for purposes of this Section
15.5(d) by reference to the actual or when issued trading market for any
securities comprising all or part of such distribution, it must in doing so
consider the prices in such market over the same period (the "Reference
Period") used in computing the Current Market Price pursuant to Section
15.5(h) to the extent possible, unless the Board of Directors in a board
resolution determines in good faith that determining the fair market value
during the Reference Period would not be in the best interest of the
Debentureholder.
In the event that the Company implements a new stockholders' rights
plan (a "Rights Plan"), such Rights Plan shall provide that upon conversion
of the Debentures the holders will receive, in addition to the Common Stock
issuable upon such conversion, the rights, whether or not such rights have
separated from Common Stock at the time of the conversion.
Rights or warrants distributed by the Company to all holders of Common
Stock entitling the holders thereof to subscribe for or purchase shares of
the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a
specified event or events ("Trigger Event"): (i) are deemed to be
transferred with such shares of Common Stock; (ii) are not exercisable; and
(iii) are also issued in respect of future issuances of Common Stock, shall
be deemed not to have been distributed for purposes of this Section 15.5(d)
(and no adjustment to the Conversion Price under this Section 15.5(d) will
be required) until the occurrence of the earliest Trigger Event. If such
right or warrant is subject to subsequent events, upon the occurrence of
which such right or warrant shall become exercisable to purchase different
securities, evidences of indebtedness or other assets or entitle the holder
to purchase a different number or amount of the foregoing or to purchase
any of the foregoing at a different purchase price, then the occurrence of
each such event shall be deemed to be the date of issuance and record date
with respect to a new right or warrant (and a termination or expiration of
the existing right or warrant without exercise by the holder thereof). In
addition, in the event of any distribution (or deemed distribution) of
rights or warrants, or
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any Trigger Event or other event (of the type described in the preceding
sentence) with respect thereto, that resulted in an adjustment to the
Conversion Price under this Section 15.5(d), (1) in the case of any such
rights or warrants which shall all have been redeemed or repurchased
without exercise by any holders thereof, the Conversion Price shall be
readjusted upon such final redemption or repurchase to give effect to such
distribution or Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price
received by a holder of Common Stock with respect to such rights or
warrants (assuming such holder had retained such rights or warrants), made
to all holders of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of such rights or warrants all of which
shall have expired or been terminated without exercise, the Conversion
Price shall be readjusted as if such rights and warrants had never been
issued.
For purposes of this Section 15.5(d) and Sections 15.5(a) and (b), any
dividend or distribution to which this Section 15.5(d) is applicable that
also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which Section 15.5(b) applies (or
both), shall be deemed instead to be (1) a dividend or distribution of the
evidences of indebtedness, assets, shares of capital stock, rights or
warrants other than such shares of Common Stock or rights or warrants to
which Section 15.5(b) applies (and any Conversion Price reduction required
by this Section 15.5(d) with respect to such dividend or distribution shall
then be made) immediately followed by (2) a dividend or distribution of
such shares of Common Stock or such rights or warrants (and any further
Conversion Price reduction required by Sections 15.5(a) and (b) with
respect to such dividend or distribution shall then be made, except (A) the
Record Date of such dividend or distribution shall be substituted as "the
date fixed for the determination of stockholders entitled to receive such
dividend or other distribution", "Record Date fixed for such determination"
and "Record Date" within the meaning of Section 15.5(a) and as "the date
fixed for the determination of stockholders entitled to receive such rights
or warrants", "the Record Date fixed for the determination of the
stockholders entitled to receive such rights or warrants" and "such Record
Date" within the meaning of Section 15.5(b) and (B) any shares of Common
Stock included in such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for such
determination" within the meaning of Section 15.5(a).
(e) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding any cash that
is distributed upon a merger or consolidation to which Section 15.6 applies
or as part of a distribution referred to in Section 15.5(d)), in an
aggregate amount that, combined together with (1) the aggregate amount of
any other such distributions to all holders of its Common Stock made
exclusively in cash within the twelve (12) months preceding the date of
payment of such distribution, and in respect of which no adjustment
pursuant to this Section 15.5(e) has been made, and (2) the aggregate of
any cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
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Resolution) of consideration payable in respect of any tender offer by the
Company or any of its subsidiaries for all or any portion of the Common
Stock concluded within the twelve (12) months preceding the date of payment
of such distribution, and in respect of which no adjustment pursuant to
Section 15.5(f) has been made, exceeds 10.0% of the product of the Current
Market Price (determined as provided in Section 15.5(h)) on the Record Date
with respect to such distribution times the number of shares of Common
Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date, the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying
the Conversion Price in effect immediately prior to the close of business
on such Record Date by a fraction (i) the numerator of which shall be equal
to the Current Market Price on the Record Date less an amount equal to the
quotient of (x) the excess of such combined amount over such 10.0% and (y)
the number of shares of Common Stock outstanding on the Record Date and
(ii) the denominator of which shall be equal to the Current Market Price on
such date, provided, however, that in the event the portion of the cash so
distributed applicable to one share of Common Stock is equal to or greater
than the Current Market Price of the Common Stock on the Record Date, in
lieu of the foregoing adjustment, adequate provision shall be made so that
each Debentureholder shall have the right to receive upon conversion of a
Debenture (or any portion thereof) the amount of cash such holder would
have received had such holder converted such Debenture (or portion thereof)
immediately prior to such Record Date. In the event that such dividend or
distribution is not so paid or made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
dividend or distribution had not been declared. Any cash distribution to
all holders of Common Stock as to which the Company makes the election
permitted by Section 15.5(n) and as to which the Company has complied with
the requirements of such Section shall be treated as not having been made
for all purposes of this Section 15.5(e).
(f) In case a tender offer made by the Company or any of its
subsidiaries for all or any portion of the Common Stock shall expire and
such tender offer (as amended upon the expiration thereof) shall require
the payment to stockholders (based on the acceptance (up to any maximum
specified in the terms of the tender offer) of Purchased Shares (as defined
below)) of an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) that combined together with
(1) the aggregate of the cash plus the fair market value (as determined by
the Board of Directors, whose determination shall be conclusive and
described in a Board Resolution), as of the expiration of such tender
offer, of consideration payable in respect of any other tender offers, by
the Company or any of its subsidiaries for all or any portion of the Common
Stock expiring within the twelve (12) months preceding the expiration of
such tender offer and in respect of which no adjustment pursuant to this
Section 15.5(f) has been made and (2) the aggregate amount of any
distributions to all holders of the Company's Common Stock made exclusively
in cash within twelve (12) months preceding the expiration of such tender
offer and in respect of which no adjustment pursuant to
Section 15.5(e) has been made, exceeds
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10.0% of the product of the Current Market Price (determined as provided in
Section 15.5(h)) as of the last time (the "Expiration Time") tenders could
have been made pursuant to such tender offer (as it may be amended) times
the number of shares of Common Stock outstanding (including any tendered
shares) on the Expiration Time, then, and in each such case, immediately
prior to the opening of business on the day after the date of the
Expiration Time, the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to close of business on the date of the Expiration
Time by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding (including any tendered shares) on the Expiration
Time multiplied by the Current Market Price of the Common Stock on the
Trading Day next succeeding the Expiration Time and the denominator shall
be the sum of (x) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up
to any maximum specified in the terms of the tender offer) of all shares
validly tendered and not withdrawn as of the Expiration Time (the shares
deemed so accepted, up to any such maximum, being referred to as the
"Purchased Shares") and (y) the product of the number of shares of Common
Stock outstanding (less any Purchased Shares) on the Expiration Time and
the Current Market Price of the Common Stock on the Trading Day next
succeeding the Expiration Time, such reduction (if any) to become effective
immediately prior to the opening of business on the day following the
Expiration Time. In the event that the Company is obligated to purchase
shares pursuant to any such tender offer, but the Company is permanently
prevented by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be adjusted to be
the Conversion Price which would then be in effect if such tender offer had
not been made. If the application of this Section 15.5(f) to any tender
offer would result in an increase in the Conversion Price, no adjustment
shall be made for such tender offer under this Section 15.5(f). Any cash
distribution to all holders of Common Stock as to which the Company has
made the election permitted by Section 15.5(n) and as to which the Company
has complied with the requirements of such Section shall be treated as not
having been made for all purposes of this Section 15.5(f).
(g) In case of a tender or exchange offer made by a person other
than the Company or any Subsidiary for an amount which increases the
offeror's ownership of Common Stock to more than 25% of the Common Stock
outstanding and shall involve the payment by such person of consideration
per share of Common Stock having a fair market value (as determined by the
Board of Directors, whose determination shall be conclusive, and described
in a resolution of the Board of Directors at the last time (the "Expiration
Time") tenders or exchanges may be made pursuant to such tender or exchange
offer (as it shall have been amended)) that exceeds the Current Market
Price of the Common Stock on the Trading Day next succeeding the Expiration
Time, and in which, as of the Expiration Time the Board of Directors is not
recommending rejection of the offer, the Conversion Price shall be reduced
so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the Expiration Time by a
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fraction of which the numerator shall be the number of shares of Common
Stock outstanding (including any tendered or exchanged shares) on the
Expiration Time multiplied by the Current Market Price of the Common Stock
on the Trading Day next succeeding the Expiration Time and the denominator
shall be the sum of (x) the fair market value (determined as aforesaid) of
the aggregate consideration payable to stockholders based on the acceptance
(up to any maximum specified in the terms of the tender or exchange offer)
of all shares validly tendered or exchanged and not withdrawn as of the
Expiration Time (the shares deemed so accepted, up to any such maximum,
being referred to as the "Purchased Shares") and (y) the product of the
number of shares of Common Stock outstanding (less any Purchased Shares) on
the Expiration Time and the Current Market Price of the Common Stock on the
Trading Day next succeeding the Expiration Time, such reduction to become
effective immediately prior to the opening of business on the day following
the Expiration Time. In the event that such person is obligated to purchase
shares pursuant to any such tender or exchange offer, but such person is
permanently prevented by applicable law from effecting any such purchases
or all such purchases are rescinded, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
tender or exchange offer had not been made. Notwithstanding the foregoing,
the adjustment described in this Section 15.5(g) shall not be made if, as
of the Expiration Time, the offering documents with respect to such offer
disclose a plan or intention to cause the Company to engage in any
transaction described in Article XII.
(h) For purposes of this Section 15.5, the following terms shall
have the meaning indicated:
(1) "Closing Price" with respect to any securities on any day
shall mean the closing sale price regular way on such day or, in case no
such sale takes place on such day, the average of the reported closing bid
and asked prices, regular way, in each case on the Nasdaq National Market
or New York Stock Exchange, as applicable, or, if such security is not
listed or admitted to trading on such National Market or Exchange, on the
principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted or
listed or admitted to trading on any national securities exchange or
quotation system, the average of the closing bid and asked prices of such
security on the over-the-counter market on the day in question as reported
by the National Quotation Bureau Incorporated, or a similar generally
accepted reporting service, or if not so available, in such manner as
furnished by any New York Stock Exchange member firm selected from time to
time by the Board of Directors for that purpose, or a price determined in
good faith by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution.
(2) "Current Market Price" shall mean the average of the
daily Closing Prices per share of Common Stock for the ten (10) consecutive
Trading Days
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immediately prior to the date in question; provided, however,
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that (1) if the "ex" date (as hereinafter defined) for any event (other
than the issuance or distribution or Fundamental Change requiring such
computation) that requires an adjustment to the Conversion Price pursuant
to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs during such ten
(10) consecutive Trading Days, the Closing Price for each Trading Day prior
to the "ex" date for such other event shall be adjusted by multiplying such
Closing Price by the same fraction by which the Conversion Price is so
required to be adjusted as a result of such other event, (2) if the "ex"
date for any event (other than the issuance or distribution or Fundamental
Change requiring such computation) that requires an adjustment to the
Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or
(g) occurs on or after the "ex" date for the issuance or distribution or
Fundamental Change requiring such computation and prior to the day in
question, the Closing Price for each Trading Day on and after the "ex" date
for such other event shall be adjusted by multiplying such Closing Price by
the reciprocal of the fraction by which the Conversion Price is so required
to be adjusted as a result of such other event, and (3) if the "ex" date
for the issuance, distribution or Fundamental Change requiring such
computation is prior to the day in question, after taking into account any
adjustment required pursuant to clause (1) or (2) of this proviso, the
Closing Price for each Trading Day on or after such "ex" date shall be
adjusted by adding thereto the amount of any cash and the fair market value
(as determined by the Board of Directors in a manner consistent with any
determination of such value for purposes of Section 15.5(d), (f) or (g),
whose determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital stock or
assets being distributed applicable to one share of Common Stock as of the
close of business on the day before such "ex" date. For purposes of any
computation under Sections 15.5(f) or (g), the Current Market Price of the
Common Stock on any date shall be deemed to be the average of the daily
Closing Prices per share of Common Stock for such day and the next two
succeeding Trading Days; provided, however, that if the "ex" date for any
-------- -------
event (other than the tender offer requiring such computation) that
requires an adjustment to the Conversion Price pursuant to Section 15.5(a),
(b), (c), (d), (e), (f) and (g) occurs on or after the Expiration Time for
the tender or exchange offer requiring such computation and prior to the
day in question, the Closing Price for each Trading Day on and after the
"ex" date for such other event shall be adjusted by multiplying such
Closing Price by the reciprocal of the fraction by which the Conversion
Price is so required to be adjusted as a result of such other event. For
purposes of this paragraph, the term "ex" date, (1) when used with respect
to any issuance or distribution or Fundamental Change, means the first date
on which the Common Stock trades regular way on the relevant exchange or in
the relevant market from which the Closing Price was obtained without the
right to receive such issuance or distribution, (2) when used with respect
to any subdivision or combination of shares of Common Stock, means the
first date on which the Common Stock trades
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regular way on such exchange or in such market after the time at which such
subdivision or combination becomes effective, and (3) when used with
respect to any tender or exchange offer means the first date on which the
Common Stock trades regular way on such exchange or in such market after
the Expiration Time of such offer. Notwithstanding the foregoing, whenever
successive adjustments to the Conversion Price are called for pursuant to
this Section 15.5, such adjustments shall be made to the Current Market
Price as may be necessary or appropriate to effectuate the intent of this
Section 15.5 and to avoid unjust or inequitable results as determined in
good faith by the Board of Directors.
(3) "fair market value" shall mean the amount which a willing
buyer would pay a willing seller in an arm's length transaction.
(4) "Record Date" shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common
Stock have the right to receive any cash, securities or other property or
in which the Common Stock (or other applicable security) is exchanged for
or converted into any combination of cash, securities or other property,
the date fixed for determination of stockholders entitled to receive such
cash, securities or other property (whether such date is fixed by the Board
of Directors or by statute, contract or otherwise).
(5) "Trading Day" shall mean (x) if the applicable security is
listed or admitted for trading on the New York Stock Exchange or another
national security exchange, a day on which the New York Stock Exchange or
another national security exchange is open for business or (y) if the
applicable security is quoted on the Nasdaq National Market, a day on which
trades may be made thereon or (z) if the applicable security is not so
listed, admitted for trading or quoted, any day other than a Saturday or
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(i) The Company may make such reductions in the Conversion Price, in
addition to those required by Sections 15.5(a), (b), (c), (d), (e), (f) and
(g), as the Board of Directors considers to be advisable to avoid or
diminish any income tax to holders of Common Stock or rights to purchase
Common stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes.
To the extent permitted by applicable law, the Company from time to
time may reduce the Conversion Price by any amount for any period of time
if the period is at least twenty (20) days, the reduction is irrevocable
during the period and the Board of Directors shall have made a
determination that such reduction would be in the best
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interests of the Company, which determination shall be conclusive and
described in a Board Resolution. Whenever the Conversion Price is reduced
pursuant to the preceding sentence, the Company shall mail to the holder of
each Debenture at his last address appearing on the Debenture register
provided for in Section 2.5 a notice of the reduction at least fifteen (15)
days prior to the date the reduced Conversion Price takes effect, and such
notice shall state the reduced Conversion Price and the period during which
it will be in effect.
(j) No adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in
such price; provided, however, that any adjustments which by reason of this
-------- -------
Section 15.5(j) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under
this Article XV shall be made by the Company and shall be made to the
nearest cent or to the nearest one hundredth of a share, as the case may
be. No adjustment need be made for a change in the par value or no par
value of the Common Stock.
(k) Whenever the Conversion Price is adjusted as herein provided,
the Company shall promptly file with the Trustee and any conversion agent
other than the Trustee an Officers' Certificate setting forth the
Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment. Promptly after delivery of such
certificate, the Company shall prepare a notice of such adjustment of the
Conversion Price setting forth the adjusted Conversion Price and the date
on which each adjustment becomes effective and shall mail such notice of
such adjustment of the Conversion Price to the holder of each Debenture at
his last address appearing on the Debenture register provided for in
Section 2.5, within twenty (20) days of the effective date of such
adjustment. Failure to deliver such notice shall not effect the legality or
validity of any such adjustment.
(l) In any case in which this Section 15.5 provides that an
adjustment shall become effective immediately after a Record Date for an
event, the Company may defer until the occurrence of such event (i) issuing
to the holder of any Debenture converted after such Record Date and before
the occurrence of such event the additional shares of Common Stock issuable
upon such conversion by reason of the adjustment required by such event
over and above the Common Stock issuable upon such conversion before giving
effect to such adjustment and (ii) paying to such holder any amount in cash
in lieu of any fraction pursuant to Section 15.3.
(m) For purposes of this Section 15.5, the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock.
The Company will not pay any dividend or make any distribution on shares of
Common Stock held in the treasury of the Company.
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(n) In lieu of making any adjustment to the Conversion Price
pursuant to Section 15.5(e), the Company may elect to reserve an amount of
cash for distribution to the holders of the Debentures upon the conversion
of the Debentures so that any such holder converting Debentures will
receive upon such conversion, in addition to the shares of Common Stock and
other items to which such holder is entitled, the full amount of cash which
such holder would have received if such holder had, immediately prior to
the Record Date for such distribution of cash, converted its Debentures
into Common Stock, together with any interest accrued with respect to such
amount, in accordance with this Section 15.5(n). The Company may make such
election by providing an Officers' Certificate to the Trustee to such
effect on or prior to the payment date for any such distribution and
depositing with the Trustee on or prior to such date an amount of cash
equal to the aggregate amount the holders of the Debentures would have
received if such holders had, immediately prior to the Record Date for such
distribution, converted all of the Debentures into Common Stock. Any such
funds so deposited by the Company with the Trustee shall be invested by the
Trustee in marketable obligations issued or fully guaranteed by the United
States government with a maturity not more than three (3) months from the
date of issuance. Upon conversion of Debentures by a holder, the holder
will be entitled to receive, in addition to the Common Stock issuable upon
conversion, an amount of cash equal to the amount such holder would have
received if such holder had, immediately prior to the Record Date for such
distribution, converted its Debenture into Common Stock, along with such
holder's pro rata share of any accrued interest earned as a consequence of
the investment of such funds. Promptly after making an election pursuant to
this Section 15.5(n), the Company shall give or shall cause to be given
notice to all Debentureholders of such election, which notice shall state
the amount of cash per $1,000 principal amount of Debentures such holders
shall be entitled to receive (excluding interest) upon conversion of the
Debentures as a consequence of the Company having made such election.
Section 15.6 Reclassification, Consolidation, Merger or Sale. If any
-----------------------------------------------
transaction shall occur (including, without limitation (a) any recapitalization
or reclassification of shares of Common Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination of Common Stock), (b) any consolidation
of the Company with, or merger of the Company into, any other person, or any
merger of another person into the Company (other than a merger that does not
result in a reclassification, conversion, exchange or cancellation of Common
Stock), (c) any sale, transfer or lease of all or substantially all of the
assets of the Company or (d) any compulsory share exchange) pursuant to which
either shares of Common Stock shall be converted into the right to
receive other securities, cash or other property, or, in the case of a sale or
transfer of all or substantially all of the assets of the Company, the holders
of Common Stock shall be entitled to receive other securities, cash or other
property, then the Company, or such successor or purchasing corporation, as the
case may be, shall, as a condition precedent to such recapitalizaion,
reclassification, change, consolidation, merger, sale, transfer or share
exchange, execute and deliver to the Trustee a supplemental indenture providing
that the holder of each Debenture then
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outstanding shall have the right thereafter, to convert such Debenture only
into: (x) in the case of any such transaction that does not constitute a Common
Stock Fundamental Change (as defined in Section 15.11(b)) and subject to funds
being legally available for such purpose under applicable law at the time of
such conversion, the kind and amount of the securities, cash or other property
that would have been receivable upon such recapitalization, reclassification,
consolidation, merger, sale, transfer or share exchange by a holder of the
number of shares of Common Stock issuable upon conversion of such Debentures
immediately prior to such recapitalization, reclassification, consolidation,
merger, sale, transfer or share exchange, after giving effect, in the case of
any Non-Stock Fundamental Change (as defined in Section 15.11(b)), to any
adjustment in the Conversion Price in accordance with Section 15.11(a)(i) and
(y) in the case of any such transaction that constitutes a Common Stock
Fundamental Change, common stock of the kind received by holders of Common Stock
as a result of such Common Stock Fundamental Change in an amount determined in
accordance with Section 15.11(a)(ii). Such supplemental indenture shall provide
for adjustments that, for events subsequent to the effective date of such
supplemental indenture shall be as nearly equivalent as may be practicable to
the relevant adjustments provided for in this Article XV. If, in the case of any
such consolidation, merger, transfer or lease, the capital stock and other
securities and assets (including cash) receivable thereupon by a holder of
Common stock includes shares of capital stock or other securities or assets of a
corporation other than the successor or purchasing corporation, as the case may
be, in such consolidation, merger, transfer or lease, then such supplemental
indenture shall also be executed by such other corporation and shall contain
such additional provisions to protect the interests of the holders as the Board
of Directors shall reasonably consider necessary by reason of the foregoing.
The above provisions of this Section shall similarly apply to successive
recapitalizations, consolidations, mergers, sales, transfers or share exchanges.
In the event the Company shall execute a supplemental indenture pursuant to
this Section 15.6, the Company shall promptly file with the Trustee an Officers'
Certificate briefly stating the reasons therefor, the kind or amount of shares
of capital stock or securities or assets (including cash) receivable by holders
upon the conversion of their Debentures after any such recapitalization,
reclassification, change, consolidation, merger, sale, transfer or share
exchange and any adjustment to be made with respect thereto.
Section 15.7 Taxes on Shares Issued. The issue of stock certificates on
----------------------
conversions of Debentures shall be made without charge to the converting
Debentureholder for any tax in respect of the issue thereof. The Company shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of stock in any name other than that
of the holder of any Debenture converted, and the Company shall not be required
to issue or deliver any such stock certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
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Section 15.8 Reservation of Shares; Shares to Be Fully Paid; Listing of
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Common Stock. The Company shall provide, free from preemptive rights, out of its
- ------------
authorized but unissued shares or shares held in treasury, sufficient shares to
provide for the conversion of the Debentures from time to time as such
Debentures are presented for conversion, and no Debenture shall be issued unless
such sufficient number of shares has been reserved and are available for
issuance upon conversion of Debentures under this Article XV.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the shares of Common Stock
issuable upon conversion of the Debentures, the Company will take all corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue shares of such Common Stock at such
adjusted Conversion Price.
The Company covenants that all shares of Common Stock issued upon
conversion of Debentures will be fully paid and non-assessable by the Company
and free from all taxes, liens and charges with respect to the issue thereof.
The Company covenants that if any shares of Common Stock to be provided for
the purpose of conversion of Debentures hereunder require registration with or
approval of any governmental authority under any Federal or State law before
such shares may be validly issued upon conversion, the Company will in good
faith and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be.
The Company further covenants that if at any time the Common Stock shall be
listed on the Nasdaq National Market or any other national securities exchange
or automated quotation system the Company will, if permitted by the rules of
such exchange or automated quotation system, list and keep listed, so long as
the Common Stock shall be so listed on such exchange or automated quotation
system, all Common Stock issuable upon conversion of the Debentures.
Section 15.9 Responsibility of Trustee. The Trustee and any other
-------------------------
conversion agent shall not at any time be under any duty or responsibility to
any holder of Debentures to determine whether any facts exist which may require
any adjustment of the Conversion Price, or with respect to the nature or extent
or calculation of any such adjustment when made, or with respect to the method
employed, or herein or in any supplemental indenture provided to be employed, in
making the same. The Trustee and any other conversion agent shall not be
accountable with respect to the validity or value (or the kind or amount) of any
shares of Common Stock, or of any securities or property, which may at any time
be issued or delivered upon the conversion of any Debenture; and the Trustee and
any other conversion agent make no representations with respect thereto. Subject
to the provisions of Section 8.1, neither the Trustee nor any conversion agent
shall be responsible for any failure of the Company to issue, transfer or
deliver any shares of Common Stock or stock certificates or other securities or
property or cash upon the surrender of any note for the purpose of conversion or
to comply with any of the duties, responsibilities or covenants of the Company
contained in this Article. Without limiting the generality of the foregoing,
neither
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<PAGE>
the Trustee nor any conversion agent shall be under any responsibility to
determine the correctness of any provisions contained in any supplemental
indenture entered into pursuant to Section 15.6 relating either to the kind or
amount of shares of stock or securities or property (including cash) receivable
by Debentureholders upon the conversion of their Debentures after any event
referred to in such Section 15.6 or to any adjustment to be made with respect
thereto, but, subject to the provisions of Section 8.1, may accept as conclusive
evidence of the correctness of any such provisions, and shall be protected in
relying upon, the Officers' Certificate (which the Company shall be obligated to
file with the Trustee prior to the execution of any such supplemental indenture)
with respect thereto.
Section 15.10 Notice to Holders Prior to Certain Actions. In case:
------------------------------------------
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock (that would require an adjustment in the
Conversion Price pursuant to Section 15.5); or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any
share of any class or any other rights or warrants; or
(c) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding Common Stock,
or a change in par value, or from par value to no par value, or from no par
value to par value), or of any consolidation or merger to which the Company
is a party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
the Company shall cause to be filed with the Trustee and to be mailed to each
holder of Debentures at his address appearing on the Debenture register,
provided for in Section 2.5 of this Indenture, as promptly as possible but in
any event at least fifteen days prior to the applicable date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution or rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution or rights are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective or occur, and the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of such
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<PAGE>
dividend, distribution, reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up.
Section 15.11 Adjustments to Conversion Price in the Event of a
-------------------------------------------------
Fundamental Change.
- ------------------
(a) Notwithstanding any other provision in this Article XV to
the contrary, if any Fundamental Change (as defined below) occurs, then the
Conversion Price in effect will be adjusted immediately following such
Fundamental Change as described below. In addition, in the event of a Common
Stock Fundamental Change, each Debenture shall be convertible solely into common
stock of the kind received by holders of Common Stock as a result of such Common
Stock Fundamental Change.
For purposes of calculating any adjustment to be made pursuant to this
Section 15.11 in the event of a Fundamental Change, immediately following such
Fundamental Change (and for such purposes a Fundamental Change shall be deemed
to occur on the earlier of (a) the occurrence of such Fundamental Change, and
(b) the date, if any, fixed for determination of stockholders entitled to
receive the cash, securities, property or other assets distributable in such
Fundamental Change to holders of the Common Stock):
(i) in the case of a Non-Stock Fundamental Change, the
Conversion Price of the Debentures immediately following such Non-Stock
Fundamental Change shall be the lower of (A) the Conversion Price in effect
immediately prior to such Non-Stock Fundamental Change, but after giving
effect to any other prior adjustments effected pursuant to this Article XV
and (B) the product of (1) the greater of the Applicable Price (as defined
in Section 15.11(b)) and the then applicable Reference Market Price (as
defined in Section 15.11(b)) and (2) a fraction, the numerator of which is
$1000 and the denominator of which is (x) the amount of the redemption
price for one Debenture if the redemption date were the date of such Non-
Stock Fundamental Change (or the date of the period commencing on the first
date of original issuance of the Debentures and to March 1, 1998 or the
twelve-month periods commencing March 1, 1998 and March 1, 1999, the
product of __%, __% and __%, respectively, times $1000) plus (y) any
accrued interest and unpaid interest thereon to, but excluding, the date of
such Non-Stock Fundamental Change; and
(ii) in the case of a Common Stock Fundamental Change, the
Conversion Price of the Debentures immediately following such Common Stock
Fundamental Change shall be the Conversion Price in effect immediately
prior to such Common Stock Fundamental Change, but after giving effect to
any other prior adjustments effected pursuant to Section 15.5 multiplied by
a fraction, the numerator of which is the Purchaser Stock Price (as defined
in Section 15.11(b)) and the denominator of which is the Applicable Price;
provided, however, that in the event of a Common Stock Fundamental Change
in which (A) 100% of the value of the consideration received by a holder of
Common Stock is common stock of the successor, acquiror or other third
party
69
<PAGE>
(and cash, if any, paid with respect to any fractional interests in such
common stock resulting from such Common Stock Fundamental Change) and (B)
all of the Common Stock shall have been exchanged for, converted into or
acquired for, common stock of the successor, acquiror or other third party
(and any cash with respect to fractional interests), the Conversion Price
immediately following such Common Stock Fundamental Change shall be the
Conversion Price in effect immediately prior to such Common Stock
Fundamental Change multiplied by a fraction, the numerator of which is one
(1) and the denominator of which is the number of shares of common stock of
the successor, acquiror or other third party received by a holder of one
share of Company Common Stock as a result of such Common Stock Fundamental
Change.
(b) For purposes of this Section 15.11, the following terms shall
have the meaning indicated:
(i) "Applicable Price" means (i) in the event of a Non-
Stock Fundamental Change in which the holders of Common Stock receive only
cash, the amount of cash received by a holder of one share of Common Stock
and (ii) in the event of any other Fundamental Change, the average of the
daily Closing Price (determined as provided in Section 15.5(h)(1)) for one
share of Common Stock during the 10 Trading Days (determined as provided in
Section 15.5(h)(5)) immediately prior to the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Fundamental
Change or, if there is no such record date, prior to the date upon which
the holders of Common Stock shall have the right to receive such cash,
securities, property or other assets. The Closing Price on any Trading Day
may be subject to adjustment as provided in Section 15.5(h)(1).
(ii) "Common Stock Fundamental Change" means any Fundamental
Change in which more than 50% of the value (as determined in good faith by
the Board of Directors) of the consideration received by holders of Common
Stock consists of common stock that, for the 10 Trading Days immediately
prior to such Fundamental Change, has been admitted for listing or admitted
for listing subject to notice of issuance on a national securities exchange
or quoted on Nasdaq National Market, provided, however, that a Fundamental
Change shall not be a Common Stock Fundamental Change unless either (i) the
Company continues to exist after the occurrence of such Fundamental Change
and the outstanding Debentures continues to exist as outstanding Debentures
or (ii) not later than the occurrence of such Fundamental Change, the
outstanding Debentures are converted into or exchanged for debentures have
terms substantially similar to those of the Debentures.
(iii) "Fundamental Change" means the occurrence of any
transaction or event or series of transactions or events pursuant to which
all or substantially all of the Common Stock shall be exchanged for,
converted into, acquired for or shall constitute solely the right to
receive cash, securities, property or other assets (whether by means of
70
<PAGE>
an exchange offer, liquidation, tender, offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise); provided,
--------
however, in the case of any such series of transactions or events, for
-------
purposes of adjustment of the Conversion Price, such Fundamental Change
shall be deemed to have occurred when substantially all of the Common Stock
shall have been exchanged for, converted into or acquired for, or shall
constitute solely the right to receive, such cash, securities, property or
other assets, but the adjustment shall be based upon the consideration that
the holders of the Common Stock received in the transaction or event as a
result of which more than 50% of the Common Stock shall have been exchanged
for, converted into or acquired for, or shall constitute solely the right
to receive, such cash, securities, property or other assets.
(iv) "Non-Stock Fundamental Change" means any Fundamental
Change other than a Common Stock Fundamental Change.
(v) "Purchase Stock Price" means, with respect to any
Common Stock Fundamental Change, the average of the daily Closing Price for
one share of the common stock received by holders of the Common Stock in
such Common Stock Fundamental Change during the 10 Trading Days immediately
prior to the date fixed for the determination of the holders of the Common
Stock entitled to receive such common stock or, if there is no such date,
prior to the date upon which the holders of the Common Stock shall have the
right to receive such common stock.
(vi) "Reference Market Price" shall initially mean $_____
(which is an amount equal to 66 2/3% of the reported last sale price for
Company Common Stock on the Nasdaq National Market on ________) and, in
the event of any adjustment to the Conversion Price other than as a
result of a Fundamental Change, the Reference Market Price shall also be
adjusted so that the ratio of the Reference Market Price to the
Conversion Price after giving effect to any such adjustment shall always
be the same as the ratio of the initial Reference Market Price to the
initial Conversion Price of $ ____ per share.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section 16.1 Provisions Binding on Company's Successors. All the
------------------------------------------
covenants, stipulations, promises and agreements of the Company in this
Indenture contained shall bind its successors and assigns whether so expressed
or not.
Section 16.2 Official Acts by Successor Corporation. Any act or proceeding
--------------------------------------
by any provision of this Indenture authorized or required to be done or
performed by any board, committee or officer of the Company shall and may be
done and performed with like force and
71
<PAGE>
effect by the like board, committee or officer of any corporation that shall at
the time be the lawful sole successor of the Company.
Section 16.3 Addresses for Notices, Etc. Any notice or demand which by any
--------------------------
provision of this Indenture is required or permitted to be given or served by
the Trustee or by the holders of Debentures on the Company shall be deemed to
have been sufficiently given or made, for all purposes if given or served by
being deposited postage prepaid by registered or certified mail in a post office
letter box addressed (until another address is filed by the Company with the
Trustee) to Sequus Pharmaceuticals, Inc., 960 Hamilton Court, Menlo Park,
California 94025, Attention: Chief Financial Officer. Any notice, direction,
request or demand hereunder to or upon the Trustee shall be deemed to have been
sufficiently given or made, for all purposes, if given or served by being
deposited postage prepaid by registered or certified mail in a post office
letter box addressed to the Corporate Trust Office, which office is, at the date
as of which this Indenture is dated, located at ______________________________.
The Trustee, by notice to the Company, may designate additional or
different addresses for subsequent notices or communications.
Any notice or communication mailed to a Debentureholder shall be mailed to
him by first class mail, postage prepaid, at his address as it appears on the
Debenture register and shall be sufficiently given to him if so mailed within
the time prescribed.
Failure to mail a notice or communication to a Debentureholder or any
defect in it shall not affect its sufficiency with respect to other
Debentureholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
Section 16.4 Governing Law. This Indenture and each Debenture shall be
-------------
deemed to be a contract made under the laws of New York, and for all purposes
shall be construed in accordance with the laws of New York.
Section 16.5 Evidence of Compliance with Conditions Precedent;
------------------------------------------------
Certificates to Trustee. Upon any application or demand by the Company to the
- -----------------------
Trustee to take any action under any of the provisions of this Indenture,
the Company shall furnish to the Trustee an Officers' Certificate stating that
all conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with, and an Opinion of Counsel stating that,
in the opinion of such counsel, all such conditions precedent have been complied
with.
Each certificate or opinion provided for by or on behalf of the Company in
this Indenture and delivered to the Trustee with respect to compliance with a
condition or covenant provided for in this Indenture shall include (1) a
statement that the person making such certificate or opinion has read such
covenant or condition; (2) a brief statement as to the nature and scope of the
examination or investigation upon which the statement or opinion contained in
such
72
<PAGE>
certificate or opinion is based; (3) a statement that, in the opinion of such
person, he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant or
condition has been complied with; and (4) a statement as to whether or not, in
the opinion of such person, such condition or covenant has been complied with.
Section 16.6 Legal Holidays. In any case where the date of maturity of
--------------
interest on or principal of the Debentures or the date fixed for redemption of
any Debenture will not be a Business Day, then payment of such interest on or
principal of the Debentures need not be made on such date, but may be made on
the next succeeding Business Day with the same force and effect as if made on
the date of maturity or the date fixed for redemption, and no interest shall
accrue for the period from and after such date.
Section 16.7 No Security Interest Created. Nothing in this Indenture or
----------------------------
in the Debentures, expressed or implied, shall be construed to constitute a
security interest under the Uniform Commercial Code or similar legislation, as
now or hereafter enacted and in effect, in any jurisdiction.
Section 16.8 Trust Indenture Act. If and to the extent that any
-------------------
provision of this Indenture limits, qualifies or conflicts with another
provision included in this Indenture which is required to be included in this
Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act,
such required provision shall control. If any provision of this Indenture
modifies or excludes any provision of the Trust Indenture Act that may be so
modified or excluded, the latter provision shall be deemed to apply to this
Indenture as so modified or excluded, as the case may be.
Section 16.9 Benefits of Indenture. Nothing in this Indenture or in the
---------------------
Debentures, expressed or implied, shall give to any person, other than the
parties hereto, any paying agent, any authenticating agent, any Debenture
registrar and their successors hereunder, the holders of Debentures and the
holders of Senior Indebtedness, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
Section 16.10 Table of Contents, Headings, Etc. The table of contents and
--------------------------------
the titles and headings of the articles and sections of this Indenture have been
inserted for convenience of reference only, are not to be considered a part
hereof, and shall in no way modify or restrict any of the terms or provisions
hereof.
Section 16.11 Authenticating Agent. The Trustee may appoint an
--------------------
authenticating agent which shall be authorized to act on its behalf and subject
to its direction in the authentication and delivery of Debentures in connection
with the original issuance thereof and transfers and exchanges of Debentures
hereunder, including under Sections 2.4, 2.5, 2.6, 2.7 and 3.3, as fully
to all intents and purposes as though the authenticating agent had been
expressly authorized by this Indenture and those Sections to authenticate and
deliver Debentures. For all purposes of this Indenture, the authentication and
delivery of Debentures by the authenticating agent shall be deemed to be
authentication and delivery of such Debentures "by the Trustee" and a
certificate of
73
<PAGE>
authentication executed on behalf of the Trustee by an authenticating agent
shall be deemed to satisfy any requirement hereunder or in the Debentures for
the Trustee's certificate of authentication. Such authenticating agent shall at
all times be a person eligible to serve as trustee hereunder pursuant to Section
8.9.
Any corporation into which any authenticating agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, consolidation or conversion to which any authenticating agent
shall be a party, or any corporation succeeding to the corporate trust business
of any authenticating agent, shall be the successor of the authenticating agent
hereunder, if such successor corporation is otherwise eligible under this
Section, without the execution or filing of any paper or any further act on the
part of the parties hereto or the authenticating agent or such successor
corporation.
Any authenticating agent may at any time resign by giving written notice of
resignation to the Trustee and to the Company. The Trustee may at any time
terminate the agency of any authenticating agent by giving written notice of
termination to such authenticating agent and to the Company. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
any authenticating agent shall cease to be eligible under this Section, the
Trustee shall promptly appoint a successor authenticating agent (which may be
the Trustee), shall give written notice of such appointment to the Company and
shall mail notice of such appointment to all holders of Debentures as the names
and addresses of such holders appear on the Debenture register.
The Trustee agrees to pay to the authenticating agent from time to time
reasonable compensation for its services (to the extent pre-approved by the
Company in writing), and the Trustee shall be entitled to be reimbursed for such
pre-approved payments, subject to Section 8.6.
The provisions of Sections 8.2, 8.3, 8.4, 9.3 and this Section 16.11 shall
be applicable to any authenticating agent.
Section 16.12 Execution in Counterparts. This Indenture may be executed
-------------------------
in any number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument.
____________________________ hereby accepts the trusts in this Indenture
declared and provided, upon the terms and conditions hereinabove set forth.
74
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly signed, and their respective corporate seals to be hereunto affixed and
attested, all as of the date first written above.
SEQUUS PHARMACEUTICALS, INC.
By:
-------------------------------------
Title:
Attest:
- ---------------------------------
[seal]
________________________, as Trustee
By:
-------------------------------------
Title:
Attest:
- ---------------------------------
[seal]
<PAGE>
EXHIBIT A - FORM OF DEBENTURE
[FORM OF FACE OF DEBENTURE]
No. ____________ $_______________
SEQUUS PHARMACEUTICALS, INC.
___% Convertible Subordinated Debenture due 2007
SEQUUS PHARMACEUTICALS, INC., a corporation duly organized and validly
existing under the laws of the State of Delaware (herein called the "Company",
which term includes any successor corporation under the Indenture referred to on
the reverse hereof), for value received hereby promises to pay to
____________________, or registered assigns, the principal sum of ______
____________________________________ Dollars on March 1, 2007, and to pay
interest on said principal sum semi-annually on March 1 and September 1 of each
year, commencing on the first such date after the Exchange Date (as defined in
the Indenture), at the rate per annum specified in the title of this Debenture,
accrued from the March 1 or September 1, as the case may be, next preceding the
date of this Debenture to which interest has been paid or duly provided for,
unless the date of this Debenture is a date to which interest has been paid or
duly provided for, in which case interest shall accrue from the date of this
Debenture, or unless no interest has been paid or duly provided for on this
Debenture, in which case interest shall accrue from the Exchange Date, until
payment of said principal sum has been made or duly provided for.
Notwithstanding the foregoing, if the date hereof is after any February 15 or
August 15, as the case may be, and before the following March 1 or September 1,
this Debenture shall bear interest from such March 1 or September 1,
respectively; provided, however, that if the Company shall default in the
-------- -------
payment of interest due on such March 1 or September 1, then this Debenture
shall bear interest from the next preceding March 1 or September 1 to which
interest has been paid or duly provided for or, if no interest has been paid or
duly provided for on this Debenture, from the Exchange Date. The interest so
payable on any March 1 or September 1 will be paid to the person in whose name
this Debenture (or one or more Predecessor Debentures) is registered at the
close of business on the record date, which shall be the February 15 or August
15 (whether or not a Business Day) next preceding such March 1 or September 1,
respectively, as provided in the Indenture; provided that any such interest not
-------- ----
punctually paid or duly provided for shall be payable as provided in the
Indenture. Payment of the principal of and interest accrued on this Debenture
shall be made at the office or agency of the Company maintained for that purpose
in the Borough of Manhattan, The City of New York, or, at the option of the
holder of this Debenture, at the Corporate Trust Office, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts; provided, however,
-------- -------
that at the option of the Company, payment of interest may be made by check
mailed to the registered address of the person entitled thereto.
Reference is made to the further provisions of this Debenture set forth on
the reverse hereof, including, without limitation, provisions subordinating the
payment of principal of and premium, if
<PAGE>
any, and interest on this Debenture to the prior payment in full of all Senior
Indebtedness as defined in the Indenture and provisions giving the holder of
this Debenture the right to convert this Debenture into Common Stock of the
Company on the terms and subject to the limitations referred to on the reverse
hereof and as more fully specified in the Indenture. Such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.
This Debenture shall be deemed to be a contract made under the laws of the
State of New York, and for all purposes shall be construed in accordance with
and governed by the laws of said State.
This Debenture shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been manually signed
by the Trustee or a duly authorized authenticating agent under the Indenture.
-2-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed under its corporate seal.
SEQUUS PHARMACEUTICALS, INC.
Dated: By:
________________________ _____________________________________
Title:
Attest:
___________________________________________
Secretary
[FORM OF CERTIFICATE OF AUTHENTICATION]
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Debentures described in the within-named Indenture.
__________________________________________
___, as Trustee
By:
_______________________________________
Authorized Signatory
-3-
<PAGE>
[FORM OF REVERSE OF DEBENTURE]
SEQUUS PHARMACEUTICALS, INC.
__% Convertible Subordinated Debenture due 2007
This Debenture is one of a duly authorized issue of Debentures of the Company,
designated as its ___% Convertible Subordinated Debentures due 2007 (herein
called the "Debentures"), limited to the aggregate principal amount of
$57,500,000 all issued or to be issued under and pursuant to an Indenture, dated
as of __________, 1996 (herein called the "Indenture"), between the Company and
___________________________ (herein called the "Trustee"), to which Indenture
and all indentures supplemental thereto reference is hereby made for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Company and the holders of the
Debentures.
In case an Event of Default, as defined in the Indenture, shall have occurred
and be continuing, the principal of and accrued interest on all Debentures may
be declared, and upon said declaration shall become, due and payable, in the
manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the Trustee, with
the consent of the holders of not less than a majority of the aggregate
principal amount of the Debentures at the time outstanding, evidenced as in the
Indenture provided, to execute supplemental indentures adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
or of any supplemental indenture or modifying in any manner the rights of the
holders of the Debentures; provided, however, that no such supplemental
-------- -------
indenture shall (i) extend the fixed maturity of any Debenture, or reduce the
rate or extend the time of payment of interest thereon, or reduce the principal
amount thereof or premium, if any, thereon, or reduce any amount payable on
redemption thereof, or impair or adversely affect the right of any
Debentureholder to institute suit for the payment thereof, or make the principal
thereof or interest or premium, if any, thereon payable in any coin or currency
other than that provided in the Debentures, or modify the provisions of the
Indenture with respect to the subordination of the Debentures in a manner
adverse to the Debentureholders, or impair, or change in any respect adverse to
the holders of the Debentures, the right to convert the Debentures into Common
Stock subject to the terms set forth in the Indenture, including Section 15.6
thereof, without the consent of the holder of each Debenture so affected or (ii)
reduce the aforesaid percentage of Debentures, the holders of which are required
to consent to any such supplemental indenture, without the consent of the
holders of all Debentures then outstanding. It is also provided in the
Indenture that, prior to any declaration accelerating the maturity of the
Debentures, the holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may on behalf of the holders of all of the
Debentures waive any past default or Event of Default under the Indenture and
its consequences except a default in the payment of interest or any premium on
or the principal of or any redemption price of any of the Debentures or a
failure by the Company to convert any Debentures into Common Stock of the
Company. Any such consent or waiver by the holder of this Debenture (unless
revoked as provided in the Indenture) shall be conclusive and binding upon
such holder and upon all future holders and owners of this Debenture and any
Debentures which may be
<PAGE>
issued in exchange or substitution hereof, irrespective of whether or not any
notation thereof is made upon this Debenture or such other Debentures.
The indebtedness evidenced by the Debentures is, to the extent and in the
manner provided in the Indenture, expressly subordinate and subject in right of
payment to the prior payment in full of all Senior Indebtedness of the Company,
as defined in the Indenture, whether outstanding at the date of the Indenture or
thereafter incurred, and this Debenture is issued subject to the provisions of
the Indenture with respect to such subordination. Each holder of this
Debenture, by accepting the same, agrees to and shall be bound by such
provisions and authorizes the Trustee on his behalf to take such action as may
be necessary or appropriate to effectuate the subordination so provided and
appoints the Trustee his attorney in fact for such purpose.
No reference herein to the Indenture and no provision of this Debenture or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and any premium and interest
on this Debenture at the place, at the respective times, at the rate and in the
coin or currency herein prescribed.
Interest on the Debentures shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Debentures are issuable in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. At the
office or agency of the Company referred to on the face hereof, and in the
manner and subject to the limitations provided in the Indenture, without payment
of any service charge but with payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any
registration or exchange of Debentures, Debentures may be exchanged for a like
aggregate principal amount of Debentures of other authorized denominations.
The Debentures will not be redeemable at the option of the Company prior to
March 2, 2000. On or after such date and prior to maturity the Debentures may
be redeemed at the option of the Company as a whole, or from time to time in
part, upon mailing a notice of such redemption not less than 20 nor more than 60
days before the date fixed for redemption to the holders of Debentures at their
last registered addresses, all as provided in the Indenture, at the following
optional redemption prices (expressed as percentages of the principal amount),
together in each case with accrued interest to, but excluding, the date fixed
for redemption.
If redeemed during the 12-month period beginning March 1 (beginning March 2,
2000 and ending on February 28, 2001, in the case of the first such period):
<TABLE>
<CAPTION>
Year Percentage
------------------ -------------
<S> <C>
2000.............. %
2001..............
2002..............
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Year Percentage
------------------ -------------
<S> <C>
2003..............
2004..............
2005..............
</TABLE>
and 100% at March 1, 2007; provided, that if the date fixed for redemption is a
-------- ----
March 1 or September 1, then the interest payable on such date shall be paid to
the holder of record on the next preceding February 15 or August 15.
The Debentures are not subject to redemption through the operation of any
sinking fund.
Subject to the provisions of the Indenture, the holder hereof has the right,
at its option, at any time, or, as to all or any portion hereof called for
redemption, prior to the close of business on the next Business Day preceding
the date fixed for redemption (unless the Company shall default in payment due
upon redemption), to convert the principal hereof or any portion of such
principal which is $1,000 or an integral multiple thereof, into that number of
fully paid and non-assessable shares of Company's Common Stock, as said shares
shall be constituted at the date of conversion, obtained by dividing the
principal amount of this Debenture or portion thereof to be converted by the
conversion price of $____ or such conversion price as adjusted from time to time
as provided in the Indenture, upon surrender of this Debenture, together with a
conversion notice as provided in the Indenture and this Debenture, to the
Company at the office or agency of the Company maintained for that purpose in
the Borough of Manhattan, The City of New York, or at the option of such holder,
the Corporate Trust Office, and, unless the shares issuable on conversion are to
be issued in the same name as this Debenture, duly endorsed by, or accompanied
by instruments of transfer in form satisfactory to the Company duly executed by,
the holder or by his duly authorized attorney. In addition, the conversion
price of the Debenture is subject to adjustment as provided in the Indenture in
the event of a Non-Stock Fundamental Change or a Common Stock Fundamental
Change. No adjustment in respect of interest or dividends will be made upon any
conversion; provided, however, that if this Debenture shall be surrendered for
-------- -------
conversion during the period from the close of business on any record date for
the payment of interest through the close of business on the Business Day next
preceding the following interest payment date, this Debenture (unless it or the
portion being converted shall have been called for redemption and a notice of
redemption has been mailed to the holders of the Debentures pursuant to Section
3.2 of the Indenture) must be accompanied by an amount, in funds acceptable to
the Company, equal to the interest otherwise payable on such interest payment
date on the principal amount being converted. No fractional shares of Common
Stock will be issued upon any conversion, but an adjustment in cash will be paid
to the holder, as provided in the Indenture, in respect of any fraction of a
share which would otherwise be issuable upon the surrender of any Debenture or
Debentures for conversion.
Any Debentures called for redemption, unless surrendered for conversion on or
before the close of business on the date fixed for redemption, may be deemed to
be purchased from the holder of such Debentures at an amount equal to the
applicable redemption price, together with accrued interest to the date fixed
for redemption, by one or more investment bankers or other purchasers who
-3-
<PAGE>
may agree with the Company to purchase such Debentures from the holders thereof
and convert them into Common Stock of the Company and to make payment for such
Debentures as aforesaid to the Trustee in trust for such holders.
Upon due presentment for registration of transfer of this Debenture at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, or at the option of the holder of this Debenture, at the Corporate Trust
Office, a new Debenture or Debentures of authorized denominations for an equal
aggregate principal amount will be issued to the transferee in exchange thereof,
subject to the limitations provided in the Indenture, without charge except for
any tax or other governmental charge imposed in connection therewith.
The Company, the Trustee, any authenticating agent, any paying agent, any
conversion agent and any Debenture registrar may deem and treat the registered
holder hereof as the absolute owner of this Debenture (whether or not this
Debenture shall be overdue and notwithstanding any notation of ownership or
other writing hereon made by anyone other than the Company or any Debenture
registrar), for the purpose of receiving payment hereof, or on account hereof,
for the conversion hereof and for all other purposes, and neither the Company
nor the Trustee nor any other authenticating agent nor any paying agent nor any
other conversion agent nor any Debenture registrar shall be affected by any
notice to the contrary. All payments made to or upon the order of such
registered holder shall, to the extent of the sum or sums paid, satisfy and
discharge liability for monies payable on this Debenture.
No recourse for the payment of the principal of or any premium or interest on
this Debenture, or for any claim based hereon or otherwise in respect hereof,
and no recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture or any indenture supplemental thereto or in any
Debenture, or because of the creation of any indebtedness represented thereby,
shall be had against any incorporator, stockholder, employee, agent, officer,
director or subsidiary, as such, past, present or future, of the Company or of
any successor corporation, either directly or through the Company or any
successor corporation, whether by virtue of any constitution, statute or rule of
law or by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
Terms used in this Debenture and defined in the Indenture are used herein as
therein defined.
-4-
<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription of the face of this
Debenture, shall be construed as though they were written out in full according
to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________ Custodian ________
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with Act ___________________________________________
right of survivorship (State)
and not as tenants in
common
</TABLE>
Additional abbreviations may also be used
though not in the above list.
<PAGE>
[FORM OF CONVERSION NOTICE]
CONVERSION NOTICE
To: Sequus Pharmaceuticals, Inc.
The undersigned registered owner of this Debenture hereby irrevocably
exercises the option to convert this Debenture, or the portion hereof (which is
$1,000 principal amount or an integral multiple thereof) below designated, into
shares of Common Stock in accordance with the terms of the Indenture referred to
in this Debenture, and directs that the shares issuable and deliverable upon
such conversion, together with any check in payment for fractional shares and
any Debentures representing any unconverted principal amount hereof, be issued
and delivered to the registered holder hereof unless a different name has been
indicated below. If shares or any portion of this Debenture not converted are
to be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto. Any amount required
to be paid to the undersigned on account of interest accompanies this Debenture.
Dated: ________________________
________________________________
________________________________
Signature(s)
Signature(s) must be guaranteed by
an eligible Guarantor Institution
(banks, Stock brokers, savings and
loan associations and credit unions)
with membership in an approved signature
guarantee medallion program pursuant to
Securities and Exchange Commission
Rule 17Ad-15 if shares of Common Stock
are to be issued, or Debentures to be
delivered, other than to and in the name
of the registered holder.
_______________________________
Signature Guarantee
<PAGE>
Fill in for registration of
shares if to be issued, and
Debentures if to be delivered,
other than to and in the name
of the registered holder:
_______________________________
(Name)
_______________________________
(Street Address)
_______________________________
(City, State and Zip Code)
Please print name and address
Principal amount to be converted (if less
than all): $______,000
________________________________
Social Security or Other Taxpayer
Identification Number
<PAGE>
[FORM OF ASSIGNMENT]
For value received ____________________________ hereby sell(s), assign(s) and
transfer(s) unto _________________________________________________ (Please
insert social security or Taxpayer Identification Number of assignee) the within
Debenture, and hereby irrevocably constitutes and appoints
___________________________________________________________ attorney to transfer
the said Debenture on the books of the Company, with full power of substitution
in the premises.
Dated: _______________________
_______________________________
_______________________________
Signature(s)
Signature(s) must be guaranteed by an eligible
Guarantor Institution (banks, stock brokers,
savings and loan associations and credit unions)
with membership in an approved signature
guarantee medallion program pursuant to Securities
Securities and Exchange Commission Rule 17Ad-15
if shares of Common Stock are to be issued, or
Debentures to be delivered, other than to and in the
name of the required holder.
_______________________________
Signature Guarantee
NOTICE: The signature on the conversion notice or the assignment must
correspond with the name as written upon the face of the Debenture in every
particular without alteration or enlargement or any change whatever.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF HELLER EHRMAN WHITE & MCAULIFFE APPEARS HERE]
February 5, 1997
21921-0007
SEQUUS Pharmaceuticals, Inc.
960 Hamilton Court
Menlo Park, California 94025
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to SEQUUS Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 to be filed with the Securities and Exchange Commission on or about
February 6, 1997 (the "Registration Statement"), for the purposes of registering
under the Securities Act of 1933, as amended, 1,150,000 shares of convertible
exchangeable preferred stock (the "Preferred Stock"), including the shares of
Common Stock issuable upon conversion of the Preferred Stock, the convertible
subordinated debentures due 2007 issuable upon exchange of the Preferred Stock
(the "Debentures"), and the shares of Common Stock issuable upon conversion of
the Debentures, all as disclosed in the Registration Statement.
We have assumed the authenticity of all records, documents and instruments
submitted to us as originals, the genuineness of all signatures, the legal
capacity of all natural persons and the conformity to the originals of all
records, documents and instruments submitted to us as copies. We have based our
opinion upon the following records, documents, instruments and certificates and
such additional certificates relating to factual matters as we have deemed
necessary or appropriate for our opinion:
(a) The Restated Certificate of Incorporation of the Company, as
amended, certified by the Secretary of State of the State of
Delaware as of February 4, 1997 and certified to us by an officer
of the Company as being complete and in full force and effect as
of the date of this opinion;
<PAGE>
SEQUUS Pharmaceuticals, Inc.
February 5, 1997 Page 2
(b) The By-laws of the Company certified to us by an officer of the
Company as being complete and in full force and effect as of the
date of this opinion;
(c) Certifications by officers of the Company (i) as to all of the
proceedings and actions of the Board of Directors of the Company
relating to the issuance of the securities contemplated by the
Registration Statement and (ii) as to certain other factual
matters;
(d) The Registration Statement;
(e) The Certificate of Powers, Designations, Preferences and Rights
of the Preferred Stock included as Exhibit 3.2 to the
Registration Statement (the "Certificate of Designation");
(f) The form of Indenture included as Exhibit 4.2 to the Registration
Statement (the "Indenture"); and
(g) Certification by ChaseMellon Shareholder Services, transfer agent
for the Company's Common Stock, as to certain factual matters.
We have assumed that the number of shares of Common Stock issuable
upon conversion of the Preferred Stock or the number of shares of Common Stock
issuable upon conversion of the Debentures is less than 4,000,000, the number of
shares of Common Stock of the Company that are currently authorized but not
outstanding or otherwise reserved for issuance and that this number of shares of
Common Stock will be available for issuance at the time of either such
conversion.
This opinion is limited to the General Corporation Law of the State of
Delaware, and we disclaim any opinion as to the laws of any other jurisdiction.
We further disclaim any opinion as to any statute, rule, regulation, ordinance,
order or other promulgation of any regional or local governmental body or as to
any related judicial or administrative opinion.
Based upon the foregoing and our examination of such questions of law
as we have deemed necessary or appropriate for the purpose of this opinion, and
assuming (i) that the Certificate of Designation in substantially the form filed
as an exhibit to the Registration Statement is filed with the Secretary of State
of the State of Delaware prior to the issuance of the Preferred Stock, (ii) that
the Company and the trustee under the
<PAGE>
SEQUUS Pharmaceuticals, Inc.
February 5, 1997 Page 3
Indenture execute the Indenture in substantially the form filed as an exhibit to
the Registration Statement prior to issuance of any Debentures, (iii) that the
full consideration for each share of Preferred Stock as stated in the
Registration Statement and the Certificate of Designation is paid, and (iv) that
all applicable securities laws are complied with, it is our opinion that, when
issued and sold by the Company, the Preferred Stock when issued in accordance
with the Certificate of Designation, the shares of Common Stock when issued upon
conversion of the Preferred Stock in accordance with the Certificate of
Designation, the Debentures when issued upon exchange of the Preferred Stock in
accordance with the Certificate of Designation and the Indenture and the shares
of Common Stock when issued upon exchange of the Debentures in accordance with
the terms of the Indenture will be legally issued, fully paid and nonassessable.
This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon
by any other person, firm, corporation or other entity without our prior written
consent. We disclaim any obligation to advise you of any change of law that
occurs, or any facts of which we become aware, after the date of this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
HELLER EHRMAN WHITE & MCAULIFFE
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF HELLER EHRMAN WHITE & MCAULIFFE APPEARS HERE]
February 5, 1997
SEQUUS Pharmaceuticals, Inc.
960 Hamilton Court
Menlo Park, California 94025
Ladies and Gentlemen:
We have acted as counsel to SEQUUS Pharmaceuticals, Inc., a Delaware
corporation (the "Company") in connection with the Registration Statement on
Form S-3 to be filed with the Securities and Exchange Commission on or about
February 6, 1997 (the "Registration Statement"), for purposes of registering
under the Securities Act of 1933, as amended, 1,150,000 shares of convertible
exchangeable preferred stock (the "Preferred Stock"), including shares of Common
Stock issuable upon conversion of the Preferred Stock, the convertible
exchangeable debentures due 2007 issuable upon exchange of the Preferred Stock
(the "Debentures"), and the shares of Common Stock issuable upon the conversion
of the Debentures, all as disclosed in the Registration Statement. You have
asked our opinion concerning certain federal income tax matters in connection
with the registration and offering, and in that connection, we have reviewed the
Registration Statement and related documents as they have appeared relevant to
us.
On the basis, and subject to the accuracy of the statements contained in
the materials referred to above, and our consideration of such other matters as
we have deemed necessary, it is our opinion that the discussion under the
heading "Certain Federal Income Tax Considerations" in the Registration
Statement is accurate in all material respects. You have not requested, and we
do not express, an opinion regarding any other tax consequences to persons who
acquire shares of the Preferred Stock. This opinion is not to be used,
circulated, quoted, or otherwise referred to for any purpose without our
express written permission.
We hereby consent to the use of this opinion in the Registration Statement
and to the reference to us therein. In giving this consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the Rules and
Regulations of the Securities and Exchange Commission thereunder. An opinion of
counsel does not bind the Internal Revenue Service or the courts; this opinion
represents, instead, only our best judgment, based upon current statutes,
regulations, and judicial and administrative precedent, as to the probable
outcome if the issues addressed by this opinion were properly presented to
<PAGE>
Sequus Pharmaceuticals, Inc. Page 2
February 5, 1997
a court of competent jurisdiction. Any of these authorities could change at any
time, and any change could adversely affect our opinion. We expressly disclaim
any obligation to advise you of any such change in authority or our opinion.
Very truly yours,
HELLER EHRMAN WHITE & MCAULIFFE
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Estimated interest portion of rent expense $126 $158 $183 $175 $211
Preferred Stock Dividends -- -- -- -- --
____ ____ ____ ____ ____
Fixed Charges and Preferred Stock Dividends $126 $158 $183 $175 $211
==== ==== ==== ==== ====
Net Loss $(15,393) $(19,654) $(29,185) $(33,596) $(17,177)
Fixed Charges and Preferred Stock Dividends 126 158 183 175 211
-------- -------- -------- -------- --------
Deficiency of earnings to cover fixed charges
and preferred stock dividends $(15,267) $(19,496) $(29,002) $(33,421) $(16,966)
======== ======== ======== ======== ========
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends -- -- -- -- --
</TABLE>
For the years ended December 31, 1992, 1993, 1994, 1995, and 1996, earnings were
insufficient to cover fixed charges and preferred stock dividends. For this
reason, no ratios are provided.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" in the Registration Statement (Form S-3) and related
Prospectus of SEQUUS Pharmaceuticals, Inc. for the registration of 1,150,000
shares of its convertible exchangeable preferred stock and to the incorporation
by reference therein of our report dated January 27, 1997 with respect to the
financial statements and schedule of SEQUUS Pharmaceuticals, Inc. included in
its Annual Report (Form 10-K) for the year ended December 31, 1996, filed with
the Securities and Exchange Commission.
ERNST & YOUNG
Palo Alto, California
February 4, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF PATENT COUNSEL
-------------------------
As special patent counsel, I hereby consent to the reference to Dehlinger &
Associates under the caption "Experts" in the Registration Statement on Form S-3
of SEQUUS Pharmaceuticals, Inc.
2-5-97 By: /s/ Peter J. Dehlinger
- --------- ----------------------------------------
Date Peter J. Dehlinger
<PAGE>
EXHIBIT 25.1
_____________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM T-l
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(B)(2)
___________________________
CHEMICAL TRUST COMPANY OF CALIFORNIA
(formerly Manufacturers Hanover Trust Company of California)
(Exact name of trustee as specified in its charter)
CALIFORNIA 94-2926573
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
101 California Street, Suite 2725
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
___________________________
SEQUUS PHARMACEUTICALS, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 94-3031834
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
SEQUUS Pharmaceuticals, Inc.
960 Hamilton Court
Menlo Park, CA 94025
(Address of principal executive offices) (Zip Code)
___________________________
_____% Convertible Subordinated Debenture due 2007
(Title of the indenture securities)
__________________________________
1
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Superintendent of Banks of the State of California,
235 Montgomery Street, San Francisco, California
94104-2980.
Board of Governors of the Federal Reserve System,
Washington, D.C. 20551
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
ITEM 16. LIST OF EXHIBITS
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Incorporation of the Trustee as now
in effect, including the Restated Articles of Incorporation dated December 23,
1986 and the Certificate of Amendment dated March 26, 1992 (see Exhibit 1 to
Form T-1 filed in connection with Registration Statement No. 33-55136, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to
Commence Business (See Exhibit 2 to Form T-1 filed in connection with
Registration Statement No. 33-55136, which is incorporated by reference).
3. Authorization to exercise corporate trust powers (Contained in
Exhibit 2).
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4
to Form T-1 filed in connection with Registration Statement No. 33-55136, which
is incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 21(b) of the
Act (See Exhibit 6 to Form T-1 filed in connection with Registration Statement
No. 33-55136, which is incorporated by reference).
7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its supervising or examining
authority.
8. Not applicable.
9. Not applicable.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, Chemical Trust Company of California, a corporation organized and
existing under the laws of the State of California, has duly caused this
statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of San Francisco and State of
California, on the 5th day of February, 1997.
CHEMICAL TRUST COMPANY OF CALIFORNIA
By /s/ Cecil D. Bobey
------------------
CECIL D. BOBEY
Assistant Vice President
3
<PAGE>
EXHIBIT 7. Report of Condition of the Trustee.
- -------------------------------------------------------------------------------
TRUST COMPANY
CONSOLIDATED REPORT OF CONDITION OF Chemical Trust Company of California
------------------------------------
(Legal Title)
LOCATED AT San Francisco San Francisco CA 94111
-----------------------------------------------------------------
(City) (County) (State) (Zip)
AS OF CLOSE OF BUSINESS ON December 31, 1996 BANK NO. 1476
----------------- -------------
===============================================================================
===============================================================================
ASSETS DOLLAR AMOUNT IN THOUSANDS
1. Cash and due from banks 10,939
2. U.S. Treasury securities 10,215
3. Obligations of other U.S. Government agencies and
corporations
4. Obligations of States and political subdivisions
5. Other securities (including $____________ corporate stock)
(a) Loans
(b) Less: Reserve for possible loan losses
(c) Loans (Net)
7. Bank Premises, furniture and fixtures and other assets
representing bank premises (including $ -0- capital
leases) 103
8. Real estate owned other than bank premises
9. Investments in subsidiaries not consolidated
10. Other assets (complete schedule on reverse) (including
$____________________ intangibles) 939
11. TOTAL ASSETS 22,196
LIABILITIES
12. Liabilities For borrowed money
13. Mortgage indebtedness (including $_________________
capital leases)
14. Other liabilities (complete on schedule on reverse) 2,699
15. TOTAL LIABILITIES 2,699
======
16. Capital notes and debentures
SHAREHOLDERS EQUITY
17. Preferred stock--
(Number shares outstanding $__________________) Amount $
18. Common stock--
(Number shares authorized 100 ) Amount $
---------
(Number shares outstanding 100 ) Amount $10
---------
19. Surplus Amount $9,990
20. TOTAL CONTRIBUTED CAPITAL 10,000
21. Retained earnings and other capital reserves 9,497
22. TOTAL SHAREHOLDERS EQUITY 19,497
23. TOTAL LIABILITIES AND CAPITAL ACCOUNTS 22,196
======
4
<PAGE>
MEMORANDA
1. Assets deposited with State Treasurer to qualify for exercise
of fiduciary powers (market value) 605
- ------------------------------------------------------------------------------
The undersigned, Francis J. Farrell, VP & Manager and Frank J. Seidel, Vice
-------------------------------------------------------------
President
- ---------
(Name and Title) (Name and Title)
of the above named trust company, each declares, for himself alone and not for
the other: I have a personal knowledge of the matters contained in this report
(including the reverse side hereof), and I believe that each statement in said
report is true. Each of the undersigned, for himself alone and not for the
other, certifies under penalty of perjury that the foregoing is true and
correct.
Executed on 1/30/97 , at San Francisco , California
-------------- ---------------------
(Date) (City)
/s/Francis J. Farrell /s/Frank J. Seidel
--------------------- ------------------
(Signature) (Signature)
SCHEDULE OF OTHER ASSETS
Accounts Receivable $422
Accrued Interest 37
Deferred Taxes 396
Other 84
----
Total (same as Item 10) $939
SCHEDULE OF OTHER LIABILITIES
Accrued Income Taxes $1,507
Accrued Expenses & A/P 377
Accrued Pension & Benefits 815
------
Total (same as Item 14) $2,699
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,997
<SECURITIES> 22,949
<RECEIVABLES> 8,972
<ALLOWANCES> 504
<INVENTORY> 5,697
<CURRENT-ASSETS> 49,216
<PP&E> 15,501
<DEPRECIATION> (9,937)
<TOTAL-ASSETS> 54,968
<CURRENT-LIABILITIES> 10,641
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 44,324
<TOTAL-LIABILITY-AND-EQUITY> 54,968
<SALES> 25,462
<TOTAL-REVENUES> 32,923
<CGS> 3,990
<TOTAL-COSTS> 51,944
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,177)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
