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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-19125
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ISIS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0336973
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
2292 FARADAY AVE., CARLSBAD, CA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
760-931-9200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ].
The approximate aggregate market value of the common stock held by
non-affiliates of the Registrant, based upon the last sale price of the common
stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $326,796,000 as of February 27, 1998.*
The number of shares of common stock outstanding as of February 27, 1998
was 26,760,742.
DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
Registrant's definitive Proxy Statement which will be filed on or before
April 13, 1998 with the Securities and Exchange Commission in connection with
Registrant's annual meeting of stockholders to be held on May 22, 1998 is
incorporated by reference into Part III of this Report.
- ---------------
* Excludes 2,441,014 shares of common stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10 percent of the shares
outstanding at February 27, 1998. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
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THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE
COMPANY'S BUSINESS, THE THERAPEUTIC AND COMMERCIAL POTENTIAL OF ANTISENSE AND
COMBINATORIAL TECHNOLOGY AND ISIS' PRODUCTS IN DEVELOPMENT. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, PARTICULARLY THOSE INHERENT IN THE
PROCESS OF DISCOVERING, DEVELOPING AND COMMERCIALIZING DRUGS THAT ARE SAFE AND
EFFECTIVE FOR USE AS HUMAN THERAPEUTICS AND THE ENDEAVOR OF BUILDING A BUSINESS
AROUND SUCH POTENTIAL PRODUCTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THIS FORM 10-K. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS FORM
10-K INCLUDING THOSE IDENTIFIED IN THE SECTION OF ITEM 1 ENTITLED "RISK
FACTORS." AS A RESULT, THE READER IS CAUTIONED NOT TO RELY ON THESE
FORWARD-LOOKING STATEMENTS.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Isis Pharmaceuticals, Inc. ("Isis", the "Company" or "we") is a leader
in the discovery and development of a new class of drugs based on antisense
technology. With antisense technology, we believe we can design drugs that are
safer and more effective than traditional drugs. Isis combines its expertise
in molecular and cellular biology with antisense drug discovery techniques to
design drugs to fight a wide range of diseases, including infectious and
inflammatory diseases and cancer. Today, we have 6 antisense compounds in
human clinical trials, with additional compounds arising out of our broad
research program in preclinical development.
Through Isis' expertise in medicinal chemistry and RNA structure and
function, we have also developed a proprietary RNA-targeting drug discovery
program. This program allows us to use genomic information to identify novel
structural targets and to quickly create and screen, as potential drugs, large
libraries of small molecule compounds designed to inhibit those targets.
This chart represents the "pipeline" of Isis products currently in
preclinical and clinical development:
ISIS DEVELOPMENT PIPELINE
<TABLE>
<CAPTION>
PRECLINICAL IND CANDIDATE PHASE I PHASE II PHASE III
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<S> <C> <C> <C> <C> <C>
FOMIVIRSEN (ISIS 2922)
CMV Retinitis
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ISIS 2302
Crohn's Disease
Psoriasis
Rheumatoid Arthritis
Ulcerative Colitis
Kidney Transplant
Rejection
ISIS 3521
Cancer
ISIS 5132
Cancer
ISIS 5320
HIV
ISIS 2503
Cancer
ISIS 13312
CMV Retinitis
</TABLE>
We have completed Phase III clinical trials of FOMIVIRSEN (ISIS 2922)
to treat CMV retinitis in AIDS patients. In one Phase III trial, fomivirsen
has demonstrated statistical significance (p=0.0001) in delaying disease
progression and was well tolerated by patients, producing no serious side
effects. These data are from 1 of 4 trials that comprise the Phase III
clinical development program for fomivirsen. Analysis of the other Phase III
studies is currently being completed. We plan to file both a New Drug
Application ("NDA") with the U.S. Food and Drug Administration ("FDA") and a
corresponding European application in early 1998. In July 1997, we entered
into an agreement with CIBA Vision Corporation ("CIBA Vision") granting CIBA
Vision exclusive worldwide distribution rights for fomivirsen.
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ISIS 2302 is in Phase II clinical trials to treat inflammatory
diseases and conditions. ISIS 2302 targets intercellular adhesion molecule-1
("ICAM-1"), which is involved in many such diseases. With our partner,
Boehringer Ingelheim International GmbH ("Boehringer Ingelheim"), we are
testing ISIS 2302 against Crohn's disease, psoriasis, rheumatoid arthritis,
ulcerative colitis and renal transplant rejection. In a Phase II study of
patients with Crohn's disease, an encouraging number of patients receiving ISIS
2302 had their symptoms improve. A statistically significant (p=0.0001) number
were also able to reduce (and, for some patients, completely eliminate) their
steroid use (the most common treatment for Crohn's disease). Because of these
positive results, we began a pivotal quality trial of ISIS 2302 in Crohn's
disease in the second quarter of 1997. With respect to the other phase II
trials, we are in the follow-up period for the rheumatoid arthritis study. We
have also decided that, based on the results of the psoriasis study, we will
study use of ISIS 2302 in a topical skin application. The ulcerative colitis
and kidney transplant studies are on-going.
ISIS 3521 is in Phase II clinical trials as an anticancer agent, both
alone and in combination with traditional cancer chemotherapies. On-going
studies are exploring the effect of this drug in treating a variety of cancer
tumors. This compound targets protein kinase C ("PKC")-[Greek alpha], a protein
associated with abnormal cell growth. We are developing ISIS 3521 as part of
our collaboration with Novartis Pharma AG ("Novartis"). In Phase I trials,
ISIS 3521 stabilized disease, reduced tumor mass and reduced tumor markers in a
number of patients with ovarian cancer, lymphoma and lung cancer. In those
trials, ISIS 3521 caused no significant side effects.
ISIS 5132 is in Phase II clinical trials as an anticancer agent, both
alone and in combination with traditional cancer chemotherapies. The Phase II
trials are studying the effect of this drug in treating a variety of cancer
tumors. This compound inhibits expression of C-raf kinase, another type of
protein associated with abnormal cell growth. We are also developing ISIS 5132
as part of our collaboration with Novartis. In Phase I clinical trials of ISIS
5132, the compound showed evidence of antitumor activity in patients with
ovarian, renal, pancreatic, and colon cancers. This compound was also well
tolerated by patients in the Phase I studies.
ISIS 2503 is in Phase I clinical trials as an anticancer agent. This
compound inhibits expression of Ha-ras, yet another protein associated with
cancer. The Phase I trial is being conducted in patients with a variety of
solid tumors that have not responded to standard cancer therapies.
ISIS 13312 is in Phase I clinical trials to treat CMV retinitis in
AIDS patients. ISIS 13312 is based on novel, improved antisense chemistry. In
preclinical studies, ISIS 13312 appears to be safer and more stable than
fomivirsen, potentially allowing less frequent dosing than fomivirsen. CIBA
Vision has an option to exclusively market and distribute ISIS 13312 worldwide.
Isis also has several antisense compounds in preclinical development,
most of which incorporate novel chemical classes that may provide improved
potency, reduced side effects, less frequent dosing and the possibility of oral
delivery. These include improved antisense inhibitors of ICAM-1 and related
cell adhesion molecules VCAM-1 and PECAM-1, C-raf kinase and 2 isotypes of the
PKC family, including PKC-[Greek epsilon]. A compound inhibiting proteins
critical for Hepatitis C ("HCV") gene expression is also in preclinical
development.
We have many research programs that use both antisense and
RNA-targeting drug discovery technologies to identify compounds that inhibit
targets associated with other diseases. Our antisense research programs focus
on targets associated with infectious, inflammatory and cardiovascular diseases
and cancer. They combine our expertise in molecular biology and drug discovery
with antisense tools to enable rapid identification of potent inhibitors of
disease causing proteins. We are then able to apply our medicinal chemistry
expertise to specifically tailor a compound to the particular disease
indication targeted. Our medicinal chemistry programs have developed novel
chemistries that allow us to design new antisense compounds that are
potentially safer and more active than current antisense drugs and which have
the potential to allow more convenient forms of dosing including oral delivery.
Our RNA-
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targeting program is focused on identifying the structural elements of RNA
targets which are important in initiating or maintaining diseases, and
designing compounds that interfere with the function of these RNA targets,
including those involved in viral and bacterial infections. This program is
also focused on designing small molecules to block the production or function
of cell adhesion molecules.
We have successfully leveraged our technology through supportive
corporate collaborations with Novartis, Boehringer Ingelheim and CIBA Vision.
These collaborations increase our financial resources, improve our
technological strength and establish valuable development and commercial
relationships. As a result, we have been able, and expect to continue, to
pursue drug discovery and development activities aggressively. We have
retained substantial commercial participation in all of our drug candidates,
including those funded by corporate collaborators.
Isis has focused significant efforts on developing cost-effective,
large-scale, Good Manufacturing Practices ("GMP") manufacturing capability for
antisense compounds. We currently manufacture antisense compounds to meet all
of our research and clinical needs, as well as the needs of our partners. We
have achieved significant manufacturing cost reductions through chemistry and
process improvements. We believe that, with reasonably anticipated benefits
resulting from increases in scale, we will be able to manufacture antisense
compounds at commercially attractive prices. We are actively preparing for a
manufacturing pre-approval inspection by the FDA which will follow the filing
of our first NDA. Under the terms of our agreement with CIBA Vision, Isis will
manufacture all of the commercial supplies of fomivirsen.
ISIS DRUG DISCOVERY AND DEVELOPMENT
The goal of drug discovery is to create chemical compounds that can
help fight or prevent disease. Isis' antisense and RNA-targeting drug discovery
programs were founded on the Company's expertise in medicinal chemistry, RNA
biochemistry and molecular and cellular biology. We have assembled a team of
scientists skilled in these core disciplines to apply the technology to both of
our drug discovery platforms. Once a drug is designed, our significant
expertise in medicinal chemistry enables us to specifically tailor the chemical
structure of the lead compound for its intended use.
ANTISENSE DRUG DISCOVERY
Almost all human diseases are a result of inappropriate protein
production or performance. Traditional drugs are designed to interact with the
proteins in the body that are supporting or causing a disease. Antisense
technology is different than traditional drug development because it targets
disease-causing proteins before they are produced. Antisense drugs can be
designed to treat a wide range of diseases, including infectious, inflammatory
and cardiovascular diseases, and cancer.
Antisense technology represents a new model for drug discovery because
it focuses on compounds that interact with messenger RNA ("mRNA"), which has
not been a site for traditional drug interaction. Using the information
contained in mRNA, Isis designs chemical structures, easily recognized by the
body, which resemble mRNA and DNA. These potent "antisense" oligonucleotides
inhibit the production of disease-causing proteins. This method of drug design
is highly productive and has allowed Isis in 9 years to create a substantial
pipeline of drug candidates, including 6 compounds currently in clinical
trials.
Design of antisense compounds is less complex, more rapid and more
efficient than traditional drug design directed at protein targets.
Traditional drug design usually begins by characterizing the three-dimensional
structure of the protein target in order to design a prototype drug to interact
with it. Proteins are complex molecules with structures that are difficult to
predict. Antisense compounds, on the other hand, are designed to bind to mRNA
structures, which are more easily understood and predicted. Prototype antisense
drugs can be designed as soon as the sequence for the mRNA receptor is
identified.
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Isis' early research efforts focused on answering basic questions
regarding antisense-based therapeutics, including their stability, their
ability to be taken up by the target cells, their efficacy and the cost of
manufacturing them. In the 9 years since its founding, Isis has made
significant progress in understanding and using antisense technology to create
drugs, and has established a leadership position in this field.
THE MECHANISM OF ANTISENSE DRUGS
Genes carry the information that cells need to produce proteins.
Specific genes contain information to produce specific proteins at the genetic
level. The human genome and its collection of more than 100,000 genes contains
the information required for the human body to produce all proteins. Genes are
made up of DNA, a molecule that contains the information about when and how
much of which protein to produce, depending on what function is to be
performed. The DNA molecule is a "double helix" -- a duplex of entwined
strands. In each strand, the building blocks of DNA, the nucleotides, are
bound or "paired" with complementary nucleotides on the other strand. The
precise sequence of a nucleotide chain, called the "sense" sequence, is a
blueprint for the information that is used during protein production. The
sequence of a nucleotide chain that is precisely complementary to a given sense
sequence is called its "antisense" sequence.
In the cell nucleus, the information in the gene necessary for the
production of a protein is copied from 1 strand of DNA into precursor mRNA
through a process called transcription. After processing into mature mRNA, the
mRNA moves from the nucleus of the cell into the cell cytoplasm, which contains
amino acids. The information encoded in a single mRNA is then translated into
many copies of the sequence of amino acids that builds the protein.
Antisense drugs are mirror or complementary images of small segments
of mRNA. To create antisense drugs, nucleotides are linked together in short
chains called oligonucleotides. Each antisense drug is designed to bind to a
specific sequence of nucleotides in its mRNA target to inhibit production of
the protein encoded by the target mRNA. By preventing the production of the
disease-causing protein, and acting in the early stage of the disease-causing
process, antisense drugs have the potential to provide greater therapeutic
benefit than traditional drugs, which do not act until after the disease
causing protein has been produced.
Antisense drugs can be designed to be much more selective than
traditional drugs. Because antisense drugs interact by binding to mRNA and
not, as traditional drugs do, by binding to proteins, antisense drugs are able
to selectively inhibit 1 protein among a closely related group of proteins
without having an impact on the other members of the group. This property
allows Isis to design antisense drugs that selectively inhibit the
disease-causing member of the group without interfering with those members of
the group necessary for normal bodily functions. As a result of this unique
selectivity, antisense drugs have the potential to be far less toxic than
traditional drugs because they can be designed to minimize the impact on
unintended targets.
RNA-TARGETING DRUG DISCOVERY
The prime objective of Isis' small molecule RNA targeting program is
to identify novel compounds that kill drug-resistant bacteria and are not toxic
to humans. Targeting RNA structures in bacteria is a novel approach to drug
discovery. This drug development strategy, when perfected, will likely have
application across a wide spectrum of non-infectious human diseases.
Three-dimensional shapes provide the opportunity to target RNA.
Recent advances in molecular biology have revealed that RNA structures are
surprisingly complex. In contrast to the regular helical nature of DNA, RNA
strands fold back on themselves to produce unique three- dimensional shapes
that rival proteins in their complexity. The specific proteins that bind to
RNA recognize these shapes. The amino acid side chains from these proteins fit
into "pockets" formed in the folded RNA to form specific contacts. These
pockets are ideal receptor sites for small molecules. Evidence that small
molecules can
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specifically bind to structured RNA already exists. Some of the most powerful,
naturally occurring antibiotics work by binding to structured RNA.
With recently acquired knowledge of RNA structures and new sequence
data from the gene sequence ("genomic") databases, Isis is developing a new
drug discovery paradigm: Specific targeting of RNA with small drug-like
molecules. New software is being used to identify particular RNA structures
that we can target. New molecular modeling techniques can be used to predict
the shape of drug binding pockets in RNA structures. With a working
approximation of the shape of a target, Isis is designing libraries of
drug-like molecules that can bind to the RNA targets. We will use mass
spectrometry to facilitate screening large numbers of small molecules against
multiple RNA targets simultaneously.
PRODUCTS UNDER DEVELOPMENT
Isis' drug discovery programs use antisense and combinatorial drug
discovery technologies to identify compounds to treat infectious and
inflammatory diseases and cancer. The following table outlines each product
under development, its target, disease indication and development status, as
well as Isis' commercial rights.
ISIS PRODUCTS IN DEVELOPMENT
CLINICAL DEVELOPMENT
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COMPOUND TARGET DISEASE INDICATION DEVELOPMENT STATUS COMMERCIAL RIGHTS
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<S> <C> <C> <C> <C>
Fomivirsen CMV Retinitis Completed Phase III Isis/CIBA Vision (1)
(ISIS 2922) NDA filing pending
ISIS 2302 ICAM-1 Crohn's disease Pivotal trial Isis/ Boehringer Ingelheim (2)
Psoriasis Phase II
Rheumatoid arthritis Phase II
Ulcerative colitis Phase II
Kidney transplant Phase II
rejection
ISIS 3521 PKC-[Greek Cancer Phase II Novartis (3)
alpha]
ISIS 5132 C-raf Cancer Phase II Novartis (3)
kinase
ISIS 2503 Ha-ras Cancer Phase I Isis
ISIS 13312 CMV Retinitis Phase I Isis/CIBA Vision (1)
</TABLE>
(1) CIBA Vision has the exclusive right to distribute fomivirsen. CIBA
Vision also has an option to acquire the exclusive license to market
and distribute ISIS 13312.
(2) Isis and Boehringer Ingelheim are co-developing ISIS 2302 and may
develop other cell adhesion compounds. The companies will split the
profits equally if ISIS 2302 is commercialized.
(3) Isis is developing ISIS 3521 and ISIS 5132 under the direction of
Novartis and at Novartis' expense, and may co-develop 2nd generation
compounds as well.
Isis also has a significant research program with the potential to
yield additional development candidates in the future. As described in the
section of this report entitled "Risk Factors - Uncertainties Associated with
Clinical Trials," the product candidates listed in the preceding table may not
progress beyond their current status or yield a commercially viable product.
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CYTOMEGALOVIRUS (CMV)RETINITIS
Individuals with suppressed immune systems, such as those with AIDS
resulting from the HIV virus, are susceptible to opportunistic infections
caused by CMV. In the AIDS population, retinitis caused by CMV is the primary
cause of blindness. There are more than 250,000 active AIDS cases in the
United States. The introduction of new anti-HIV drugs, particularly protease
inhibitors and combination treatment regimens, have prolonged survival in
HIV-infected individuals. Over the last 2 years this has resulted in a decline
in mortality from AIDS, accompanied by a decline in the incidence of many
opportunistic infections including CMV. Nevertheless, because of side effects
and poor compliance with HAART, many of the approximately 1 million HIV
infected individuals will probably ultimately progress to and through the
advanced stages of AIDS. A significant percentage of these AIDS patients may
develop CMV retinitis (CMV retinitis generally occurs in the advanced stages of
AIDS).
The drugs that are available now for CMV retinitis have limitations,
including the creation of viral resistance. Currently approved drugs for CMV
retinitis are ganciclovir, foscarnet and cidofovir. Foscarnet and cidofovir are
available in intravenous (IV) dosing forms only. Ganciclovir is available in
IV and oral doses, as well as in an intraocular implant form. In order to
begin and maintain IV treatment with ganciclovir and foscarnet, patients
require daily administrations of the drug through lines that are placed
permanently in the veins to allow easy access to the blood stream. Each drug
is associated with significant toxic effects to the body. Oral ganciclovir is
approved for preventive treatment and maintenance therapy, but is less
effective than IV ganciclovir and still carries significant side effects. The
ganciclovir intraocular implant is a small disk that is surgically implanted in
the patient's eye, and provides local sustained release of the drug for up to 8
months. However, this treatment is associated with impaired vision for 2 to 4
weeks after implantation in most patients, and the implant itself has also been
associated with an increased incidence of retinal detachment that can result in
permanent blindness. There is a 12-18% chance of retinal detachment after the
first implant and a near 30% chance following a second or third implant.
Cidofovir is administered intravenously less frequently than ganciclovir or
foscarnet: weekly for the initial therapy and every 2 weeks for maintenance
therapy. Cidofovir is also associated with significant toxicities,
particularly to the kidney. For that reason, the patient must take other drugs
and follow strict safety measures over a period of approximately 12 hours to
manage toxicities.
FOMIVIRSEN. Fomivirsen is an antisense compound discovered by Isis
for the treatment of CMV retinitis. Fomivirsen is given by injection into the
eye and is well tolerated by patients.
The Phase III program for fomivirsen includes 4 randomized controlled
studies. The first study compares immediate fomivirsen therapy with no therapy
until disease progression; the second compares fomivirsen treatment in
combination with ganciclovir to ganciclovir treatment alone; and the third and
fourth trials study different dosing regimens for fomivirsen in a patient
population with advanced, resistant CMV retinitis. All 4 study designs examine
the time to disease progression. The trials are being conducted in North
America, Europe, South America and Australia.
In the first of 4 Phase III studies, fomivirsen delayed disease
progression (statistical significance of p=0.0001) and was well-tolerated,
producing no serious side effects. In this trial, treatment of patients with
newly-diagnosed, previously untreated CMV retinitis with fomivirsen was
compared to deferred treatment. The intent to treat analysis (all patients
enrolled in the trial) demonstrated that the median time to disease progression
for the immediate treatment group was 71 days versus 13 days for the deferred
treatment group (p=0.0001). Fomivirsen administered by intravitreal injection
was well-tolerated by patients. No patients were discontinued from this study
because of fomivirsen-related ocular side effects. A large number of patients
receiving immediate treatment with fomivirsen remained on study for prolonged
periods of several months or more.
The Phase III trials of fomivirsen were completed at the end of 1997.
Analysis of the other Phase III studies is currently being completed. We
anticipate filing both an NDA and a corresponding European regulatory
application in early 1998.
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As CMV retinitis patients are living longer with their disease due to
improvements in the management of HIV infection and AIDS, there is increasing
need for more CMV retinitis treatment options, particularly ones with novel
mechanisms of action such as fomivirsen. Local therapy with fomivirsen could
provide therapeutic benefit without significant side effects or the need for
intravenous treatments, reserving treatment with oral ganciclovir or other
systemic CMV therapies in combination with fomivirsen for patients who show
evidence of the disease in other organs. Approximately one-third of the
patients diagnosed with CMV retinitis could develop systemic CMV disease, but,
in general, these disease manifestations are short-lived and require short
courses of therapy.
In July 1997, the Company entered into an agreement with CIBA Vision
Corporation (a Novartis subsidiary) granting CIBA Vision exclusive worldwide
distribution rights for fomivirsen. See "Collaborative Agreements - CIBA
Vision."
ISIS 13312. ISIS 13312, a second generation compound, is based on
novel, improved antisense chemistry and is being tested in a Phase I clinical
trial as a local treatment for CMV retinitis in AIDS patients. Based on the
results of preclinical studies, ISIS 13312 appears to be less toxic and more
stable than fomivirsen. Because of this improved profile, ISIS 13312 may be
able to be dosed less frequently than fomivirsen. CIBA Vision has an option to
market and distribute ISIS 13312 exclusively worldwide. See "Collaborative
Agreements - CIBA Vision."
INFLAMMATORY DISEASES
Cell adhesion molecules make up a large family of related proteins and
represent targets for treating inflammatory diseases. Inflammation is a key
component of a large number of acute and chronic diseases. Although
inflammation is part of a normal localized protective response that the human
body uses to destroy infectious agents or repair injured tissue, disruptions of
normal inflammatory responses often lead to inflammatory diseases. These
inflammatory responses result in or contribute to a diverse set of diseases
that can affect many organs of the body ranging from the skin to the brain.
Common inflammatory diseases include rheumatoid arthritis, psoriasis, asthma
and inflammatory bowel disease. Inflammation also occurs as a result of burn,
shock or organ transplantation.
Some cell adhesion molecules are expressed on the surface of
endothelial cells which line the blood vessels of the body during periods of
heightened inflammatory or immune system response. These adhesion molecules
act as anchors for various types of immune cells circulating in the blood.
Once the immune cells are anchored to the endothelial cells by the cell
adhesion molecules, these immune cells can migrate between the endothelial
cells, leave the blood vessels and travel into tissues and organs where they
can cause inflammation. Left unchecked, these processes can result in acute
and chronic tissue damage and disease. Current anti-inflammatory agents and
drugs that suppress the immune system decrease the symptoms of inflammation but
do little to change the course of the underlying disease, or do so at the risk
of substantial toxicity. However, a drug that stops the production of cell
adhesion molecules may prevent the migration of immune cells from the blood
vessels into tissue and therefore modify the disease process with a more
acceptable toxicity profile than do currently available therapies.
Isis has focused on a number of targets in its cell adhesion molecule
program. While we have identified preclinical lead compounds targeting
vascular cell adhesion molecules ("VCAM-1") and platelet-endothelial cell
adhesion molecules ("PECAM-1") that could also represent novel approaches to
treat chronic inflammatory diseases, the Company is currently focused on the
intercellular adhesion molecule ("ICAM") family and in particular, ICAM-1.
Unlike other adhesion molecules, ICAM-1 facilitates the migration of immune
cells involved in both chronic and acute inflammation, allowing Isis to target
both conditions. Over-expression of ICAM-1 is specifically involved in a wide
variety of inflammatory disorders, such as rheumatoid arthritis, asthma,
psoriasis, organ transplant rejection and inflammatory bowel disease. While it
is unlikely that over-expression of ICAM-1 is a cause of these disorders,
ICAM-1 is thought to contribute to the pathology of these diseases or
conditions.
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In 1995, Isis and Boehringer Ingelheim agreed to combine their
respective programs in the area of cell adhesion to form a jointly managed and
funded effort. This partnership combines Boehringer Ingelheim's significant
expertise in cell adhesion biology and its small molecule and monoclonal
antibody-based drug discovery efforts, including its state-of-the-art analysis
technology, with Isis' antisense and combinatorial drug discovery programs.
The collaboration uses these multiple drug discovery programs to identify
compounds that limit the disease-related functions of cell adhesion molecules.
ISIS 2302. ISIS 2302, the Company's most advanced compound in its
cell adhesion program, selectively inhibits ICAM-1 gene expression. In Phase I
testing of ISIS 2302 in healthy volunteers, the compound was well tolerated at
all doses. The Company initiated Phase II trials in 5 disease indications:
rheumatoid arthritis, ulcerative colitis, Crohn's disease, psoriasis and
prevention of renal transplant rejection. The Phase II studies involve 20 to
40 patients each and, in general, are randomized and placebo-controlled. We
will choose indications for further development of ISIS 2302 based on results
from these studies.
Crohn's disease is a serious inflammatory disease that affects the
intestines and other parts of the digestive tract. A patient with Crohn's
disease suffers chronic and often severe episodes of diarrhea, abdominal pain,
rectal bleeding and fever. Approximately 500,000 people worldwide are
currently estimated to be afflicted with Crohn's disease. In a randomized,
double-blinded, placebo-controlled 20-patient Phase II study of patients with
Crohn's disease, 15 patients were treated with ISIS 2302 and 5 patients
received a placebo. ISIS 2302 was administered every other day for 26 days (13
doses) by 2-hour intravenous infusion. At the end of the one-month treatment
period, 7 of 15 patients treated with ISIS 2302 experienced disease remission
(measured by a Crohn's Disease Activity Index score of below 150) compared to
zero patients in remission in the placebo group. The duration of the
remissions was prolonged, with 5 of 7 remitting patients still in remission at
the end of the 6-month trial. Results of this study also showed a
statistically significant lowering of steroid use in the ISIS 2302 treated
group compared to the placebo treated group. The results also showed favorable
trends both in the Endoscopic Index of Severity (EIS), based on colonoscopic
examination, and in the Inflammatory Bowel Disease Questionnaire (IBDQ), a
quality of life scale. Based on the results of this study, Isis and Boehringer
Ingelheim decided to initiate a pivotal quality trial of ISIS 2302 in Crohn's
disease. That trial is progressing. The full development program for ISIS
2302 in Crohn's disease includes dose regimen studies intended to enhance the
commercial potential of the drug. The program may be expanded to include
additional pivotal studies in 1999 based on analysis of the data from ongoing
trials.
In the rheumatoid arthritis study, enrollment was increased from 20 to
40 patients to provide more definitive information on this disease. The last
patient was enrolled in November 1997. We are currently in the follow-up
period for this study. The decision to proceed with development in rheumatoid
arthritis using ISIS 2302 or a second-generation ICAM-1 inhibitor will depend
upon the results of this study.
Data from the psoriasis study showed that about one half of the
patients had some clinical improvement but that the effect was of short
duration. Based on these results, as well as animal studies using a topical
formulation of ISIS 2302, we have decided to develop a topical formulation of
ISIS 2302 for psoriasis. In animal studies, we have demonstrated good drug
penetration of skin, with strong evidence that ICAM- 1 would be inhibited in
skin cells with a topical formulation of ISIS 2302. We will begin evaluating a
topical treatment approach with both ISIS 2302 and a second-generation ICAM-1
compound in 1998.
In ulcerative colitis study, enrollment of steroid-dependent patients
is proceeding slowly, as this patient population will often choose surgery,
which can be curative, over long-term steriod use. We are exploring local
delivery of ISIS 2302 directly to the colon via retention enema, a common
treatment for inflammatory bowel disorders. Animal sudies have demonstrated
significant local absorption into the
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colon, suggesting that this route of delivery could be appropriate for
ulcerative colitis patients who have failed aminosalicylates but who wish to
avoid steroid use.
The Phase II study in kidney transplant rejection is also proceeding
at a pace mandated by the regulatory authorities, as they carefully monitor
clinical studies in this patient population. We and Boehringer Ingelheim are
exploring local delivery to the lung for asthma with both ISIS 2302 and analogs
of ISIS 2302 incorporating second generation antisense chemistry.
CANCER
Much of Isis' work in the area of cancer is focused on specific
targets within multigene families believed to be involved in both normal and
abnormal cell differentiation and cell growth. Members of multigene families,
called isotypes, are extremely similar to one another at the protein level but
most likely serve different biological functions. Since traditional drugs are
not specific enough to inhibit one isotype within a family without affecting
the function of the other related isotypes, it has been difficult to determine
the functional differences among them. There is growing evidence that certain
isotypes might be involved in abnormal cell differentiation or proliferation.
Antisense drug discovery technology exploits the differences among the isotypes
at the mRNA level to design drugs that can inhibit specific isotypes.
Selective inhibition of a single isotype may result in less toxicity. Much of
Isis' work has focused on multigene families in the signal transduction
pathway, the method by which various cellular and extra cellular proteins
communicate information necessary for cell function and growth. Disruptions in
the production or behavior of signal transduction proteins are involved in
numerous proliferative disorders, including cancer.
Clinical trials of Isis' anticancer compounds demonstrated that
antisense drugs can be effective cancer therapeutics. In these trials, Isis'
compounds were well tolerated, with none of the serious side effects associated
with standard cancer chemotherapies such as bone marrow or immune system
suppression, gastrointestinal distress and hair loss.
ISIS 3521. ISIS 3521 is an antisense compound in Phase II clinical
development which inhibits the production of one particular isotype (the [Greek
alpha] isotype) of protein kinase C. PKC is a key enzyme in signal
transduction, and PKC isotypes are associated with both normal and abnormal cell
growth. Isis has been able to specifically inhibit the production of the
PKC-[Greek alpha] isotype without inhibiting the production of other isotypes,
thus allowing the inhibition of the isotype believed to be involved in abnormal
cell growth without inhibiting the isotypes required for healthy cells to grow.
In specially developed mice with compromised immune systems in which
human tumors can be grown (called nude mouse xenograft models), ISIS 3521
showed strong inhibition of tumor growth.
The Phase I studies included 56 patients with various types of cancer
that had not responded to standard treatment. In one study, 36 patients
received the drug via a 2-hour infusion 3 times per week for 3 weeks, with
redosing every 4 weeks. In a second study, 20 patients received the drug via a
21-day continuous infusion for 3 weeks repeated every 4 weeks. The primary
endpoint of the Phase I trials was safety, and all patients were assessed for
antitumor effects. In these Phase I trials, the drug was well-tolerated by
patients with no significant side effects. We also saw preliminary evidence of
anticancer activity. In the short infusion study, 1 patient with lymphoma
experienced a partial response (defined as a greater than 50% reduction in
measurable disease) that has continued for more than 16 months from the start
of therapy. Another patient with lymphoma has had a partial response lasting
more than 8 months, and 1 patient with non-small cell lung cancer has
experienced disease stabilization for 8 months. In the continuous infusion
study, 3 of 4 patients with ovarian cancer showed a decrease in disease. One
patient, whose abdominal mass had doubled in size in the month prior to
entering the study, experienced a partial response for over 11 months before
progressing. One patient experienced a 40% decrease in CA-125, an ovarian
tumor marker, for over 5 months, and 1 patient experienced a 75% decrease in
CA-125 for more than 7 months.
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We initiated Phase II clinical trials in the third quarter of 1997.
In the Phase II trials ISIS 3521 is being evaluated in both single-agent and
combination studies in patients with a variety of solid tumors, including
ovarian, prostate, breast, brain, colon and lung cancers, and melanomas.
We are developing ISIS 3521 as part of our antisense research and
development collaboration with Novartis. Isis also has additional PKC-[Greek
alpha] inhibitors in preclinical development which incorporate second generation
chemistry, and which have the potential for increased safety and more convenient
dosing, possibly including oral delivery. Isis also has lead compounds that
inhibit 2 isotypes of the PKC family, including PKC-[Greek epsilon], believed to
be involved in cancer and other diseases.
ISIS 5132. ISIS 5132 is an antisense compound which inhibits the
expression of C-raf kinase, another molecular target involved in cell
signaling. C-raf kinase is a member of the raf kinase multi-gene family and is
associated with abnormal cell growth. ISIS 5132 selectively inhibits C-raf
kinase without inhibiting the production of other members of that multigene
family. Studies of ISIS 5132 in cell culture and in nude mouse xenograft
models using human tumor cells show that ISIS 5132 inhibits expression of the
target C-raf gene.
In Phase I clinical trials, ISIS 5132 was very well-tolerated.
Several patients in this trial experienced disease stabilization. In the
2-hour infusion study, 1 patient with colon cancer experienced a decrease in
CEA, a colon cancer marker, with no growth in tumor for approximately 7 months.
Another patient with kidney cancer experienced disease stabilization for more
than 9 months and continues to be on study. In the continuous infusion study,
1 patient with pancreatic cancer experienced disease stabilization for 7 months
and continues on study, 1 patient with kidney cancer experienced disease
stabilization for 9 months, and 1 patient with ovarian cancer had a 97% drop in
CA-125 after 6 months.
We initiated Phase II clinical trials of ISIS 5132 in the fourth
quarter of 1997. In the Phase II trials ISIS 5132 is being evaluated as a
single-agent in studies of patients with a variety of solid tumors, including
prostate, breast, ovarian, pancreatic, colon and both small-cell and non-small
cell lung cancers. We will also conduct studies examining the use of ISIS 5132
in combination with approved chemotherapies in 1998.
ISIS 2503. Substantial evidence exists supporting a direct role for
ras gene products in the development and maintenance of human cancer. Ras
proteins are involved in passing information between cells. Ras, in both
normal and mutated forms, is associated with abnormal cell growth and, as such,
is associated with cancer. ISIS 2503, a potent selective inhibitor of Harvey
ras, has been shown to inhibit abnormal cell growth by inhibiting expression of
ras genes in cell culture and animal models. ISIS 2503 has also inhibited the
growth of multiple different human cancers in nude mouse xenograft models. In
the fall of 1997, we initiated Phase I clinical trials of ISIS 2503. The Phase
I trial involves patients with a variety of solid tumors that have not
responded to standard cancer therapies.
HUMAN IMMUNODEFICIENCY VIRUS ("HIV")
ISIS 5320 was discovered through the Company's combinatorial drug
discovery program to prevent replication of HIV. Isis has decided not to
pursue further development of this compound. In the Phase I trial, completed
in late 1997, ISIS 5320 was well-tolerated but antiviral activity in the
regimen studied was minimal. We had initiated this small trial based on
promising anti-HIV activity demonstrated in vitro and in animal models, but we
knew that the drug would have to demonstrate extraordinary antiviral activity
to justify full development. In light of the other product opportunities in
our pipeline, we decided not to invest further in development. The National
Cancer Institute, which funded much of the preclinical development of ISIS
5320, has the option to do additional work on the compound.
RESEARCH PROGRAMS
Isis combines its core technology programs in medicinal chemistry, RNA
biochemistry, and molecular and cellular biology with molecular target-focused
drug discovery efforts to design drug candidates. The goal of Isis'
target-based research programs is to identify antisense and combinatorial
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drug candidates to treat diseases for which there are substantial markets and
for which there is a need for better drugs. In addition, Isis' research
programs focus on identifying next-generation compounds to serve as backup
compounds to its current products in development and development candidates.
Isis' combinatorial drug discovery program is currently focused both on cell
adhesion molecules in connection with its collaboration with Boehringer
Ingelheim and on identifying broad-spectrum antibacterial agents with a focus
on important drug-resistant infections.
Isis' core technology programs can support multiple target-based
antisense research programs without significantly increasing costs. Through
these programs, Isis can efficiently explore numerous disease targets and
identify the best lead compounds to advance into preclinical development. Isis
is currently pursuing antisense and combinatorial drug discovery programs
focused on various anti-viral and anti-bacterial targets, inflammatory disease
targets, and other key molecular targets that might play critical roles in
cancer.
COLLABORATIVE AGREEMENTS
Isis' strategy is to use alliances with other companies and
equity-based financing to increase its financial resources, reduce risk, and
retain an appropriate level of ownership of products currently in development.
Through alliances with other major pharmaceutical companies, Isis can obtain
funding, expand existing programs, learn of new technologies, and gain
additional expertise in developing and marketing products. Isis intends to
continue this strategy.
NOVARTIS
Isis began its research and development collaboration with Ciba-Geigy
Limited ("Ciba") in 1990. In 1996, Ciba merged with Sandoz, Ltd. to form a new
company called Novartis. As of February 27, 1998, Novartis owned approximately
8% of Isis' outstanding Common Stock.
The research alliance currently focuses on PKC-[Greek alpha] and C-raf
kinase and other undisclosed targets (the "Novartis Targets"). Isis has
committed substantial resources to discover and investigate antisense compounds
that inhibit the Novartis Targets. Novartis provides financial support for Isis
research relating to these targets. Novartis has also committed substantial
resources of its own to the research of antisense drugs. Either company may end
the collaborative research program beginning in September 1998, with certain
exceptions. We are in the process of negotiating an expanded collaborative
research program with Novartis..
Novartis has the option, which can be exercised before clinical
development begins, to obtain an exclusive license to develop, manufacture,
use, and market compounds produced by the alliance that inhibit the Novartis
Targets (the "Novartis Compounds"). If Novartis exercises its option, Isis and
Novartis will develop the Novartis Compounds at Novartis' expense. Novartis
will pay Isis for achievement of certain milestones as the first 2 Novartis
Compounds are developed against each Novartis Target. With certain exceptions,
in the event that Novartis fails to exercise its option to license any Novartis
Compound, it forfeits all rights to the compound. Novartis has exercised its
option with respect to ISIS 5132 and ISIS 3521. At Novartis' expense, Isis is
conducting clinical development of these compounds. See "Products Under
Development - Cancer - ISIS 3521; ISIS 5132."
Novartis will pay Isis royalties on the sale of any Novartis Compound.
Isis has the right to commercially manufacture ISIS 5132 and ISIS 3521 for
additional royalties. Manufacturing of additional Novartis Compounds will be
determined based on cost, quality, and supply factors. If Isis is the
manufacturer, we will receive additional royalties. Both Novartis and Isis
have the right to terminate the collaborative research program beginning in
September 1998. Under certain circumstances Novartis may terminate the
research program earlier.
BOEHRINGER INGELHEIM
In July 1995, Isis and Boehringer Ingelheim formed an alliance to
combine the clinical development and research programs of both companies in the
field of cell adhesion. Isis contributes its
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expertise in antisense and combinatorial drug discovery and Boehringer
Ingelheim contributes its ongoing program in cell adhesion biology and small
molecule library screening capabilities. Both companies provide ongoing
funding for the combined research and development program. Either party may
terminate the funding requirements under the collaboration agreement if, at the
end of 5 years, there are no compounds being developed or commercialized
jointly.
As of February 27, 1998, Boehringer Ingelheim owned approximately 9%
of Isis' outstanding Common Stock. In addition to funding one- half of the
collaboration's research and development, Boehringer Ingelheim will make
additional investments in Isis as certain development milestones are met.
Boehringer Ingelheim has already paid Isis a milestone payment of $10 million
for the completion of the first Phase II clinical trial of ISIS 2302 in Crohn's
disease. It also provided Isis with a $40 million line of credit, which is
available under certain circumstances. As of December 31, 1997, outstanding
borrowings under this line of credit totaled $ 22.6 million.
The partnership includes development of ISIS 2302, an antisense
inhibitor of ICAM-1, and multiple other preclinical and research compounds
targeting other adhesion molecules. Isis and Boehringer Ingelheim will split
the operating profits associated with all future products of the partnership.
If a partner chooses not to continue to fund its share of the development
expenses for a compound, it will receive a certain amount of royalties on any
future sales of such compounds rather than a split of operating profits.
Boehringer Ingelheim will market the first 2 drugs resulting from the
collaboration. Both companies will agree on commercialization responsibilities
for any products to follow.
ISIS 2302 is in a pivotal quality trial for Crohn's disease and Phase
II clinical trials for 4 other indications. This compound is being developed
by an Isis-led project team as part of the collaboration See "Products Under
Development - Inflammatory Diseases."
CIBA VISION
In July 1997, the Company entered into an agreement with CIBA Vision,
granting it exclusive worldwide distribution rights for fomivirsen. Under the
terms of the agreement, Isis will receive $20 million in pre-commercial fees
and milestones through the time of regulatory approval in the United States and
Europe. In the third quarter of 1997, Isis received the first $5 million of
the pre-commercial fees and milestones. While CIBA Vision will market and sell
fomivirsen worldwide, we will manufacture and sell fomivirsen to CIBA Vision,
at a price that will allow us to share the commercial value of the product with
CIBA Vision. An NDA filing for fomivirsen is planned for early 1998. CIBA
Vision also has the option to acquire the exclusive license to market and
distribute our second generation antisense compound to treat CMV retinitis,
ISIS 13312, which is currently in preclinical development. See "Products Under
Development - Cytomegalovirus (CMV) Retinitis."
MANUFACTURING
In the past, production of chemically modified oligonucleotides like
those used in the Company's research and development programs, was generally
expensive and difficult, except in small quantities. As a result, Isis
dedicated significant resources to focus on ways to improve manufacturing
capacity. Because all oligonucleotide compounds are made of variants of the
same nucleotide building blocks and are produced using the same types of
equipment, Isis found that the same techniques used to efficiently manufacture
one oligonucleotide drug product proved helpful in improving the manufacturing
processes for many other oligonucleotide products. Through the development of
several Isis-owned chemical processes for scaling up manufacturing
capabilities, we have been able to greatly reduce the cost of producing
oligonucleotide compounds. For example, we have significantly reduced the cost
of raw materials, while at the same time greatly increasing our capacity to
make the compounds. We have both internal programs and outside collaborations
with various industry vendors to allow for even greater production.
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We have sufficient manufacturing capacity to meet both current and
future research and clinical needs both for ourselves and for our partners.
The Company also believes that it has, or will be able to develop or acquire,
sufficient supply capacity to meet its anticipated commercial needs. Isis also
believes that with reasonably anticipated benefits from increases in scale, we
will be able to manufacture antisense compounds at commercially competitive
prices.
In March 1998, Isis established an antisense oligonucleotide
manufacturing collaboration with Zeneca Life Science Molecules ("Zeneca LSM"),
a leading supplier of chemical and biological compounds to the pharmaceutical
and biotechnology industries. Access to an alternate manufacturing source will
provide greater flexibility in production scheduling and will reduce the
Company's risk of dependence on a single manufacturing site for all of its
clinical needs. Under the terms of the 5 year agreement, Zeneca LSM will
supplement Isis' primary manufacturing facility in producing antisense
oligonucleotides for use in clinical trials. The agreement specifies that Isis
will have Zeneca LSM manufacture a certain portion of the drug supplies
required for its clincal trials. Isis is not required to make any capital
investment to create this manufacturing capability.
GOVERNMENT REGULATION
The Company's manufacture and potential sale of therapeutics are
subject to extensive regulation by United States and foreign governmental
authorities. In particular, pharmaceutical products are subject to rigorous
preclinical and clinical testing and other approval requirements by the FDA in
the United States under the Federal Food, Drug and Cosmetic Act and by
comparable agencies in most foreign countries. Various federal, state and
foreign statutes also govern or influence the manufacture, safety, labeling,
storage, record keeping and marketing of such products. Pharmaceutical
manufacturing facilities are also regulated by state, local and other
authorities. Obtaining approval from the FDA and other regulatory authorities
for a new therapeutic may take several years and involve substantial
expenditures. Moreover, ongoing compliance with these requirements can require
the expenditure of substantial resources. Difficulties or unanticipated costs
may be encountered by the Company or its licensees or marketing partners in
their respective efforts to secure necessary governmental approvals, which
could delay or preclude the Company or its licensees or marketing partners from
marketing their products.
In addition to regulations enforced by the FDA, the Company is also
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations. The Company believes that it is in compliance in
all material respects with applicable laws and regulations.
COMPETITION
For many of their applications, antisense based drugs will be
competing with existing therapies for market share. In addition, a number of
companies are pursuing the development of oligonucleotide-based technology and
the development of pharmaceuticals utilizing such technology. These companies
include specialized pharmaceutical firms and large pharmaceutical companies
acting either independently or together with biopharmaceutical companies. Many
of the Company's existing or potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. In addition, many of
these companies have extensive experience in preclinical testing and human
clinical trials. These companies may develop and introduce products and
processes competitive with or superior to those of the Company. Furthermore,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection and may establish
collaborative arrangements for product and clinical development.
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The Company's products under development address numerous markets.
The Company's competition will be determined in part by the diseases for which
the Company's compounds are developed and ultimately approved by regulatory
authorities. For certain of the Company's potential products, an important
factor in competition may be the timing of market introduction of its or
competitive products. Accordingly, the relative speed with which Isis can
develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market is expected to be an
important competitive factor. The Company expects that competition among
products approved for sale will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent position.
The development by others of new treatments for the diseases for which
the Company is developing compounds could render the Company's compounds
non-competitive or obsolete. Furthermore, because of the fundamental
differences between antisense and other technologies, there may be applications
for which the products of one technology are superior to those of another.
Isis is aware of several companies with late-stage compounds in development for
diseases targeted by the Company.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between technological conception and
commercial sales.
EMPLOYEES
As of February 27, 1998, Isis employed 338 individuals, of whom 135
hold advanced degrees. A significant number of the Company's management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. Isis believes that it has been
highly successful in attracting skilled and experienced scientific personnel;
however, competition for such personnel is intensifying. None of the Company's
employees is covered by collective bargaining agreements, and management
considers relations with its employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of February
28, 1997 are as follows:
STANLEY T. CROOKE, M.D., PH.D.... 52
Chairman of the Board and Chief Executive Officer
Dr. Crooke was a founder of the Company and has been its Chief
Executive Officer and a director since January 1989 and served as its President
from January 1989 to May 1994. He was elected Chairman of the Board in
February 1991. From 1980 until January 1989, Dr. Crooke was employed by
SmithKline Beckman Corporation, a pharmaceutical company, most recently as
President of Research and Development of SmithKline & French Laboratories. Dr.
Crooke is Chairman of the Board of GeneMedicine, Inc. and a director of SIBIA
Neurosciences, Inc., both biotechnology companies, and EPIX Medical, Inc., a
developer of magnetic resonance imaging contrast agents. He is also an adjunct
professor of pharmacology at the Baylor College of Medicine and the University
of California, San Diego.
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DANIEL L. KISNER, M.D.... 51
President and Chief Operating Officer
Dr. Kisner has served as a director of the Company since March 1991,
Chief Operating Officer since February 1993 and President since May 1994. He
was Executive Vice President of the Company from March 1991 until May 1994.
From December 1988 until March 1991, he was a Division Vice President of
Pharmaceutical Development for Abbott Laboratories, a pharmaceutical company.
He is also a director of Anesta Corporation, a drug delivery company.
B. LYNNE PARSHALL.... 42
Executive Vice President, Chief Financial Officer and Secretary
Ms. Parshall has served as Executive Vice President since December
1995, Chief Financial Officer of the Company since June 1994, and Secretary
since November 1991. From February 1993 to December 1995, she was a Senior
Vice President of the Company, and from November 1991 to February 1993, she was
a Vice President of the Company. Prior to joining Isis, Ms. Parshall practiced
law at Cooley Godward LLP, counsel to the Company, where she was a partner from
1986 to 1991. Ms. Parshall served as Vice President of Business Development of
Biotrack, Inc., a medical device company, during 1988 and 1989.
RISK FACTORS
Please consider the following risk factors carefully in addition to
the other information contained in this Report.
UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS
We must conduct time-consuming, extensive and costly clinical trials,
in compliance with FDA regulations, to show the safety and effectiveness
("efficacy") of each of our drug candidates, as well as its optimum dosage,
before the FDA can approve a drug candidate for sale.
To begin the process, preclinical studies are conducted, first in the
research laboratory and then in animals, to identify potential safety problems.
For certain diseases, there are animal models that we believe will predict the
effects of the drug candidate in humans. For these diseases, a drug candidate
is first tested in such an animal model. For several of our drug candidates,
no such animal model exists, so evidence of the drug candidate's efficacy must
wait until testing on humans. If the research and preclinical development
support further development, we must then submit an Investigational New Drug
("IND") application to the FDA to obtain authorization for human clinical
testing. However, our IND application may not be granted by the FDA.
Clinical trials are typically conducted in 3 sequential phases,
although the phases may overlap. In Phase I, which typically involves giving
the drug to healthy human subjects before giving it to patients, the drug
candidate is tested for safety and tolerance. Phase II typically involves
studies in a somewhat larger population of diseased patients to identify
possible negative effects and safety risks, to begin gathering preliminary
effectiveness data and to investigate possible dose sizes and schedules. Phase
III trials further evaluate the drug's effectiveness and further test for
safety within an expanded patient population. Each trial follows certain
standards and procedures set out in a scientific document, called a protocol,
that describes the objectives of the study, the standards to be used to monitor
safety and the efficacy criteria to be measured. Each proposed study protocol
must be submitted to the FDA as part of the IND. In addition, in the United
States, each clinical study is observed by an independent Institutional Review
Board ("IRB"). The IRB will consider, among other things, ethical factors, the
safety of human subjects and patients and the possible liability of the study
center. Foreign countries have similar protocol review procedures and review
boards.
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Even when human clinical trials are authorized, such testing of any of
our current or future drug candidates may not be completed within the specified
time period, if at all. The rate of patient enrollment is a critical factor in
determining whether a clinical trial will be completed. Patient enrollment
depends upon many different factors, including the number of patients suffering
from the disease, the type of procedure involved in the trial, whether patients
live near the clinical site and if patients meet the criteria to allow them to
participate in the study. Delays in planned patient enrollment may result in
significant increased costs and delays to the Company.
We, the FDA or foreign regulatory agencies may also suspend clinical
trials at any time if it is shown that the subjects or patients participating
in such trials are being exposed to unacceptable health risks. Clinical
testing may show any current or future drug candidate to be unsafe or
ineffective, and the FDA or foreign regulatory agency might not approve any
such product.
Once the clinical trials are completed, data from preclinical testing
and clinical trials are submitted to the FDA in an NDA in order to obtain
approval to sell the drug. Preparing an NDA involves considerable data
collection, verification, analysis and expense. The NDA often takes months to
prepare. NDA approval may not be granted on a timely basis, if at all. A
number of factors are weighed by the FDA in the approval process, including the
severity of the disease, whether other treatments are currently available and
the risks and benefits demonstrated in clinical trials. The FDA may deny an
NDA if applicable regulatory criteria are not satisfied. The FDA may also
require additional testing or information prior to approval, or approve the
application but require post-marketing testing and surveillance to monitor the
safety of the drug. Quality control and appropriate manufacturing procedures
are also conditions for NDA approval. We must submit a similar separate
application to foreign regulatory agencies for their review in order to obtain
approval to sell the drug in other countries.
NO ASSURANCE OF REGULATORY APPROVAL
The Company's ongoing research and development activities, as well as
the production and marketing of the Company's products, are regulated by many
federal, state and local governmental authorities in the United States.
Similar regulatory authorities exist in other countries where we intend to test
and market our products. Various federal, state and foreign statutes also
affect the labeling, storage and record keeping of the drug. The regulatory
process, which includes preclinical and clinical testing of each drug candidate
to establish its safety and effectiveness, can take many years and is very
expensive. Data obtained from preclinical and clinical activities can be
interpreted in different ways, which could delay, limit or prevent FDA or other
regulatory approval. If FDA drug approval policies change during the period of
product development and regulatory review, delays or rejections can also
result. The Company, its licensees or its marketing partners may encounter
similar delays, difficulties or unanticipated costs in foreign countries.
Therefore, even after spending significant amounts of time, money, and effort,
regulatory approval may not be obtained for drugs developed by the Company in
the United States or in other countries in which it wishes to sell those drugs.
Even if regulatory approval of a drug is granted, the approval may
limit the drug to certain uses or "indications." Additional clinical trials
may be necessary to obtain approval for the use of a drug for any additional
indications. An approved drug, its manufacturer and its manufacturing
facilities are also subject to continual review and periodic inspections by the
FDA or foreign regulatory agencies, even after the drug is on the market.
Manufacturers must spend considerable time, money and effort, especially in the
areas of production and quality control, to comply with FDA or foreign
manufacturing regulations. Later discovery of previously unknown problems with
a product, manufacturer or facility may result in restrictions being placed on
such product or manufacturer, including forcing a withdrawal of the product
from the market. Additionally, if the drug product manufacturer's facility is
not approved or if approval is withdrawn, it can take a considerable amount of
time to obtain recertification or to certify a new facility. The Company's
failure to comply with applicable regulatory requirements could, among other
things, result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal
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prosecution. Further, additional government regulations may be created in the
future that could prevent or delay regulatory approval of our products.
DEPENDENCE ON COLLABORATIVE PARTNERS
We have relied on certain established pharmaceutical companies
interested in our technology and products to pay for a portion of our research
and development expenses. We have entered into research, development and
distribution agreements with these collaborative partners whereby the partners
provide money in exchange for certain research services, product rights and/or
marketing rights related to the products or targets involved. Under certain of
these agreements, the collaborative partner has some responsibility for
conducting preclinical testing and human clinical trials and for preparing and
filing the submission for regulatory approval of the drug candidate with the
FDA and foreign regulatory agencies. In addition, certain of these agreements
provide for Isis to receive royalties or other revenues based on sales of
products developed and/or marketed by its corporate partners.
If any collaborative partner fails to successfully develop or sell
any product in which we have rights, our business may be negatively affected.
While we believe that our collaborative partners will have sufficient
motivation to continue their funding, development and commercialization
activities, we cannot be sure that any of these collaborations will be
continued or result in successfully commercialized products. The failure of a
corporate partner to continue funding any particular program could delay or
stop the development or commercialization of any products resulting from such
program. In addition, collaborative partners may be pursuing other
technologies or developing other drug candidates either on their own or in
collaboration with others, including our competitors, to develop treatments for
the same diseases targeted by our own collaborative programs. We also may wish
to rely on additional collaborative arrangements to develop and commercialize
our products in the future. However, we may not be able to negotiate
acceptable collaborative arrangements in the future, and, even if successfully
negotiated, the collaborative arrangements themselves may not be successful.
Our current collaboration agreement with Novartis is scheduled to terminate in
September 1998. While we are currently negotiating another collaboration
agreement with Novartis which would extend and expand the scope of our
collaboration, we may not be able to negotiate acceptable terms for that
agreement.
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Isis is still at an early stage of development. Most of our resources
are dedicated to applying molecular biology and medicinal chemistry to the
discovery and development drug candidates based upon antisense technology.
Although we have a pipeline of promising antisense drug candidates, with 6 such
products in clinical trials, as yet we have no products on the market, and
there are no drugs using antisense technology currently on the market.
Laboratory results obtained in preclinical studies do not necessarily indicate
the results that will be obtained in later stages of preclinical development or
in human clinical testing. For example, we are attempting to develop products
for certain diseases for which no appropriate animal model that might predict
effectiveness currently exists. As a result, drug candidates for these
diseases must advance at least to Phase II human clinical trials before we will
have evidence of effectiveness outside of the laboratory. Drugs discovered by
the Company may not effectively combat the targeted disease and, even if they
work, may not be commercially successful.
CONTINUING OPERATING LOSSES
Because of the nature of the business of drug discovery and
development, our expenses have exceeded our revenues since the Company was
founded in January 1989. At December 31, 1997, the Company's accumulated
deficit was approximately $154 million. Most of the losses have resulted from
costs incurred in connection with the Company's research and development
programs and from general and administrative costs associated with the
Company's growth and operations. These costs have exceeded the Company's
revenues, most of which has come from collaborative arrangements, interest
income and research grants. We have received no revenues from product sales.
We expect to incur additional operating losses over the next several years and
we expect losses to increase as our preclinical
17
<PAGE> 20
testing and clinical trial efforts continue to expand. Our ability to ever
achieve profitability depends upon whether we are able to obtain regulatory
approvals for our products, enter into agreements for product development and
commercialization and develop the ability to manufacture and sell our products
successfully.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company believes that it has enough money to satisfy its needs for
at least the next 2 years. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its
research, drug discovery and development programs; the size of these programs
and progress with preclinical and clinical trials; the time and costs involved
in obtaining regulatory approvals; the costs involved in filing, prosecuting
and enforcing patent claims; competing technological and market developments;
changes in existing collaborative relationships and the ability of the Company
to establish and maintain additional collaborative arrangements. Need for
additional funding will also depend upon the cost of manufacturing products on
a larger scale and the ability of the Company to establish and maintain
effective marketing and sales activities and arrangements. If the Company
finds that it does not have enough money, additional funds may be raised,
including through public or private financing. Additional financing may not be
available, or, if available, may not be on acceptable terms. If additional
funds are raised by issuing equity securities, the shares of existing
stockholders will be subject to further dilution and share prices may decline.
If adequate funds are not available, the Company may be required to cut back on
one or more of its research, drug discovery or development programs or obtain
funds through arrangements with collaborative partners or others. These
arrangements may require the Company to give up rights to certain of its
technologies, product candidates or products.
LIMITED LARGE-SCALE MANUFACTURING EXPERIENCE
Our ability to operate profitably will depend in part on our ability
to manufacture our drug products, or to have another company manufacture our
products, at a cost low enough to enable us to charge a competitive price to
buyers. To successfully establish additional commercial manufacturing
capability on a large scale, we must improve our manufacturing processes and
reduce our product costs. The manufacture of sufficient quantities of new drugs
is typically a time-consuming and complex process. Pharmaceutical products
based on chemically modified oligonucleotides have never been manufactured on a
large commercial scale. There are a limited number of suppliers for certain
capital equipment and raw materials that we use to manufacture our drugs, and
some of these suppliers will need to increase their scale of production to meet
our projected needs for commercial manufacturing. We may not be able to
manufacture at a cost or in quantities necessary to make commercially
successful products.
POSSIBLE OBSOLESCENCE DUE TO TECHNOLOGICAL CHANGE; COMPETITION
Certain companies, both private and publicly traded, are conducting
research and development activities with antisense technology and products. We
believe that the investigation of the potential of antisense drugs will
continue and may increase as these drug design and development techniques
become more widely understood. Our competitors are engaged in all areas of
drug discovery in the United States and other countries, are numerous, and
include, among others, major pharmaceutical and chemical companies, specialized
biopharmaceutical firms, universities and other research institutions. Our
competitors may succeed in developing antisense drugs or other new therapeutic
drug candidates that are more effective than any drug candidates that we have
been developing. Such competitive development could make our technology and
products obsolete or non-competitive before we have had enough time to recover
our research, development or commercialization expenses.
Many of our competitors have substantially greater financial,
technical and human resources than we do. In addition, many of these
competitors have significantly greater experience than we do in conducting
preclinical testing and human clinical trials of new pharmaceutical products
and in obtaining FDA and other regulatory approvals of products for use in
health care. Accordingly, our competitors may succeed in obtaining regulatory
approval for products earlier than we do. Furthermore, if we are
18
<PAGE> 21
permitted to sell products, we will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which we have
limited or no experience.
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain
patent protection for its products both in the United States and in other
countries. The Company files applications, as appropriate, for patents
covering both its products and processes. As of December 31,1997, Isis had
been issued more than 90 United States patents and more than 70 foreign
patents, had received 27 U.S. notices of allowance and had filed more than 250
patent applications in the United States and counterparts of certain of these
applications in many foreign countries. Patents may not issue from any of
these applications. Patent applications in the United States are maintained in
secrecy until the patents actually issue, and publication of discoveries in the
scientific or patent journals tends to lag behind the date of the actual
discoveries by several months. For these reasons, the Company cannot be
certain that it was the first creator of inventions covered by its pending
patent applications or that it was the first to file patent applications for
such inventions. Further, the claims allowed under any issued patents may not
be broad enough to protect the Company's proprietary position in its
technology. In addition, even issued patents may be challenged, invalidated or
circumvented by third parties, and the rights granted may not provide us with
competitive advantage.
We must also avoid both infringing patents issued to our competitors
and breaching the technology licenses upon which our products might be based.
While we are aware of patent applications and patents belonging to competitors,
there is always a possibility that a competitor's patent might require us to
alter our products or processes, pay licensing fees or stop certain activities.
We may not be able to obtain a license to other required technology or, if
obtainable, such technology may not be available at reasonable cost. Such
developments would cause financial harm to us.
Costly litigation may also be necessary to enforce any patents issued
to us and/or to determine the scope and validity of others' proprietary rights
in court or in administrative proceedings. In addition, to determine the
priority of inventions, we may find it necessary to participate in interference
proceedings declared by the U. S. Patent and Trademark Office or in opposition,
nullity or other proceedings before foreign agencies in connection with any of
our existing or future patents or patent applications. Further, we may find it
necessary to participate, at substantial cost, in International Trade
Commission proceedings to reduce or stop importation of goods that would
compete unfairly with our products. If required, any of the proceedings
described above will result in substantial cost to the Company.
We also rely on trade secrets and proprietary know-how, which we try
to protect, in part, by insisting upon confidentiality agreements with our
corporate partners, collaborators, employees and consultants. However, these
agreements may be breached, and we may not have adequate remedies for any
breach. If this happens, our trade secrets may become known or be
independently discovered by competitors.
ABSENCE OF SALES AND MARKETING CAPABILITIES
We have no experience in sales, marketing or distribution. To market
any of our products directly, we must develop an expert marketing and sales
force capable of supporting product distribution. We may not be able to build
such a sales force at all, or at a reasonable cost, and if we do, our direct
sales and marketing efforts may not be successful. As with any new product,
the Company's products may not achieve market acceptance in place of existing
treatments.
UNCERTAINTIES ASSOCIATED WITH THIRD-PARTY REIMBURSEMENT
Our ability to successfully sell the Company's products, if any,
depends in part on the extent to which reimbursement for the cost of such
products and related treatments will be available from government health
administration authorities, private health coverage insurers, HMOs and other
19
<PAGE> 22
organizations. Adequate third-party coverage may not be available to allow the
Company to obtain satisfactory price levels for third-party payor
reimbursements. 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. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's products, the market acceptance of these products will be
more difficult.
DEPENDENCE ON KEY EMPLOYEES
We are dependent on the principal members of our management and
scientific staff. The loss of these employees might slow the achievement of
important development goals. It is also critical to our success to recruit and
retain qualified scientific personnel to perform research and development work.
Although we believe we will be successful in attracting and keeping skilled and
experienced scientific personnel, we may not be able to do so on acceptable
terms, because of stiff competition for experienced scientists among many
pharmaceutical and health care companies, universities and non-profit research
institutions.
PRODUCT LIABILITY AND POTENTIAL LIMITS OF INSURANCE COVERAGE
Drugs used in clinical trials and, if approved, drugs sold on the
market may expose the Company to damages claims resulting from the use of such
products. Consumers, sellers or distributors of the Company's products can
make these claims. We have obtained limited product liability insurance
coverage. However, such coverage is becoming increasingly expensive, and we
may not be able to afford to buy enough liability insurance to protect the
Company against all of the product liability losses that could possibly occur.
USE OF HAZARDOUS MATERIALS
The Company's research and development activities involve the
controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standards prescribed
by local, state and federal regulations, there is still a risk of accidental
contamination or injury. If there was such an accident, the Company could be
held liable for any damages that result, which could prove costly. Although we
believe that we are in compliance with applicable environmental laws and
regulations and currently do not expect to have to spend significant amounts of
money for environmental control facilities, we may be required to do so to
comply with environmental laws and regulations in the future.
VOLATILITY OF STOCK PRICE
The market price of our Common Stock, like that of the securities of
many other biopharmaceutical companies, has been and is likely to continue to
be highly volatile. The market price can be affected by many factors,
including, for example, fluctuation in our operating results, announcements of
technological innovations or new drug products being developed by us or our
competitors, governmental regulation, regulatory approval, developments in
patent or other proprietary rights, public concern regarding the safety of our
drugs and general market conditions.
ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation provides for classified terms for the
members of the Board of Directors. Our Certificate also includes a provision
(the "Fair Price Provision") that requires at least 66-2/3% of our voting
stockholders to approve a merger or certain other business transactions with,
or proposed by, 15% or more of our voting stockholders, except in cases where
certain Directors approve the transaction or certain minimum price criteria and
other procedural requirements are met. Our Certificate of Incorporation also
requires that any action required or permitted to be taken by our stockholders
must be taken at a duly called annual or special meeting of stockholders and
may not be taken by written consent. In addition, special meetings of our
stockholders may be called only by the Board of Directors, the Chairman of the
Board or the President, or by any holder of 10% or more of the outstanding
Common
20
<PAGE> 23
Stock. The classified board, Fair Price Provision and other charter provisions
protect the Company in 2 ways. These provisions may discourage certain types
of transactions in which the stockholders might otherwise receive a premium for
their shares over then current market prices, and may limit the ability of the
stockholders to approve transactions that they think may be in their best
interests. In addition, the Board of Directors has the authority to fix the
rights and preferences of and issue shares of Preferred Stock, which may have
the effect of delaying or preventing a change in control of the Company without
action by the stockholders.
ITEM 2. PROPERTIES
Isis occupies approximately 132,000 square feet of laboratory and
office space (including a 12,000 square foot GMP manufacturing suite) in 5
buildings located on our "campus" in Carlsbad, California. Three of these
buildings are owned by the Company and, as of December 31, 1997, secure
approximately $9.3 million in indebtedness of the Company. Two of the buildings
are leased. We have also leased 850 sq. ft. of office space in the United
Kingdom to accommodate employees supervising European clinical trials. We
believe that our facilities will be adequate to meet our needs through 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock (Nasdaq symbol "ISIP") is traded publicly through the
Nasdaq National Market. The following table presents quarterly information on
the price range of the common stock. This information indicates the high and
low sale prices reported by the Nasdaq National Market. These prices do not
include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter $ 15.13 $ 10.88
Second Quarter $ 24.75 $ 10.38
Third Quarter $ 19.50 $ 11.75
Fourth Quarter $ 20.50 $ 15.38
1997
First Quarter $ 19.88 $ 15.00
Second Quarter $ 17.38 $ 12.88
Third Quarter $ 18.63 $ 12.75
Fourth Quarter $ 18.38 $ 11.00
</TABLE>
As of January 31, 1998, there were approximately 1,422 stockholders of
record of the common stock. The Company has never paid dividends and does not
anticipate paying any dividends in the foreseeable future. Under the terms of
certain term loans, the Company will be restricted from paying cash dividends
until the loans are fully repaid. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Research and development revenues $ 32,470 $ 22,572 $ 12,966 $ 10,088 $ 10,654
Research and development expenses 55,940 45,653 33,175 26,468 25,604
Net loss (31,066) (26,521) (23,712) (18,181) (19,062)
Basic and diluted net loss per share (1.17) (1.04) (1.10) (0.93) (1.22)
Shares used in computing basic and
diluted net loss per share 26,456 25,585 21,514 19,542 15,685
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 86,786 $ 77,624 $ 77,407 $ 43,440 $ 54,034
Working capital 62,573 56,300 60,040 33,679 44,076
Total assets 117,881 101,305 99,569 66,643 78,814
Long-term debt and capital lease
obligations, less current portion 56,452 19,864 4,714 9,295 8,847
Accumulated deficit (154,133) (123,067) (96,546) (72,834) (54,653)
Stockholders' equity 34,852 58,385 75,850 46,019 58,459
</TABLE>
22
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Since its inception in January 1989, almost all of the Company's
resources have been devoted to its research, drug discovery and drug
development programs. The Company is not yet profitable and expects to
continue to have operating losses for the next several years. Isis' revenue
comes from collaborative research and development agreements with
pharmaceutical companies, research grants and interest income. The revenue
from the collaboration agreements increases the amount of research and
development activity that the Company is able to fund and offsets a portion of
its research and development costs. See Item 1, "Business--Collaborative
Agreements." To date, Isis has not received any significant revenue from the
sale of products.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and December 31, 1996
The Company's revenue from collaborative research and development
agreements was $32.5 million for the year ended December 31, 1997 compared with
$22.6 million in 1996, an increase of 44%. The receipt of a $5 million
pre-commercial fee from CIBA Vision together with $4 million in milestone
payments from Novartis caused this revenue increase. The $5 million
pre-commercial fee from CIBA Vision was the first payment under the terms of a
distribution agreement for fomivirsen (ISIS 2922). The $4 million in milestone
payments from Novartis was related to the initiation of Phase II clinical
studies for ISIS 3521 and ISIS 5132. Interest income was $4.1 million in 1997
versus $4.0 million in 1996.
Research and development expenses rose 22% to $55.9 million in 1997
from $45.7 million in 1996. The increase in research and development expenses
occurred because compounds in preclinical and clinical development are
continuing to advance into more expensive stages of development. We expect
that research and development expenses will continue to increase as compounds
continue to advance in clinical development.
General and administrative expenses were $8.1 million for 1997
compared with $6.2 million in 1996. This increase is primarily because of
expanded business development and investor relations activities and support of
our increasing research and development efforts. We expect that general and
administrative expenses will continue to increase in the future to support our
growing research and development activities.
Isis' net loss for 1997 was $31.1 million, or $1.17 per share,
compared to $26.5 million, or $1.04 per share, for 1996. We expect that
operating losses will increase for several more years as research and
development activities grow. Operating losses may fluctuate from quarter to
quarter because of differences in the timing of revenue and expense
recognition.
At December 31, 1997, Isis' net operating loss carryforward for
federal income tax purposes was approximately $161.9 million. The company's
research credit carryforward for federal income tax purposes was approximately
$5.8 million. The company's net operating loss and tax credit carryforwards
will be subject to an annual limitation regarding utilization against taxable
income in future periods, due to "change of ownership" provisions of the Tax
Reform Act of 1986. We believe that such limitation will not have a material
adverse impact on the benefits that may arise from the company's net operating
loss and tax credit carryforwards. However, there may or may not be additional
limitations arising from any future changes in ownership that may have a
material adverse impact on the Company.
Isis believes that inflation and changing prices have not had a
material effect on the Company's operations to date.
23
<PAGE> 26
Years Ended December 31, 1996, and December 31, 1995
Isis' revenue from collaborative research and development agreements
was $22.6 in 1996 and $13.0 million in 1995, an increase of 74%. Revenue from
collaborative agreements increased because additional preclinical and clinical
development efforts were funded by the collaborations with Novartis and
Boehringer Ingelheim. The Company's interest income was $4.0 million in 1996
and $3.0 million in 1995. The increase in interest income in 1996 was due to
higher cash and short-term investment balances.
Research and development expenses amounted to $45.7 million in 1996
and $33.2 million in 1995. This increase in research and development expenses
resulted from Isis' growing preclinical and clinical development activities.
General and administrative expenses were $6.2 million in 1996 compared
with $5.4 million in 1995. This increase was due to increases in spending for
staffing, recruiting and relocation in the business development and investor
relations functions.
The Company's net loss was $26.5 million, or $1.04 per share, in 1996
and $23.7 million, or $1.10 per share, in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Isis has financed its operations with revenue from contract research
and development, through the sale of equity securities and the issuance of
long-term debt. From its inception through December 31, 1997, Isis has earned
approximately $105 million in revenue from contract research and development.
The Company has also raised net proceeds of approximately $180 million from the
sale of equity securities since it was founded. In 1996 and 1997, Isis
borrowed approximately $47.6 million under long-term debt arrangements to
finance a portion of its operations.
As of December 31, 1997, Isis had cash, cash equivalents and
short-term investments of $86.8 million and working capital of $62.6 million.
In comparison, the Company had cash, cash equivalents and short-term
investments of $77.6 million and working capital of $56.3 million as of
December 31, 1996. This increase was mainly due to the receipt of $25 million
from a private debt financing, $6.4 million from borrowings under a line of
credit made available to the Company by Boehringer Ingelheim, and $9.0 in
milestone payments and pre-commercial fees from CIBA Vision and Novartis. This
increase in cash and short-term investments was offset by the amounts needed to
fund operating losses, make investments in capital equipment and building
improvements and to make principal payments on debt and capital lease
obligations.
The agreement with Boehringer Ingelheim provides the Company with a
$40 million line of credit. This line of credit is available under certain
circumstances and is to be used to support the collaboration cell adhesion
programs. As of December 31, 1997, the outstanding balance under this line of
credit was $22.6 million. See Note 3 to the Financial Statements, "Long-term
debt and commitments".
In October 1997, Isis borrowed $25 million in a private transaction.
The loan must be repaid within 10 years. The loan bears interest at 14% per
annum. No payments of either principal or interest are required during the
first 5 years of the loan. After the first 5 years, interest must be paid
quarterly until the end of the loan. No principal payments are required until
the end of the loan. Because interest is deferred during the first 5 years,
the principal balance will be $50 million on November 1, 2002. In conjunction
with this transaction, Isis issued warrants to purchase 500,000 shares of
common stock at a price of $25 per share. The warrants will expire on November
1, 2004. The warrants have been valued at
24
<PAGE> 27
$3.8 million. This amount has been credited to equity. See Note 3 to the
Financial Statements, "Long-term debt and commitments".
As of December 31, 1997, the Company's long-term debt and capital
lease obligations totaled $58.7 million compared to $26.1 million at December
31, 1996. This increase was due to the $25 million private debt financing
together with the $6.4 million borrowing under the Boehringer Ingelheim line of
credit and additional capital lease financing. In addition, 2 new term loans
totaling $9.7 million were obtained from a bank to refinance $6.5 million in
existing notes secured by the Company's real property. We expect that capital
lease obligations will increase over time to fund capital equipment
acquisitions required for the Company's growing business. We will continue to
use lease lines as long as the terms continue to remain commercially
attractive. We believe that the company's existing cash, cash equivalents and
short-term investments, combined with interest income and contract revenue will
be sufficient to meet its anticipated requirements for at least 2 years.
YEAR 2000 COMPUTER ISSUES
Until recently many computer programs were written to store only 2
digits of date-related information. Thus the programs were unable to
distinguish between the year 1900 and the year 2000. As a result, many
computer experts have significant concerns regarding how those programs will
function after December 31, 1999. This is frequently referred to as the "Year
2000 Problem." The Company is in the process of reviewing its computer systems
to assess the potential exposure to this problem. Because Isis was founded in
1989 and all of its computer systems have been purchased or upgraded since that
time, we believe the risk of material disruption to the Company's operations as
a result the presence of this defect in its own computer systems is minimal.
The Company has also initiated discussions with its significant
suppliers, corporate partners and financial institutions to ensure that those
parties have appropriate plans to address Year 2000 issues where their systems
could impact Isis' operations. The Company is assessing the extent to which
its operations are vulnerable should those organizations fail to properly
modify their computer systems.
A team of Isis employees is conducting the Company's Year 2000
initiative. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers, corporate partners and financial institutions are
fully supported. These efforts are scheduled to be completed by early 1999.
While the Company believes its planning and preparations will be adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the Company.
The cost of the Year 2000 initiatives is not expected to be material to the
Company's results of operations or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company
required by this item are filed as exhibits hereto, are listed under Item
14(a)(1) and (2), and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's definitive Proxy Statement (the "Proxy
Statement") which will be filed on or before April 13, 1998 with the Securities
and Exchange Commission in connection with the solicitation of proxies for the
Company's 1998 Annual Meeting of stockholders to be held on May 22, 1998.
The required information concerning Executive Officers of the Company
is contained in Item 1, Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the captions "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page 32 of this Report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 32
Balance Sheets at December 31, 1997 and 1996 33
Statements of Operations for the years ended December 31, 1997,
1996 and 1995 34
Statements of Stockholders' Equity for the years ended December 31,
1997, 1996 and 1995 35
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 36
Notes to Financial Statements 37
</TABLE>
26
<PAGE> 29
(A)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
None required.
(A)(3) INDEX TO EXHIBITS
See Index to Exhibits on pages 30 through 31.
The following management compensatory plans and arrangements are required to be
filed as exhibits to this Report pursuant to Item 14(c):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
10.2 -- Registrant's 1989 Stock Option Plan, as amended (the "Plan").
10.3 -- Revised form of Incentive Stock Option Agreement under the Plan. (1)
10.4 -- Revised form of Supplemental Stock Option Agreement under the Plan. (1)
10.5 -- Form of Incentive Stock Option Agreement entered into between Registrant and certain of its officers
together with related schedule. (2)
10.6 -- Form of Supplemental Stock Option Agreement entered into between Registrant and certain of its
officers together with related schedule. (2)
10.7 -- Registrant's 1992 Non-employee Directors Stock Option Plan, as amended. (1)
10.8 -- Revised form of Supplemental Stock Option Agreement under Registrant's 1992 Non-
employee Directors' Stock Option Plan, as amended. (5)
10.9 -- Registrant's Employee Stock Purchase Plan. (3)
10.11 -- Stock Option Agreement with Daniel L. Kisner, dated as of November 29, 1990. (4)
- ----------------
</TABLE>
(1) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter September 30, 1996 and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 33-42970) and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-39640) or amendments thereto and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1997.
(C) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required by this Item are listed
under Item 14(a)(2).
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 14 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on the
17th day of March, 1998.
ISIS PHARMACEUTICALS, INC.
By: /s/ STANLEY T. CROOKE, M.D., Ph.D.
-----------------------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board and Chief Executive
Officer (Principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoint Stanley T. Crooke, Daniel L. Kisner, and
B. Lynne Parshall, or any of them, his or her attorney-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto and
other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ STANLEY T. CROOKE, M.D., PH.D.
- -------------------------------------------
Stanley T. Crooke, M.D., Ph.D. Chairman of the Board,
Chief Executive Officer and
Director (Principal
executive officer) March 17, 1998
/s/ B. LYNNE PARSHALL
- -------------------------------------------
B. Lynne Parshall Executive Vice President and
Chief Financial Officer
(Principal financial and
accounting officer) March 17, 1998
/s/ DANIEL L. KISNER, M.D.
- -------------------------------------------
Daniel L. Kisner, M.D. President, Chief Operating
Officer and Director March 17, 1998
/s/ BURKHARD BLANK
- -------------------------------------------
Burkhard Blank Director March 17, 1998
/s/ CHRISTOPHER F. O. GABRIELI
- -------------------------------------------
Christopher F. O. Gabrieli Director March 17, 1998
/s/ ALAN C. MENDELSON
- -------------------------------------------
Alan C. Mendelson Director March 17, 1998
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ WILLIAM R. MILLER
- -------------------------------------------
William R. Miller Director March 17, 1998
/s/ MARK B. SKALETSKY
- -------------------------------------------
Mark B. Skaletsky Director March 17, 1998
/s/ LARRY SOLL
- -------------------------------------------
Larry Soll Director March 17, 1998
/s/ JOSEPH H. WENDER
- -------------------------------------------
Joseph H. Wender Director March 17, 1998
</TABLE>
29
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
3.1 -- Amended and Restated Certificate of Incorporation. (1)
3.2 -- Bylaws. (1)
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 10.19.
4.2 -- Ciba-Geigy Investor Rights Agreement between the Registrant and Novartis AG, formerly Ciba-Geigy Limited
("Novartis"), dated November 9, 1990. (1)
4.3 -- Voting Rights Agreement among the Registrant, Novartis and Dr. Crooke, dated November 9, 1990. (1)
4.4 -- Specimen stock certificate. (1)
9.1 -- Reference is made to Exhibit 4.4.
10.1 -- Form of Indemnification Agreement entered into between the Registrant and its Directors and officers with
related schedule. (1)
10.2 -- Registrant's 1989 Stock Option Plan, as amended.
10.3 -- Revised form of Incentive Stock Option Agreement under the Plan. (8)
10.4 -- Revised form of Supplemental Stock Option Agreement under the Plan. (8)
10.5 -- Form of Incentive Stock Option Agreement entered into between Registrant and certain of its officers together
with related schedule. (4)
10.6 -- Form of Supplemental Stock Option Agreement entered into between Registrant and certain of its officers together
with related schedule. (4)
10.7 -- Registrant's 1992 Non-Employee Directors Stock Option Plan, as amended. (8)
10.8 -- Revised form of Supplemental Stock Option Agreement under Registrant's 1992 Non-Employee Directors' Stock
Option Plan. (9)
10.9 -- Registrant's Employee Stock Purchase Plan. (2)
10.10 -- Form of Employee Assignment of Patent Rights. (1)
10.11 -- Stock Option Agreement with Daniel L. Kisner, dated as of November 29, 1990. (1)
10.12 -- Amended and Restated Research, Development and Licensing Agreement by and between Isis Pharmaceuticals, Inc.
and Novartis AG dated February 13, 1996 (with certain confidential information deleted). (7)
10.13 -- License Agreement between the Registrant and the PNA Group dated as of January 29, 1992 (with certain
confidential information deleted). (3)
10.14 -- Stock Purchase Agreement between the Registrant and Boehringer Ingelheim International GmbH, dated as of
July 18, 1995 (with certain confidential information deleted). (5)
10.15 -- Collaborative Agreement between the Registrant and Boehringer Ingelheim International GmbH, dated as of
July 18, 1995 (with certain confidential information deleted).(6)
10.16 -- Agreement between Registrant and CIBA Vision Corporation dated July 10, 1997 (with certain confidential
information deleted). (9)
10.17 -- Imperial Bank Note Secured by Deed of Trust dated March 24, 1997 in the amount of $6,000,000; together with
the related Deed of Trust and Assignment of Rents dated March 24, 1997. (9)
10.18 -- Imperial Bank Note Secured by Deed of Trust dated March 24, 1997 in the amount of $3,706,620; together with
the related Deed of Trust and Assignment of Rents dated March 24, 1997. (9)
10.19 -- Purchase Agreement for 14% Senior Subordinated Discount Notes due November 1, 2007 and Warrants for Common
Stock dated October 24, 1997 (with certain confidential information deleted).
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
10.20 -- Asset Purchase Agreement between Registrant and Gen-Probe Incorporated dated December 19, 1997 (with
certain confidential information deleted).
23.1 -- Consent of Ernst & Young LLP.
24.1 -- Power of Attorney. Reference is made to page 33.
27.1 -- Financial Data Schedule.
- ------------------
</TABLE>
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-39640) or amendments thereto and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (No. 33-42970) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1992 and incorporated herein by
reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Report on Form 8-K dated July
18, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 and incorporated herein by
reference.
(9) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and incorporated herein by
reference.
31
<PAGE> 34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Isis Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Isis
Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
3 years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Isis
Pharmaceuticals, Inc. at December 31, 1997 and 1996, and the results of its
operations and cash flows for each of the 3 years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 23, 1998, except for the first
paragraph of Note 4, as to which
the date is February 27, 1998
32
<PAGE> 35
ISIS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 38,102 $ 37,082
Short-term investments 48,684 40,542
Prepaid expenses and other current assets 2,364 1,732
--------- ---------
Total current assets 89,150 79,356
Property, plant and equipment, net 18,785 15,334
Patent costs, net 7,485 6,157
Deposits and other assets 2,461 458
--------- ---------
$ 117,881 $ 101,305
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,843 $ 2,362
Accrued payroll and related expenses 2,242 1,489
Accrued liabilities 4,347 2,763
Deferred contract revenues 14,893 10,204
Current portion of long-term debt and capital lease obligations 2,252 6,238
--------- ---------
Total current liabilities 26,577 23,056
Long-term debt and capital lease obligations, less current portion 56,452 19,864
Commitments (See Note 3)
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized, 26,655,000 shares
and 26,201,000 shares issued and outstanding at December 31, 1997 and 1996,
respectively 27 26
Additional paid-in capital 188,793 181,248
Unrealized gain on investments 165 178
Accumulated deficit (154,133) (123,067)
--------- ---------
Total stockholders' equity 34,852 58,385
--------- ---------
$ 117,881 $ 101,305
========= =========
</TABLE>
See accompanying notes.
33
<PAGE> 36
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------- -------- --------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Research and development revenues
under collaborative agreements $ 32,470 $ 22,572 $ 12,966
Interest income 4,067 4,012 3,001
-------- -------- --------
36,537 26,584 15,967
Expenses:
Research and development 55,940 45,653 33,175
General and administrative 8,078 6,246 5,402
Interest expense 3,585 1,206 1,102
-------- -------- --------
67,603 53,105 39,679
-------- -------- --------
Net loss $(31,066) $(26,521) $(23,712)
======== ======== ========
Basic and diluted net loss per share $ (1.17) $ (1.04) $ (1.10)
======== ======== ========
Shares used in computing basic and
diluted net loss per share 26,456 25,585 21,514
======== ======== ========
</TABLE>
See accompanying notes.
34
<PAGE> 37
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
--------- --------- PAID IN GAINS AND ACCUMULATED STOCKHOLDERS'
DESCRIPTION SHARES AMOUNT CAPITAL (LOSSES) DEFICIT EQUITY
- -------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 19,716 $ 20 $ 118,833 $-- $ (72,834) $ 46,019
Options exercised and employee
stock purchase plan 318 -- 1,702 -- -- 1,702
Issuances of common stock net of
repurchases and offering costs 5,215 5 51,655 -- -- 51,660
Compensation relating to the
granting of options -- -- 63 -- -- 63
Change in unrealized gains,
net of income taxes -- -- -- 118 -- 118
Net loss -- -- -- -- (23,712) (23,712)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 25,249 25 172,253 118 (96,546) 75,850
--------- --------- --------- --------- --------- ---------
Options exercised and employee
stock purchase plan 543 1 3,164 -- -- 3,165
Issuances of common stock net of
repurchases and offering costs 409 -- 5,822 -- -- 5,822
Compensation relating to the
granting of options -- -- 9 -- -- 9
Change in unrealized gains,
net of income taxes -- -- -- 60 -- 60
Net loss -- -- -- -- (26,521) (26,521)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 26,201 26 181,248 178 (123,067) 58,385
--------- --------- --------- --------- --------- ---------
Options exercised and employee
stock purchase plan 454 1 3,306 -- -- 3,307
Issuance of warrants to purchase
common stock -- -- 3,780 -- -- 3,780
Compensation relating to the
granting of options -- -- 459 -- -- 459
Change in unrealized gains,
net of income taxes -- -- -- (13) -- (13)
Net loss -- -- -- -- (31,066) (31,066)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 26,655 $ 27 $ 188,793 $ 165 $(154,133) $ 34,852
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
35
<PAGE> 38
ISIS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net loss $(31,066) $(26,521) $(23,712)
Adjustments to reconcile net loss to net cash provided
from (used in) operating activities:
Depreciation and amortization 3,178 2,633 2,814
Issuance of securities in exchange for technology -- -- 733
Compensation related to grant of options and
stock bonus 459 9 63
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (632) (94) (70)
Accounts payable 481 1,365 (533)
Accrued payroll and related expenses 753 240 309
Accrued liabilities 1,584 (75) 784
Deferred contract revenues 4,689 1,291 4,532
-------- -------- --------
Net cash used in operating activities (20,554) (21,152) (15,080)
-------- -------- --------
Investing activities:
Short-term investments (8,142) (9,598) (430)
Unrealized gain on investments (13) 60 118
Property, plant and equipment (3,454) (862) (1,073)
Patent costs (1,455) (1,439) (742)
Deposits and other assets (2,098) 568 629
-------- -------- --------
Net cash used in investing activities (15,162) (11,271) (1,498)
-------- -------- --------
Financing activities:
Net proceeds from issuance of equity 7,087 8,987 52,629
Proceeds from long-term borrowing 33,320 16,200 --
Principal payments on debt and capital lease obligations (3,671) (2,145) (2,514)
-------- -------- --------
Net cash provided from financing activities 36,736 23,042 50,115
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,020 (9,381) 33,537
Cash and cash equivalents at beginning of year 37,082 46,463 12,926
-------- -------- --------
Cash and cash equivalents at end of year $ 38,102 $ 37,082 $ 46,463
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 2,644 $ 1,150 $ 1,094
Supplemental disclosures of non-cash investing and
financing activities:
Additions to debt and capital lease obligations for
acquisitions of property, plant and equipment $ 2,953 $ 2,325 $ 517
</TABLE>
See accompanying notes.
36
<PAGE> 39
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and business activity--Isis Pharmaceuticals was
incorporated in California on January 10, 1989. In conjunction with its
initial public offering the Company was reorganized as a Delaware corporation,
as Isis Pharmaceuticals, Inc., in April 1991. The Company was organized
principally to develop human therapeutic drugs using antisense and
combinatorial technology.
Basic net loss per share--In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share." Statement No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share includes the dilutive effects of options, warrants and
convertible securities. Options and warrants to purchase common stock were not
included in the computation of diluted net loss per share because the effect
would be antidilutive. All net losses per share have been presented to conform
to Statement No. 128 requirements.
Contract revenues and expenses--Contract revenues are recorded as
earned based on the performance requirements of the collaborative research and
development contracts. Payments received in excess of amounts earned are
recorded as deferred contract revenues. Research and development costs are
expensed as incurred. For the years ended December 31, 1997, 1996 and 1995,
costs and expenses of approximately $31,000,000, $29,000,000, and $18,100,000
respectively, were related to collaborative research and development
arrangements.
Cash equivalents and short-term investments--Cash equivalents and
short-term investments consist of highly liquid debt instruments. The Company
considers instruments with original maturities of less than 90 days to be cash
equivalents. The Company has recorded its cash equivalents and short-term
investments at fair market value as of December 31, 1997, and has classified
all of its investments as available- for-sale. This category includes all
securities which the Company does not have the positive intent and ability to
hold to maturity. The measurement basis for available-for-sale securities is
fair market value. Unrealized gains and losses, net of the related tax effect,
are included as a separate component of stockholders' equity. See Note 2 -
Investments.
Property, plant and equipment--Property, plant and equipment is
stated at cost and consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Land $ 1,163 $ 1,163
Buildings and improvements 13,607 12,974
Equipment 21,599 16,311
Furniture and fixtures 927 441
-------- --------
37,296 30,889
Less accumulated depreciation (18,511) (15,555)
-------- --------
$ 18,785 $ 15,334
======== ========
</TABLE>
37
<PAGE> 40
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
Depreciation of property, plant and equipment is provided on the straight-line
method over estimated useful lives as follows:
Building 31.5 years
Improvements 15 years
Equipment 2.5-5 years
Furniture and fixtures 5 years
Patent costs--The Company capitalizes certain costs related to patent
applications. Accumulated costs are amortized over the estimated economic
lives of the patents using the straight-line method, beginning with the date
the patents are issued. Accumulated amortization was $240,000 at December 31,
1997 and $112,000 at December 31, 1996.
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.
2. INVESTMENTS
The Company invests its excess cash in U.S. Government securities and
debt instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any losses on its short-term
investments. As of December 31, 1997, 77% of the debt securities held by the
Company had a contractual maturity of one year or less, and the remaining 23%
of the portfolio was due within 2.5 years.
38
<PAGE> 41
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-------------------------------------
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
-------------------------------------
DECEMBER 31, 1997 (in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
agencies $32,980 $ 105 $33,085
U.S. corporate debt securities 15,539 60 15,599
-------------------------------------
Total debt securities $48,519 $ 165 $48,684
=====================================
DECEMBER 31, 1996
U.S. Treasury securities and
obligations of U.S. Government
agencies $36,416 $ 165 $36,581
U.S. corporate debt securities 3,948 13 3,961
-------------------------------------
Total debt securities $40,364 $ 178 $40,542
=====================================
</TABLE>
3. LONG-TERM DEBT AND COMMITMENTS
In 1997, the Company obtained $25,060,000 in private debt financing.
The terms of the financing provide for a 10 year maturity on the debt, interest
of 14% per annum and deferred interest payments for the first 5 years of the
loan. After the first 5 years, interest must be paid quarterly until the end
of the loan. No principal repayments are required until the end of the loan.
Because interest is deferred during the first 5 years, the principal balance
will be $50 million on November 1, 2002. In conjunction with the debt
financing, Isis has issued warrants to the lender to purchase 500,000 shares of
common stock, exercisable at $25 per share. The warrants have been valued at
$3,780,000 and have been credited to equity. The debt is carried on the
balance sheet net of the amortized amount allocated to the warrants, and
including accrued interest. The carrying amount at December 31, 1997 was
$21,935,000.
In 1997, the Company obtained 2 new term loans from a bank to refinance
existing notes secured by real property and to fund facilities expansion. Both
notes are secured by the Company's real property and bear interest at the prime
interest rate plus 0.5%. The first note in the amount of $3,707,000 requires
monthly principal repayments of $12,433 plus interest with the remaining
principal balance due in April 2002. The balance of the note at December 31,
1997 was $3,588,000. The second note in the amount of $6,000,000 requires
monthly principal repayments of $50,000 plus related interest with the remaining
principal balance due in July 2002. The balance at December 31, 1997 was
$5,700,000.
39
<PAGE> 42
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
In 1996, The Company borrowed $16,200,000 under a $40,000,000 line of
credit made available under the terms of its collaborative agreement with
Boehringer Ingelheim International GmbH. In 1997, an additional $6,376,000 was
borrowed. The borrowed funds are being used to fund research and development
costs associated with the collaboration. Borrowings under the line of credit
bear interest at the 7 year U.S. interbanking rate plus 2.0%, determined at
the time each advance is made. Interest payments are due twice each year with
principal repayment due 7 years after the advance date. The principal may be
repaid in cash or stock, at the Company's option. If the Company elects to
repay the loan in shares of Isis common stock, repayment will be made at a
share price equal to 90% of the average market value over the 20 trading days
preceding the maturity date. The balance under this line of credit as of
December 31, 1997 was $22,576,000.
The Company leases equipment and certain office and lab space under
non-cancelable operating and capital leases with terms through February 2007.
Annual future minimum payments under operating and capital leases and future
maturities of long-term debt as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL LONG-TERM
LEASES LEASES DEBT
-------- -------- --------
<S> <C> <C> <C>
1998 $ 1,150 $ 1,910 $ 3,456
1999 990 1,575 3,388
2000 751 1,247 3,321
2001 743 1,060 3,253
2002 689 -- 8,447
Thereafter 715 -- 70,905
-------- -------- --------
Total minimum payments $ 5,038 5,792 92,770
========
Less amount representing interest (887) (38,971)
-------- --------
Present value of future minimum payments 4,905 53,799
Less current portion (1,503) (749)
-------- --------
Total $ 3,402 $ 53,050
======== ========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996, and 1995 was
$1,030,000, $520,000 and $303,000, respectively. Cost of equipment under
capital leases at December 31, 1997 and 1996 was $14,133,000 and $12,781,000,
respectively. Accumulated depreciation of equipment under capital leases at
December 31, 1997 and 1996 was $11,177,000 and $9,899,000, respectively.
4. STOCKHOLDERS' EQUITY
Stock Option Plans and Other Employee Option Grants--In June 1989, the
Company adopted a stock option plan which provides for the issuance of incentive
and non-qualified stock options for the purchase of up to 10,200,000 shares of
common stock (2,000,000 shares of which remain subject to stockholders'
approval) to its employees and certain other individuals. In addition to the
options issued under the terms of the 1989 plan, non-qualified options to
purchase 319,000 shares of common stock have been granted to certain employees.
The plan also includes provisions for the issuance of stock pursuant to
restricted stock purchases and bonuses. Typically options expire 10 years from
the date of grant. Options granted after December 31, 1995 vest over a 4 year
period, with 25% exercisable at the end of 1 year from the date of the grant and
the balance vesting ratably thereafter. Options granted before January 1, 1996
generally vest over a 5 year period. At December 31, 1997, a total of 3,377,000
shares
40
<PAGE> 43
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
were exercisable, with an aggregate exercise price of $26,585,000. As of that
date, 8,200,000 shares had been reserved for issuance under the 1989 plan, of
which 704,000 were available for future grant.
In July 1992, the Company adopted the 1992 Non-Employee Directors'
Stock Option Plan which provides for the issuance of non-qualified stock
options for the purchase of up to 300,000 shares of common stock to its
non-employee directors. Options under this plan expire 10 years from the date
of grant. Options granted after December 31, 1995 become exercisable in 4
equal annual installments beginning 1 year after the date of grant. Options
granted before January 1, 1996 vest over a 5 year period. At December 31,
1997, 99,000 shares issued under this plan were exercisable and 68,000 Shares
were available for future grant.
The following table summarizes stock option activity for the years
ended December 31, 1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
---------- -----------------------
<S> <C>
Outstanding at December 31, 1995 5,446 $ .14 to $ 19.75
Granted 1,337 11.38 to 20.00
Exercised (468) .14 to 17.88
Terminated (222) 4.00 to 18.63
------
Outstanding at December 31, 1996 6,093 .14 to 20.00
Granted 1,071 13.19 to 19.88
Exercised (395) .14 to 16.00
Terminated (327) 3.75 to 18.25
------
Outstanding at December 31, 1997 6,442 .14 to 20.00
======
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable options (in thousands, except contractual life and
exercise price data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AS OF 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
- ---------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.14 - $5.00 1,204 5.40 $3.29 745 $2.82
$5.13 - $6.75 1,364 5.75 $6.18 1,051 $6.17
$6.81 - $11.13 1,081 5.58 $8.66 814 $8.55
$11.25 - $13.13 1,275 7.88 $12.74 590 $12.74
$13.18 - $18.00 1,303 8.56 $16.20 212 $14.91
$18.13 - $20.00 215 8.60 $18.57 63 $18.43
---------- ----------
$0.14 - $20.00 6,442 6.74 $9.80 3,476 $7.89
========= ========
</TABLE>
41
<PAGE> 44
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
Employee Stock Purchase Plan--In 1991, the Board of Directors adopted
the Employee Stock Purchase Plan and reserved 500,000 shares of common stock
for issuance thereunder. The plan permits full-time employees to purchase
common stock through payroll deductions (which cannot exceed 10% of each
employee's compensation) at the lower of 85% of fair market value at the
beginning of the offer or the end of each six-month purchase period. During
1997, 58,000 shares were issued to employees at prices ranging from $10.73 to
$15.30 per share. In 1996, 75,000 shares were issued at prices ranging from
$3.40 to $11.16 per share. At December 31, 1997, 184,000 shares were available
for purchase under this plan.
Stock-Based Employee Compensation--The Company has adopted the
disclosure-only provision of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
expense has been recognized for the stock option plans. Had compensation
expense been determined consistent with Statement No. 123, the Company's net
loss and basic net loss per share would have been changed to the following pro
forma amounts (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net loss - as reported $ (31,066) $ (26,521)
Net loss - pro forma (38,004) (32,200)
Basic net loss per share - as reported $ (1.17) $ (1.04)
Basic net loss per share - pro forma (1.44) (1.26)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted- average
assumptions for both 1996 and 1997: expected life of 1 year from vesting date
for regular employees, 2 years from vesting date for Directors and Vice
Presidents, and 4 years from vesting date for Executive Officers; expected
dividend yield of zero percent and expected volatility of 60 percent.
Risk-free interest rate was based on the Treasury Bill rate at the end of each
quarter during 1996 and 1997. All options granted during the quarter were
valued using the same risk-free rate for the quarter. The weighted average
fair value of options granted was $7.20 for 1996 and $8.50 for 1997.
Warrants--In 1993, the Company issued Class A warrants in connection
with a strategic alliance with PerSeptive Biosystems, Inc. As of December 31,
1997, 448,001 of the warrants remain outstanding at an exercise price of $7.75
per share. The warrants expire March 15, 1999.
In 1997, Isis issued 500,000 warrants in conjunction with a private
debt financing agreement. As of December 31, 1997, all of the warrants remain
outstanding at an exercise price of $25 per share. The warrants expire
November 1, 2004. See Note 3.
As of December 31, 1997, total common shares reserved for future
issuance was 10,363,000 (2,000,000 shares of which remain subject to
stockholders' approval).
42
<PAGE> 45
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
5. INCOME TAXES
Significant components of the Company's deferred tax assets as of
December 31, 1997 and 1996 are shown below. Valuation allowances of
$71,400,000 and $55,313,000 have been recognized for 1997 and 1996,
respectively, to offset the net deferred tax assets as realization of such
assets is uncertain.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Capitalized research expense $ 7,741,000 $ 6,287,000
Net operating loss carryforwards 57,959,000 42,136,000
Research and development credits 7,258,000 5,683,000
Other, net 889,000 3,131,000
------------ ------------
Total deferred tax assets 73,847,000 57,237,000
Deferred tax liabilities:
Patent expense (2,447,000) (1,924,000)
------------ ------------
Total deferred tax liabilities (2,447,000) (1,924,000)
Total net deferred tax assets 71,400,000 55,313,000
Valuation allowance for deferred tax
assets (71,400,000) (55,313,000)
------------ ------------
Net deferred tax assets $ 0 $ 0
============ ============
</TABLE>
At December 31, 1997, approximately $2,880,000 of the valuation
allowance for deferred tax assets relates to stock option deductions which,
when recognized, will be allocated directly to additional paid-in capital.
At December 31, 1997, the Company had federal and California tax net
operating loss carryforwards of approximately $161,884,000, and $22,606,000,
respectively. The Company also had federal and California research credit
carryforwards of approximately $5,760,000 and $2,305,000, respectively. The
difference between the tax loss carryforwards for federal and California
purposes was attributable to the capitalization of research and development
expenses for California tax purposes and a required 50% limitation in the
utilization of California loss carryforwards. The federal tax loss
carryforward and the research credit carryforwards will begin expiring in 2004
unless previously utilized. Approximately $3,000,000 of the California tax
loss carryforward expired during 1997 and the related deferred tax asset and
tax loss carryforward amounts have been reduced accordingly. The remaining
California tax loss carryforward will begin expiring in 1998, unless utilized.
Annual use of the Company's net operating loss and credit
carryforwards will be limited under the Internal Revenue Code as a result of
cumulative changes in ownership of more than 50% during the periods ended
December 31, 1989 and 1991. However, the Company believes that such
limitations will not have a material impact upon the utilization of the
carryforwards.
43
<PAGE> 46
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
6. RESEARCH AND DEVELOPMENT COLLABORATIVE ARRANGEMENTS
In 1990, Isis entered into a collaborative agreement with Novartis to
discover and investigate oligonucleotide compounds active against 4 specific
targets In 1996, Isis and Novartis signed a definitive agreement broadening the
companies' antisense research and development collaboration to include the
development of ISIS 3521 and ISIS 5132, anticancer compounds that were
discovered through the research collaboration. The broadened collaboration also
includes research to discover additional therapeutic compounds. Under the terms
of the expanded collaboration, Novartis is funding the development of both ISIS
3521 and ISIS 5132. Isis receives certain milestone payments from Novartis as
these compounds and subsequent compounds arising out of the expanded research
program progress through development. Novartis will market these compounds
worldwide and will pay Isis a royalty based on sales. Included in the statement
of operations for the years ended December 31, 1997, 1996 and 1995 are contract
revenues arising from this collaboration totaling $21,106,000, $14,003,000 and
$7,308,000, respectively.
As part of the expanded collaborative relationship, Novartis also made
additional equity investments in Isis totaling $10,000,000 in 1995. In June
1995, Novartis made a private equity investment purchasing 200,000 shares for
$3,000,000. In October 1995, Novartis purchased an additional 700,000 shares
for $7,000,000 as part of the Company's public offering. As of December 31,
1997, Novartis owned approximately 8% of the outstanding common stock of the
Company.
In December 1990, the Company entered into an agreement for a
collaborative research program with Eisai Co., Ltd. ("Eisai") to discover and
investigate oligonucleotide compounds active against CMV. As a result of the
collaboration efforts under this program, in December 1992, the Company entered
into a co-development agreement with Eisai to develop a specific oligonucleotide
compound (ISIS 2922) for North American and European markets. In August 1996,
Isis reacquired full ownership of ISIS 2922 in exchange for a royalty on future
sales. Included in the statement of operations are co-development revenues of
$3,788,000 and $2,720,000 for the years ended December 31, 1996 and 1995,
respectively.
In July 1997, the Company and CIBA Vision Corporation ("CIBA Vision")
entered into an agreement granting CIBA Vision exclusive worldwide distribution
rights for fomivirsen (ISIS 2922). Under the terms of the agreement, Isis will
receive $20 million in pre-commercial fees and milestones payments through the
time of regulatory approval in the United States and Europe. Isis will
manufacture and sell fomivirsen to CIBA Vision at a price that will allow Isis
and CIBA Vision to share the commercial value of the product. CIBA Vision will
market and sell fomivirsen worldwide and will be responsible for regulatory
approvals outside of the United States and Europe. If regulatory approvals are
obtained, CIBA Vision will hold the registrations. Additionally, CIBA Vision
received the option to acquire the exclusive license to market and distribute a
second generation antisense compound to treat CMV retinitis (ISIS 13312) which
is currently in development by Isis. Included in the statement of operations
for the year ended December 31, 1997 are contract revenues of $5,000,000 from
this arrangement.
In July 1995, the Company and Boehringer Ingelheim International GmbH
("Boehringer Ingelheim") signed definitive agreements and completed the
formation of a major collaboration in cell adhesion drug design, discovery,
development and commercialization. Boehringer Ingelheim purchased 2,000,000
shares of common stock for $28,500,000 in cash plus certain license rights. Of
the $28,500,000, $21,300,000 was accounted for as equity and $7,200,000 was
accounted for as deferred revenue,
44
<PAGE> 47
ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
representing Boehringer Ingelheim's advance payment of research and development
costs under the collaboration. In December 1996, coinciding with the
achievement of a milestone, Boehringer Ingelheim purchased 409,000 shares for
$10,000,000. Of that total, $6,000,000 was accounted for as equity and
$4,000,000 as deferred revenue. The agreement also provides that Boehringer
Ingelheim is entitled to designate 1 person for election to Isis' Board of
Directors. As of December 31, 1997 Boehringer Ingelheim owns approximately 9%
of the outstanding common stock of the Company. Boehringer Ingelheim and Isis
are providing equal funding for the combined research and development program
and will share equally in the profits from all products of the collaboration.
Boehringer Ingelheim has also provided Isis with a $40,000,000 line of credit,
available under certain circumstances to be used in support of the combined
programs. As of December 31, 1997, the outstanding balance under this line of
credit was $22,576,000. The statement of operations for the years ended
December 31, 1997, 1996 and 1995 reflects contract revenues of $5,603,000,
$4,024,000 and $1,267,000, respectively, from this collaboration.
7. EARNINGS PER SHARE
In July 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share." The Company has adopted the
provisions of the new standard. In accordance with the statement, prior
periods have not been restated as the effect of the change is not material.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for basic net loss per share-
net loss (31,066) (26,521) (23,712)
Numerator for diluted net loss per share-
net loss (31,066) (26,521) (23,712)
Denominator:
Denominator for basic net loss per share-
weighted average shares 26,456 25,585 21,514
Denominator for diluted net loss per share-
weighted average shares 26,456 25,585 21,514
Basic net loss per share (1.17) (1.04) (1.10)
======= ======= =======
Diluted net loss per share (1.17) (1.04) (1.10)
======= ======= =======
</TABLE>
Options and warrants to purchase common stock were not included in the
computation of diluted net loss per share because the effect would be
antidilutive. For additional disclosures regarding outstanding stock options
and warrants, see Note 4-Stockholders' equity.
45
<PAGE> 1
EXHIBIT 10.2
Registrant's 1989 Stock Option Plan, as amended.
<PAGE> 2
ISIS PHARMACEUTICALS, INC.
1989 STOCK OPTION PLAN
As Amended September 5, 1991
As Amended September 4, 1992
As Amended January 4, 1993
As Amended December 2, 1993 and January 20, 1994
As Amended December 7, 1994
As Amended February 27, 1995 and December 14, 1995
As Amended September 6, 1996
As Amended February 27, 1998
1. PURPOSE.
(a) The purpose of the Plan is to provide a means by
which selected employees and directors (if declared eligible under paragraph 4)
of and consultants to Isis Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), and its Affiliates, as defined in subparagraph 1(b), may be given
an opportunity to benefit from increases in value of the stock of the Company
through the granting of (i) incentive stock options, (ii) supplemental stock
options, (iii) stock bonuses, and (iv) rights to purchase stock, all as defined
below.
(b) The word "Affiliate" as used in the Plan means any
parent corporation or subsidiary corporation of the Company, as those terms are
defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code
of 1986, as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain
the services of persons now employed by or serving as consultants or directors
to the Company, to secure and retain the services of new employees/persons
capable of filling such positions, and to provide incentives for such persons
to exert maximum efforts for the success of the Company.
(d) The Company intends that the rights issued under the
Plan ("Stock Awards") will, in the discretion of the Board of Directors of the
Company (the "Board") or any committee to which responsibility for
administration of the Plan has been delegated pursuant to subparagraph 2(c), be
either (i) stock options granted pursuant to paragraph 5 hereof, including
incentive stock options as that term is used in Section 422 of the Code
("Incentive Stock Options"), or options which do not qualify as Incentive Stock
Options ("Supplemental Stock Options") (together hereinafter referred to as
"Options"), or (ii) stock bonuses or rights to purchase restricted stock
granted pursuant to paragraph 6 hereof. All Options will be separately
designated Incentive Stock Options or Supplemental Stock Options at the time of
grant, and in such form as issued pursuant to paragraph 5, and a separate
certificate or certificates will be issued for
<PAGE> 3
shares purchased on exercise of each type of Option. An Option designated as a
Supplemental Stock Option will not be treated as an Incentive Stock Option.
2. ADMINISTRATION.
(a) The Plan will be administered by the Board unless and
until the Board delegates administration to a committee, as provided in
subparagraph 2(c).
(b) The Board will have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the
persons eligible under the Plan will be granted Stock Awards; when and how
Stock Awards will be granted; whether a Stock Award will be an Incentive Stock
Option, a Supplemental Stock Option, a stock bonus, a right to purchase
restricted stock, or a combination of the foregoing; the provisions of each
Stock Award granted (which need not be identical), including the time or times
when a person will be permitted to purchase or receive stock pursuant to a
Stock Award; and the number of shares with respect to which Stock Awards will
be granted to each such person.
(2) To construe and interpret the Plan and Stock
Awards granted under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise of this power,
may correct any defect, omission or inconsistency in the Plan or in any Stock
Award, in a manner and to the extent it will deem necessary or expedient to
make the Plan fully effective.
(3) To amend the Plan as provided in
paragraph 12.
(4) Generally, to exercise such powers and to
perform such acts as the Board deems necessary or expedient to promote the best
interests of the Company.
(c) The Board may delegate administration of the Plan to
one or more committees, each committee composed of not fewer than 2 members
(each, a "Committee"). If administration is delegated to a Committee, that
Committee will have, in connection with the administration of the Plan, the
powers theretofore possessed by the Board, subject, however, to such
resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish a Committee at
any time and revest in the Board the administration of the Plan. Additionally,
and notwithstanding anything to the contrary contained herein, the Board or
Committee may delegate to a committee of one or more members of the Board the
authority to grant options to certain eligible persons in accordance with
guidelines approved by the Board or Committee.
3. SHARES SUBJECT TO THE PLAN.
<PAGE> 4
(a) Subject to the provisions of paragraph 11 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Stock Awards granted under the Plan will not exceed in the aggregate 10,200,000
shares of the Company's common stock. If any Stock Award granted under the
Plan will for any reason expire or otherwise terminate without having been
exercised in full, the stock not purchased under such Stock Award will again
become available for the Plan.
(b) The stock subject to the Plan may be unissued shares
or reacquired shares, bought on the market or otherwise.
(c) An Incentive Stock Option may be granted to an
eligible person under the Plan only if the aggregate fair market value
(determined at the time the Option is granted) of the stock with respect to
which incentive stock options (as defined in the Code) granted after 1986 are
exercisable for the first time by such optionee during any calendar year under
all Incentive Stock Option plans of the Company and its Affiliates does not
exceed $100,000. If it is determined that an entire Option or any portion
thereof does not qualify for treatment as an Incentive Stock Option by reason
of exceeding such maximum, such Option or the applicable portion will be
considered a Supplemental Stock Option.
4. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to
employees (including officers) of the Company or its Affiliates. A director of
the Company will not be eligible to receive Incentive Stock Options unless such
director is also an employee (including an officer) of the Company or any
Affiliate. Stock Awards other than Incentive Stock Options may be granted only
to employees (including officers) of, directors of or consultants to the
Company or its Affiliates.
(b) No person will be eligible for the grant of an
Incentive Stock Option under the Plan if, at the time of grant, such person
owns (or is deemed to own pursuant to Section 424(d) of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of any of its Affiliates unless the exercise price of
such Option is at least 110% of the fair market value of such stock at the date
of grant and the term of the Option does not exceed 5 years from the date of
grant.
(c) No person will be eligible to be granted Options
covering more than 294,873 shares of the Company's common stock in any 12 month
period.
5. OPTION PROVISIONS.
Each Option will be in such form and will contain such terms
and conditions as the Board or the Committee will deem appropriate. The
provisions of separate Options need not be identical, but each Option will
include (through incorporation of provisions hereof by reference in the Option
or otherwise) the substance of each of the following provisions:
<PAGE> 5
(a) No Option will be exercisable after the expiration of
10 years from the date it was granted.
(b) The exercise price of each Incentive Stock Option
will be not less than 100% of the fair market value of the stock subject to the
Option on the date the Option is granted. The exercise price of each
Supplemental Stock Option will be not less than 85% of the fair market value of
the stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or
Supplemental Stock Option) may be granted with an exercise price lower than set
forth in the preceding sentences if such Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.
(c) The purchase price of stock acquired pursuant to an
Option will be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, either at the time of the grant
or exercise of the Option, (A) by delivery to the Company of other common stock
of the Company, (B) according to a deferred payment or other arrangement (which
may include, without limiting the generality of the foregoing, the use of other
common stock of the Company) with the person to whom the Option is granted or
to whom the Option is transferred pursuant to subparagraph 5(d), or (C) in any
other form of legal consideration that may be acceptable to the Board or the
Committee.
In the case of any deferred payment arrangement, interest will be
payable at least annually and will be charged at the minimum rate of interest
necessary to avoid the treatment as interest, under any applicable provisions
of the Code, of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d) An Incentive Option will not be transferable except
by will or by the laws of descent and distribution, and will be exercisable
during the lifetime of the person to whom the Option is granted only by such
person. A Supplemental Stock Option may be transferable at the discretion of
the Board or the Committee.
(e) The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). From time to time during each of such installment
periods, the Option may become exercisable ("vest") with respect to some or all
of the shares allotted to that period, and may be exercised with respect to
some or all of the shares allotted to such period and/or any prior period as to
which the Option was not fully exercised. During the remainder of the term of
the Option (if its term extends beyond the end of the installment periods), the
Option may be exercised from time to time with respect to any shares then
remaining subject to the Option. The provisions of this subparagraph 5(e) are
subject to any Option provisions governing the minimum number of shares as to
which an Option may be exercised.
<PAGE> 6
(f) The Company may require any optionee, or any person
to whom an Option is transferred under subparagraph 5(d), as a condition of
exercising any such Option, (1) to give written assurances satisfactory to the
Company as to the optionee's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with
the purchaser representative, the merits and risks of exercising the Option;
and (2) to give written assurances satisfactory to the Company stating that
such person is acquiring the stock subject to the Option for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. These requirements, and any assurances given pursuant to such
requirements, will be inoperative as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws.
(g) An Option will terminate 3 months after termination
of the optionee's employment or relationship as a consultant or director with
the Company or an Affiliate, unless (i) such termination is due to such
person's permanent and total disability, within the meaning of Section
422(c)(6) of the Code, in which case the Option may, but need not, provide that
it may be exercised at any time within 1 year following such termination of
employment or relationship as a consultant or director; or (ii) the optionee
dies while in the employ of or while serving as a consultant or director to the
Company or an Affiliate, or within not more than 3 months after termination of
such relationship, in which case the Option may, but need not, provide that it
may be exercised at any time within 18 months following the death of the
optionee by the person or persons to whom the optionee's rights under such
Option pass by will or by the laws of descent and distribution; or (iii) the
Option by its terms specifies either (a) that it will terminate sooner than 3
months after termination of the optionee's employment or relationship as a
consultant or director or (b) that it may be exercised more than 3 months after
termination of the relationship with the Company or an Affiliate. This
subparagraph 5(g) will not be construed to extend the term of any Option or to
permit anyone to exercise the Option after expiration of its term, nor will it
be construed to increase the number of shares as to which any Option is
exercisable from the amount exercisable on the date of termination of the
optionee's employment or relationship as a consultant or director.
(h) The Option may, but need not, include a provision
whereby the optionee may elect at any time during the term of his or her
employment or relationship as a consultant or director with the Company or any
Affiliate to exercise the Option as to any part or all of the shares subject to
the Option prior to the stated vesting date of the Option or of any installment
or installments specified in the Option. Any shares so purchased from any
unvested installment or Option may be subject to a repurchase right in favor of
the Company or to any other restriction the Board or the Committee determines
to be appropriate.
<PAGE> 7
(i) To the extent provided by the terms of an Option, the
optionee may satisfy any federal, state or local tax withholding obligation
relating to the exercise of such Option by any of the following means or by a
combination of such means: (1) tendering a cash payment; (2) authorizing the
Company to withhold from the shares of the common stock otherwise issuable to
the participant as a result of the exercise of the Option a number of shares
having a fair market value less than or equal to the amount of the withholding
tax obligation; or (3) delivering to the Company owned and unencumbered shares
of the common stock having a fair market value less than or equal to the amount
of the withholding tax obligation.
6. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement will
be in such form and will contain such terms and conditions as the Board or the
Committee will deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the
terms and conditions of separate agreements need not be identical, but each
stock bonus or restricted stock purchase agreement will include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions as appropriate:
(a) The purchase price under each stock purchase
agreement will be such amount as the Board or Committee will determine and
designate in such agreement. Notwithstanding the foregoing, the Board or the
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company or for its benefit.
(b) No rights under a stock bonus or restricted stock
purchase agreement will be assignable by any participant under the Plan, either
voluntarily or by operation of law, except where such assignment is required by
law or expressly authorized by the terms of the applicable stock bonus or
restricted stock purchase agreement.
(c) The purchase price of stock acquired pursuant to a
stock purchase agreement will be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment or other arrangement with the person to whom the stock is
sold; or (iii) in any other form of legal consideration that may be acceptable
to the Board or the Committee in their discretion. Notwithstanding the
foregoing, the Board or the Committee to which administration of the Plan has
been delegated may award stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.
(d) Shares of stock sold or awarded under the Plan may,
but need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee.
<PAGE> 8
(e) In the event a person ceases to be an employee of or
ceases to serve as a consultant to the Company or an Affiliate, the Company may
repurchase or otherwise reacquire any or all of the shares of stock held by
that person which have not vested as of the date of termination under the terms
of the stock bonus or restricted stock purchase agreement between the Company
and such person.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards granted under
the Plan, the Company will keep available at all times the number of shares of
stock required to satisfy such Stock Awards.
(b) The Company will seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be
required to issue and sell shares of stock under the Stock Awards granted under
the Plan; provided, however, that this undertaking will not require the Company
to register under the Securities Act either the Plan, any Stock Award granted
under the Plan or any stock issued or issuable pursuant to any such Stock
Award. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company will be relieved from any liability for failure to issue and
sell stock upon exercise of such Stock Awards unless and until such authority
is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards
granted under the Plan will constitute general funds of the Company.
9. MISCELLANEOUS.
(a) The Board or the Committee will have the power to
accelerate the time during which a Stock Award may be exercised or the time
during which a Stock Award or any part thereof will vest, notwithstanding the
provisions in the Stock Award stating the time during which it may be exercised
or the time during which it will vest.
(b) Neither an optionee nor any person to whom an Option
is transferred under subparagraph 5(d) will be deemed to be the holder of, or
to have any of the rights of a holder with respect to, any shares subject to
such Option unless and until such person has satisfied all requirements for
exercise of the Option pursuant to its terms.
(c) Throughout the term of any Option granted pursuant to
the Plan, the Company will make available to the holder of such Option, not
later than 120 days
<PAGE> 9
after the close of each of the Company's fiscal years during the Option term,
upon request, such financial and other information regarding the Company as
comprises the annual report to the stockholders of the Company provided for in
the bylaws of the Company.
(d) Nothing in the Plan or any instrument executed or
Stock Award granted pursuant thereto will confer upon any eligible employee,
consultant, director or holder of Stock Awards under the Plan any right to
continue in the employ of the Company or any Affiliate (or to continue acting
as a consultant or director) or will affect the right of the Company or any
Affiliate to terminate the employment or consulting relationship or
directorship of any eligible employee, consultant, director or holder of Stock
Awards under the Plan with or without cause. In the event that a holder of
Stock Awards is permitted or otherwise entitled to take a leave of absence, the
Company will have the unilateral right to (i) determine whether such leave of
absence will be treated as a termination of employment or relationship as
consultant or director for purposes of paragraphs 5(g) or 6(e) hereof and
corresponding provisions of any outstanding Stock Awards, and (ii) suspend or
otherwise delay the time or times at which exercisability or vesting would
otherwise occur with respect to any outstanding Stock Awards under the Plan.
10. CANCELLATION AND RE-GRANT OF OPTIONS.
The Board or the Committee will have the authority to effect,
at any time and from time to time, with the consent of the affected optionees,
(i) the repricing of any or all outstanding Options under the Plan and/or
(ii) the cancellation of any or all outstanding Options under the Plan and the
grant in substitution therefor of new Options under the Plan covering the same
or different numbers of shares of common stock, but having an exercise price
per share not less than 85% of the fair market value (100% of the fair market
value in the case of an Incentive Stock Option or, in the case of a 10%
stockholder (as defined in subparagraph 4(b)), not less than 110% of the fair
market value) per share of common stock on the new grant date. Notwithstanding
the foregoing, an Option (whether an Incentive stock Option or Supplemental
Stock Option) may be granted with an exercise price lower than set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of
Section 424(a) of the Code.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the
Plan, or subject to any Stock Award granted under the Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Plan and outstanding Stock Awards will be appropriately adjusted in the
class(es) and maximum number of shares subject to the Plan or an Option under
paragraph 4(c) and the class(es) and number of shares and price per share of
stock subject to outstanding Stock Awards.
<PAGE> 10
(b) In the event of: (1) a dissolution or liquidation of
the Company; (2) a merger or consolidation in which the Company is not the
surviving corporation; or (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's common stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise then to
the extent permitted by applicable law: (i) any surviving corporation will
assume any Stock Awards outstanding under the Plan or will substitute similar
Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards
will continue in full force and effect. In the event any surviving corporation
refuses to assume or continue such Stock Awards, or to substitute similar Stock
Awards for those outstanding under the Plan, then, with respect to Stock Awards
held by persons then performing services as employees or as consultants or
directors for the Company, as the case may be, the time during which such Stock
Awards become vested or may be exercised will be accelerated and the Stock
Awards terminated if not exercised prior to such event.
12. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may
amend the Plan. However, except as provided in paragraph 11 relating to
adjustments upon changes in stock, no amendment will be effective unless
approved by the stockholders of the Company within 12 months before or after
the adoption of the amendment, where such amendment requires stockholder
approval in order for the Plan to satisfy the requirements of Section 422 of
the Code, Rule 16(b)(3) promulgated under the Securities Exchange Act of 1934,
as amended or any Nasdaq or securities exchange requirements.
(b) It is expressly contemplated that the Board may amend
the Plan in any respect the Board deems necessary or advisable to provide
optionees with the maximum benefits provided or to be provided under the
provisions of the Code and the regulations promulgated thereunder relating to
employee Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(c) Rights and obligations under any Stock Award granted
before amendment of the Plan will not be altered or impaired by any amendment
of the Plan unless (i) the Company requests the consent of the person to whom
the Stock Award was granted and (ii) such person consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan will terminate on January 31, 2008.
No Stock Awards may be granted under the Plan while the Plan is suspended or
after it is terminated.
<PAGE> 11
(b) Rights and obligations under any Stock Award granted
while the Plan is in effect will not be altered or impaired by suspension or
termination of the Plan, except with the consent of the person to whom the
Stock Award was granted.
14. EFFECTIVE DATE OF PLAN.
The Plan is effective April 19, 1991.
<PAGE> 1
EXHIBIT 10.19
CONFIDENTIAL TREATMENT REQUESTED UNDER
17 C.F.R. SECTIONS 200.80(b)(4), 200.83
AND 240.24b-2. * INDICATES OMITTED
MATERIAL THAT IS THE SUBJECT OF A
CONFIDENTIAL TREATMENT REQUEST THAT IS
FILED SEPARATELY WITH THE COMMISSION.
================================================================================
ISIS PHARMACEUTICALS, INC.
-----------------------------
$50,000,000
14% Senior Subordinated Discount Notes due November 1, 2007
And
Warrants for Common Stock
-----------------------------
PURCHASE AGREEMENT
Dated as of October 24, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
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DESCRIPTION OF PARTIES......................................................... 1
ARTICLE I AUTHORIZATION AND ISSUANCE OF SECURITIES........................ 1
1.1 AUTHORIZATION OF ISSUE.......................................... 1
1.2 ISSUANCE OF SECURITIES.......................................... 1
(a) Purchase of Notes; Delivery of Warrants..................... 1
(b) Closing Date; Delivery of Notes and Warrants................ 1
1.3 SECURITIES LAWS................................................. 2
(a) The Company's Representation and Agreements................. 2
(b) The Purchaser's Representations and Agreements.............. 2
ARTICLE II THE COMPANY'S REPRESENTATIONS AND WARRANTIES.................... 3
2.1 FINANCIAL INFORMATION........................................... 3
(a) Statements.................................................. 3
(b) Debt........................................................ 3
(c) No Material Adverse Change.................................. 3
2.2 ORGANIZATION, STANDING AND QUALIFICATION OF THE
COMPANY......................................................... 3
2.3 CAPITALIZATION.................................................. 4
2.4 AUTHORIZATION................................................... 4
2.5 FRANCHISES, LICENSES, AND OTHER RIGHTS.......................... 4
2.6 LITIGATION...................................................... 5
2.7 INTELLECTUAL PROPERTY........................................... 5
2.8 TITLE AND LIENS................................................. 5
2.9 LEASES.......................................................... 5
2.10 BURDENSOME AND CONFLICTING AGREEMENTS AND
VIOLATIONS OF CHARTER PROVISIONS................................ 5
2.11 CONSENTS AND APPROVALS.......................................... 6
2.12 COMPLIANCE WITH ERISA........................................... 6
2.13 COMPLIANCE WITH LAWS............................................ 6
2.14 RESERVATION OF SHARES........................................... 7
2.15 DISCLOSURE...................................................... 7
2.16 BROKER'S OR FINDER'S COMMISSIONS................................ 7
ARTICLE III CLOSING CONDITIONS.............................................. 7
3.1 OPINION OF PURCHASER'S SPECIAL COUNSEL.......................... 7
3.2 OPINION OF COMPANY'S COUNSEL.................................... 8
3.3 REPRESENTATIONS AND WARRANTIES.................................. 8
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3.4 CONSENTS AND APPROVALS.......................................... 8
3.5 PROCEEDINGS AND DOCUMENTS....................................... 8
3.6 LEGALITY OF INVESTMENT.......................................... 8
ARTICLE IV REGISTRATION, EXCHANGE AND TRANSFER OF NOTES.................... 9
4.1 AUTHORIZED DENOMINATIONS........................................ 9
4.2 THE NOTE REGISTER; PERSONS DEEMED OWNERS........................ 9
4.3 ISSUANCE OF NEW NOTES UPON EXCHANGE OR TRANSFER................. 9
4.4 LOST, STOLEN, DAMAGED AND DESTROYED NOTES....................... 9
ARTICLE V PAYMENT OF NOTES................................................ 10
5.1 REGULAR METHOD OF PAYMENT....................................... 10
5.2 HOME OFFICE PAYMENT............................................. 10
5.3 LIMITATION ON INTEREST.......................................... 10
5.4 PAYMENT OF PRINCIPAL AND INTEREST............................... 11
5.5 METHOD OF PAYMENT............................................... 11
ARTICLE VI AFFIRMATIVE COVENANTS........................................... 12
6.1 USE OF PROCEEDS................................................. 12
6.2 PRESERVATION OF FRANCHISES AND EXISTENCE........................ 12
6.3 INSURANCE....................................................... 12
6.4 PAYMENT OF TAXES AND OTHER CHARGES.............................. 13
6.5 COMMISSION AND STOCK EXCHANGE FILINGS........................... 13
6.6 COMPLIANCE CERTIFICATES......................................... 13
6.7 INSPECTION AND OTHER INFORMATION................................ 13
6.8 COST OF THIS FINANCING.......................................... 14
(a) Payment of Fees and Expenses................................ 15
(b) Reimbursement............................................... 15
(c) Indemnification............................................. 15
6.9 COMPLIANCE WITH LAWS............................................ 16
6.10 FINANCIAL REPORTS AND BOOKS AND RECORDS......................... 16
(a) Interim Statements.......................................... 16
(b) Annual Statements........................................... 16
(c) Financial Reports........................................... 16
6.11 ERISA REPORTS................................................... 17
6.12 PRIVATE PLACEMENT NUMBERS....................................... 17
ARTICLE VII NEGATIVE COVENANTS.............................................. 17
7.1 LIMITATION ON DEBT.............................................. 17
7.2 LIMITATIONS ON LIENS............................................ 18
7.3 LIMITATION ON RESTRICTED PAYMENTS............................... 18
7.4 CHANGE OF CONTROL............................................... 19
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7.5 ASSET SALE...................................................... 21
7.6 TRANSACTIONS WITH AFFILIATES.................................... 23
7.7 REPURCHASE OF NOTES............................................. 23
ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES.................................. 24
8.1 EVENT OF DEFAULT................................................ 24
8.2 OTHER REMEDIES.................................................. 26
8.3 CONDUCT NO WAIVER; COLLECTION EXPENSES.......................... 26
8.4 REMEDIES CUMULATIVE............................................. 26
8.5 COOPERATION BY THE COMPANY...................................... 26
ARTICLE IX DEFINITIONS..................................................... 27
9.1 PREVIOUS DEFINITIONS............................................ 27
9.2 ADDITIONAL DEFINITIONS.......................................... 27
9.3 ACCOUNTING PRINCIPLES........................................... 38
9.4 DIRECTLY OR INDIRECTLY.......................................... 38
ARTICLE X REGISTRATION RIGHTS............................................. 39
10.1 REGISTRATION REQUESTED BY THE HOLDERS........................... 39
10.2 "PIGGYBACK" REGISTRATIONS....................................... 40
10.3 THE COMPANY'S OBLIGATIONS IN REGISTRATION....................... 42
10.4 PAYMENT OF REGISTRATION EXPENSES................................ 45
10.5 INFORMATION FROM HOLDERS........................................ 45
10.6 INDEMNIFICATION................................................. 46
10.7 OBLIGATIONS OF THE HOLDERS...................................... 48
ARTICLE XI SUBORDINATION OF NOTES.......................................... 49
11.1 NOTE SUBORDINATE TO SENIOR INDEBTEDNESS......................... 49
11.2 PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.................. 49
11.3 SUSPENSION OF PAYMENT WHEN SENIOR INDEBTEDNESS
IN DEFAULT...................................................... 51
11.4 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR
INDEBTEDNESS.................................................... 52
11.5 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS..................... 52
11.6 NO WAIVER OF SUBORDINATION PROVISIONS........................... 53
11.7 NOTICES......................................................... 53
11.8 RELIANCE ON JUDICIAL ORDERS OR CERTIFICATES..................... 54
11.9 NO SUSPENSION OF REMEDIES....................................... 54
11.10 REINSTATEMENT................................................... 54
11.11 AMENDMENTS TO ARTICLE XI........................................ 54
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ARTICLE XII REDEMPTION OF NOTES............................................. 54
12.1 RIGHT OF REDEMPTION............................................. 54
12.2 APPLICABILITY OF ARTICLE........................................ 55
12.3 ELECTION TO REDEEM; NOTICE TO HOLDERS........................... 55
12.4 SELECTION BY THE COMPANY OF NOTES TO BE
REDEEMED........................................................ 55
12.5 NOTICE OF REDEMPTION............................................ 55
12.6 DEPOSIT OF REDEMPTION PRICE..................................... 56
12.7 NOTES PAYABLE ON REDEMPTION DATE................................ 56
12.8 NOTES REDEEMED IN PART.......................................... 56
12.9 SURVIVAL OF WARRANTS............................................ 56
ARTICLE XIII CONSOLIDATION, MERGER, CONVEYANCE, SALE,
TRANSFER OR LEASE............................................... 57
13.1 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN
TERMS........................................................... 57
13.2 SUCCESSOR SUBSTITUTED........................................... 58
ARTICLE XIV MISCELLANEOUS................................................... 58
14.1 AMENDMENTS AND WAIVERS.......................................... 58
14.2 COPIES TO REGULATORY BODIES..................................... 58
14.3 INTEGRATION AND SEVERABILITY.................................... 59
14.4 SUCCESSORS AND ASSIGNS.......................................... 59
14.5 RELIANCE ON AND SURVIVAL OF VARIOUS PROVISIONS.................. 59
14.6 VERIFICATION.................................................... 59
14.7 NOTICES AND OTHER COMMUNICATIONS................................ 59
14.8 GOVERNING LAW................................................... 60
14.9 REPRODUCTION OF DOCUMENTS....................................... 60
14.10 TABLE OF CONTENTS AND HEADINGS.................................. 60
14.11 COUNTERPARTS.................................................... 61
EXECUTION BY PARTIES............................................................ 62
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SCHEDULE I Purchaser and Payment Information
EXHIBIT A Form of 14% Senior Subordinated Discount Note
EXHIBIT B Form of Warrant
EXHIBIT C Form of Opinion of Purchaser's Counsel
EXHIBIT D Form of Opinion of Company's Counsel
</TABLE>
iv
<PAGE> 6
PURCHASE AGREEMENT
PURCHASE AGREEMENT, dated as of October 24,1997 (this "Agreement"),
between ISIS PHARMACEUTICALS, INC., a Delaware corporation (including any
corporation succeeding thereto by merger, consolidation or acquisition of all or
substantially all of its assets, the "Company"), and the Purchaser listed on
Schedule I hereto (the "Purchaser").
The Company and the Purchaser agree as follows:
ARTICLE I
AUTHORIZATION AND ISSUANCE OF SECURITIES
1.1 AUTHORIZATION OF ISSUE. The Company has duly authorized the
issuance of its 14% Senior Subordinated Discount Notes due November 1, 2007, in
the aggregate principal amount, at maturity, of $50,000,000 (including all debt
securities issued in exchange or replacement therefor, the "Notes"). Each Note
shall be substantially in the form of Exhibit A hereto. In order to induce the
Purchaser to purchase the Notes and in connection therewith, the Company has
duly authorized the issuance of its warrants (the "Warrants") evidencing the
right to purchase, in the aggregate, 500,000 shares of Common Stock, $.001 par
value per share, of the Company at the Basic Purchase Price (as defined in the
Warrants) of $25.00 per share; such number of shares and such Basic Purchase
Price being subject to adjustment as provided in the Warrants. Each Warrant
shall be substantially in the form of Exhibit B hereto. The Notes and the
Warrants hereinafter referred to are herein collectively called the
"Securities."
1.2 ISSUANCE OF SECURITIES. (a) Purchase of Notes: Delivery of
Warrants. Subject to the terms hereof, (i) the Company agrees to sell, and the
Purchaser agrees to purchase, on the Closing Date hereinafter referred to, Notes
in the aggregate principal amount, at maturity, of $50,000,000 at a price equal
to $25,060,075.13, payable in immediately available funds and (ii) the Company
agrees to deliver to the Purchaser, and the Purchaser agrees to accept, on the
Closing Date hereinafter referred to, the Warrants evidencing the right to
purchase, in the aggregate, 500,000 shares of Common Stock, $.001 par value per
share, at the Basic Purchase Price of $25.00 per share, such number of shares
and such Basic Purchase Price being subject to adjustment as provided in the
Warrants.
(b) Closing Date: Delivery of Notes and Warrants. The date for
the purchase and sale of Notes hereunder (the "Closing Date") shall be October
24, 1997, or such other date as may be agreed to by the parties hereto. Purchase
and sale of the Notes hereunder shall take place at 1:00 P.M., Eastern Time, on
the Closing Date, at the offices
<PAGE> 7
of the Purchaser, ( * ) or such other place as the parties hereto may designate.
On the Closing Date, the Company will deliver to the Purchaser against payment
of the purchase price therefor, ten Notes in the aggregate principal amount, at
maturity, of $50,000,000, dated the Closing Date and registered in the
Purchaser's name or in the name of its nominee, and in connection with the
delivery of the Notes to the Purchaser on the Closing Date, and simultaneously
with such delivery, the Company will deliver to the Purchaser ten Warrants,
registered in the Purchaser's name or in the name of its nominee, and evidencing
the right to purchase an aggregate of 500,000 shares of Common Stock, $.001 par
value per share, at the Basic Purchase Price of $25.00 per share, such number of
shares and such Basic Purchase Price being subject to adjustment as provided in
such Warrant.
1.3 SECURITIES LAWS. (a) The Company's Representation and
Agreements. The Company represents and warrants to the Purchaser that the
Company has not, directly or through any agent, offered any of the Securities or
any similar security for sale to, or solicited any offers to buy any thereof
from, or otherwise approached or negotiated in respect thereof with, any Person
other than the Purchaser who was offered the Securities in a private sale for
investment, and the Company agrees that neither the Company nor any agent acting
on the Company's behalf has done or caused to be done or will do or cause to be
done or omit to do or cause to be done anything which would result in bringing
the issuance or sale of the Notes and the Warrants within the registration
requirements of Section 5 of the Securities Act.
(b) The Purchaser's Representations and Agreements. The
Purchaser represents and warrants, and in entering into this Agreement the
Company understands and acknowledges, that it is acquiring the Securities for
its own account for investment purposes and not with a view to, or for sale in
connection with, any distribution (as such term is used under Section 2(11) of
the Securities Act) thereof. Without limiting the foregoing, the Purchaser
acknowledges and agrees that the Securities have not and will not be registered
under the Securities Act or any applicable state securities laws and it agrees
that it will reoffer or resell the Securities or the Warrant Shares purchased by
it under this Agreement (i) only (A) to the Company, (B) pursuant to any
transaction under and meeting the requirements of Rule 144A, as amended from
time to time, promulgated under the Securities Act, (C) pursuant to an exemption
from registration under the Securities Act in accordance with Rule 144, as
amended from time to time, promulgated under the Securities Act, or (D) in
accordance with any other available exemption from the requirements of Section 5
of the Securities Act and (ii) in accordance with any applicable federal and
state securities laws. The Purchaser further agrees to hold the Company harmless
from any claim, demand or liability for broker's or finder's placement fees or
commissions payable by the Purchaser alleged to have been incurred by Purchaser
in connection with this transaction.
-2- *CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 8
ARTICLE II
THE COMPANY'S REPRESENTATIONS AND WARRANTIES
2.1 FINANCIAL INFORMATION. (a) Statements. The Company has
heretofore filed all reports, statements and schedules with the Commission
required to be filed pursuant to the Exchange Act since January 1, 1992 (the
"SEC Reports") and has made available to the Purchaser copies of all SEC
Reports. The SEC Reports did not (as of their respective filing dates) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. The audited and unaudited consolidated financial statements of the
Company included in the SEC Reports have been prepared in accordance with GAAP
applied on a consistent basis and fairly present the financial position of the
Company as of the dates thereof and the results of operations and consolidated
cash flows for the periods then ended, subject, in the case of the unaudited
financial statements, to normal year-end audit adjustments which were not
materially adverse to the Company. The Company has no material liabilities,
fixed or contingent, other than (i) liabilities fully reflected in said
financial statements and (ii) liabilities incurred since December 31, 1996 in
the ordinary course of business which in the aggregate have no material adverse
effect on the properties, operations or condition, financial or otherwise, of
the Company or on the conduct of its businesses.
(b) Debt. The Company has furnished to the Purchaser true,
correct and complete copies of each instrument which evidences, or will evidence
on the Closing Date, any Debt in excess of $5 million of the Company and each
instrument under which any Debt in excess of $5 million of the Company is or
will be issued or by which it is or may be secured.
(c) No Material Adverse Change. Other than changes reflected
in the SEC Reports, there has been no material adverse change in the business,
prospects, properties, operations or condition, financial or otherwise, of the
Company since December 31, 1996, whether or not covered by insurance and whether
or not arising from transactions in the ordinary course of business.
2.2 ORGANIZATION, STANDING AND QUALIFICATION OF THE COMPANY. The Company is a
corporation duly organized and validly existing and in good standing under the
laws of the State of Delaware. The Company has all requisite power to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted. The Company is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which failure to so
qualify
-3-
<PAGE> 9
would materially and adversely affect the business, prospects, properties,
operations or condition, financial or otherwise, of the Company.
2.3 CAPITALIZATION. The authorized Capital Stock of the Company
consists solely of (i) 50,000,000 shares of Common Stock, par value $.001 per
share, of which 26,632,766 shares of Common Stock are outstanding as of October
17, 1997, all of which have been duly authorized and validly issued by the
Company and are fully paid, nonassessable and free of preemptive rights and (ii)
15,000,000 shares of Preferred Stock, par value $.001 per share, none of which
has been issued. There are no shares of Common Stock held on the date hereof in
the treasury of the Company. The issuance and sale of all outstanding shares
have been in full compliance with all applicable federal and state securities
laws. Except (i) as contemplated in this Agreement and (ii) as otherwise
disclosed in the SEC Reports, there are no subscriptions, options, warrants or
calls relating to the issuance by the Company of any shares of its Capital
Stock, including any right of conversion or exchange under any outstanding
security or other instrument. Except as disclosed in SEC Reports, the Company is
not subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its Capital Stock or any security
convertible into or exchangeable for any of its Capital Stock. Except for (i)
the Voting Agreement, dated November 9, 1990, between the Company, Stanley T.
Crooke and Novartis Pharma AG (formerly known as Ciba-Geigy Limited)
("Novartis") and (ii) Section 8. 1 (d) of the Stock Purchase Agreement dated
July 18, 1995, between the Company and Boehringer Ingelheim International GmbH
("Boehringer"), each of which relates solely to the election of one director by
Novartis or Boehringer, as the case may be, to the Board of Directors, there are
no voting trusts or other agreements or understandings with respect to the
voting of the Capital Stock of the Company to which the Company is a party. The
Common Stock is vested with all the voting rights in the Company.
2.4 AUTHORIZATION. The Company has full power and authority to
execute and deliver this Agreement and to issue, sell and deliver the
Securities, to perform its obligations hereunder and thereunder and to engage in
the transactions contemplated hereby and thereby. This Agreement has been duly
authorized, executed and delivered and constitutes, and the Securities will,
upon their issuance, execution and delivery, constitute, the legal, valid and
binding obligations of the Company.
2.5 FRANCHISES, LICENSES, AND OTHER RIGHTS. The Company has all
franchises, permits, licenses and other authority as are necessary to enable it
to conduct the business of the Company, except for such franchises, permits,
licenses or authorities which the failure to have do not, individually or in the
aggregate, materially and adversely affect the business, prospects, properties,
operations or condition, financial or otherwise, of the Company, and the Company
is not in default under any of such franchises, permits, licenses or other
authority. The Company
-4-
<PAGE> 10
possesses all patents, patent rights, trademarks, trademark rights, trade names,
trade names rights and copyrights necessary to conduct the business of the
Company, without conflict with any valid rights of others, except for such
conflicts which would not, individually or in the aggregate, materially and
adversely affect the business, prospects, properties, operations or condition,
financial or otherwise, of the Company.
2.6 LITIGATION. There is no action, suit or proceeding pending
against or, to the best of the Company's knowledge, threatened against the
Company before or by any court, governmental authority or arbitrator, which (i)
questions, either individually or collectively, the validity of this Agreement,
the Securities or the consummation of the transactions herein and therein
contemplated, (ii) would result, either individually or collectively, in any
material adverse change in the business, prospects, properties, operations or
condition, financial or otherwise, of the Company or (iii) would impair,
individually or collectively, the ability of the Company to perform its
obligations under this Agreement or the Securities.
2.7 INTELLECTUAL PROPERTY. Except as disclosed in the SEC Reports,
the Company owns or possesses the rights to use the Intellectual Property, and
the Company is not aware of any claim to the contrary or any challenge by any
person to the rights of the Company with respect to the Intellectual Property
which claim or challenge is material to the business, prospects, properties,
operations or condition, financial or otherwise, of the Company.
2.8 TITLE AND LIENS. Except as otherwise disclosed in the SEC
Reports, the Company has good and marketable fee simple title to all the real
property owned by it, and a good and marketable ownership interest in all the
other assets, reflected in the financial statements included in the most recent
SEC Report or subsequently acquired by the Company other than that subsequently
sold or otherwise disposed of in the ordinary course of business, free and clear
of all Liens, except as otherwise disclosed in the SEC Reports.
2.9 LEASES. The Company enjoys adequate possession under all of the
leases for the use of personal property and real property under which the
Company is a lessee or is operating. All of such leases are valid and
subsisting, free and clear of all Liens, except for Liens permitted by Section
7.2, and none of them is in default, except for such defaults which would not,
individually or in the aggregate, materially and adversely affect the business,
prospects, properties, operations or condition, financial or otherwise, of the
Company.
2.10 BURDENSOME AND CONFLICTING AGREEMENTS AND VIOLATIONS OF CHARTER
PROVISIONS. The Company is not subject to any charter or other corporate
restriction or, to its knowledge after due inquiry, bound by any
-5-
<PAGE> 11
agreement or instrument which materially and adversely affects the business,
prospects, properties, operations or condition, financial or otherwise, of the
Company, other than, with respect to any such agreement or instrument, as
disclosed in the SEC Reports. The Company is not (i) in violation of its charter
or by-laws or (ii) in default under or in violation of any agreement, or
instrument by which it is bound, or of any statute, law, rule or regulation, or
of any judgment, decree, writ, injunction, order or award of any arbitrator,
court or governmental authority applicable to it any of which would result,
individually or collectively, in any material adverse change in the business,
prospects, properties, operations or condition, financial or otherwise, of the
Company. Neither the authorization, execution and delivery of this Agreement,
the Securities, the consummation of the transactions herein and therein
contemplated, nor the fulfillment of or compliance with the terms hereof and
thereof, will conflict with or result in a breach of any of the terms of the
charter or by-laws of the Company or will conflict with or result in a material
breach of any other corporate restriction or any statute, law, rule or
regulation, or of any judgment, decree, writ, injunction, order or award of any
arbitrator, court or governmental authority, or of any agreement or instrument,
which is applicable to the Company or by which the Company is bound, or
constitute a material default thereunder, or result in the imposition of any
material Lien upon any of the properties or assets of the Company.
2.11 CONSENTS AND APPROVALS. The Company has obtained or made all
necessary (i) governmental consents, approvals and authorizations, and
registrations and filings with governmental authorities other than any notices
of sale required to be filed with the Commission under Regulation D pursuant to
the Securities Act or any such filings as may be required after the Closing
under applicable state securities laws, all of which will be timely filed within
the applicable periods therefore; and (ii) consents, approvals, waivers and
notifications of stockholders, creditors, lessors and other non-governmental
persons, in each case, in connection with the execution and delivery of this
Agreement and the Securities and the consummation of the transactions herein and
therein contemplated.
2.12 COMPLIANCE WITH ERISA. The Company does not maintain, or
contribute to, and it is not otherwise obligated to contribute to, any Plan.
2.13 COMPLIANCE WITH LAWS. Except as disclosed in the SEC Reports,
the Company is in compliance with all applicable statutes, law, rules,
regulations, decisions and orders of all governmental authorities or any court
or arbitral tribunal, including, without limitation, those relating to the use,
operation, handling, transportation, disposal or release of hazardous or toxic
substances or wastes or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances or wastes, except
where such failure to comply would not, individually or in the aggregate, have a
material adverse effect on the business, prospects, properties,
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operations or condition, financial or otherwise, of the Company, and the Company
is not aware of any pending investigation which would reasonably be expected to
lead to such a claim.
2.14 RESERVATION OF SHARES. The shares of Common Stock deliverable
upon exercise of the Warrants have been duly authorized and reserved for
issuance upon such exercise, free from preemptive rights in favor of the holders
of shares of Capital Stock or other securities of the Company.
2.15 DISCLOSURE. This Agreement, the Securities and all other
documents, certificates, instruments, reports and statements furnished to the
Purchaser by or on behalf of the Company in connection with the transactions
contemplated hereby and thereby do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements contained herein and therein, in light
of the circumstances under which they were made, not misleading. Other than
facts relating to general economic conditions, there is no fact known to the
executive officers of the Company which materially and adversely affects, or
which is reasonably likely to materially and adversely affect during the twelve
month period commencing on the date hereof, the business, prospects, properties,
operations or condition, financial or otherwise, of the Company, which has not
been set forth in this Agreement or in the SEC Reports.
2.16 BROKER'S OR FINDER'S COMMISSIONS. No broker's or finder's
placement fee or commission will be payable by the Company with respect to the
issue of the Securities or any of the transactions contemplated hereby. The
Company will hold the Purchaser harmless from any claim, demand or liability for
broker's or finder's placement fees or commissions payable by the Company
alleged to have been incurred by the Company in connection with this
transaction.
ARTICLE III
CLOSING CONDITIONS
The Purchaser's obligation to purchase and pay for the Notes and the
Warrants on the Closing Date is subject to the complete satisfaction of the
Purchaser, on or before the Closing Date, of the conditions set forth in this
Article.
3.1 OPINION OF PURCHASER'S SPECIAL COUNSEL. The Purchaser shall have
received from Fried, Frank, Harris, Shriver & Jacobson, special counsel for the
Purchaser, an opinion, dated the Closing Date, substantially in the form set
forth in Exhibit C hereto.
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3.2 OPINION OF COMPANY'S COUNSEL. The Purchaser and its special
counsel shall each have received from Cooley Godward LLP, counsel for the
Company, an opinion, dated the Closing Date, substantially in the form set forth
in Exhibit D hereto.
3.3 REPRESENTATIONS AND WARRANTIES. The Company's representations
and warranties contained in Section 1.3(a) and in Article II shall be true on
and as of the Closing Date with the same effect as if made on and as of the
Closing Date. There shall exist on the Closing Date no Event of Default and no
condition or event which, with notice or lapse of time or both, would constitute
an Event of Default if the Securities had been outstanding at all times from and
after the date hereof, and all agreements and conditions to be performed or
satisfied by the Company hereunder on or before the Closing Date shall have been
duly performed or satisfied. The Company shall have delivered to the Purchaser a
certificate, dated the Closing Date and signed by its Chief Executive Officer or
its President or one of its Vice Presidents and by its Secretary or an Assistant
Secretary, to each of the foregoing effects.
3.4 CONSENTS AND APPROVALS. The Company shall have delivered to the
Purchaser a certificate, dated the Closing Date and signed by its Chief
Executive Officer or its President or one of its Vice Presidents, listing any
consents, waivers, approvals, authorizations, registrations, filings and
notifications of the character referred to in Section 2.11 which are necessary,
to which shall be attached evidence, satisfactory to the Purchaser, that the
same that are required to be obtained or made prior to the Closing Date have
been obtained or made and are in full force and effect, or stating that none is
necessary.
3.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
and all documents incident to the transactions contemplated by this Agreement
shall be reasonably satisfactory in form and substance to the Purchaser, and the
Purchaser shall have received copies of all documents and records relating
thereto which the Purchaser may reasonably request.
3.6 LEGALITY OF INVESTMENT. The Purchaser's acquisition of the
Securities shall be permitted as of the Closing Date under the provisions of all
applicable laws or governmental regulations, and such acquisition shall not
subject the Purchaser to any penalty or other onerous condition in or pursuant
to any such law or regulation; and the Purchaser shall have received such
certificates or other evidence as the Purchaser may reasonably request to
establish compliance with this condition.
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ARTICLE IV
REGISTRATION, EXCHANGE AND TRANSFER OF NOTES
4.1 AUTHORIZED DENOMINATIONS. The Notes are issuable only as fully
registered Notes in denominations of at least $5 million.
4.2 THE NOTE REGISTER; PERSONS DEEMED OWNERS. The Company shall
maintain, at its office designated for notices in accordance with Section 14.7,
a register for the Notes (the "Note Register"), in which the Company shall
record the name and address of the Person in whose name each Note has been
issued and the name and address of each transferee and prior owner of each Note.
The Company may deem and treat the Person in whose name a Note is so registered
as the holder and owner thereof for all purposes and shall not be affected by
any notice to the contrary; until due presentment of such Note for registration
of transfer as provided in this Article IV.
4.3 ISSUANCE OF NEW NOTES UPON EXCHANGE OR TRANSFER. Upon surrender
for exchange or registration of transfer of any Note at the office of the
Company designated for notices in accordance with Section 14.7, the Company
shall execute and deliver, at its expense, one or more new Notes of the same
class of any authorized denominations requested by the Holder of the surrendered
Note, each dated the date to which interest has been paid on the Note so
surrendered (or, if no interest has been paid, the date of such surrendered
Note), but in the same aggregate unpaid principal amount as such surrendered
Note, and registered in the name of such Person or Persons as shall be
designated in writing by such Holder. Every Note surrendered for registration of
transfer shall be duly endorsed, or be accompanied by a written instrument of
transfer duly executed, by the Holder of such Note or by its attorney duly
authorized in writing. The Company may condition the issuance of any new Note or
Notes in connection with a transfer by any Person other than a Purchaser on the
payment of a sum sufficient to cover any stamp tax or other governmental charge
imposed in respect of such transfer. Any transfer of a Note is subject to the
delivery by the Holder to the Company of a completed and signed Bond Power in
the form attached to the Note.
4.4 LOST, STOLEN, DAMAGED AND DESTROYED NOTES. At the request of any
Holder, the Company will issue, at its expense, in replacement of any Note or
Notes lost, stolen, damaged or destroyed, upon surrender of the mutilated
portions thereof, if any, a new Note or Notes of the same denominations, of the
same unpaid principal amounts and otherwise of the same class and tenor as, the
Note or Notes so lost, stolen, damaged or destroyed. The Company may condition
the replacement of a Note reported by a Holder as lost, stolen, damaged or
destroyed upon the receipt from such Holder of an indemnity or security
reasonably satisfactory to the Company, provided that
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if such Holder shall be the Purchaser or its nominee or an institutional
investor having assets in excess of $100 million (as disclosed in its last
financial statement) or its nominee, the Purchaser's or such institutional
investor's agreement of indemnity shall be sufficient for purposes of this
Section 4.4.
ARTICLE V.
PAYMENT OF NOTES
5.1 REGULAR METHOD OF PAYMENT. Except as provided in Section 5.2,
the principal of, and the premium, if any, and interest on, each Note shall be
payable at the office of the Company maintained pursuant to Section 14.7, in
lawful money of the United States of America, against presentment of such Note
for notation of payment or, in the case of a payment in full of such Note,
against surrender thereof.
5.2 HOME OFFICE PAYMENT. So long as the Purchaser or its nominee
shall be a Holder, the Company will pay all sums becoming due on each Note held
by the Purchaser or such nominee at the address of such Purchaser specified for
such purpose in Schedule I hereto, by wire transfer of immediately available
funds, or at such other address or by such other method as the Purchaser shall
have designated by notice to the Company, without presentment and without
notations being made thereon, except that any such Note so paid or prepaid in
full shall be surrendered to the Company for cancellation upon written request
by the Company therefor. Before selling or otherwise transferring any such Note,
the Purchaser will make a notation thereon of the aggregate amount of all
payments of principal theretofore made, and of the date to which interest has
been paid. If the transferee of any Note is an institutional investor having
assets in excess of $100 million (as disclosed in its last financial
statement) or its nominee and is the Holder of at least $5 million principal
amount of Notes, and shall request the Company to make all payments on account
of such Note either by check or by wire transfer of immediately available funds,
the Company shall make such payments as specified in such request at an address
specified in such request, provided that said institutional investor undertakes
in said request the same obligations in respect of such Note as those undertaken
by such Purchaser in the immediately preceding sentence.
5.3 LIMITATION ON INTEREST. No provision of this Agreement or of
any Note shall require the payment or permit the collection of interest in
excess of the maximum which is permitted by law. If any such excess interest is
provided for herein or in any Note, or shall be adjudicated to be so provided
for, then the Company shall not be obligated to pay such interest in excess of
the maximum permitted by law, and the right to demand payment of any such excess
interest is hereby waived, any other provisions in this Agreement or in any Note
to the contrary notwithstanding.
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5.4 PAYMENT OF PRINCIPAL AND INTEREST. The Company will pay the
principal of the Notes on November 1, 2007.
The Company will pay interest on the principal amount of the Notes
on each Interest Payment Date, as set forth below, at the rate of 14% per annum.
Interest will be paid quarterly in arrears on each Interest Payment
Date, commencing on February 1, 2003; provided that no interest shall accrue on
the principal amount of the Notes prior to November 1, 2002.
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from November 1, 2002;
provided that, if there is no existing default in the payment of interest and if
a Note is authenticated between a Regular Record Date and the next succeeding
Interest Payment Date, interest shall accrue from such Interest Payment Date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The Company shall pay interest on overdue principal and premium, if
any, and interest on overdue installments of interest, to the extent lawful, at
the rate set forth in the Notes.
5.5 METHOD OF PAYMENT. The Company will pay interest (except
defaulted interest) on the principal amount of the Notes as provided above on
each Interest Payment Date to the persons who are Holders (as reflected in the
Note Register at the close of business on the January 15, April 15, July 15 and
October 15, immediately preceding the Interest Payment Date), in each case, even
if the Notes are canceled on registration of transfer, registration of exchange,
redemption or repurchase after such record date; provided that, with respect to
the payment of principal, the Company will make payment to the Holder that
surrenders the Notes to the Company on or after November 1, 2007.
The Company will pay principal, premium, if any, and as provided
above, interest in money of the United States that at the time of payment is
legal tender for payment of public and private debts. If a payment date is a
date other than a Business Day at a place of payment, payment may be made at
that place on the next succeeding day that is a Business Day and no interest
shall accrue for the intervening period.
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ARTICLE VI
AFFIRMATIVE COVENANTS
The Company covenants and agrees that, from the date hereof and as
long as any of the Securities shall remain outstanding, (and thereafter to the
extent provided in Section 6.8):
6.1 USE OF PROCEEDS. The Company represents, warrants, covenants and
agrees that:
(a) the proceeds of the sale of the Securities will be used by
the Company, in accordance with applicable law, for the purpose of supporting
its research and development programs, and
(b) the Company does not own, directly or indirectly, any
"margin security", as defined in Regulation G issued by the Board of Governors
of the Federal Reserve System (12 CFR Part 207); and the Company will not use
any proceeds from the sale of the Securities to purchase or carry any
"security", as defined in Section 3(a)(10) of the Exchange Act, or for any other
purpose which would result in any transaction contemplated by this Agreement
constituting a "purpose credit" within the meaning of said Regulation G, or
which would involve a violation of Section 7 of the Exchange Act or Regulation
T, U or X of said Board of Governors (12 CFR Parts 220, 221 and 224,
respectively).
6.2 PRESERVATION OF FRANCHISES AND EXISTENCE. Except as otherwise
permitted by this Agreement, the Company will (i) maintain its corporate
existence, rights and franchises in full force and effect, and (ii) cause each
operating Subsidiary to maintain its respective corporate existence, rights and
franchises in full force and effect, provided that nothing in this Section 6.2
shall prevent (x) any merger of a Subsidiary into the Company or another
Subsidiary or (y) the Company or any Subsidiary from discontinuing any material
operations in any particular state or jurisdiction or at any particular location
or locations within the state or jurisdiction, or prevent the corporate
existence, rights and franchises of any Subsidiary from being terminated if, in
the opinion of the Board of Directors of the Company, such discontinuance or
termination will not adversely affect the Holders, and if such discontinuance or
termination is not in violation of any provision of this Agreement.
6.3 INSURANCE. The Company will maintain or cause to be maintained
with respect to its properties and business and the properties and businesses of
the Subsidiaries, with financially sound and reputable insurers, insurance
against such casualties and contingencies of such types and in such amounts as
is customary for
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corporations engaged in the same or similar business or having similar
properties to the ones of the Company.
6.4 PAYMENT OF TAXES AND OTHER CHARGES. The Company will pay, and
will cause each of the Subsidiaries to pay, when due, (i) all taxes, assessments
and other governmental charges or levies imposed upon it or any of its
properties or income, and (ii) all claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like Persons which, if unpaid, might
result in the creation of a Lien upon any of its properties, subject, in the
case of any of the foregoing or any Lien in respect thereof, to Section 7.2.
6.5 COMMISSION AND STOCK EXCHANGE FILINGS. Promptly upon their
becoming available, the Company will deliver to each Holder a copy of (i) all
regular or periodic reports which the Company or any Subsidiary shall file with
the Commission or any national securities exchange or NASDAQ, and (ii) all
reports, proxy statements and financial statements delivered or sent by the
Company to its stockholders or by any Subsidiary to its stockholders other than
the Company.
6.6 COMPLIANCE CERTIFICATES. Within 45 days after the close of each
of the first three quarters of each fiscal year of the Company, and within 90
days after the close of each fiscal year of the Company, the Company will
deliver to each Holder a certificate, signed by any two of the Chief Executive
Officer, the President, the Executive Vice President or the Vice
President-Finance of the Company, stating that a review of the activities of the
Company and the Subsidiaries during such fiscal quarter or such fiscal year, as
the case may be, has been made under such officers' supervision and that no
Event of Default or condition or event which, with notice or lapse of time or
both, would constitute an Event of Default has occurred, or, if such Event of
Default has occurred, specifying the nature and status thereof, and containing
computation (in reasonable detail) demonstrating compliance with the provisions
of Article VII. Within 15 days after any Holder shall so request, the Company
will execute and deliver to such Holder a certificate, signed by any two of the
Chief Executive Officer, the President, the Executive Vice President or the Vice
President-Finance of the Company, stating that this Agreement and every Security
held by or registered in the name of such Holder are unmodified and in full
effect (or, if there has been any modification, that this Agreement and every
such Security are in full effect as modified, and setting forth such
modifications), and either stating that to the knowledge of the signers of such
certificate no Event of Default exists hereunder, or specifying each such
default of which the signers may have knowledge.
6.7 INSPECTION AND OTHER INFORMATION. Each Holder and such Persons
as it may reasonably designate, may visit and inspect any of the properties of
the Company or any Subsidiaries, examine their books of account, take extracts
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therefrom and discuss the affairs, finances and accounts of the Company or such
Subsidiary with its officers and, after providing written notice to the Company,
public accountants (and by this provision the Company and each Subsidiary hereby
authorize said accountants to discuss with each Holder and such Persons its
finances and accounts), at such reasonable times during business hours and with
prior notice and as often as such Holder may reasonably desire. The Company will
furnish to each Holder such other financial information as it from time to time
may reasonably request.
Any information which is furnished pursuant to this Section 6.7 and
is designated in writing by the Company as confidential shall be treated as
confidential by each Holder and such Persons in accordance with such procedures
as such Holder applies generally to information of this kind; provided, however,
that each such Holder may disclose any such information (a) as has become
generally available to the public (other than by an act of a Holder in violation
of this Agreement), (b) as may be required in any report, statement or testimony
required to be submitted to any municipal, state or Federal regulatory body
having or claiming to have jurisdiction over any such Holder or to the National
Association of Insurance Commissioners or similar organization or their
successors, (c) as may be required in response to any summons or subpoena or in
connection with any litigation, (d) to the extent that any such Holder believes
it appropriate in order to comply with any law, order, regulation or ruling
applicable to such Holder and (e) to the prospective transferee in connection
with any contemplated transfer of any of the Notes by such Holder; and provided,
further, that such Holder (i) agrees that it will not trade in any securities of
the Company during any time that it is in possession of confidential information
that is material and not generally available to the public (except pursuant to
clause (e) above) and (ii) in the event that any such Person does not have a
duty of confidentiality to such Holder similar in scope to the duty set forth in
this Section 6.7, will cause such Person to undertake in writing to be bound by
the confidentiality and other provisions of this Section 6.7. Prior to any
disclosure by a Holder of any such information designated in writing by the
Company as confidential pursuant to clause (b), (c) or (d) above, such Holder
will (A) give written notice to the Company and (B) reasonably cooperate with
the Company if it seeks a protective order with respect to such disclosure.
Prior to any disclosure by a Holder to a prospective transferee pursuant to
clause (e) above of any such information designated in writing by the Company as
confidential which information has not become generally available to the public,
such Holder will (i) give written notice to the Company and (ii) cause such
prospective transferee to enter into an undertaking in writing pursuant to which
such prospective transferee will agree to be bound by the confidentiality and
other provisions of this Section 6.7.
6.8 COST OF THIS FINANCING. Whether or not the transactions
contemplated by this Agreement shall be consummated:
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(a) Payment of Fees and Expenses. The Company will pay all
reasonable costs and expenses of the Purchaser in connection with this Agreement
and the consummation of all transactions contemplated hereby, all printing or
reproduction expenses relating to transactions contemplated by this Agreement,
and the cost of transmitting the Securities to such address as may be requested
by the Purchaser, and will pay (on the Closing Date) the reasonable fees,
expenses, and disbursements of Fried, Frank, Harris, Shriver & Jacobson, special
counsel to the Purchaser for their services in connection therewith, which fees
will not exceed $100,000. Without limiting the foregoing, the Company agrees
to pay the cost of obtaining a private placement number for the Notes and the
Warrants and authorizes the submission of such information as may be required by
Standard and Poor's Corporation for the purpose of obtaining such number.
The Company will also pay all reasonable costs and expenses of
the Purchaser and each other Holder relating to any future amendment or
supplement to this Agreement or any of the Securities (or any proposal for such
amendment or supplement) requested by the Company whether or not consummated or
any waiver or consent with respect thereto (or any proposal for such waiver or
consent) whether or not consummated, including, but not limited to,
out-of-pocket expenses, the reasonable cost of all accounting services required
thereby, all printing or reproduction expenses relating to transactions
contemplated thereby, and the cost of transmitting the Securities to such
address as may be requested by the Purchaser or Holders, and will pay the
reasonable fees, expenses, and disbursements of counsel to the Purchaser and
Holders for their services in connection therewith.
(b) Reimbursement. The Company will reimburse all costs
and expenses of the character referred to in clause (a) of this Section 6.8
which shall have been paid by the Purchaser or any Holder.
(c) Indemnification. The Company will pay and indemnify
the Purchaser and each Holder of any of the Securities against, and hold the
Purchaser and any other Holder of any of the Securities harmless from, any and
all liability, loss, claim and damage and related expenses, including counsel
fees and expenses, incurred by or asserted against the Purchaser or any such
Holder arising out of, relating to or as a result of (i) the consummation of the
transactions contemplated hereby, (ii) the use of any of the proceeds of the
sale of the Securities or (iii) any claim, litigation, investigation or
proceeding relating to any of the foregoing, whether or not the Purchaser or any
such Holder is a party thereto.
The obligations of the Company under this Section 6.8 shall
survive the payment or transfer of the Notes or the expiration or transfer of
the Warrants.
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6.9 COMPLIANCE WITH LAWS. The Company will, and will cause each
Subsidiary to, comply with all applicable statutes, rules, regulations and
orders of all governmental authorities, with respect to the conduct of its
business and the ownership of its properties, including without limitation (i)
all applicable statutes, rules, regulations and orders relating to the use,
operation, handling, transportation, disposal, or release of hazardous or toxic
substances or wastes or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances or wastes, (ii)
the Occupational Safety and Health Act of 1970, as amended, and (iii) ERISA, if
failure to so comply, individually or in the aggregate, could have a material
adverse effect on the business, properties, operations or condition, financial
or otherwise, of the Company.
6. 1 0 FINANCIAL REPORTS AND BOOKS AND RECORDS. The Company will
keep proper books of record and account with respect to a dealings or
transactions of the business and affairs of the Company, in accordance with
GAAP, and will furnish to each Holder:
(a) Interim Statements. Within 45 days after the end of
each of the first three fiscal quarters of each fiscal year of the Company,
copies of the unaudited financial statements of the Company and its subsidiaries
that are customarily provided by the Company for reporting purposes, all in
reasonable detail and certified by an executive officer of the Company as
presenting fairly the financial position of the Company; provided that so long
as the Company is subject to the reporting requirements of the Exchange Act, the
Company may satisfy this requirement by delivery of the Form 1O-Q filed by it
with the Commission promptly after the filing thereof.
(b) Annual Statements. Within 90 days after the close of
each fiscal year of the Company, copies of consolidated financial statements of
the Company setting forth in comparative form the figures for the preceding
fiscal year, all in reasonable detail and accompanied by a report thereon of a
firm of independent public accountants selected by the Company, to the effect
that the consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Company as of the end of
the fiscal year being reported on in conformity with GAAP and that the
examination of such accountants in connection with such financial statements has
been conducted in accordance with generally accepted auditing standards and
included such tests of the accounting records and such other auditing procedures
as said accountants deemed necessary; provided that so long as the Company is
subject to the reporting requirements of the Exchange Act, the Company may
satisfy this requirement by delivery of the Form 10-K filed by it with the
Commission promptly after the filing thereof.
(c) Financial Reports. The provisions of paragraphs (a)
and (b) notwithstanding, promptly after the same are available, copies of all
financial statements
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and reports as the Company shall send or make available generally to its
stockholders, including without limitation, periodic reports containing
unaudited interim statements of results to the extent such reports are prepared
by the Company.
6.11 ERISA REPORTS. The Company shall notify each Holder in a
statement of an authorized officer of the Company setting forth in reasonable
detail the circumstances surrounding such event within 30 days after the Company
has knowledge of, or is notified of, the occurrence of (i) a reportable event
(within the meaning of Section 4043 of ERISA) with respect to any Plan; (ii) the
institution of any steps by the Company, any ERISA Affiliate, the PBGC or any
other Person to terminate or reorganize any Plan; (iii) the institution of any
steps by the Company or any ERISA Affiliate to withdraw from any Plan; (iv) a
non-exempt "prohibited transaction" within the meaning of Section 406 of ERISA
in connection with any Plan; (v) any material increase in the liability of the
Company with respect to any post-retirement welfare liability; (vi) any failure
to make a required installment or other payment with respect to a Plan, on or
prior to the applicable date, pursuant to Section 412(m) of the Code or (vii)
the taking of any action by, or the threatening of the taking of any action by,
the Internal Revenue Service, the Department of Labor or the PBGC with respect
to any of the foregoing.
6.12 PRIVATE PLACEMENT NUMBERS. Within two Business Days after
the Closing Date, the Company shall apply to Standard and Poor's Corporation for
assignment of a Private Placement Number for the Notes and the Warrants.
ARTICLE VII
NEGATIVE COVENANTS
The Company covenants and agrees that, so long as any of the
Notes shall be outstanding:
7.1 LIMITATION ON DEBT. Each Subsidiary will not, and the Company
will cause each Subsidiary not to, create, incur, assume, suffer to exist or
otherwise become liable for, any Debt, except for:
(i) Debt of any Subsidiary outstanding on October 24, 1997; and
(ii) Debt incurred by any Subsidiary, to any commercial financial
institution, for the acquisition by any Subsidiary of plant, property and
equipment, which acquisition is reasonably necessary, in the good faith
determination of the Board of Directors, for the business of the Company and the
Subsidiaries, and which Debt has a term to maturity equal to or less than five
years at the date of incurrence thereof.
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7.2 LIMITATIONS ON LIENS. The Company will not, and will not
permit any Subsidiary to, create, incur, assume or suffer to exist any Lien of
any kind upon any of their Intellectual Property, now owned or hereafter
acquired, except for (i) any Lien created to secure all or any part of the
purchase price, or to secure Debt incurred to pay all or any part of the
purchase price, of property or assets acquired by the Company or any Subsidiary
in the ordinary course of business at no more than its Fair Market Value, in the
good faith determination of the Board of Directors, (ii) any Lien created in
connection with a license of the Company or any Subsidiary and granted by the
Company or any Subsidiary in the ordinary course of business provided that the
Board of Directors has determined in good faith that the Company or any such
Subsidiary has received Fair Market Value for such license or (iii) any Lien
arising by reason of (1) any judgment, decree or order of any court, so long as
such Lien is adequately bonded or the execution or other enforcement thereof is
effectively stayed, any appropriate legal proceedings which may have been duly
initiated for the review of such judgment, decree or order shall not have been
finally terminated or the period within which such proceedings may be initiated
shall not have expired; (2) taxes, assessments and charges not yet delinquent or
which are being contested in good faith by appropriate proceedings, provided,
that adequate reserves with respect thereto are maintained on the books of the
Company or its Subsidiaries, as the case may be; (3) security for payment of
workmen's compensation, unemployment insurance or social security benefits or
other insurance; or (4) operation of law in favor of mechanics, materialmen,
laborers, carriers, lessors, landlords, employees or suppliers or similar
Persons, incurred in the ordinary course of business for sums which are not yet
delinquent or are being contested in good faith by negotiations or by
appropriate proceedings which suspend the collection thereof.
7.3 LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend on, or make any
distribution in respect of, any shares of Capital Stock (excluding dividends or
distributions payable in shares of Capital Stock, but including dividends or
distributions payable in Redeemable Stock or in options, warrants or other
rights to purchase Redeemable Stock (other than dividends on such Redeemable
Stock payable in shares of such Redeemable Stock)), or
(b) purchase, redeem, prepay or acquire or retire for
value, any Capital Stock (such payments or any other actions described in
clauses (a) and (b) above being collectively referred to as "Restricted
Payments").
Notwithstanding the foregoing, (i) any Subsidiary may declare and
pay dividends or make distributions to the Company and (ii) the Company may
issue, purchase, redeem, prepay, acquire or retire for value any shares of
Capital Stock of
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<PAGE> 24
any Subsidiary or any shares of Capital Stock of the Company which is intended
to track the separate performance of a particular Subsidiary.
7.4 CHANGE OF CONTROL. (a) Upon a Change of Control, each Holder
shall have the right (the "Change in Control Right") to require that the Company
repurchase any or all of such Holder's Notes at the purchase price in cash equal
to (i) 105% of the Accreted Value if such Change of Control occurs during the
period commencing on the Closing Date and ending on November 1, 1999; (ii) 104%
of the Accreted Value if such Change of Control occurs during the period
commencing on November 2, 1999 and ending on November 1, 2001; (iii) 103% of
the Accreted Value if such Change of Control occurs during the period commencing
on November 2, 2001 and ending on November 1, 2003; (iv) 102% of the Accreted
Value if such Change of Control occurs during the period commencing on November
2, 2003 and ending on November 1, 2005; and (iv) 101% of the Accreted Value if
such Change of Control occurs during the period commencing on November 2, 2005
and ending on November 1, 2007. The Company shall pay the Holder such repurchase
price plus accrued and unpaid interest, if any, to the date of repurchase, in
accordance with the procedures set forth in paragraphs (b) through (f) of this
Section 7.4.
(b) Within 5 days following becoming aware of any Change
of Control, the Company shall mail a notice to each Holder with a copy to the
Paying Agent stating:
(1) that a Change of Control has occurred and that such Holder
has the right to require the Company to repurchase such Holder's
Notes, in whole or in part, in integral multiples of $1,000 of
principal amount, at a purchase price in cash equal to the
appropriate percentage of the Accreted Value thereof as set forth in
clause (a) above plus accrued and unpaid interest, if any, to the
date of repurchase;
(2) the circumstance and relevant facts regarding such Change of
Control (including, to the extent available, information with
respect to pro forma historical income, cash flow and capitalization
after giving effect to such Change of Control);
(3) the date on which the Change in Control Right expires (which
shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed) (the "Change in Control Expiration
Date") and date for the repurchase of Notes within 10 days after the
Change in Control Expiration Date;
(4) the current exercise price of the Warrants; and
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<PAGE> 25
(5) the procedures determined by the Company, consistent with
this Section 7.4, that a Holder must follow in order to have its
Notes repurchased.
This notice shall also contain information concerning the
business of the Company which the Company in good faith believes will enable
such Holders to make an informed decision.
(c) Not later than two Business Days after the close of
business on the Change in Control Expiration Date, the Company shall (i) accept
for payment Notes or portions thereof tendered pursuant to the Change in Control
Right, (ii) deposit with the Paying Agent (which for purposes of this Section
7.4 shall not be the Company) money sufficient in immediately available funds to
pay the purchase price of all the Notes or portions thereof so tendered and
(iii) deliver to the Paying Agent the Notes or portions thereof which have been
properly tendered to and are accepted by the Company. The Paying Agent shall, on
the repurchase date, mail or deliver payment to each tendering holder in the
amount of the purchase price with respect to the Notes tendered by such holder
and accepted by the Company from the funds provided by the Company for such
payment, and the Company shall execute and the Paying Agent shall mail and
deliver to such Holder a new Note equal in amount to any unpurchased portion of
the Note surrendered.
(d) Holders electing to have a Note repurchased will be
required to surrender the Note, with an appropriate form duly completed, to the
Company at the address specified in the notice on or prior to the Change in
Control Expiration Date. Holders will be entitled to withdraw their election if
the Paying Agent or the Company receives on or prior to the Change in Control
Expiration Date written notice setting forth the name of the Holder, the
principal amount of the Note which was delivered for purchase by the Holder and
a statement that such Holder is withdrawing his election to have such Note
repurchased.
(e) At the time the Company delivers Notes to the Paying
Agent which are to be accepted for purchase, the Company will also deliver an
Officers' Certificate stating that such Notes are to be accepted by the Company
pursuant to and in accordance with the terms of this Section 7.4.
(f) The Company shall comply, to the extent applicable,
with the requirements of Section 14(e) of the Exchange Act and any other
securities laws or regulations in connection with the repurchase of Notes
pursuant to this Section. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this Section, the Company
shall comply with the applicable securities laws and
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<PAGE> 26
regulations and shall not be deemed to have breached its obligations under this
Section by virtue thereof
7.5 ASSET SALE. (a) The Company will not, and will not permit any
of its Subsidiaries to, participate in an Asset Sale unless (i) such Asset Sale
is for not less than the Fair Market Value of the assets sold (as determined by
the Board of Directors whose determination shall be conclusive and evidenced by
a Board Resolution), (ii) the Company repays, from the proceeds of such Asset
Sale, all Senior Indebtedness to the extent the terms of the governing documents
therefor require such repayment or prohibit the purchase of the Notes, and (iii)
the Net Available Proceeds of such Asset Sale include an amount of cash or
Cash-Equivalents sufficient to satisfy, in full, the Company's obligations under
this Section.
(b) In the event of an Asset Sale, the Company shall make
an offer to purchase Notes (the "Offer to Purchase") at the purchase price in
cash equal to (i) 105% of the Accreted Value if such Asset Sale occurs during
the period commencing on the Closing Date and ending on November 1, 1999; (ii)
104% of the Accreted Value if such Asset Sale occurs during the period
commencing on November 2, 1999 and ending on November 1, 2001; (iii) 103% of
the Accreted Value if such Asset Sale occurs during the period commencing on
November 2, 2001 and ending on November 1, 2003; (iv) 102% of the Accreted Value
if such Asset Sale occurs during the period commencing on November 2, 2003 and
ending on November 1, 2005; and (iv) 101% of the Accreted Value if such Asset
Sale occurs during the period commencing on November 2, 2005 and ending on
November 1, 2007. The Company shall pay the Holder such repurchase price plus
accrued and unpaid interest, if any, to the date of repurchase, in accordance
with the procedures set forth in paragraphs (b) through (i) of this Section 7.5.
(c) Within 5 days following any Asset Sale, the Company
shall mail a notice to each Holder with a copy to the Paying Agent stating:
(1) that an Asset Sale has occurred and that such Holder has the
right to require the Company to repurchase such Holder's Notes in
whole or in part in integral multiples of $1,000 of principal
amount, at a purchase price in cash equal to the appropriate
percentage of the Accreted Value thereof as set forth in clause (b)
above plus accrued and unpaid interest, if any, to the date of
repurchase;
(2) the circumstance and relevant facts regarding such Asset
Sale (including information which respect to pro-forma historical
income, cash flow and capitalization after giving effect to such
Asset Sale);
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<PAGE> 27
(3) the Expiration Date (which shall be no earlier than 30 days
nor later than 60 days from the date such notice is mailed) (the
"Expiration Date") and a date for the repurchase of Notes within 10
days after the Expiration Date;
(4) the current exercise price of the Warrants; and
(5) the procedures determined by the Company, consistent with
this Section 7.5, that a Holder must follow in order to have its
Notes repurchased.
The notice shall also contain information concerning the business
of the Company which the Company in good faith believes will enable each Holder
to make an informed decision.
(d) Upon the occurrence of an Asset Sale, the Company
shall, within five Business Days thereafter, irrevocably deposit with the Paying
Agent (which for the purpose of this Section 7.5 shall not be the Company) money
in immediately available funds in an amount sufficient to repay the Notes, if
all the then outstanding Notes were tendered pursuant to the Offer to Purchase,
to be held for payment in accordance herewith. The proceeds may be invested in
any Temporary Cash Investment the maturity date of which shall not be later than
the Expiration Date. The Company shall be entitled to any interest or dividends
accrued, earned or paid on such Temporary Cash Investments, unless an Event of
Default shall have occurred and be continuing (in which case, such amounts shall
be held for application in accordance with Article VIII hereof). To the extent
that the aggregate amount of funds deposited by the Company with the Paying
Agent exceeds the aggregate amount required to repurchase the Notes, or portions
thereof, to be repurchased pursuant to the Offer to Purchase, the Paying Agent
shall promptly after the Business Day following the repurchase date, return such
excess to the Company.
(e) Upon the Expiration Date, the Company shall deliver to
the Paying Agent the Notes or portions thereof which have been properly tendered
to and are to be accepted by the Company. The Paying Agent shall, on the
repurchase date, mail or deliver payment to each tendering holder in the amount
of the purchase price with respect to the Notes tendered by such Holder and
accepted by the Company from the funds provided by the Company for such payment,
and the Company shall execute and the Paying Agent shall mail and deliver to
such Holder a new Note equal in amount to any unpurchased portion of the Note
surrendered.
(f) Holders electing to have a Note repurchased will be
required to surrender the Note, with an appropriate form duly completed, to the
Company at the
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<PAGE> 28
address specified in the notice on or prior to the Expiration Date. Holders will
be entitled to withdraw their election if the Paying Agent or the Company
receives on or prior to the Expiration Date, a written notice setting forth the
name of the Holder, the principal amount of the Note which was delivered for
purchase by the Holder and the statement that such Holder is withdrawing his
election to have such Note repurchased.
(g) At the time the Company delivers Note's to the Paying
Agent which are to be accepted for purchase, the Company will also deliver an
Officers' Certificate stating that such Notes are to be accepted by the Company
pursuant to and in accordance with the terms of this Section 7.5. A Note shall
be deemed to have been accepted for purchase at the time the Paying Agent,
directly or through an agent, mails or delivers payment therefor to the
surrendering Holder.
(h) The Company shall comply, to the extent applicable,
with the requirements of Section 14(e) of the Exchange Act and any other
securities laws or regulations in connection with the repurchase of Notes
pursuant to this Section 7.5.
(i) The Company will not, and will not permit any
Subsidiary to, create or permit to exist or become effective any restriction
that would materially impair the ability of the Company to make an Offer to
Purchase or, if such offer is made, to pay for Notes tendered for purchase.
7.6 TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any Subsidiary to, enter into any transaction or series of similar
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property, the rendering of any service or the making of any loan
or extension of credit) with, or make any payment or transfer to, any Affiliate,
unless:
(a) such transaction (or series of related transactions)
is entered into in the ordinary course of business and pursuant to the
reasonable requirements of the Company's or such Subsidiary's business; and
(b) such transaction or series of related transactions are
upon fair and reasonable terms no less favorable to the Company or such
Subsidiary than the Company or such Subsidiary would obtain in a comparable
arm's-length transaction from a Person who is not an Affiliate.
7.7 REPURCHASE OF NOTES. Neither the Company nor any Subsidiary
thereof, directly or indirectly, shall repurchase or make any offer to
repurchase any Note unless the offer has been made to repurchase Notes, pro
rata, from all Holders of the Notes at the same time and upon the same terms. In
case the Company or any Subsidiary thereof repurchases any Notes, such Notes
shall thereafter be cancelled and no Notes shall be issued in substitution
therefor.
- 23 -
<PAGE> 29
ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES
8.1 EVENT OF DEFAULT. Each of the following shall constitute an
Event of Default under this Agreement:
(a) The Company defaults in the payment of any interest
upon any of the Notes as and when the same shall become due and payable, and
continuance of such default for a period of five Business Days; or
(b) The Company defaults in the payment of the principal
of, or premium, if any, on any of the Notes as and when the same shall become
due and payable either at maturity or in connection with any redemption, by
declaration or otherwise; or
(c) Any representation or warranty made by the Company in
this Agreement shall prove to have been untrue in any material respect as of the
date of this Agreement or the Company fails to duly observe or perform any
covenant contained in Article VII; or
(d) The Company fails to duly observe or perform any other
of the covenants or agreements on the part of the Company set forth in the
Notes, in this Agreement or in any Warrant, and such failure shall have
continued for a period of 30 days after the date on which the Company obtains
knowledge of such failure irrespective of the source; or
(e) An event of default, as defined in any mortgage,
indenture or instrument under which there may be issued, or by which there may
be secured or evidenced, any Debt of the Company or a Subsidiary (whether such
Debt now exists or shall hereafter be created or incurred) shall occur and shall
(i) consist of a default in the payment of such Debt at the maturity thereof or
(ii) shall result in such Debt being declared due and payable prior to the date
on which it would otherwise become due and payable, and such default in payment
is not cured or such acceleration shall not be rescinded or annulled prior to
any period of grace provided with respect thereto; provided that it shall not be
an Event of Default if the principal amount of Debt which is not paid at
maturity or the maturity of which is accelerated is less than $1 million; and
provided, further, that if, prior to a declaration of acceleration of the
maturity of the Note or the entry of judgment in favor of the Holders in a suit,
such default shall be remedied or cured by the Company or waived by the holders
of such Debt, then the Event of Default hereunder by reason thereof shall be
deemed likewise to have been thereupon remedied, cured or waived without further
action upon the part of any of the Holders of the Notes; or
- 24 -
<PAGE> 30
(f) A court having jurisdiction over the Company shall
enter a decree or order for relief in respect of the Company in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or appoint a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Company or of substantially
all of its property or winding-up or liquidation of its affairs, and such decree
or order shall remain unstayed and in effect for a period of sixty consecutive
days; or
(g) The Company shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect or shall consent to the entry of an order for relief in an involuntary
case under any such law, or shall consent to the appointment of or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Company or of substantially all of its property, or
shall make any general assignment for the benefit of creditors; or
(h) A final judgment or judgments (after the expiration of
all times to appeal therefrom) for the payment of money in excess of an amount,
in the aggregate, equal to 25% of the total current assets minus the total
current liabilities of the Company (as determined in accordance with GAAP), as
such assets and liabilities are reflected in the most recent balance sheet of
the Company filed with the Commission, shall be rendered against the Company or
any Subsidiary of the Company unless the same shall be (i) fully covered by
insurance (subject to a reasonable deductible) and the insurer shall have
accepted liability therefor in writing or (ii) vacated, stayed, bonded, paid or
discharged within a period of 15 days from the date of such judgment.
If an Event of Default shall be continuing, then and in each and
every such case, unless the principal of all of the Notes shall have already
become due and payable, the Holders of not less than 25% in aggregate face
amount of the Notes then outstanding hereunder, by notice in writing to the
Company, may declare the Default Amount (as set forth below), and all accrued
and unpaid interest thereon, of all the Notes 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 Agreement or in the Notes contained to the
contrary notwithstanding; provided, however, that if an Event of Default under
clause (f) or (g) above shall have occurred, the Default Amount of all the
Notes, and all accrued and unpaid interest thereon, shall immediately become due
and payable, anything in this Agreement or in the Notes contained to the
contrary notwithstanding, without any declaration and without declaration,
demand, protest or other notice whatsoever, all of which are hereby waived.
Prior to November 1, 2002, the "Default Amount" in respect of any
particular Note as of any particular date shall be equal to the Accreted Value
of the Note
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<PAGE> 31
as of such date. On or after November 1, 2002, the Default Amount in respect of
any particular Note as of any particular date shall be equal to 100% of the
principal amount payable in respect of the Note at its Stated Maturity.
In case the Holders shall have proceeded to enforce any right
under this Agreement and such proceedings shall have been discontinued or
abandoned because of such rescission or annulment or for any other reason or
shall have been determined adversely to the Holders, then and in every such case
the Company and the Holders shall be restored respectively to their several
positions and rights hereunder, and all rights, remedies and powers of the
Company and the Holders shall continue as though no such proceeding had been
taken.
8.2 OTHER REMEDIES. If any Event of Default shall be continuing,
any Holder may enforce its rights by suit in equity, by action at law, or by any
other appropriate proceedings, whether for the specific performance (to the
extent permitted by law) of any covenant or agreement contained in this
Agreement or in the Notes or in aid of the exercise of any power granted in this
Agreement or in any of the Notes, and may enforce the payment of any Note held
by such Holder and any of its other legal or equitable rights.
8.3 CONDUCT NO WAIVER; COLLECTION EXPENSES. No course of dealing
on the part of any Holder, nor any delay or failure on the part of any Holder to
exercise any of its rights, shall operate as a waiver of such right or otherwise
prejudice such Holder's rights, powers and remedies. If the Company fails to
pay, when due, the principal of, the premium, if any, or the interest on any
Note, or if the Company fails to comply with any other provision of this
Agreement, the Company will pay to the Holders, to the extent permitted by law,
on demand, such further amounts as shall be sufficient to cover the cost and
expenses, including but not limited to reasonable attorneys' fees, incurred by
such Holders in collecting any sums due on the Notes or in otherwise enforcing
any of their rights.
8.4 REMEDIES CUMULATIVE. No right or remedy conferred upon or
reserved to the Purchaser of any Holder under this Agreement is intended to be
exclusive of any other right or remedy, an every right and remedy shall be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing under applicable law. Every right and remedy given by
this Agreement or by applicable law to the Purchaser or any Holder may be
exercised from time to time and as often as may be deemed expedient by the
Purchaser or such Holder, as the case may be.
8.5 COOPERATION BY THE COMPANY. To the extent that it lawfully
may, the Company agrees that it will not at any time insist upon or plead, or in
any manner whatever claim or take any benefit or advantage of any applicable
present or
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<PAGE> 32
future stay, extension or moratorium law, which may affect observance or
performance of the provisions of this Agreement or of any Security.
ARTICLE IX
DEFINITIONS.
9.1 PREVIOUS DEFINITIONS. The following terms have been elsewhere
defined in this Agreement and have the respective meanings assigned to them in
the indicated sections, and such terms, together with the other terms defined in
Section 9.2, shall include the singular as well as the plural: "Agreement,"
"Company" and "Purchaser," defined in the introductory paragraph; "Notes,"
"Warrants" and "Securities," defined in Section 1.1; "Closing Date," defined in
Section 1.2(b); "SEC Reports," defined in Section 2.1; "Note Register," defined
in Section 4.2; "Restricted Payments," defined in Section 7.3; "Change in
Control Right" and "Change in Control Expiration Date," defined in Section 7.4;
"Offer to Purchase" and "Expiration Date," defined in Section 7.5; "Default
Amount," defined in Section 8.1; "NASDAQ," defined in Section 9.2; "Senior
Representative," "Payment Blockage Period" and "Initial Blockage Period,"
defined in Section 11.3.
9.2 ADDITIONAL DEFINITIONS. Except as otherwise specified or as
the context may otherwise require, the following terms shall have the respective
meanings set forth below whenever used in this Agreement:
The term "Accreted Value" shall mean, for any Specified Date, the
amount provided below for each $1,000 principal amount at maturity of Notes
(which shall be calculated by the Company and communicated in writing to the
Purchaser and each Holder when required by the terms of this Agreement):
(a) if the Specified Date occurs on one of the following
dates (each a "Quarterly Accrual Date"), the Accreted Value will equal the
amount set forth below for such Quarterly Accrual Date:
<TABLE>
<CAPTION>
Quarterly Accrual Date Accreted Value
---------------------- --------------
<S> <C>
February 1, 1998 $ 520.16
May 1, 1998 $ 538.36
August 1, 1998 $ 557.20
November 1, 1998 $ 576.71
February 1, 1999 $ 596.89
May 1, 1999 $ 617.78
August 1, 1999 $ 639.40
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
Quarterly Accrual Date Accreted Value
---------------------- --------------
<S> <C>
November 1, 1999 $ 661.78
February 1, 2000 $ 684.95
May 1, 2000 $ 708.92
August 1, 2000 $ 733.73
November 1, 2000 $ 759.41
February 1, 2001 $ 785.99
May 1, 2001 $ 813.50
August 1, 2001 $ 841.97
November 1, 2001 $ 871.44
February 1, 2002 $ 901.94
May 1, 2002 $ 933.51
August 1, 2002 $ 966.18
November 1, 2002 $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first
Quarterly Accrual Date, the Accreted Value will equal the sum of (a) $501.20 and
(b) an amount equal to the product of (1) the Accreted Value for the first
Quarterly Accrual Date less $501.20 multiplied by (2) a fraction, the numerator
of which is the number of days from the date of issue of the Notes to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days from the date of issue of the Notes
to the first Quarterly Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if the Specified Date occurs between two Quarterly
Accrual Dates, the Accreted Value will equal the sum of (a) the Accreted Value
for the Quarterly Accrual Date immediately preceding such Specified Date and (b)
an amount equal to the product of (1) the Accreted Value for the immediately
following Quarterly Accrual Date less the Accreted Value for the immediately
preceding Quarterly Accrual Date multiplied by (2) a fraction, the numerator of
which is the number of days from the immediately preceding Quarterly Accrual
Date to the Specified Date, using a 360-day year of twelve 30-day months, and
the denominator of which is 90; or
(iv) if the Specified Date occurs after the last Quarterly
Accrual Date, the Accreted Value will be equal to $1,000.
The term "Affiliate" shall mean, any Person, directly or
indirectly, controlling, controlled by or under direct or indirect common
control with the Company or a Subsidiary. For purposes of this definition, a
Person shall be deemed to control another Person if the controlling Person owns
10% or more of any class of voting securities of the controlled Person or
possesses, directly or indirectly, the power to direct or cause the direction of
the management or policies of the controlled Person, whether
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<PAGE> 34
through ownership of stock, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
The term "Asset Sale" shall mean, if the Company and/or its
Subsidiaries sell, lease, convey, transfer or otherwise dispose of (including,
without limitation, by saleleaseback, merger or consolidation, and whether by
operation of law or otherwise) all or substantially all of the assets of the
Company and its Subsidiaries, taken as a whole. An Asset Sale shall not include
a sale, lease, conveyance, transfer or other disposition by the Company or any
of its Subsidiaries to any wholly-owned Subsidiary of the Company or by any
Subsidiaries to the Company.
The term "Bankruptcy Law" shall mean Title 11, United States
Bankruptcy Code of 1978, as amended, or any similar United States Federal or
state law relating to bankruptcy, insolvency, receivership, winding-up,
liquidation, reorganization or relief of debtors or any amendment to, succession
to or change in any such law.
The term "Board of Directors" shall mean the board of directors
of the Company or any duly authorized committee thereof.
The term "Board Resolution" shall mean 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.
The term "Business Day" shall mean any day other than a Saturday,
a Sunday or other day on which banking institutions or trust companies in the
State of New York are not required to be open.
The term "Capital Stock" of any Person shall mean any and all
shares, interests (including partnership interests), rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into or exchangeable for such equity.
The terms "Cash Equivalents" shall mean (A) any security,
maturing not more than six months after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof and guaranteed
fully as to principal, premium, if any, and interest by the United States of
America, (B) any certificate of deposit, time deposit, Eurodollar time deposit
or bankers' acceptance, maturing not more than six months after the date of
acquisition, issued by any lender who was a commercial banking institution that
is a member of the Federal Reserve System and that has combined capital and
surplus of not less than $100 million, whose debt has a rating, at the time as
of which any investment therein is made, of "P-1" (or higher) according to
Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or
higher) according to
- 29 -
<PAGE> 35
Standard & Poor's Corporation or any successor rating agency, (C) commercial
paper, maturing not more than three months after the date of acquisition, issued
by any lender who was a corporation (other than an Affiliate or Subsidiary of
the Company) organized and existing under the laws of the United States of
America with a rating, at the time as of which any investment therein is made,
of "P-1" (or higher) according to Moody's Investors Service, Inc. or any
successor rating agency, or "A-1" (or higher) according to Standard & Poor's
Corporation or any successor rating agency, and (D) any security, on the date of
acquisition by any Person, that is listed on any national securities exchange or
trades of which are reported on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ").
The term "Change of Control" shall mean an event or series of
events by which (i) any "person" (as such term is used in sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all shares that any such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the aggregate
voting power of all the Capital Stock of the Company normally entitled to vote
in the election of directors; or (ii) individuals who on the date of this
Agreement constituted the Board of Directors of the Company (together with any
new or replacement directors whose election by such Board or whose nomination
for election by the stockholders was approved by a vote of a majority of the
directors then still in office who were either directors on the date of this
Agreement or whose election or nomination was previously so approved) shall
cease for any reason to constitute a majority of the Board of Directors then in
office.
The term "Code" shall mean the Internal Revenue Code of 1986, as
amended.
The term "Commission" shall mean the Securities and Exchange
Commission and any other similar or successor agency of the federal government
administering the Securities Act or the Exchange Act.
The term "Common Stock" shall mean, when used with reference to
the Capital Stock of the Company, the class of stock which, on the date of this
Agreement, is designated as common stock of the Company and stock of any class
or classes into which such common stock or any such other class may thereafter
be changed or reclassified.
The term "Company" shall mean Isis Pharmaceuticals, Inc., a
Delaware corporation and its permitted successors and assigns.
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The term "Credit Agreement" shall mean that certain $40 million
Collaboration Agreement, dated as of July 18, 1995 between the Company, as
borrower, and Boehringer, as lender, as the same may be amended, restated,
supplemented or otherwise modified from time to time.
The term "Debt" of any Person shall mean at any date, without
duplication, (i) all obligations of such Person for borrowed money, (ii) all
obligations of such Person evidenced by bonds, debentures, notes, letters of
credit or other similar instruments, (iii) all obligations of such Person to pay
the deferred purchase price of property or services, or arising under any
conditional sales or title retention agreement with respect to property acquired
by such Person, except accounts payable arising in the ordinary course of
business, (iv) all obligations of such Person as lessee under capital leases (in
the amount reflected on the balance sheet of such Person, prepared in accordance
with GAAP), (v) all Debt of others Guaranteed by such Person, (vi) all
obligations, contingent or otherwise, in connection with letters of credit,
acceptance facilities or similar facilities, and (vii) to the extent not
otherwise included, obligations under (x) any interest rate protection
agreement, interest rate swap, interest rate cap or other interest rate hedge
agreement, to or under which such Person is a party (but only to the extent of
any net credit exposure thereunder) or (y) any forward foreign exchange
contract, currency swap agreement or other similar agreement or arrangement
designed to protect such Person against fluctuations in currency values (but
only to the extent of any net credit exposure thereunder).
The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
The term "ERISA Affiliate" shall mean any corporation, trade or
business that is under common control with the Company or is a member of a
controlled group of corporations or an affiliated service group or a controlled
group of trades or businesses, as described in Sections 414(b), 414(c) or 414(m)
of the Code or Section 4001(a)(14) of ERISA.
The term "Event of Default" shall mean any event specified in
Section 8.1, continued for the period of time, if any, and after the giving of
notice, if any, therein designated.
The term "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
The term "Exchangeable Stock" shall mean any Capital Stock of a
Person which is exchangeable or convertible into another security (other than
Capital Stock of such Person which is neither Exchangeable Stock nor Redeemable
Stock).
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The term "Fair Market Value" shall mean, with respect to any
asset or property, the sale value that would be obtained in an arm's length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy.
The term "GAAP" shall mean generally accepted accounting
principles in the United States in effect from time to time, consistently
applied.
The term "GAAP Consolidated Adjusted Net Worth" of any Person
shall mean, at any date, all amounts which would, in conformity with GAAP, be
included under shareholders' equity on a consolidated balance sheet of such
Person as at such date, after deducting therefrom goodwill, including any
amounts (however designated on the balance sheet) representing the cost of
acquisitions of Subsidiaries in excess of underlying tangible assets.
The term "Guarantee" by any Person shall mean, without
duplication, any obligation, contingent or otherwise, of such Person directly or
indirectly guaranteeing any Debt or other obligation of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase of payment of) such Debt or other
obligation (whether arising by virtue of partnership arrangements, by agreement
to purchase assets, goods, securities or services, to take-or-pay, to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
The term "Holder, of Notes, or other similar terms, shall mean
any Person in whose name at the time a particular Note is registered on the
books of the Company kept for that purpose in accordance with the terms hereof.
The term "Imperial Bank Note Agreement" shall mean those certain
Promissory Notes Secured by a Deed of Trust for an aggregate amount equal to
$9.7 million dated as of March 24, 1997 between the Company, as borrower, and
Imperial Bank, as lender, as the same may be amended, restated, supplemented or
otherwise modified from time to time.
The term "incur" (including the correlative terms "incurred",
"incurring", "incurs", and "incurrence"), when used with respect to any Debt,
shall mean create, incur, assume, guarantee or in any manner become liable in
respect of (including, without limitation, by operation of law) such Debt.
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The term "Intellectual Property" shall mean all patents, patent
rights and applications, inventions, trade secrets, know-how, proprietary
techniques, including processes and substances, trademarks, service marks, trade
names, copyrights and licenses described or referred to in the SEC Reports or
owned or used by the Company and the Subsidiaries or which, to the Company's
knowledge after reasonable inquiry, are necessary for the conduct of their
business as it is presently conducted, or as proposed to be conducted.
The term "Interest Payment Date" shall mean each quarterly
interest payment date on February 1, May 1, August I and November 1, of each
year, commencing on February 1, 2003.
The term "Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority, or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any conditional sale or title retention agreement, any financing
lease having substantially the same economic effect as any of the foregoing, and
the filing of, or agreement to give, any financing statement perfecting a
security interest under the Uniform Commercial Code of any jurisdiction, other
than a protective filing filed in connection with a true lease or a filing in
connection with a financing lease which is not required to be capitalized on a
balance sheet in accordance with GAAP on the basis of immateriality) with
respect to any property of the Company or the Subsidiaries, real or personal,
movable or immovable, now owned or hereinafter acquired.
The term "Net Available Proceeds" from any Asset Sale shall mean
cash or Cash Equivalents received therefrom by the Company and/or its
Subsidiaries, net of (i) all legal, title and recording tax expenses,
commissions and other fees and expenses incurred and all Federal, state, foreign
and local taxes required to be accrued as a liability as a consequence of such
Asset Sale, (ii) all payments made by the Company or its Subsidiaries to pay or
repay Debt of the Company or any Subsidiary to the extent the terms of governing
documents therefor require such repayment or prohibit the purchase of the Notes,
(iii) all payments made by the Company or its Subsidiaries on any Debt which is
secured by such assets in accordance with the terms of any Lien upon or with
respect to such assets or which must by the terms of such lien, in order to
obtain a necessary consent to such Asset Sale or by applicable law, be repaid
out of the proceeds from such Asset Sale, (iv) all distributions and other
payments made to minority interest holders in subsidiaries of the Company or
joint ventures as a result of such Asset Sale and (v) appropriate amounts to be
provided by the Company or any Subsidiary thereof, as the case may be, as a
reserve in accordance with GAAP against any liabilities associated with such
assets and retained by the Company or any Subsidiary thereof, as the case may
be, after such Asset Sale, including, without limitation, liabilities under any
indemnification
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obligations and severance and other employee termination costs associated with
such Asset Sale, in each case as determined by the Board of Directors of the
Company or Subsidiary, in its reasonable good faith judgment evidenced by a
resolution of such Board of Directors.
The term "Non-payment Default" shall mean any event (other than a
Payment Default) the occurrence of which entitles one or more Persons to
accelerate the maturity of any Senior Indebtedness.
The term "Officers' Certificate" when used with respect to the
Company, shall mean a certificate signed by any two of the Chief Executive
Officer, the President, the Executive Vice President or the Vice
President-Finance of the Company.
The term "Opinion of Counsel" shall mean a written opinion of
counsel, who may be legal counsel for the Company, and who shall be acceptable
to the Holders of not less than 51% in aggregate principal amount of the Notes
then outstanding.
The term "Paying Agent" shall mean any state or national bank or
trust company organized under the laws of the United States or any state thereof
or the District of Columbia and having capital, surplus and undivided profits
aggregating at least $100 million and which has been appointed by the Company
as paying agent under this Agreement.
The term "PBGC" shall mean the Pension Benefit Guaranty
Corporation, or any successor thereto.
The term "Payment Default" shall mean any default in the payment
of any amount of Senior Indebtedness as and when due whether at maturity, by
acceleration, upon a date set for prepayment or otherwise, including principal,
premium, if any, interest, commitment fees, letter of credit fees or
reimbursement obligations in respect of letters of credit under Senior
Indebtedness.
The term "Permitted Junior Securities" shall mean (so long as the
effect of any exclusion employing this definition is not to cause or permit the
Notes (or any securities proposed to be issued as "Permitted Junior Securities")
to be treated in any case or proceeding or similar event described in clause
(a), (b) or (c) of Section 11.2 as part of the same class of claims as the
Senior Indebtedness or any class of claims pari passu with, or senior to, the
Senior Indebtedness, for any payment or distribution) debt or equity securities
of the Company (or any successor corporation) that are provided for by a plan of
reorganization or readjustment and that are subordinated at least to the same
extent that the Notes are subordinated to the payment of all Senior Indebtedness
then outstanding; provided that (1) if a new corporation results from such
reorganization or readjustment, such corporation assumes any Senior Indebtedness
not paid in full in cash or, as
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acceptable to the holders of Senior Indebtedness, in any other manner in
connection with such reorganization or readjustment and (2) the rights of the
holders of such Senior Indebtedness are not, without the consent of such
holders, altered by such reorganization or readjustment.
The term "Person" shall mean any natural person, corporation,
partnership, trust, association, governmental authority or unit, or any other
entity, whether acting in an individual, fiduciary or other capacity.
The term "Plan" shall mean any multiemployer plan or single
employer plan, as defined in Section 4001 of ERISA that is subject to Title IV
of ERISA.
The term "Preferred Stock," as applied to the Capital Stock of
any corporation, shall mean Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such corporation, over shares of Capital Stock of any other class
of such corporation.
The term "Prospectus" shall mean the prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the Notes or the
Warrant Shares, pursuant to any registration, as the case may be, covered by the
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
The term "Redeemable Stock" shall mean any Capital Stock that by
its terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), upon the happening of any event or otherwise matures
or its required to be redeemed, in whole or in part, on or prior to the first
anniversary of the Stated Maturity of the Notes or is redeemable at the option
of the holder thereof, in whole or in part, at any time on or prior to the first
anniversary of the Stated Maturity of the Notes.
The term "Redemption Date", when used with respect to any Note to
be redeemed, shall mean the date fixed for such redemption by or pursuant to
this Agreement.
The term "Redemption Price", when used with respect to any Note
to be redeemed, shall mean the price at which it is to be redeemed pursuant to
this Agreement.
The term "Registrable Securities" shall mean any Notes. As to any
particular Registrable Securities once issued, such securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been
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disposed of in accordance with such registration statement, (ii) such securities
shall have been distributed to the public pursuant to Rule 144 (or any successor
provision) under the Securities Act, (iii) such securities shall have been
otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent disposition of them shall not require registration or qualification
of them under the Securities Act, or (iv) such securities shall have ceased to
be outstanding.
The term "Registration Expenses" shall mean any and all expenses
incident to performance of or compliance with Article X, including, without
limitation, (i) all Commission and stock exchange or National Association of
Securities Dealers, Inc. registration, filing fees and listing expenses, (ii)
all fees and expenses of complying with securities or blue sky laws (including
reasonable fees and disbursements of counsel for any underwriters in connection
with blue sky qualifications of any Registrable Securities), (iii) all printing,
messenger and delivery expenses, (iv) the fees and disbursements of counsel for
the Company and of its independent public accountants, including the expenses of
any special audits and/or "cold comfort" letters required by or incident to such
performance and compliance, (v) the fees and disbursements of counsel retained
in connection with such registration by the holders of a majority (by number of
shares) of the Registrable Securities being registered, and (vi) any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities, including the fees and expenses of any special experts retained in
connection with the requested registration.
The term "Registration Statement" shall mean any registration
statement of the Company which covers any of the Notes or the Warrant Shares
pursuant to the provisions of this Agreement, including the Prospectus,
amendments and supplements to such Registration Statement, including
post-effective amendments, and all exhibits and all material incorporated by
reference in such Registration Statement.
The term "Regular Record Date" for the interest payable on any
Interest Payment Date shall mean the January 15, April 15, July 15 and October
15 (whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date.
The term "Securities Act" shall mean the Securities Act of 1933,
as amended.
The term "Senior Indebtedness" shall mean the principal of,
premium, if any, and interest (including interest accruing after the filing of a
petition initiating any proceeding under any state, federal or foreign
bankruptcy laws whether or not allowable in such proceeding) on any Debt of the
Company (other than as otherwise provided in this definition), whether
outstanding on the date of this Agreement or thereafter created, incurred or
assumed, and whether at any time owing, actually or contingent, unless, in the
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case of any particular Debt, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such Debt
shall not be senior in right of payment to the Notes. Without limiting the
generality of the foregoing, "Senior Indebtedness" shall include the principal
of, premium, if any, and interest (including interest accruing after the filing
of a petition initiating any proceeding under any state, federal or foreign
bankruptcy laws whether or not allowable in such proceeding) on all monetary
obligations of every kind and nature of the Company from time to time owed under
the (i) Credit Agreement and (ii) Imperial Bank Note Agreement, including fees,
reimbursement obligations in respect of letters of credit (or guarantees
thereof) and indemnity and expense reimbursement obligations thereof; provided,
however, that any Debt under any refinancing, refunding, or replacement of the
Credit Agreement shall not constitute Senior Indebtedness to the extent that the
Debt thereunder is by its express terms subordinate to the Notes.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) any
Debt that expressly provides that it is subordinate or junior in right of
payment to the Notes, (ii) any liability for foreign, federal, state, local or
other taxes owed or owing by the Company, (iii) any Debt of the Company to a
Subsidiary or any other Affiliate of the Company or any of such Affiliate's
subsidiaries and (iv) that portion of any Debt which at the time of incurrence
is issued in violation of this Agreement.
The term "Specified Date" means any Redemption Date, any payment
date for an Offer to Purchase pursuant to Section 7.4 or Section 7.5 or any date
on which the Notes are due and payable after an Event of Default.
The term "Stated Maturity" shall mean, with respect to any
security, the date specified in such security as the fixed date on which the
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency).
The term "Subordinated Indebtedness" shall mean Debt which is
subordinate in right of payment and on liquidation to the Notes.
The term "Subsidiary" shall mean, with respect to any Person, any
corporation or entity of which a majority of the Capital Stock or other
ownership interests having ordinary voting power to elect a majority of the
Board of Directors or other Persons performing similar functions is at the time
directly or indirectly owned by such Person and/or by one or more other
Subsidiaries. Unless the context otherwise requires, the term "Subsidiary" as
used herein, means a Subsidiary of the Company.
The term "Temporary Cash Investment" shall mean (A) any evidence
of Debt, maturing not more than one year after the date of acquisition, issued
by the United
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States of America, or an instrumentality or agency thereof and guaranteed fully
as to principal, premium, if any, and interest by the United States of America,
(B) any certificate of deposit, maturing not more than one year after the date
of acquisition, issued by, or time deposit of, any lender who was a commercial
banking institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than $100
million, whose debt has a rating, at the time as of which any investment therein
is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or
any successor rating agency, or "A-1" (or higher) according to Standard &
Poor's Corporation or any successor rating agency, (C) commercial paper,
maturing not more than one year after the date of acquisition, issued by any
lender who was a corporation (other than an Affiliate or Subsidiary of the
Company) organized and existed under the laws of the United States of America
with a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's Investors Service, Inc. or any
successor rating agency, or "A-1" (or higher) according to Standard & Poor's
Corporation or any successor rating agency, and (D) any money market deposit
accounts issued or offered by any lender who was an original signatory to the
Credit Agreement or a domestic commercial bank having capital and surplus in
excess of $100 million.
The term "Trust Indenture Act" shall mean the Trust Indenture Act
of 1939, and any similar or successor federal statute, and the rules and
regulations of the Commission thereunder, all as the same may be in effect at
the time.
The term "Warrant Shares" shall have the meaning specified in the
Warrants.
9.3 ACCOUNTING PRINCIPLES. The character or amount of any asset,
liability, capital account or reserve and of any item of income or expense
required to be determined pursuant to this Agreement, and any consolidation or
other accounting computation required to be made pursuant to this Agreement, and
the construction of any definition in this Agreement containing a financial
term, shall be determined or made, as the case may be, in accordance with GAAP,
to the extent applicable, unless such principles are inconsistent with the
express requirements of this Agreement.
9.4 DIRECTLY OR INDIRECTLY. If any provision in this Agreement
refers to any action taken or to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such Person, whether or not expressly
specified in such provision.
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ARTICLE X
REGISTRATION RIGHTS
10.1 REGISTRATION REQUESTED BY THE HOLDERS. (1) At any time and from time
to time after the date hereof, Holders of Registrable Securities shall have the
right to request to the Company to effect the registration under the Securities
Act of all or part of such Holders' Registrable Securities. Upon receipt of such
request, the Company shall promptly give notice of such proposed registration to
all Holders and thereupon shall, as expeditiously as possible, use its best
efforts to effect the registration under the Securities Act of.
(i) all Registrable Securities which the Company has been
requested to register pursuant to clause (1) of this Section 10.1; and
(ii) all other Registrable Securities which Holders have,
within 20 days after the Company has given such notice, requested the
Company to register;
all to the extent requisite to permit the sale or other disposition by the
Holders of the Registrable Securities so to be registered.
(2) If the managing underwriter of the public offering to be
effected pursuant to a registration statement filed pursuant to this clause (1)
of Section 10.1 shall advise the Company in writing (with a copy to each holder
of Registrable Securities requesting registration) that, in its opinion, the
number of securities requested to be included in such registration (including
securities of the Company which are not Registrable Securities) exceeds the
number which can be sold in such offering, the Company will include in such
registration to the extent of the number which the Company is so advised can be
sold in such offering:
(i) first, Registrable Securities requested to be included
in such registration by the Holders pursuant to clauses (i) and (ii) of
Section 10.1, pro rata among such Holders on the basis of the number of
shares of Registrable Securities requested to be included by each; and
(ii) second, other securities of the Company proposed to be
included in such registration, in accordance with the priorities, if any,
then existing among the Company and the holders of such other securities.
(3) Notwithstanding the foregoing, in the event that the Company
proposes to include newly issued securities in any registration statement and
offering pursuant to clause (1) of this Section 10.1 and such securities would
be excluded from
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such offering by operation of the priority provisions set forth above, the
Company may elect to cause such registration statement to be filed under Section
10.2; provided, however, that the Company may make such election no more than
once. In the event that the Company makes such election, all of the provisions
of Section 10.2 shall apply to such registration and such registration shall not
be deemed to be a registration pursuant to Section 10.1.
(4) The Holders requesting inclusion in a registration statement
under this Section 10.1 may withdraw from any requested registration pursuant
to this Section 10.1 by giving written notice to the Company prior to the
filing date of such registration statement; provided, however, that for a
period of three months after such withdrawal, such Holders may not request any
registration pursuant to this Section 10.1.
(5) The Company shall not be required to effect more than a total
of two effective registrations under this Section 10.1.
(6) The Company shall not be required to effect a registration
pursuant to this Section 10.1 unless the offering includes at least $12.5
million aggregate face amount of Registrable Securities.
10.2 "PIGGYBACK" REGISTRATIONS. If the Company at any time proposes to
register any of its securities under the Securities Act (other than pursuant to
Section 10.1) on a registration statement on Form S-1, S-2 or S-3 or on any
other form upon which may be registered securities similar to the Registrable
Securities for sale to the general public, the Company will at each such time
give prompt notice to all Holders of its intention to do so setting forth the
date on which the Company proposes to file such registration statement, which
date shall be no earlier than 30 days from the date of such notice, and
advising each such Holder of its right to have its Registrable Securities
included therein. Upon the written request of any Holder given to the Company
not less than 5 days prior to the proposed filing date of such registration
statement set forth in such the Company notice, the Company will use its best
efforts to cause each of the Registrable Securities which the Company has been
requested to register by such Holder to be registered under the Securities Act.
If the securities to be so registered for sale include securities to be sold for
the account of the Company and to be distributed by or through a firm of
underwriters of recognized standing under underwriting terms appropriate for
such transaction, then the Registrable Securities shall also be included in such
underwriting, provided that if, in the reasonable written opinion of the
managing underwriter or underwriters, the total amount of such securities to be
so registered, when added to such Registrable Securities, will exceed the
maximum amount of the Company securities which can be marketed (i) at a price
reasonably related to their then current market value, or (ii) without otherwise
materially and adversely affecting the entire
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offering, the Company will include in such registration to the extent of the
number which the Company is so advised can be sold in such offering securities
determined as follows:
(1) if such registration as initially proposed by the Company was
solely a primary registration of its securities:
(i) first, the securities proposed by the Company to be sold
for its own account,
(ii) second, any Registrable Securities requested to be
included in such registration pro rata among the holders of such
Registrable Securities and the holders of such other securities of the
Company on the basis of the number of Registrable Securities and other
securities of the Company requested to be included by each such holder,
and
(iii) third, any other securities of the Company proposed to
be included in such registration statement in accordance with the
provisions, if any, then existing among the holders of such securities,
and
(2) if such registration as initially proposed by the Company was
in whole or in part requested by holders of securities of the Company, other
than holders of Registrable Securities, pursuant to demand registration rights,
(i) first, such securities held by the holders initiating
such registration, pro rata among the holders thereof, on the basis agreed
upon by such holders and the Company,
(ii) second, Registrable Securities requested to be included
in such registration pro rata among the holders of such Registrable
Securities and the holders of such other securities on the basis of the
number of Registrable Securities and other securities of the Company
requested to be included by each such holder, and
(iii) third, any other securities of the Company proposed to
be included in such registration statement in accordance with the
priorities, if any, then existing among the holders of such securities.
Each Holder for the account of which any Registrable Securities shall be
included in such underwriting shall agree not to sell any other Registrable
Securities then held by such Holder until 120 days after the effective date of
such registration statement, except that such Holder may sell such other
Registrable Securities in private transactions within such period to transferees
who agree not to sell such securities within the remainder of such
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120-day period. Any registration of Registrable Securities pursuant to this
Section 10.2 shall have no effect on any registration pursuant to Section 10.1.
10.3 THE COMPANY'S OBLIGATIONS IN REGISTRATION. If and whenever the
Company is obligated by the provisions of this Article X to use its best efforts
to effect the registration of any Registrable Securities under the Securities
Act, as expeditiously as possible the Company will:
(1) prepare and file with the Commission, as expeditiously as
possible within 60 days after the initial request from Holders to register such
Registrable Securities, a registration statement with respect to such
Registrable Securities and use its best efforts to cause such registration
statement to become effective within 120 days after such initial request and to
remain effective; provided, however, that the Company shall not be required to
keep such registration statement effective, or to prepare and file any
amendments or supplements thereto, later than 5 P.M., Eastern Time, on the last
Business Day of the ninth month following the date on which such registration
statement becomes effective under the Securities Act or such longer period
during which the Commission requires that such registration statement be kept
effective with respect to any of the Registrable Securities so registered;
(2) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with provisions of the Securities Act with respect to the disposition
of all Registrable Securities covered by such registration statement whenever
the Holders for whom such Registrable Securities are registered or are to be
registered shall desire to dispose of the same, subject, however, to the proviso
contained in the immediately preceding clause (1);
(3) furnish to the Holders for whom such Registrable Securities
are registered or are to be registered, such numbers of copies of a printed
prospectus, including a preliminary prospectus and any amendments or supplements
thereto, in conformity with the requirements of the Securities Act, and such
other documents and information as such Holders may reasonably request in order
to facilitate the disposition of such Registrable Securities or in order to
conduct any investigation of the Company in connection with the registration of
such Registrable Securities;
(4) use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holders for whom such Registrable
Securities are registered or are to be registered shall request, and do any and
all other acts and things which may be necessary or advisable to enable such
Holders to consummate the disposition in such jurisdictions of such Registrable
Securities except that the Company
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shall not for any purpose be required to (i) qualify generally to do business as
a foreign corporation in any jurisdiction wherein it would not but for the
requirements of this clause (4) be obligated to be so qualified, (ii) subject
itself to taxation in any such jurisdiction or (iii) consent to general service
of process in any such jurisdiction unless the Company is already subject to
service of process in such jurisdiction;
(5) furnish to the Holders for whom such Registrable Securities
are registered or are to be registered at the time of the disposition of such
Registrable Securities by such Holders a signed copy of an opinion of counsel
for the Company acceptable to such Holders as to such matters as such Holders
may request and substantially to the effect that, a registration statement
covering such Registrable Securities has been filed with the Commission under
the Securities Act and has been made effective by order of the Commission; said
registration statement and the prospectus contained therein comply as to form in
all material respects with the requirements of the Securities Act and, based
upon such investigation and inquiry as said counsel deems necessary or
appropriate, nothing has come to said counsel's attention which would cause it
to believe that either said registration statement or said prospectus contains
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein (in
the case of said prospectus, in the light of the circumstances under which they
were made) not misleading; said counsel knows of no legal or governmental
proceedings required to be described in said prospectus which are not described
as required, or of any contract or documents of a character required to be
described in said registration statement or said prospectus or to be filed as an
exhibit to said registration statement or to be incorporated by reference
therein which is not described and filed as required; no stop order has been
issued by the Commission suspending the effectiveness of such registration
statement and that, to the best of such counsel's knowledge, no proceedings for
the issuance of such a stop order are threatened or contemplated; and the
applicable provisions of the securities or blue sky laws of each state in which
the Company shall be required, pursuant to clause (4) of this Section, to
register or qualify such Registrable Securities, have been complied with,
assuming the accuracy and completeness of the information furnished to such
counsel with respect to each filing relating to such laws; it being understood
that said counsel may rely, as to all factual matters and financial data treated
therein, on certificates of the Company (copies of which shall be delivered to
such Holders), and as to all questions of the laws of each state in which the
Company shall be so required to register or qualify such Registrable Securities,
on the opinion of counsel from such state reasonably acceptable to such Holders,
copies of which shall be delivered to such Holders;
(6) immediately notify each Holder for whom such Registrable
Securities are covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as
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then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made, and at the request of any such Holder promptly prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made;
(7) advise each Holder of Registrable Securities covered by such
Registration Statement, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such Registration Statement or the initiation or
threatening of any proceeding for that purpose; and use its reasonable efforts
to comply with all applicable rules and regulations of the Commission, and make
generally available to the Holders of any Registrable Securities covered by such
Registration Statement, earnings statements satisfying the provisions of Section
11(a) of the Securities Act, no later than forty-five (45) days after the end
of any twelve (12) month period (or ninety (90) days, if such period is a fiscal
year) (a) commencing at the end of any fiscal quarter in which Securities are
sold to underwriters in an underwritten offering, or (b) if not sold to
underwriters in such an offering, beginning with the first day of the month of
the Company's first fiscal quarter commencing after the effective date of a
Registration Statement;
(8) permit any Holder holding Registrable Securities covered by
such Registration Statement or Prospectus to withdraw their Registrable
Securities from such Registration Statement or Prospectus if such Holder has
informed the Company that it believes that such amendment or supplement does not
comply in all material respects with the requirements of the Securities Act or
the rules and regulations thereunder, after having been furnished with a copy
thereof at least five (5) business days prior to the filing thereof;
(9) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
Holders of a majority in aggregate face amount of the Registrable Securities
being sold or the underwriters retained by such Holders, if any, reasonably
request in order to expedite or facilitate the disposition of such Registrable
Securities, including customary opinions and indemnification;
(10) make available for inspection by any Holder of any Registrable
Securities covered by such Registration Statement, any underwriter participating
in any disposition pursuant to such Registration Statement, and any attorney,
accountant or other
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agent retained by any such Holder or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate documents
and properties of the Company and its subsidiaries (collectively, the
"Records"), if any, as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, and cause the Company's and its
subsidiaries' directors, officers and employees to supply all information and
respond to all inquiries reasonably requested by any such Inspector in
connection with such Registration Statement. Holders of Registrable Securities
agree that Records and other information which the Company determines in good
faith to be confidential, and of which determination the Inspectors and Holders
are so notified, shall not be disclosed by the Inspectors or the Holders unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in the Registration Statement or (b) the release of
such Records is required pursuant to a subpoena or court order. Holders of
Registrable Securities agree that they will, upon learning that disclosure of
the Records is being sought in a court of competent jurisdiction or by a
government agency, give prompt notice to the Company and allow the Company to
undertake appropriate action to prevent disclosure of the Records deemed
confidential;
(11) if requested by the managing underwriters or a Holder of
Registrable Securities being sold in connection with an underwritten offering,
promptly incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters and the Holders of a majority in
aggregate face amount of the Registrable Securities being sold agree should be
included therein relating to the plan of distribution with respect to such
Registrable Securities including, without limitation, information with respect
to the securities being sold to such underwriters, the purchase price being paid
therefor by such underwriters and with respect to any other terms of the
underwritten offering of the Registrable Securities to be sold in such offering;
and make all required filings of such Prospectus supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; and
(12) obtain a CUSIP number for all Registrable Securities (unless
already obtained) not later than the Effective Date.
10.4 PAYMENT OF REGISTRATION EXPENSES. The Company shall pay all
Registration Expenses in connection with each registration pursuant to this
Article X.
10.5 INFORMATION FROM HOLDERS. Notices and requests delivered by Holders
to the Company pursuant to this Article X shall contain such information
regarding the Registrable Securities to be so registered and the intended method
of disposition thereof as shall reasonably be required in connection with the
action to be taken.
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10.6 INDEMNIFICATION.
(1) Indemnification by the Company. In the event of any
registration under the Securities Act of any Registrable Securities pursuant to
this Article X, the Company hereby agrees to indemnify and hold harmless each
Holder disposing of such Registrable Securities, its respective agents,
directors and officers, each other person, if any, who controls (within the
meaning of the Securities Act) such Holder and each other person (including
underwriters) who participates in the offering of such Registrable Securities,
against any losses, claims, damages or liabilities, to the extent that such
losses, claims, damages or liabilities (or proceedings in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement, on the effective date
thereof, under which such Registrable Securities were registered under the
Securities Act, in any preliminary prospectus or final prospectus contained
therein or in any amendment or supplement to any preliminary prospectus or final
prospectus (if used during the period the Company is required to keep such
registration statement current in any such case), or arise out of or are based
upon 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,
and will reimburse such Holder, such agents, directors and officers and each
such controlling person or participating person (including underwriters) for any
legal or any other expenses reasonably incurred by such Holder, such agents,
directors and officers or such controlling person or participating person
(including underwriters) in connection with investigating or defending any such
loss, claim, damage, liability or proceeding, provided, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in such registration
statement, said preliminary or final prospectus or said amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder or such controlling or
participating person (including underwriters), as the case may be, specifically
for use in the preparation of such registration statement; and provided,
further, that, with respect to any untrue statement or omission or alleged
untrue statement or omission made in any preliminary prospectus, the Company
will not be liable to any Holder to the extent that any loss, claim, damage,
liability or expense results from the fact that a current copy of the final
prospectus was not sent or given to the Person asserting any such loss, claim,
damage, liability or expense at or prior to the written confirmation of the sale
of the Registrable Securities concerned to such Person if it is determined that
it was the responsibility of such Holder to provide such Person with a current
copy of the final prospectus and such current copy of the final prospectus was
provided to such Holder and would have cured the defect giving rise to such
loss, claim, damage, liability or expense. The Company agrees to provide for
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contributions relating to such indemnification as shall be reasonably requested
by any Holder disposing of any Registrable Securities or by any such
underwriter.
(2) Indemnification by Holders. Each such Holder hereby agrees to
indemnify and hold harmless the Company, its respective agents, directors and
officers, each other person, if any, who controls (within the meaning of the
Securities Act) the Company and each other person (including underwriters) who
participates in the offering of such Registrable Securities, against all losses,
claims, damages and liabilities to which the Company may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement of any material
fact contained in any such registration statement, on the effective date
thereof, under which such Registrable Securities were registered under the
Securities Act, in any preliminary prospectus or final prospectus contained
therein or in any amendment or supplement to any preliminary prospectus or final
prospectus (if used during the period the Company is required to keep such
registration statement current in any such case), or arise out of or are based
upon 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,
to the extent that any such loss, claim, damage or liability arises out of or is
based upon any such statement or omission made in such registration statement,
said preliminary or final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder and specifically stated to be for use in
the preparation of such registration statement.
(3) Notices of Claims, Etc. Each indemnified party, promptly but
not later than 30 days after its receipt of notice of the commencement of any
action against it in respect of which indemnity may be sought from any
indemnifying party or pursuant to this Section 10.6, shall notify such
indemnifying party in writing of the commencement thereof. In case any such
action shall be brought against any indemnified party and it shall notify such
indemnifying party of the commencement thereof, such indemnifying party will be
entitled to participate therein and, to the extent that it may wish, to assume
the defense thereof, with counsel satisfactory to such indemnified party, and
such indemnified party may participate in such defense at such party's expense,
and provided, further that the failure of any such indemnified party to give
notice as provided herein shall not relieve such indemnifying party of its
obligations under this Section 10.6 unless such failure to give notice shall
materially adversely affect such indemnifying party in the defense of any such
claim or any such litigation. With respect to any claim or litigation being
conducted by such indemnifying party, no indemnified party shall, except with
the consent of such indemnifying party, consent to entry of any judgment or
enter into any settlement of any claim as to which indemnity may be sought. No
indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which
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does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation.
(4) Contribution. To the extent that the undertaking to indemnity,
pay and hold harmless set forth in paragraphs (1) and (2) of this Section 10.6
may be unenforceable because it is violative of any law or public policy, each
party that would have been required to provide the indemnity shall contribute
the maximum portion which it is permitted to pay and satisfy under applicable
law, to the payment and satisfaction of all indemnified liabilities incurred by
each party entitled to indemnification under this Section 10.6; provided that in
no event shall a Holder be required to contribute an amount greater than the
dollar amount of net proceeds received by such Holder with respect to the sale
of any Registrable Securities.
10.7 OBLIGATIONS OF THE HOLDERS. Each Holder agrees:
(1) that upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 10.3(6), such Holder
will forthwith discontinue such Holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 10.3(6) and, if so directed by the Company,
will use its best efforts to deliver to the Company (at the Company expense) all
copies, other than permanent file copies, then in such Holder's possession of
the prospectus relating to such Registrable Securities current at the time of
receipt of such notice, and
(2) that it will immediately notify the Company at any time when a
prospectus relating to the registration of such Registrable Securities is
required to be delivered under the Securities Act, of the happening of any
event as a result of which information previously furnished by such Holder to
the Company in writing specifically for inclusion in such prospectus contains an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances under which they were made. In the event the
Company or any such Holder shall give any such notice, the period referred to in
the proviso contained in Section 10.3(l) shall be extended by a number of days
equal to the number of days during the period from and including the giving of
notice pursuant to Section 10.3(6) to and including the date when each seller of
any Registrable Securities covered by such registration statement shall have
received the copies of the supplemented or amended prospectus contemplated by
Section 10.3(6).
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ARTICLE XI
SUBORDINATION OF NOTES
11.1 NOTE SUBORDINATE TO SENIOR INDEBTEDNESS. The Company covenants and
agrees, and each Holder of a Note, by his acceptance thereof, likewise covenants
and agrees, that, to the extent and in the manner hereinafter set forth in this
Article, the Debt represented by the Notes and the payment of the principal of,
premium, if any, interest on and any other payment with respect to, each and all
of the Notes are hereby expressly made subordinate and subject in right of
payment as provided in this Article to the prior payment in full, in cash or, as
acceptable to each holder of Senior Indebtedness, in any other manner, of all
Senior Indebtedness.
This Article shall constitute a continuing offer to all Persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness; and such provisions are made for the benefit of the holders of
Senior Indebtedness; and such holders are made obligees, hereunder and they or
each of them may enforce such provisions.
The Notes shall be senior in right of payment and in rights of liquidation
to all Subordinated Indebtedness.
11.2 PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of (a)
any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection
therewith, relative to the Company or to its creditors, as such, or to its
assets, or (b) any liquidation, dissolution or other winding up of the Company,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy, or (c) any assignment for the benefit of creditors or any other
marshaling of assets or liabilities of the Company, then and in any such event:
(1) the holders of Senior Indebtedness shall be entitled to
receive payment in full in cash or, as acceptable to each holder of Senior
Indebtedness, in any other manner, of all amounts due on or in respect of all
Senior Indebtedness, before the Holders of the Notes are entitled to receive any
payment or distribution of any kind or character (excluding Permitted Junior
Securities) on account of principal of, premium, if any, or interest on the
Notes (including any payment or other distribution which may be received from
the holders of Subordinated Indebtedness as a result of any payment on such
Subordinated Indebtedness); and
(2) until all of the Senior Indebtedness is repayed in full as
provided in clause (1) above, any payment or distribution of assets of the
Company of any
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kind or character, whether in cash, property or securities (excluding Permitted
Junior Securities), by set-off or otherwise, to which the Holders would be
entitled but for the provisions of this Article (including any payment or other
distribution which may be received from the holders of Subordinated Indebtedness
as a result of any payment on such Subordinated Indebtedness) shall be paid by
the liquidating trustee or agent or other Person making such payment or
distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee
or otherwise, directly to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of such Senior Indebtedness
may have been issued, ratably according to the aggregate amounts remaining
unpaid on account of the Senior Indebtedness held or represented by each, to the
extent necessary to make payment in full in cash or as acceptable to each holder
of Senior Indebtedness, in any other manner, of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Indebtedness; and
(3) in the event that, notwithstanding the foregoing provisions of
this Section, the Holder of any Note shall have received any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, in respect of principal, premium, if any, and interest
on the Notes before all Senior Indebtedness is paid in full, then and in such
event such payment or distribution (excluding Permitted Junior Securities)
(including any payment or other distribution which may be received from the
holders of Subordinated Indebtedness as a result of any payment on such
Subordinated Indebtedness) shall be paid over or delivered forthwith directly to
the holders of Senior Indebtedness or their representative or representatives or
to the trustee or trustees under any indenture under which any instruments
evidencing any of such Senior Indebtedness have been issued for application to
the payment of all Senior Indebtedness remaining unpaid, to the extent necessary
to pay all Senior Indebtedness in full in cash or, as acceptable to each holder
of Senior Indebtedness, any other manner, after giving effect to any concurrent
payment or distribution to or for the holders of Senior Indebtedness.
The consolidation of the Company with, or the merger of the Company with
or into, another Person or the liquidation or dissolution of the Company
following the conveyance, transfer or lease of its properties and assets
substantially as an entirety to another Person upon the terms and conditions set
forth in Article XIII shall not be deemed a dissolution, winding up,
liquidation, reorganization, assignment for the benefit of creditors or
marshaling of assets and liabilities of the Company for the purposes of this
Section if the Person formed by such consolidation or the surviving entity of
such merger or the Person which acquires by conveyance, transfer or lease such
properties and assets substantially as an entirety, as the case may be, shall,
as a part of such consolidation, merger, conveyance, transfer or lease, comply
with the conditions set forth in Article XIII.
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11.3 SUSPENSION OF PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. (a)
Unless Section 11.2 shall be applicable, upon the occurrence and during the
continuance of a Payment Default, no cash payment (other than any payments
previously made pursuant to Section 11.1 of this Agreement) or distribution of
any assets of the Company of any kind or character (excluding Permitted Junior
Securities) shall be made by the Company on account of principal of, premium, if
any, or interest on, the Notes, or on account of the purchase, redemption or
other acquisition of or in respect of the Notes unless and until such Payment
Default shall have been cured or waived or shall have ceased to exist or the
Senior Indebtedness shall have been discharged or paid in full in cash or in any
other manner as acceptable to each holder of such Senior Indebtedness, after
which the Company shall (subject to the other provisions of this Article XI)
resume making any and all required payments in respect of the Notes, including
any missed payments.
(b) Unless Section 11.2 shall be applicable, upon (1) the
occurrence and during the continuance of a Non-payment Default and (2) receipt
by the Holders and the Company from a representative of the holder of any Senior
Indebtedness (collectively a "Senior Representative") or the holder of any
Senior Indebtedness of written notice of such Non-payment Default, no payment or
distribution of any assets of the Company of any kind or character (excluding
Permitted Junior Securities) shall be made by the Company on account of any
principal of, premium, if any, or interest on, the Notes, or on account of the
purchase, redemption or other acquisition of or in respect of Notes for a period
("Payment Blockage Period") commencing on the date of receipt by the Holders of
such notice and continuing until the earliest of (subject to any blockage of
payments that may then or thereafter be in effect under subsection (a) of this
Section 11.3) (x) 180 days after receipt of such written notice by the Holders
(provided that any Senior Indebtedness as to which notice was given shall
theretofore have not been accelerated), (y) the date on which such Non-payment
Default is cured or waived or ceases to exist or on which the Senior
Indebtedness related thereto is discharged or paid in full in cash, or in any
other manner as acceptable to the applicable holder of Senior Indebtedness or
(z) the date on which such Payment Blockage Period shall have been terminated by
written notice to the Company or the Holders from the Senior Representative or
holder of Senior Indebtedness initiating such Payment Blockage Period, after
which, in the case of clause (x), (y) or (z), the Company shall (subject to the
other provisions of this Article including paragraph (a) above) promptly resume
making any and all required payments in respect of the Notes, including any
missed payments. Notwithstanding any other provision of this Agreement, in no
event shall a Payment Blockage Period under this paragraph (b) extend beyond 180
days from the date of the receipt by the Holders of the notice referred to in
clause (2) of this paragraph (b) (the "Initial Blockage Period"). Any number of
notices of Nonpayment Defaults may be given during the Initial Blockage Period;
provided that during any period of 365 consecutive days only one Payment
Blockage Period under this
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paragraph (b) may commence and the duration of such period may not exceed 180
days. No Non-payment Default with respect to Senior Indebtedness that existed or
was continuing on the date of the commencement of any Payment Blockage Period
will be, or can be, made the basis for the commencement of a second Payment
Blockage Period, whether or not within a period of 365 consecutive days, unless
such Non-payment Default shall have been cured or waived for a period of not
less than 90 consecutive days. The Company shall deliver a notice to the Holders
promptly after the date on which any Nonpayment Default is cured or waived or
ceases to exist or on which the Senior Indebtedness related thereto is
discharged or paid in full in cash, or in any other manner as acceptable to each
holder of Senior Indebtedness.
(c) In the event that, notwithstanding the foregoing, the Company
shall make any payment to the Holder of any Note prohibited by the foregoing
provisions of this Section, then and in such event such payment shall be paid
over and delivered forthwith to a Senior Representative of the holders of the
Senior Indebtedness or as a court of competent jurisdiction shall direct.
11.4 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. After the
payment in full, in cash or, as acceptable to each holder of Senior
Indebtedness, in any other manner of all Senior Indebtedness, the Holders of the
Notes shall be subrogated to the rights of the holders of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities applicable to the Senior Indebtedness until the principal of,
premium, if any, and interest on the Notes shall be paid in full. For purposes
of such subrogation, no payments or distributions to the holders of Senior
Indebtedness of any cash, property or securities to which the Holders of the
Notes would be entitled except for the provisions of this Article, and no
payments over pursuant to the provisions of this Article to the holders of
Senior Indebtedness by Holders of the Notes, shall, as among the Company, their
creditors other than holders of Senior Indebtedness, and the Holders of the
Notes, be deemed to be a payment or distribution by the Company to or on account
of the Senior Indebtedness.
11.5 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this
Article are intended solely for the purpose of defining the relative rights of
the Holders of the Notes on the one hand and the holders of Senior Indebtedness
on the other hand. Nothing contained in this Article or elsewhere in this
Agreement or in the Notes is intended to or shall (a) impair, as among the
Company and the Holders of the Notes, the obligation of the Company, which is
absolute and unconditional, to pay to the Holders of the Notes the principal of,
premium, if any, and interest on the Notes as and when the same shall become due
and payable in accordance with their terms; or (b) affect the relative rights of
the Holders of the Notes and creditors of the Company other than the rights of
the Holders of the Notes in relation to the rights of the holders of Senior
Indebtedness; or (c) prevent the Holder of any Note from exercising all remedies
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otherwise permitted by applicable law upon default under this Agreement, subject
to the rights under this Article of the holders of Senior Indebtedness (1) in
any case, proceeding, dissolution, liquidation or other winding up, assignment
for the benefit of creditors or other marshaling of assets and liabilities of
the Company referred to in Section 11.2, to receive, pursuant to and in
accordance with such Section, cash, property and securities otherwise payable or
deliverable to such Holder, or (2) under the conditions specified in Section
11.3, to prevent any payment prohibited by such Section or enforce their rights
pursuant to Section 11.3(c).
11.6 NO WAIVER OF SUBORDINATION PROVISIONS. (a) 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 non-compliance by the Company with the
terms, provisions and covenants of this Agreement, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.
(b) Without limiting the generality of Subsection (a) of this
Section 11.6, the holders of Senior Indebtedness may, at any time and from time
to time, without the consent of or notice to the Holders of the Notes, without
incurring responsibility to the Holders of the Notes and without impairing or
releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Notes to the holders of Senior Indebtedness: (1)
change the manner, place or terms of payment or extend the time of payment of,
or renew or alter, Senior Indebtedness or any instrument evidencing the same or
any agreement under which Senior Indebtedness is outstanding; (2) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; (3) release any Person liable in any
manner for the collection or payment of Senior Indebtedness; and (4) exercise or
refrain from exercising any rights against the Company and any other Person;
provided, however, that in no event shall any such actions limit the right of
the Holders of the Notes to take any action to accelerate the maturity of the
Notes pursuant to Article VIII of this Agreement or to pursue any rights or
remedies hereunder or under applicable laws if the taking of such action does
not otherwise violate the terms of this Article, subject to the rights under
this Article, of the holders of Senior Indebtedness to receive the cash,
property or securities receivable upon the exercise of such rights or remedies.
11.7 NOTICES. The Company shall provide the Holders with prompt notice of
any event known to the Company which would prohibit the making of any payment of
money to the Holders in respect of the Notes pursuant to the provisions of this
Article.
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11.8 RELIANCE ON JUDICIAL ORDERS OR CERTIFICATES. Upon any payment or
distribution of assets of the Company referred to in this Article, the Holders
of the Notes shall be entitled to rely upon any order or decree entered by any
court of competent jurisdiction in which such insolvency, bankruptcy,
receivership, liquidation, reorganization, dissolution, winding up or similar
case or proceeding is pending, or a certificate of the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee for the benefit of creditors,
agent or other person making such payment or distribution, delivered to the
Holders of Notes or a certificate of a Senior Representative, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of 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,
provided that the foregoing shall apply only if such court has been fully
apprised of the provisions of this Article.
11.9 NO SUSPENSION OF REMEDIES. Nothing contained in this Article shall
limit the right of the Holders of Notes to take any action to accelerate the
maturity of the Notes pursuant to Article VIII of this Agreement or to pursue
any rights or remedies hereunder or under applicable law, subject to the rights
under this Article of the holders of Senior Indebtedness to receive the cash,
property or securities receivable upon the exercise of such rights or remedies.
11.10 REINSTATEMENT. The provisions of this Article shall continue to be
effective or reinstated, as the case may be, if at any time any payment of the
Senior Indebtedness is rescinded or must otherwise be returned by any holder of
Senior Indebtedness upon the insolvency, bankruptcy or reorganization of the
Company or otherwise, all as though such payment had not been made.
11.11 AMENDMENTS TO ARTICLE XI. No change, modification or amendment of
any provision of this Article shall be effective against any holder of Senior
Indebtedness that did not consent to such change, modification or amendment.
ARTICLE XII
REDEMPTION OF NOTES
12.1 RIGHT OF REDEMPTION. The Notes may be redeemed at the election of
the Company, as a whole or from time to time in part, at any time on or after
November 1, 2002, at the Redemption Prices specified in the form of Note
hereinafter set forth, together with accrued interest, if any, to the Redemption
Date.
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12.2 APPLICABILITY OF ARTICLE. Redemption of Notes at the election of the
Company or otherwise, as permitted or required by any provision of this
Agreement, shall be made in accordance with such provision and this Article.
12.3 ELECTION TO REDEEM; NOTICE TO HOLDERS. The election of the Company
to redeem any Notes pursuant to Section 12.1 shall be evidenced by a Board
Resolution. In case of any redemption at the election of the Company of less
than all of the Notes, the Company shall, at least 30 days prior to the
Redemption Date fixed by the Company, notify the Holders of such Redemption Date
and of the principal amount of Notes to be redeemed.
12.4 SELECTION BY THE COMPANY OF NOTES TO BE REDEEMED. If less than all
the Notes are to be redeemed, the particular Notes to be redeemed shall be
selected at least 30 days and not more than 60 days prior to the Redemption
Date by the Company, from the Notes not previously called for redemption, by
such method as the Company shall deem fair and appropriate and which may provide
for the selection for redemption of portions (equal to $ 1,000 or any integral
multiple thereof) of the principal amount of Notes of a denomination larger than
$1,000.
The Company shall promptly notify the Holders in writing of the Notes
selected for redemption and, in the case of any Notes selected for partial
redemption, the principal amount thereof to be redeemed.
For all purposes of this Agreement, unless the context otherwise requires,
all provisions relating to the redemption of Notes shall relate, in the case of
any Notes redeemed or to be redeemed only in part, to the portion of the
principal amount of such Notes which has been or is to be redeemed.
12.5 NOTICE OF REDEMPTION. Notice of redemption shall be given by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the Redemption Date, to each Holder to be redeemed, at his address
appearing in the Note Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Notes are to be redeemed, the
identification (and, in the case of partial redemption of any Notes, the
principal amounts) of the particular Notes to be redeemed,
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(4) that on the Redemption Date the Redemption Price will become
due and payable upon each such Note to be redeemed and that interest
thereon will cease to accrue on and after said date, and
(5) the place or places where such Notes are to be surrendered for
payment of the Redemption Price.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company.
12.6 DEPOSIT OF REDEMPTION PRICE. On or prior to any Redemption Date, the
Company shall deposit with the Paying Agent (which for purposes of this Article
shall not be the Company) an amount of money sufficient to pay the Redemption
Price of, and accrued interest on, all the Notes which are to be redeemed on
that date.
12.7 NOTES PAYABLE ON REDEMPTION DATE. Notice of redemption having been
given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date,
become due and payable at the Redemption Price therein specified, and from and
after such date (unless the Company shall default in the payment of the
Redemption Price and accrued interest) such Notes shall cease to bear interest.
Upon surrender of any such Note for redemption in accordance with said notice,
such Note shall be paid by the Company at the Redemption Price, together with
accrued interest, if any, to the Redemption Date.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate of 14% per annum.
12.8 NOTES REDEEMED IN PART. Any Note which is to be redeemed only in
part shall be surrendered at an office or agency of the Company designated by
the Company in its notice of redemption for that purpose (with, if the Company
so requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute and deliver to the
Holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the unredeemed portion of the principal of
the Note so surrendered.
12.9 SURVIVAL OF WARRANTS. Notwithstanding anything to the contrary
herein, in the event that the Company exercises its right to redeem the Notes as
provided in this Article XII, the Warrants shall survive and shall remain in
full force and effect in accordance with their terms.
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ARTICLE XIII
CONSOLIDATION, MERGER, CONVEYANCE, SALE, TRANSFER OR LEASE
13.1 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company
shall not consolidate with or merge into any other Person or convey, sell,
transfer or lease its properties and assets substantially as an entirety to any
Person, and the Company shall not permit any Person to consolidate with or merge
into the Company or convey, sell, transfer or lease its properties and assets
substantially as an entirety to the Company, unless:
(1) in case the Company shall consolidate with or merge into
another Person or convey, sell, transfer or lease its properties and
assets substantially as an entirety to any Person, the Person formed by
such consolidation or into which the Company is merged or the Person which
acquires by conveyance, sale or transfer, or which leases, the properties
and assets of the Company substantially as an entirety shall be a
corporation, partnership or trust, shall be organized and validly existing
under the laws of the United States of America, any State thereof or the
District of Columbia and shall expressly assume, by a counterpart to this
Agreement or an agreement, executed and delivered to the Company, in form
satisfactory to the Company, the due and punctual payment of the principal
of (and premium, if any) and interest on all the Notes and the performance
or observance of every covenant of this Agreement on the part of the
Company to be performed or observed;
(2) immediately after giving effect to such transaction and
treating any Debt which becomes an obligation of the Company or a
Subsidiary as a result of such transaction as having been incurred by the
Company or such Subsidiary at the time of such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have happened and be continuing;
(3) if, as a result of any such consolidation or merger or such
conveyance, transfer or lease, properties or assets of the Company would
become subject to a mortgage, pledge, lien, security interest or other
encumbrance which would not be permitted by this Agreement, the Company or
such successor corporation or Person, as the case may be, shall take such
steps as shall be necessary effectively to secure the Notes (and if the
Company selects, any Debt ranking pari passu with the Notes) equally and
ratably with all Debt secured thereby; and
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(4) the Company has delivered to the Holders an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a counterpart
to this Agreement or an agreement is required in connection with such
transaction, such counterpart or agreement complies with this Article and
that all conditions precedent herein provided for relating to such
transaction have been complied with.
13.2 SUCCESSOR SUBSTITUTED. Upon any consolidation of the Company with,
or merger of the Company into, any other Person or any conveyance, sale,
transfer or lease of the properties and assets of the Company substantially as
an entirety in accordance with Section 13.1, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
sale, transfer or lease is made shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under this Agreement with the
same effect as if such successor Person had been named as the Company herein,
and thereafter, except in the case of a lease, the predecessor Person shall be
relieved of all obligations and covenants under this Agreement and the Notes.
ARTICLE XIV
MISCELLANEOUS
14.1 AMENDMENTS AND WAIVERS. This Agreement may not be changed, modified
or discharged orally, nor may any waivers or consents be given orally hereunder,
and every such change, modification, discharge, waiver or consent shall be in
writing and, except as provided in the following sentence, signed by the Person
against which enforcement thereof is sought. Subject to the subordination
provisions contained in Article XI, this Agreement may be amended, and any of
its restrictions or provisions may be waived, with the consent of the Company
and of the Holders of not less than 51% in aggregate face amount of the Notes
then outstanding, except that without the consent of the Holders of all the
Notes then outstanding no amendment to or waiver under this Agreement shall
extend the maturity of any Note, or reduce the rate of interest or any premium
payable with respect to any Note, or amend Article V, VII, VIII or XI or reduce
the proportion of the principal amount of the Notes required to consent to any
waiver, consent or amendment.
14.2 COPIES TO REGULATORY BODIES. The Purchaser and each Holder that is
an institutional investor may furnish copies of any financial statements and
other certificates, reports or documents delivered to it pursuant to this
Agreement to any regulatory body or commission to whose jurisdiction such Holder
may be subject.
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14.3 INTEGRATION AND SEVERABILITY. This Agreement embodies the entire
agreement and understanding between the Purchasers and the Company and
supersedes all prior agreements and understandings relating to the subject
matter hereof. In case any one or more of the provisions contained in this
Agreement or in any Security, or any application thereof, shall be invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein, and any
other application thereof, shall not in any way be affected or impaired thereby.
14.4 SUCCESSORS AND ASSIGNS. All covenants, agreements, statements,
representations and warranties in this Agreement or any certificate delivered
pursuant hereto by or on behalf of the Company or by or on behalf of the
Purchaser shall bind and inure to the benefit of the respective successors and
assigns of such party hereto, except where the context otherwise requires, and
except that the Purchaser shall not be obligated to acquire any Security from
any issuer other than the Company.
14.5 RELIANCE ON AND SURVIVAL OF VARIOUS PROVISIONS. All covenants,
agreements, statements, representations and warranties made herein or in any
certificate delivered pursuant hereto (i) shall be deemed to be material and to
have been relied upon by the Purchaser, notwithstanding any investigation
heretofore or hereafter made by any Purchaser or on such Purchaser's behalf, and
(ii) shall survive the execution and delivery of the Notes and shall continue in
full force and effect so long as any Note is outstanding and unpaid and
thereafter as provided in Section 6.8.
14.6 VERIFICATION. The Purchaser and each other Holder shall be entitled
to make such independent examinations as such person may deem reasonable, and to
receive copies of all such instruments, certificates, opinions and other
evidence as it may reasonably request, with respect to the transactions
contemplated by this Agreement and the taking of all corporate proceedings in
connection therewith and for the purpose of verifying the accuracy of any
certificate which is made or required to be made pursuant to this Agreement.
14.7 NOTICES AND OTHER COMMUNICATIONS. All notices, requests, consents
and other communications hereunder shall be in writing and shall be delivered,
or shall be sent by certified or registered mail, return receipt requested,
postage prepaid and addressed (i) if to the Purchaser at its address for
communications set forth in Schedule 1 hereto or to such other address as may
have been furnished to the Company by notice from the Purchaser, or (ii) if to
any Holder of a Note other than the Purchaser, to its address set forth in the
Note Register or to such other address as may have been furnished to the Company
by notice from such Holder or (iii) if to the Company, to Isis Pharmaceuticals,
Inc., 2292 Faraday Avenue, Carlsbad, California 92008, Attention Secretary, with
a copy to the General Counsel, or to such other address as may have been
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furnished to the Purchaser and the Holders other than the Purchaser by notice
from the Company. All notices shall be deemed to have been given either at the
time of the delivery thereof to any officer or employee of the person entitled
to receive such notice at the address of such persons for purposes of this
Section 14.7, or, if mailed, at the completion of the fifth full day following
the time of such mailing thereof to such address, as the case may be. Whenever
pursuant to this Agreement or any Note, notice is required to be given to any or
all of the Holders, such requirement shall be satisfied if such notice is given,
in the manner prescribed, to the persons last known by the Company to be Holders
of such Notes, entitled to such notice, at the addresses of such persons last
known to the Company.
14.8 GOVERNING LAW. This Agreement and the Notes shall be construed in
accordance with and governed by the laws of the State of New York (without
giving effect to the principles of conflict of laws thereof). If any action or
proceeding shall be brought by the Purchaser or by any Holder in order to
enforce any right or remedy under this Agreement or under any Security, the
Company hereby consents and will, and the Company will cause each Subsidiary to,
submit to the jurisdiction of any state or federal court of competent
jurisdiction sitting within the area comprising the Southern District of New
York on the date of this Agreement. Nothing contained in this section shall
affect the right of any Holder of Notes to serve legal process in any other
manner permitted by law or to bring any action or proceeding in the courts of
any jurisdiction against the Company or to enforce a judgment obtained in the
courts of any other jurisdiction.
14.9 REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating
to this Agreement, including, without limitation, (a) consents, waivers and
modifications that may hereafter be executed, (b) documents received by any
Purchaser at the closing of the purchase of the Notes (except the Notes
themselves) and (c) financial statements, certificates and other information
previously or hereafter furnished to the Purchaser, may be reproduced by the
Purchaser by any photographic, photostatic, microfilm, microcard, miniature
photographic or other similar process, and the Purchaser may destroy any
original document so reproduced. The Company agrees and stipulates that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by the Purchaser in the
regular course of business) and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
14.10 TABLE OF CONTENTS AND HEADINGS. The table of contents and the
headings of the various subdivisions hereof are for convenience of reference
only and shall in no way modify any of the terms or provisions hereof
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14.11 COUNTERPARTS. This Agreement may be signed by each party hereto upon
a separate copy in which event both of said copies shall constitute a single
counterpart of this Agreement. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.
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IN WITNESS WHEREOF, the Company and the Purchaser have caused
this Agreement to be executed and delivered in New York City, New York by their
respective officers thereunto duly authorized.
ISIS PHARMACEUTICALS, INC.
By /s/ Stanley T. Crooke
-------------------------------
Stanley T. Crooke
Chairman and Chief Executive Officer
By ( * )
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 68
SCHEDULE1
PURCHASER AND PAYMENT INFORMATION
PURCHASER NOTES
(NAME AND ADDRESS) TO BE PURCHASED
1. ( * ) $50,000 000
Registration instructions:
( * )
Delivery instructions:
( * )
Wire instructions:
( * )
Notices:
( * )
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 69
EXHIBIT A
FORM OF SENIOR SUBORDINATED DISCOUNT NOTE
ISIS PHARMACEUTICALS, INC.
14% SENIOR SUBORDINATED DISCOUNT NOTE
DUE NOVEMBER 1, 2007
$________________
Private Placement No.___________________ No._____________
FOR VALUE RECEIVED, the undersigned, (herein called the "Company"), a
corporation organized and existing under the laws of the State of Delaware,
hereby promises to pay to ________ or registered assigns, the principal sum of
_______, DOLLARS ($______), on November 1, 2007. The Company promises to pay
interest on the principal amount of this Note on each Interest Payment Date, as
set forth below, at the rate of 14% per annum.
Interest will be paid quarterly (to the holder of record of this Note at
the close of business on the January 15, April 15, July 15 and October 15
immediately preceding the Interest Payment Date) on each Interest Payment Date,
commencing on February 1, 2003; provided that, no interest shall accrue on the
principal amount of this Note prior to November 1, 2002.
Interest on this Note will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from November 1, 2002;
provided that, if there is no existing default in the payment of interest and if
a Note is authenticated between a Regular Record Date and the next succeeding
Interest Payment Date, interest shall accrue from such Interest Payment Date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The Company promises to pay interest on overdue principal of, and
premium on, if any, this Note and interest on overdue installments of interest,
to the extent lawful, at the rate borne by this Note plus 2% per annum.
Payments of the principal of, and the premium, if any, and interest on,
this Note shall be made in lawful money of the United States of America in the
manner and at the place provided in Article V of the Agreement hereinafter
referred to.
This Note is one of the Company's 14% Senior Subordinated Discount Notes
due November 1, 2007, limited in aggregate principal amount, at maturity, to
$50,000,000
A-1
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which are issued, in fully registered form, pursuant to that certain Purchase
Agreement, dated as of October 24, 1997, between the Company and the purchaser
listed on Schedule I thereto (said Purchase Agreement, as amended and modified
from time to time, being herein called the "Agreement"). This Note is entitled
to the benefits of, and is subject to the terms contained in the Agreement. The
provisions of the Agreement are hereby incorporated in this Note to the same
extent as if set forth at length herein.
The Company may deem and treat the person in whose name this Note is
registered pursuant to Article IV of the Agreement as the holder and owner
hereof for the purpose of receiving payments and for all other purposes
whatsoever, notwithstanding any notations of ownership or transfers hereon and
notwithstanding that this Note is overdue, and the Company shall not be affected
by any notice to the contrary until presentation of this Note for registration
of transfer as provided in Article IV of the Agreement. This Note may be
transferred or exchanged and, if lost, stolen, damaged or destroyed, this Note
may be replaced, in the manner and upon the conditions set forth in said Article
IV.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the office of the Company designated for notices in
accordance with Section 14.7 of the Agreement duly endorsed or accompanied by a
written instrument of transfer duly executed by the registered holder of this
Note or its attorney duly authorized in writing. By its acceptance hereof, the
holder of this Note agrees that in the absence of the registration of the Notes
under the Securities Act of 1933, as amended (the "Securities Act"), it will
offer, sell or otherwise transfer this Note (i) only (A) to the Company, (B)
pursuant to any transaction under and meeting the requirements of Rule 144A, as
amended from time to time, promulgated under the Securities Act, (C) pursuant to
an exemption from registration under the Securities Act in accordance with Rule
144, as amended from time to time, promulgated under the Securities Act or (D)
in accordance with any other available exemption from the registration
requirements of Section 5 of the Securities Act, and (ii) in accordance with any
applicable federal and state securities laws.
In certain circumstances involving the occurrence of a Change of Control
or Asset Sale (each as defined in the Agreement), the Holder hereof shall have
the right to require the Company to repurchase this Note in whole or in part in
integral multiples of $ 1,000 of the principal, at a purchase price in cash
equal to a certain percentage of the Accreted Value hereof, as set forth in
Sections 7.4(a) and 7.5(b) of the Agreement, respectively, together with accrued
and unpaid interest, if any, to the date of repurchase.
In case an Event of Default (as defined in the Agreement) shall happen
and be continuing, the principal of this Note may become or be declared due and
payable in the manner and with the effect provided in the Agreement.
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<PAGE> 71
This Note is subordinate to all Senior Indebtedness (as defined in the
Agreement), to the extent and as provided in Article XI of the Agreement.
The Notes are subject to redemption upon not less than 30 nor more than
60 days' notice by mail, at any time on or after November 1, 2002, as a whole or
in part, at the election of the Company, at a Redemption Price in cash equal to
100% of the Accreted Value hereof together in the case of any such redemption
with accrued interest, if any, to the Redemption Date.
Should the indebtedness represented by this Note or any part thereof be
collected in any proceeding provided for in the Agreement or be placed in the
hands of attorneys for collection, the Company agrees to pay, in addition to the
principal, premium, if any, and interest due and payable hereon, all costs of
collecting this Note, including reasonable attorneys' fees and expenses.
This Note and the Agreement are governed and construed in accordance
with the laws of the State of New York (without giving effect to the
principles of conflict of laws thereof).
A-3
<PAGE> 72
IN WITNESS THEREOF, ISIS PHARMACEUTICALS, INC. has caused this Note to
be dated October 24, 1997 and to be executed on its behalf by its officers
thereunto duly authorized in New York, New York.
ISIS PHARMACEUTICALS, INC.
By:___________________________________
Stanley T. Crooke
Chairman and Chief Executive Officer
By:___________________________________
B. Lynne Parshall
Executive Vice President and
Chief Financial Officer
A-4
<PAGE> 73
BOND POWER
FOR VALUE RECEIVED,__________________________ hereby sells, assigns and
transfers unto___________________ one note of the 14% Senior Subordinated
Discount Notes due November 1, 2007 of Isis Pharmaceuticals, Inc. in the
aggregate principal amount of $______________, for $_______,No. ______________
herewith, standing in the name of Reliance Insurance Company on the books of
said Company and do hereby irrevocably constitute and appoint __________________
_________________________________________ attorney to transfer the said note on
the books of the within named Company, with full power of substitution in the
premises.
Dated:_________ __, ____ ___________________________
Social Security or other By:_____________________________
identification number of
assignee:__________________________
In presence of
___________________________
A-5
<PAGE> 74
EXHIBIT B
THIS WARRANT AND THE WARRANT SHARES REFERRED TO HEREIN HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH SUCH ACT.
No. of Shares:___________________ Warrant No.____________________
WARRANT
To Purchase Common Stock of
ISIS PHARMACEUTICALS, INC.
Expiring November 1, 2004
THIS WARRANT CERTIFIES THAT, for value received, the registered
holder hereof,
whose address is
or its registered assigns, is entitled to purchase from ISIS PHARMACEUTICALS,
INC., a corporation organized and existing under the laws of Delaware, on or
before 5 P.M., Eastern Time, November 1, 2004, shares of the Stock (as
hereinafter defined) at the Basic Purchase Price (as hereinafter defined) in
lawful money of the United States of America or as provided in Section 6.12 of
the Purchase Agreement (as hereinafter defined). The number of shares of the
Stock purchasable hereunder and the Basic Purchase Price therefor are subject to
adjustment as hereinafter provided in Section 6.
B-1
<PAGE> 75
SECTION 1. DEFINITIONS. For all purposes of this Warrant, the
following terms shall have the meanings indicated and such terms shall include
the singular as well as the plural:
"Basic Purchase Price" shall mean the price of $25.00 per share
of the Stock, at which price the registered holder hereof may exercise this
Warrant prior to any adjustments being made as provided in Section 6.
"Date of Original Delivery" shall mean the Closing Date as
defined in the Purchase Agreement.
"Dilutive Basis" shall mean, with respect to any issuance or sale
of the Stock (or any right or option to acquire the same or any Convertible
Securities) by the Company after October 24, 1997, an amount equal to 85% of the
Market Price on the date of such issuance or sale.
"Market Price" shall mean, as of the date of determination, the
average of any number of days as determined in good faith by the Board of
Directors, provided, however, that such number of days shall be no less than the
10 consecutive Trading Days (as hereinafter defined) nor more than the 60
consecutive Trading Days, in each case, immediately prior to such date, of
either: (i) the average of the high and low sales prices of the Stock on such
Trading Day on the NYSE, or (ii) if the Stock shall not on such Trading Day then
be listed on the NYSE, the average of such high and low sales prices on the
principal (determined by highest volume of the Stock during the month
immediately preceding the month in which occurs the date as of which Market
Price is being determined) national securities exchange (as defined in the
Exchange Act) on which the Stock may then be listed, or (iii) if there shall
have been no sales on the NYSE or such securities exchange on any such Trading
Day, the average of the bid and asked prices on the NYSE or such securities
exchange at the end of such Trading Day, or (iv) if the Stock shall not be so
listed on any such Trading Day, the average of the representative bid and asked
prices at the end of such Trading Day in the over-the-counter market as reported
by the National Association of Securities Dealers Automated Quotations System
("NASDAQ") or a similar organization if NASDAQ is no longer reporting such
information. If none of the foregoing categories (i), (ii), (iii) or (iv) shall
be applicable, the term "Market Price" shall mean, as of any date, with respect
to any share of the Stock, the greater of the fair market value per share of the
Stock, determined in good faith by the Board of Directors based upon an
appraisal of an investment banking or appraisal firm acceptable to the
Warrantholders, or the net book value per share of the Stock.
"Public Offering" shall mean the offer and sale of shares of the
Stock pursuant to a registration statement filed and made effective pursuant to
the Securities Act.
B-2
<PAGE> 76
"Purchase Agreement" shall mean the Purchase Agreement, dated as
of October 24, 1997, as the same may be amended and modified from time to time
in accordance with the provisions thereof, between the Company and the
Purchaser.
"Purchase Price" shall mean, as of any date, the Basic Purchase
Price, as the same has been adjusted from time to time pursuant to the
provisions of Section 6.
"Registrable Securities" shall mean any Warrant Shares. As to any
particular Registrable Securities once issued, such securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such registration
statement, (ii) such securities shall have been distributed to the public
pursuant to Rule 144 (or any successor provision) under the Securities Act,
(iii) such securities shall have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer shall have been
delivered by the Company and subsequent disposition of them shall not require
registration or qualification of them under the Securities Act, or (iv) such
securities shall have ceased to be outstanding.
"Registration Expenses" shall mean any and all expenses incident
to performance of or compliance with Section 5, including, without limitation,
(i) all Commission and stock exchange or National Association of Securities
Dealers, Inc. registration, filing fees and listing expenses, (ii) all fees and
expenses of complying with securities or blue sky laws (including reasonable
fees and disbursements of counsel for any underwriters in connection with blue
sky qualifications of any Warrant Shares), (iii) all printing, messenger and
delivery expenses, (iv) the fees and disbursements of counsel for the Company
and of its independent public accountants, including the expenses of any special
audits and/or "cold comfort" letters required by or incident to such performance
and compliance, (v) the fees and disbursements of counsel retained in connection
with such registration by the holders of a majority (by number of shares) of the
Warrant Shares being registered, and (vi) any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, including the
fees and expenses of any special experts retained in connection with the
requested registration.
"Stock" shall mean and include the Company's authorized common
stock, $.001 par value per share, as constituted at October 24, 1997, and shall
also include any class of the capital stock of the Company hereafter authorized
which shall neither (i) be limited to a fixed sum or a percentage of par value
in respect of the rights of the holders thereof to receive dividends and to
participate in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding-up of the Company, nor (ii) be subject at
any time to redemption by the Company, provided, however, that except as
provided in Section 6G, the Stock receivable upon exercise of any Warrant shall
include
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only shares of the capital stock of the Company designated as common stock on
October 24, 1997, or shares of any class or classes of the capital stock of the
Company resulting from any reclassification or reclassifications of such common
stock which are not limited to any such fixed sum or percentage of par value and
which are not subject to any such redemption.
"Transfer" as used in Section 5, shall include any disposition of
any Warrants or Warrant Shares, or of any interest in either thereof, which
would constitute a sale thereof within the meaning of the Securities Act.
"Warrantholders" shall mean, as of any date, the then registered
holders of the Warrants and the then registered holders of the Warrant Shares.
"Warrants" shall mean all Warrants of the Company (including this
Warrant) described in Section 1.1 of the Purchase Agreement, whether issued or
issuable, which are identical as to terms and conditions, except as to the names
and addresses of the Warrantholders thereunder and the number of shares of the
Stock for which they may be exercised, and which evidence the right to purchase
an aggregate of not in excess of 500,000 shares of the Stock (prior to making
any adjustments of the character provided in Section 6), including all
amendments thereto, and together with all Warrants issued in exchange, transfer
or replacement of any thereof.
"Warrant Shares" shall mean all shares of the Stock purchased or
purchasable by the registered holders of the Warrants upon the exercise thereof
pursuant to Section 4 thereof.
All terms used in this Warrant which are not defined in this
Section 1 have the meanings respectively set forth therefor in the Purchase
Agreement or elsewhere in this Warrant.
SECTION 2. OWNERSHIP OF THIS WARRANT. The Company may deem and
treat the person in whose name this Warrant is registered as the holder and
owner hereof, notwithstanding any notations of ownership or writing hereon made
by anyone other than the Company, for all purposes and shall not be affected by
any notice to the contrary, until presentation of this Warrant for registration
of transfer as provided in Section 3. The Company shall maintain, at its office
in Carlsbad, California, a register for the Warrants, in which the Company
shall record the name and address of the person in whose name each Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of such Warrant. Within 5 Business Days after any Warrantholder shall by
notice request the same, the Company will deliver to such Warrantholder a
certificate, signed by one of its officers, listing the names and address of
every other Warrantholder, as such information appears in said register and in
the stock
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transfer books of the Company at the close of business on the day before such
certificate is signed.
SECTION 3. EXCHANGE, TRANSFER AND REPLACEMENT. This Warrant is
exchangeable, upon the surrender hereof by the registered holder to the Company
at its office or agency provided for in Section 2, for new Warrants of like
tenor, representing in the aggregate the right to purchase the number of shares
of the Stock purchasable hereunder, each of such new Warrants to represent the
right to purchase such number of shares of the Stock as shall be designated by
said registered holder at the time of such surrender. This Warrant and all
rights hereunder are transferable, in whole or in part, in compliance with
applicable law and only upon the register provided for in Section 2, by the
registered holder hereof in person or by duly authorized attorney, and a new
Warrant shall be made and delivered by the Company, of the same tenor as this
Warrant but registered in the name of the transferee, upon surrender of this
Warrant with the Assignment Form attached hereto duly completed, at said office
or agency of the Company. Upon receipt by the Company at its office or agency
provided for in Section 2 of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in the case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender thereof this Warrant if mutilated, the Company will make and
deliver a new Warrant of like tenor in replacement of this Warrant; provided,
that, if an institutional investor having assets in excess of $ 100 million (as
disclosed in its last published financial statement) shall be said registered
holder, an agreement of indemnity by it shall be sufficient for all purposes of
this Section 3. This Warrant shall be promptly cancelled by the Company upon the
surrender hereof in connection with any exchange, transfer or replacement. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses and charges payable in connection with the preparation, execution and
delivery of Warrants pursuant to this Section 3.
SECTION 4. EXERCISE OF THIS WARRANT. A. Procedure for Exercise.
In order to exercise this Warrant in whole or in part, the registered holder
hereof shall complete the Subscription Form attached hereto, and deliver this
Warrant to the Company together with cash in an amount equal to the aggregate
Purchase Price of the shares of the Stock then being purchased, at its office or
agency provided for in Section 2. The exercise of this Warrant shall be deemed
to have been effected and the Purchase Price and the number of shares of the
Stock issuable in connection with such exercise shall be determined as of the
close of business on the Business Day prior to the date on which the last to be
delivered of such completed Subscription Form and all other items required to be
delivered in connection with such exercise by the registered holder hereof
pursuant to Section 5 shall have been delivered at such office or agency. Upon
receipt of such Subscription Form and other items, the Company shall, as
promptly as practicable, and in any event within 5 days thereafter, execute or
cause to be executed and deliver to said holder a certificate or certificates
representing the aggregate number of
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shares of the Stock specified in such Subscription Form. Each stock certificate
so delivered shall be in such authorized denomination as may be requested by the
registered holder hereof and shall be registered in the name of said holder or
such other name as shall be designated by said holder, and, to the extent
permitted by law, the person in whose name any such stock certificate shall be
issuable upon such exercise shall be deemed to have become the holder of record
of the shares represented thereby as of the time when the exercise of this
Warrant with respect to such shares shall be deemed to have been effected. If
this Warrant shall have been exercised only in part, the Company shall, at its
expense at the time of delivery of said stock certificate or certificates,
deliver to said holder a new Warrant evidencing the rights of said holder to
purchase the remaining shares of the Stock covered by this Warrant. The Company
shall pay all taxes and other expenses and charges payable in connection with
the preparation, execution and delivery of stock certificates pursuant to this
Section 4, except that, in case such stock certificates shall be registered in a
name or names other than the name of the registered holder of this Warrant,
funds sufficient to pay all stock transfer taxes which shall be payable upon the
execution and delivery of such stock certificate or certificates shall be paid
by the registered holder hereof to the Company at the time of delivery of such
stock certificates to the Company as mentioned above.
B. Transfer Restriction Legend. Each certificate representing
Warrant Shares initially issued upon exercise of this Warrant, unless at the
time of exercise such Warrant Shares are registered under the Securities Act,
shall bear the following legend (and any additional legend required by any
securities exchange on which the Warrant Shares may at the time be listed) on
the face thereof:
"The securities represented hereby have not been registered
under the Securities Act of 1933, as amended, and the transfer of
said securities is subject to the restrictions set forth in such
Act, and no transfer of said securities shall be valid or
effective unless and until the terms and conditions of such Act
shall have been complied with."
Any certificate issued at any time upon transfer of, or in exchange for or
replacement of, any certificate bearing such legend (except a new certificate
issued upon completion of a public distribution of the securities represented
thereby pursuant to a registration under the Securities Act) shall also bear
such legend unless, in the opinion of counsel for the registered holder thereof,
addressed and delivered to the Company and such holder, which shall be
reasonably acceptable to the Company, the securities represented thereby need no
longer be subject to the restrictions contained in the Securities Act.
C. Acknowledgment of Continuing Obligation. The Company will, at
the time of the exercise of this Warrant, in whole or in part, upon the
reasonable request of
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the registered holder hereof but at the expense of the Company, acknowledge in
writing its continuing obligation to said holder in respect of any rights
(including, without limitation, any right to obtain registration under the
Securities Act of the shares of the Stock issued upon such exercise) to which
said holder shall continue to be entitled after such exercise in accordance with
this Warrant, provided that the failure of said holder to make any such request
shall not affect the continuing obligation of the Company to said holder in
respect of such rights.
D. Character of Warrant Shares. All shares of the Stock issuable
upon the exercise of this Warrant shall, when issued, be duly authorized,
validly issued, fully paid and nonassessable.
SECTION 5. RESTRICTIONS ON TRANSFER. A. Restrictions in General.
Notwithstanding any provisions contained in this Warrant to the contrary, this
Warrant shall not be transferable and the related Warrant Shares shall not be
transferable except upon the conditions specified in this Section 5, which
conditions are intended, among other things, to insure compliance with the
provisions of the Securities Act in respect of the transfer of this Warrant or
transfer of such Warrant Shares. The registered holder of this Warrant agrees
that it will not (i) transfer this Warrant prior to delivery to the Company of
the opinion of the counsel referred to in, and to the effect described in,
clause (1) of Section 5B, or (ii) transfer such Warrant Shares prior to
delivery to the Company of the opinion of the counsel referred to in, and to the
effect described in, clause (1) of Section 5B, or until registration of such
Warrant Shares under the Securities Act has become effective. The registered
holder of this Warrant agrees that such opinion of counsel must be reasonably
satisfactory to the Company.
B. Statement of Intention to Transfer: Opinion of Counsel. The
registered holder of this Warrant, by its acceptance hereof, agrees that prior
to any transfer of this Warrant or any transfer of the related Warrant Shares,
said holder will deliver a statement to the Company setting forth the intention
of said holder's prospective transferee with respect to its retention or
disposition of this Warrant or of said Warrant Shares (whichever is involved in
such transfer), together with a signed copy of the opinion of said holder's
counsel reasonably satisfactory to the Company as to the necessity or
non-necessity for registration under the Securities Act in connection with such
transfer.
(1) If, in the opinion of said holder's counsel, the
proposed transfer of this Warrant or the proposed transfer of such Warrant
Shares may be effected without registration under the Securities Act of this
Warrant or such Warrant Shares, as the case may be, then the registered holder
of this Warrant shall be entitled to transfer this Warrant or to transfer such
Warrant Shares in accordance with the intended method of disposition specified
in the statement delivered by said holder to the Company.
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(2) Notwithstanding the foregoing provisions of this
Section 5B, no opinion of any counsel need be furnished (x) in the event of any
proposed transfer of this Warrant to an institutional investor who is an
"accredited investor" as defined in Regulation D promulgated under the
Securities Act and which transfer is otherwise exempt from the registration
requirements of the Securities Act or (y) in the event of any proposed transfer
of Warrant Shares in connection with a registration under the Securities Act.
C. Registration Requested by Warrantholders.
(1) At any time and from time to time after the date
hereof, the Warrantholders shall have the right to request the Company to effect
the registration under the Securities Act of all or part of such Warrantholders'
Registrable Securities. Upon receipt by the Company of any such request, the
Company shall promptly give notice of such proposed registration to all
Warrantholders and thereupon shall, as expeditiously as possible, use its best
efforts to effect the registration under the Securities Act of:
(i) all Registrable Securities which the Company has been
requested to register pursuant to clause (1) of this Section 5C; and
(ii) all other Registrable Securities which Warrantholders have,
within 20 days after the Company has given such notice, requested
the Company to register;
all to the extent requisite to permit the sale or other disposition by the
Warrantholders of the Registrable Securities so to be registered.
(2) If the managing underwriter of the public offering to
be effected pursuant to a registration statement filed pursuant to clause (1) of
this Section 5C of any Warrant shall advise the Company in writing (with a copy
to each holder of Registrable Securities requesting registration) that, in its
opinion, the number of securities requested to be included in such registration
(including securities of the Company which are not Registrable Securities)
exceeds the number which can be sold in such offering, the Company will include
in such registration to the extent of the number which the Company is so advised
can be sold in such offering:
(i) first, Registrable Securities requested to be included in
such registration by the Warrantholders pursuant to clauses (i) and
(ii) of Section 5C(l), pro rata among such holders on the basis of
the number of Registrable Securities requested to be included by
each; and
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(ii) second, other securities of the Company proposed to be
included in such registration, in accordance with the priorities, if
any, then existing among the Company and the holders of such other
securities.
(3) The Warrantholders requesting inclusion in a
registration statement under this Section 5C and Section 5C of the other
Warrants may withdraw from any requested registration pursuant to this Section
5C and Section 5C of the other Warrants by giving written notice to the Company
prior to the filing date of such registration statement; provided, however, that
for a period of three months after such withdrawal, such Warrantholders may not
request any registration pursuant to this Section 5C and Section 5C or the other
Warrants.
(4) The Company shall not be required to effect more than
a total of three effective registrations under this Section 5C.
(5) The Company shall not be required to effect a
registration pursuant to this Section 5C unless the offering includes
Registrable Securities having a Fair Market Value of at least $4 million in the
aggregate.
(6) The Company shall not be required to effect any
registration within twelve months of the effective date of any other
registration under this Section 5C.
D. "Piggyback" Registrations. If the Company at any time proposes
to register any of its securities under the Securities Act (other than pursuant
to Section 5C of any Warrant) on a registration statement on Form S-1, S-2 or
S-3 or on any other form upon which may be registered securities similar to the
Registrable Securities for sale to the general public except Form S-4 and Form
S-8, the Company will at each such time give prompt notice to all Warrantholders
of its intention to do so setting forth the date on which the Company proposes
to file such registration statement, which date shall be no earlier than 30
days from the date of such notice, and advising each such Warrantholder of its
right to have Registrable Securities included therein. Upon the written request
of any Warrantholder given to the Company not less than 5 days prior to the
proposed filing date of such registration statement set forth in such the
Company' notice, the Company will use its best efforts to cause each of the
Registrable Securities which the Company has been requested to register by such
Warrant holder to be registered under the Securities Act. If the securities to
be so registered for sale include securities to be sold for the account of the
Company and to be distributed by or through a firm of underwriters of recognized
standing under underwriting terms appropriate for such transaction, then the
Registrable Securities shall also be included in such underwriting, provided
that if, in the reasonable written opinion of the managing underwriter or
underwriters, the total amount of such securities to be so registered, when
added to such Registrable Securities, will exceed the maximum amount of the
Company' securities which can be marketed (i) at a
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price reasonably related to their then current market value, or (ii) without
otherwise materially and adversely affecting the entire offering, the Company
will include in such registration to the extent of the number which the Company
is so advised can be sold in such offering securities determined as follows:
(1) if such registration as initially proposed by the Company was
solely a primary registration of its securities:
(i) first, the securities proposed by the Company to be sold for
its own account,
(ii) second, any Registrable Securities requested to be included
in such registration pro rata among the holders of such Registrable
Securities and the holders of such other shares of the Stock on the
basis of the number of Registrable Securities and other shares of
the Stock requested to be included by each such holder, and
(iii) third, any other securities of the Company proposed to be
included in such registration statement in accordance with the
provisions, if any, then existing among the holders of such
securities, and
(2) if such registration as initially proposed by the Company was
in whole or in part requested by holders of securities of the Company, other
than holders of Registrable Securities, pursuant to demand registration rights,
(i) first, such securities held by the holders initiating such
registration, pro rata among the holders thereof, on the basis
agreed upon by such holders and the Company,
(ii) second, Registrable Securities requested to be included in
such registration pro rata among the holders of such Registrable
Securities and the holders of such other shares of the Stock on the
basis of the number of Registrable Securities and other shares of
the Stock requested to be included by each such holder, and
(iii) third, any securities of the Company proposed to be
included in such registration statement in accordance with the
priorities, if any, then existing among the holders of such
securities.
Each Warrantholder for the account of which any Registrable Securities shall be
included in such underwriting shall agree not to sell any other Registrable
Securities then held by such Warrantholder until 120 days after the effective
date of such registration statement, except that such Warrantholder may sell
such other Registrable Securities in private
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transactions within such period to transferees who agree not to sell such
securities within the remainder of such 120-day period. Any registration of
Registrable Securities pursuant to this Section 5D shall have no effect on any
registration pursuant to Section 5C.
E. The Company Obligations in Registration. If and whenever the
Company is obligated by the provisions of this Section 5 to use its best efforts
to effect the registration of any Registrable Securities under the Securities
Act, as expeditiously as possible the Company will:
(1) prepare and file with the Commission, as expeditiously
as possible within 60 days after the initial request from Warrantholders to
register such Registrable Securities, a registration statement with respect to
such Registrable Securities and use its best efforts to cause such registration
statement to become effective within 120 days after such initial request and to
remain effective; provided, however, that the Company shall not be required to
keep such registration statement effective, or to prepare and file any
amendments or supplements thereto, later than 5 P.M., Eastern Time, on the last
business day of the sixth month following the date on which such registration
statement becomes effective under the Securities Act or such longer period
during which the Commission requires that such registration statement be kept
effective with respect to any of the Registrable Securities so registered;
(2) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and to comply with provisions of the Securities Act with respect to
the disposition of all Registrable Securities covered by such registration
statement whenever the holders for whom such Registrable Securities are
registered or are to be registered shall desire to dispose of the same, subject,
however, to the proviso contained in the immediately preceding clause (1);
(3) furnish each holder for whom such Registrable
Securities are registered or are to be registered such numbers of copies of each
registration statement and printed prospectus, including a preliminary
prospectus and any amendments or supplements thereto, in conformity with the
requirements of the Securities Act, and such other documents and information as
such seller may reasonably request in order to facilitate the disposition of
such Registrable Securities;
(4) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under such other
securities or blue Sky laws of such jurisdictions as each seller shall request,
and do any and all other acts and things which may be necessary or advisable to
enable such seller to consummate the disposition in such jurisdictions of such
Registrable Securities guaranteed by such seller except that the Company shall
not for any purpose be required to (i) qualify generally to
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do business as a foreign corporation in any jurisdiction wherein it would not
but for the requirements of this clause (4) be obligated to be so qualified,
(ii) subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction unless the Company is
already subject to general service of process in such jurisdiction;
(5) furnish to the holders for whom such Registrable
Securities are registered or are to be registered at the time of the disposition
of such Registrable Securities by such holders a signed copy of an opinion of
counsel for the Company acceptable to such holders as to such matters as such
holders may request and substantially to the effect that, a registration
statement covering such Registrable Securities has been filed with the
Commission under the Securities Act and has been made effective by order of the
Commission; said registration statement and the prospectus contained therein
comply as to form in all material respects with the requirements of the
Securities Act and, based upon such investigation and inquiry as said counsel
deems necessary or appropriate, nothing has come to said counsel's attention
which would cause it to believe that either said registration statement or said
prospectus contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein (in the case of said prospectus, in the light of the circumstances under
which they were made) not misleading; said counsel knows of no legal or
governmental proceedings required to be described in said prospectus which are
not described as required, or of any contract or documents of a character
required to be described in said registration statement or said prospectus or to
be filed as an exhibit to said registration statement or to be incorporated by
reference therein which is not described and filed as required; no stop order
has been issued by the Commission suspending the effectiveness of such
registration statement and that, to the best of such counsel's knowledge, no
proceedings for the issuance of such a stop order are threatened or
contemplated; and the applicable provisions of the securities or blue sky laws
of each state in which the Company shall be required, pursuant to clause (4) of
this Section 5E, to register or qualify such Registrable Securities, have been
complied with, assuming the accuracy and completeness of the information
furnished to such counsel with respect to each filing relating to such laws; it
being understood that said counsel may rely, as to all factual matters and
financial data treated therein, on certificates of the Company (copies of which
shall be delivered to such holders), and as to all questions of the laws of each
state in which the Company shall be so required to register or qualify such
Registrable Securities, on the opinion of counsel from such state reasonably
acceptable to such holders, copies of which shall be delivered to such holders;
(6) immediately notify each holder of Registrable
Securities covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes
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an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made, and at
the request of any such seller promptly prepare and furnish to such seller a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
(7) advise each holder of Registrable Securities covered
by such registration statement, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such Registration Statement or the initiation or
threatening of any proceeding for that purpose; and use its reasonable efforts
to comply with all applicable rules and regulations of the Commission, and make
generally available to the seller of Registrable Securities covered by such
Registration Statement, earnings statements satisfying the provisions of Section
11 (a) of the Securities Act, no later than forty-five (45) days after the end
of any twelve (12) month period (or ninety (90) days, if such period is a fiscal
year) (a) commencing at the end of any fiscal quarter in which Securities are
sold to underwriters in an underwritten offering, or (b) if not sold to
underwriters in such an offering, beginning with the first day of the month of
the Company's first fiscal quarter commencing after the effective date of a
registration statement;
(8) permit any holder holding Registrable Securities
covered by such registration statement or prospectus to withdraw their
Registrable Securities from such registration statement or prospectus if such
seller has informed the Company that it believes that such amendment or
supplement does not comply in all material respects with the requirements of the
Securities Act or the rules and regulations thereunder, after having been
furnished with a copy thereof at least five (5) business days prior to the
filing thereof,
(9) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
holders of a majority in the aggregate face amount of the Registrable Securities
being sold or the underwriters retained by such sellers, if any, reasonably
request in order to expedite or facilitate the disposition of such Registrable
Securities, including customary opinions and indemnification;
(10) make available for inspection by any holder of
Registrable Securities covered by such registration statement, any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent
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retained by any such holder or underwriter (collectively, the "Inspectors"), all
financial and other records, pertinent corporate documents and properties of the
Company and its subsidiaries (collectively, the "Records"), if any, as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's and its subsidiaries' directors,
officers and employees to supply all information and respond to all inquiries
reasonably requested by any such Inspector in connection with such registration
statement. Holders of Registrable Securities agree that Records and other
information which the Company determines in good faith to be confidential, and
of which determination the Inspectors and holders are so notified, shall not be
disclosed by the Inspectors or the holders unless (a) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in the
Registration Statement or (b) the release of such Records is required pursuant
to a subpoena or court order. Holders of Registrable Securities agree that they
will, upon learning that disclosure of the Records is being sought in a court of
competent jurisdiction or by a government agency, give prompt notice to the
Company and allow the Company to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
(11) if requested by the managing underwriters or a holder of
Registrable Securities being sold in connection with an underwritten offering,
promptly incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriters and the holders of a majority in the
aggregate face amount of the Registrable Securities being sold agree should be
included therein relating to the plan of distribution with respect to such
Registrable Securities including, without limitation, information with respect
to the securities being sold to such underwriters, the purchase price being paid
therefor by such underwriters and with respect to any other terms of the
underwritten offering of the Registrable Securities to be sold in such offering;
and make all required filings of such Prospectus supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
Prospectus supplement or post-effective amendment;
(12) list such Registrable Securities on any securities
exchange on which the Company's Common Stock is then listed, if such Registrable
Securities are not already so listed and if such listing is then permitted under
the rules of such exchange, and provide a transfer agent and registrar for such
Registrable Securities covered by such registration statement not later than the
effective date of such registration statement; and
(13) obtain a CUSIP number for all Registrable Securities
(unless already obtained) not later than the Effective Date.
C. Payment of Registration Expenses. The Company shall pay all
Registration Expenses in connection with each registration pursuant to this
Section 5.
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D. Information from Holders. Notices and requests delivered by
holders of Registrable Securities to the Company pursuant to this Section 5
shall contain such information regarding the Registrable Securities to be so
registered and the intended method of disposition thereof as shall reasonably be
required in connection with the action to be taken.
E. Indemnification.
(1) Indemnification by the Company. In the event of any
registration under the Securities Act of any Registrable Securities pursuant to
this Section 5, the Company hereby agrees to indemnify and hold harmless each
holder disposing of such Registrable Securities, its respective agents,
directors and officers, each other person, if any, who controls (within the
meaning of the Securities Act) such holder and each other person (including
underwriters) who participates in the offering of such Registrable Securities,
against any losses, claims, damages or liabilities, to the extent that such
losses, claims, damages or liabilities (or proceedings in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement, on the effective date
thereof, under which such Registrable Securities were registered under the
Securities Act, in any preliminary prospectus or final prospectus contained
therein or in any amendment or supplement to any preliminary prospectus or final
prospectus (if used during the period the Company is required to keep such
registration statement current in any such case), or arise out of or are based
upon 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, and will reimburse such holder, such agents, directors and officers
and each such controlling person or participating person (including
underwriters) for any legal or any other expenses reasonably incurred by such
holder, such agents, directors and officers or such controlling person or
participating person (including underwriters) in connection with investigating
or defending any such loss, claim, damage, liability or proceeding, provided,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, said preliminary or final prospectus or said
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
holder or such controlling or participating person (including underwriters), as
the case may be, specifically for use in the preparation of such registration
statement; and provided, further, that, with respect to any untrue statement or
omission or alleged untrue statement or omission made in any preliminary
prospectus, the Company will not be liable to any holder to the extent that any
loss, claim, damage, liability or expense results from the fact that a current
copy of the final prospectus was not sent or given to the Person asserting any
such loss, claim, damage, liability or expense at or prior to the written
confirmation of the sale of the Registrable Securities concerned
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to such Person if it is determined that it was the responsibility of such holder
to provide such Person with a current copy of the final prospectus and such
current copy of the final prospectus was provided to such holder and would have
cured the defect giving rise to such loss, claim, damage, liability or expense.
The Company agrees to provide for contributions relating to such indemnification
as shall be reasonably requested by any holder disposing of any Registrable
Securities or by any such underwriter.
(2) Indemnification by Holders. Each such holder of
Registrable Securities agrees to indemnify and hold harmless the Company, its
respective agents, directors and officers, each other person, if any, who
controls (within the meaning of the Security Act) the Company and each other
person (including underwriters) who participate in the offering of such
Registrable Securities, against all losses, claims, damages and liabilities to
which the Company, may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are based
upon any untrue statement of any material fact contained in any such
registration statement, on the effective date thereof, under which such
Registrable Securities were registered under the Securities Act, in any
preliminary prospectus or final prospectus contained therein or in any amendment
or supplement to any preliminary prospectus or final prospectus (if used during
the period the Company is required to keep such registration statement current
in any such case), or arise out of or are based upon 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, to the extent that any
such loss, claim, damage or liability arises out of or is based upon any such
statement or omission made in such registration statement, said preliminary or
final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such holder or such underwriter, as the case may be, and
specifically stated to be for use in the preparation of such registration
statement.
(3) Notices of Claims, Etc. Each indemnified party, promptly
but not later than 30 days after its receipt of notice of the commencement of
any action against it in respect of which indemnity may be sought from any
indemnifying party or pursuant to this Section 5H, shall notify such
indemnifying party in writing of the commencement thereof. In case any such
action shall be brought against any indemnified party and it shall notify such
indemnifying party of the commencement thereof, such indemnifying party will be
entitled to participate therein and, to the extent that it may wish, to assume
the defense thereof, with counsel satisfactory to such indemnified party, and
such indemnified party may participate in such defense at such party's expense,
and provided, further that the failure of any such indemnified party to give
notice as provided herein shall not relieve such indemnifying party of its
obligations under this Section 5E unless such failure to give notice shall
materially adversely affect such indemnifying party in the defense of any such
claim or any such litigation. With respect to any claim or
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litigation being conducted by such indemnifying party, no indemnified party
shall, except with the consent of such indemnifying party, consent to entry of
any judgment or enter into any settlement of any claim as to which indemnity may
be sought. No indemnifying party, in the defense of any such claim or
litigation, shall, except with the consent of each indemnified party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
(4) Contribution. To the extent that the undertaking to
indemnity, pay and hold harmless set forth in paragraphs (1) and (2) of Section
5(E) may be unenforceable because it is violative of any law or public policy,
each party that would have been required to provide the indemnity shall
contribute the maximum portion which it is permitted to pay and satisfy under
applicable law, to the payment and satisfaction of all indemnified liabilities
incurred by each party entitled to indemnification under this Section 5(E);
provided that in no event shall a holder of Registrable Securities be required
to contribute an amount greater than the dollar amount of net proceeds received
by such holder with respect to the sale of any Registrable Securities.
F. Exchange of Certificates. As soon as possible after the
effectiveness of any registration statement under the Securities Act pursuant to
this Section 5, the Company will deliver to the holder of any Warrant Shares so
registered, upon demand of such holder and its delivery to the Company of a
certificate or certificates representing such Warrant Shares bearing the legend
set forth in Section 4B, a new certificate or certificates representing such
Warrant Shares but not bearing such legend.
G. Obligations of the Holders. Each holder of Registrable
Securities agrees:
(1) that upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5E(6), such holder will
forthwith discontinue such holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 5E(6) and, if so directed by the Company,
will use its best efforts to deliver to the Company (at the Company expense) all
copies, other than permanent file copies, then in such Warrantholder's
possession of the prospectus relating to such Registrable Securities current at
the time of receipt of such notice, and
(2) that it will immediately notify the Company at any time
when a prospectus relating to the registration of such Registrable Securities is
required to be delivered under the Securities Act, of the happening of any event
as a result of which information previously furnished by such holder to the
Company in writing specifically
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for inclusion in such prospectus contains an untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the circumstances
under which they were made.
H. Underwritten Registration. If any of the Registrable
Securities covered by a registration pursuant to this Section 5 are to be sold
in an underwritten offering, the investment banker or investment bankers and
manager, or managers that will administer the offering will be selected by the
holders of a majority in aggregate principal amount of such Registrable
Securities included in such offering. No Person may participate in any
underwritten registration hereunder unless such Person (a) agrees to sell such
Person's Registrable Securities on the basis provided in any underwriting
arrangements approved by the Persons entitled hereunder to approve such
arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
SECTION 6. ANTI-DILUTION PROVISIONS. A. Adjustment of Purchase Price
and Number of Warrant Shares. The Purchase Price shall be subject to adjustment
from time to time as hereinafter in this Section 6 provided. Upon each
adjustment of the Purchase Price, except pursuant to Section 6G, the registered
holder of this Warrant shall thereafter be entitled to purchase, at the Purchase
Price resulting from such adjustment, the number of shares of the Stock
(calculated to the nearest whole share) obtained by multiplying the Purchase
Price in effect immediately prior to such adjustment by the number of shares of
the Stock purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Purchase Price resulting from such
adjustment.
B. Purchase Price Adjustment Formulas. If and whenever after
October 24, 1997, the Company shall issue or sell any shares of the Stock for a
consideration per share which is less than the then effective Dilutive Basis at
the time of such issue or sale, then in each such case (except when a different
method of adjusting the Purchase Price is provided in Section 6D, 6E or 6F), the
Purchase Price shall be forthwith changed (but only, except as otherwise
provided in Section 6C(3), if a reduction would result) to the lower of the
prices (calculated to the nearest cent) determined as follows:
(1) by dividing (i) an amount equal to the sum of (a) the
number of shares of the Stock outstanding and deemed (in accordance with Section
6C) to be outstanding immediately prior to such issue or sale, multiplied by the
then effective Purchase Price, plus (b) the total consideration, if any,
received and deemed (in accordance with Section 6C) received by the Company upon
such issue or sale, by (ii) the total number of shares of the Stock outstanding
and deemed (in accordance with Section 6C) outstanding immediately after such
issue or sale; and
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(2) by multiplying the Purchase Price in effect immediately
prior to the time of such issue or sale by a fraction, the numerator of which
shall be (i) the sum of (a) the number of shares of the Stock outstanding and
deemed (in accordance with Section 6C) to be outstanding immediately prior to
such issue or sale, multiplied by the Dilutive Basis immediately prior to such
issue or sale, plus (b) the total consideration, if any, received and deemed (in
accordance with Section 6C) received by the Company upon such issue or sale,
divided by (ii) the total number of shares of Stock outstanding and deemed (in
accordance with Section 6C) to be outstanding immediately after such issue or
sale, and the denominator of which shall be the Dilutive Basis immediately prior
to such issue or sale.
No adjustment of the Purchase Price, however, shall be made (i) in
an amount less than one cent per share, but any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any subsequent adjustments so carried
forward shall amount to one cent per share or more, (ii) in the event that such
issuance or sale of Stock or Convertible Securities (as hereinafter defined) or
rights or options to subscribe for or to purchase Stock or Convertible
Securities is effected pursuant to a firm commitment underwriting, the aggregate
gross proceeds of which are at least $10 million, (iii) in the event that such
issuance or sale of Stock (or the grant by the Company of any rights or options
to subscribe for or to purchase Stock) is to an officer, director or employee
of, or consultant to, the Company pursuant to a stock option plan or stock
purchase plan duly approved by the stockholders of the Company, or (iv) upon the
exercise of the Company's outstanding Class A Warrants issued by the Company in
1993 to purchase 449,123 shares of its common stock.
C. Constructive Issuances of the Stock: Convertible Securities,
Rights and Options. For purposes of Section 6B, the following provisions shall
also be applicable:
(1) In case at any time the Company shall in any manner
grant any rights or options to subscribe for or to purchase the Stock or any
stock or securities convertible into or exchangeable for shares of the Stock
(such convertible or exchangeable stock or securities being hereinafter called
"Convertible Securities"), whether or not such rights or options or the right to
convert or exchange any such Convertible Securities are immediately exercisable,
and the price per share for which the Stock is issuable upon the exercise of
such rights or options or upon conversion or exchange of such Convertible
Securities (determined by dividing (i) the total amount, if any, received or
receivable by the Company as consideration for the granting of such rights or
options, plus the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the exercise of such rights or options, plus, in the
case of any such rights or options which related to such Convertible Securities,
the minimum
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aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of the Stock issuable upon the
exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the Dilutive Basis in effect as of the time of
granting such rights or options, then the total maximum number of shares of the
Stock issuable upon the exercise of such rights or options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such rights or options shall (on and after the date of the
granting of such rights or options) be deemed to be outstanding and to have been
issued for such price per share. Except as provided in clause (3) below, no
further adjustments of the Purchase Price shall be made upon the actual issue of
shares of the Stock or Convertible Securities upon exercise of such rights or
options or upon the actual issue of shares of the Stock upon conversion or
exchange of such Convertible Securities.
(2) In case at any time the Company shall in any manner
issue or sell any Convertible Securities, whether or not the rights to exchange
or convert thereunder are immediately exercisable, and the price per share for
which the Stock is issuable upon such conversion or exchange (determined by
dividing (i) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of the Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Dilutive Basis in effect as
of the time of such issue or sale, then the total maximum number of shares of
the Stock issuable upon conversion or exchange of all such Convertible
Securities shall (on and after the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued for such price
per share, provided, that, except as otherwise specified in clause (3) below,
(a) no further adjustments of the Purchase Price shall be made upon the actual
issue of the Stock upon conversion or exchange of such Convertible Securities,
and (b) if any such issue or sale of such Convertible Securities is made upon
exercise of any rights to subscribe for or to purchase of any option to purchase
any such Convertible Securities for which adjustments of the Purchase Price have
been or are to be made pursuant to other provisions of this Section 6C, no
further adjustment of the Purchase Price shall be made by reason of such issue
or sale.
(3) If the exercise price provided for in any right or
option referred to in clause (1) of this Section 6C, or the rate at which any
Convertible Securities referred to in clauses (1) and (2) of this Section 6C are
convertible into or exchangeable for the Stock, shall change or a different
exercise price or rate shall become effective at any time or from time to time
(other than under or by reason of provisions designed to protect against
dilution) then, upon such change becoming effective, the Purchase Price
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then in effect hereunder shall forthwith be increased or decreased to such
Purchase Price as would have obtained had the adjustments made and required to
be made under this Section 6C upon the issuance of such rights or options or
Convertible Securities been made upon the basis of (and the total consideration
received therefor) (i) the issuance of the number of shares of the Stock
theretofor actually delivered upon the exercise of such options or rights or
upon the conversion or exchange of such Convertible Securities, (ii) the
issuance of all of the Stock and all other rights, options and Convertible
Securities issued after the issuance of such rights, options or Convertible
Securities, and (iii) the original issuance at the time of such change of any
such options, rights and Convertible Securities then still outstanding. On the
expiration of any such option or right or the termination of any such right to
convert or exchange such Convertible Securities, the Purchase Price then in
effect hereunder shall forthwith be increased or decreased to such Purchase
Price as would have obtained (a) had the adjustments made upon the issuance of
such rights or options or such Convertible Securities been made upon the basis
of the issuance of only the number of shares of the Stock theretofor actually
delivered (and the total consideration received therefor) upon the exercise of
such rights or options or upon the conversion or exchange of such Convertible
Securities and (b) had adjustments been made on the basis of the Purchase Price
as adjusted under the immediately preceding clause (a) for all issues or sales
of the Stock or rights, options or Convertible Securities made after the
issuance of such rights or options or such Convertible Securities. If the
exercise price provided for in any right or option referred to in clause (1) of
this Section 6C, or the rate at which any Convertible Securities referred to in
clauses (1) and (2) of this Section 6C are convertible into or exchangeable for
shares of the Stock, shall decrease at any time under or by reason of provisions
with respect thereto designed to protect against dilution, then in the case of
the delivery of shares of the Stock upon the exercise of any such right or
option or upon conversion or exchange of any such Convertible Securities, the
Purchase Price then in effect hereunder shall forthwith be decreased to such
Purchase Price as would have obtained had the adjustments made upon issuance of
such right or option or such Convertible Securities been made upon the basis of
the issuance of (and the total consideration received for) the shares of the
Stock delivered as aforesaid.
(4) In case at any time any shares of the Stock or
Convertible Securities or any rights or options to purchase any shares of the
Stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount payable to the
Company therefor, after deduction therefrom of any expenses incurred or any
underwriting commissions or concessions or discounts or, in the case of a
private placement thereof, reasonable finders' fees or brokerage commissions
paid or allowed by the Company in connection therewith. In case any shares of
the Stock or Convertible Securities or any rights or options to purchase any
shares of the Stock or Convertible Securities shall be issued or sold for a
consideration
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other than cash, the amount of the consideration other than cash payable to the
Company shall be deemed to be the fair value of such consideration as determined
by the Board of Directors of the Company, after deduction therefrom of any
expenses incurred or any underwriting commissions or concessions or discounts
paid or allowed by the Company in connection therewith. In case any shares of
the Stock or Convertible Securities or any rights or options to purchase any
shares of the Stock or Convertible Securities shall be issued in connection with
any merger of another corporation into the Company, the amount of consideration
therefor shall be deemed to be the Fair Market Value as determined by the Board
of Directors of the Company of such portion of the assets of such merged
corporation as such Board shall determine to be attributable to such shares of
the Stock, Convertible Securities, rights or options, as the case may be.
(5) In case at any time the Company shall take a record of
the holders of the Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in shares of the Stock or in Convertible
Securities, or (ii) to subscribe for or purchase shares of the Stock or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of the Stock deemed to have been issued or sold
upon the declaration of such dividend or of such other distribution or the date
of the granting of such right of subscription or purchase, as the case may be.
No adjustment in the Purchase Price, however, shall be made (i) in
the event that such issuance or sale of Stock or Convertible Securities or
rights or options to subscribe for or to purchase Stock or Convertible
Securities is effected pursuant to a firm commitment underwriting, the aggregate
gross proceeds of which are at least $10 million, (ii) in the event that such
issuance or sale of Stock (or the grant by the Company of any rights or options
to subscribe for or to purchase Stock) is to an officer, director or employee
of, or consultant to, the Company pursuant to a stock option plan or stock
purchase plan duly approved by the stockholders of the Company, or (iv) upon the
exercise of the Company's outstanding Class A Warrants issued by the Company in
1993 to purchase 449,123 shares of its common stock.
D. Stock Dividends. In case at any time the Company shall declare
a dividend or any other distribution upon the Stock of the Company which is
payable in shares of the Stock, then the Purchase Price in effect immediately
prior to the declaration of such dividend or distribution shall be reduced to
the quotient obtained by dividing (i) the product of (a) the number of shares of
the Stock outstanding and deemed (in accordance with Section 6C) to be
outstanding immediately prior to such declaration, multiplied by (b) the then
effective Purchase Price, by (ii) the total number of shares of the Stock
outstanding and deemed (in accordance with Section 6C) to be outstanding
immediately after such declaration.
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E. Extraordinary Dividends and Distributions. In case at any time
the Company shall declare a dividend or any other distribution upon the Stock
payable otherwise than out of current earnings, retained earnings or earned
surplus and otherwise than in shares of the Stock or Convertible Securities, the
Purchase Price in effect immediately prior to such declaration shall be reduced
by an amount equal, in the case of a dividend or distribution in cash, to the
amount thereof payable per share of the Stock or, in the case of any other
dividend or distribution, to the Fair Market Value thereof per share of the
Stock at the time such dividend or distribution was declared, as determined by
the Board of Directors of the Company. For the purposes of the foregoing a
dividend or distribution other than in cash shall be considered payable out of
earnings, retained earnings or earned surplus only to the extent that such
current earnings, retained earnings or earned surplus are charged an amount
equal to the Fair Market Value of such dividend or distribution at the time of
the declaration thereof, as determined by the Board of Directors of the Company.
Such reductions shall take effect as of the date on which a record is taken for
the purposes of such dividend or distribution, or, if a record is not taken, the
date as of which the holders of record of the Stock entitled to such dividend or
distribution are to be determined.
F. Stock Splits and Reverse Splits. In case at any time the
Company shall subdivide its outstanding shares of the Stock into a greater
number of shares, the Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of Warrant Shares
purchasable pursuant to this Warrant immediately prior to such subdivision shall
be proportionately increased, and conversely, in case at any time the Company
shall combine the outstanding shares of the Stock into a smaller number of
shares, the Purchase Price in effect immediately prior to such combination shall
be proportionately increased and the number of Warrant Shares purchasable upon
the exercise of this Warrant immediately prior to such combination shall be
proportionately reduced.
G. Adjustments for Consolidation, Merger, Sale of Assets,
Reorganization, Etc. If at any time the Company shall be a party to any
transaction (including without limitation a merger, consolidation, sale of all
or substantially all of the Company, assets or a recapitalization of the Stock)
in which the previously outstanding shares of the Stock shall be changed into
and exchanged for different securities of the Company or changed into or
exchanged for common stock or other securities of another corporation or other
property (including cash) or any combination of any of the foregoing (each such
transaction being hereinafter referred to as the "Transaction"; the Company (in
the case of a recapitalization of the Stock) or such other corporation being
hereinafter referred to as the "Acquiring Company"; and the common stock of the
Acquiring Company being hereinafter referred to as the "Acquirer's Stock"),
then, as a condition to the consummation of the Transaction, lawful and adequate
provisions shall be made so that, upon the basis and the terms and in the manner
provided in this Section 6G, each
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holder of any Warrants, upon the exercise of such Warrants at any time after the
consummation of the Transaction, shall be entitled to receive, in lieu of the
shares of the Stock issuable upon such exercise prior to such consummation, at
the election of such holder given by notice to the Company on or before the
later of (i) the day on which the holders of the Stock approve the Transaction,
or (ii) the thirtieth day following the date of delivery or mailing to such
holder of the last proxy statement relating to the vote on the Transaction by
the holders of the Stock:
(1) the stock and other securities, cash and property to
which such holder would have been entitled upon the consummation of the
Transaction if such holder had exercised such Warrants immediately prior thereto
(subject to adjustments from and after the date of the consummation of the
Transaction (the "Consummation Date") as nearly equivalent as possible to the
adjustments provided for in Sections 6A and 6B and this Section 6G); or
(2) Except with respect to a Transaction in which the
previously outstanding shares of the Stock shall be exchangeable for cash only,
if the Acquiring Company meets the requirements set forth in this Section 6G,
the number of shares of the Acquirer's Stock or, if the Acquiring Company fails
to meet, but a Parent (as defined in this Section 6G) does meet, such
requirements, the number of shares of such Parent's common stock (subject to
adjustments from and after the Consummation Date as nearly equivalent as
possible to the adjustments provided for in Section 6A and 6B and this Section
6G), determined by dividing (i) the product obtained by multiplying (a) the
number of shares of the Stock to which the holder of such Warrants would have
been entitled had such holder exercised such Warrant immediately prior to the
consummation of the Transaction, times (b) the greater of the Purchase Price or
the Acquisition Price (as defined in this Section 6G) in effect on the date
immediately preceding the Consummation Date, by (ii) the Market Value of the
Acquirer's Stock on the date immediately preceding the Consummation bate.
For the purposes of this Section 6G: the term "Market Value" shall mean, for any
share of common stock on any date specified herein, the last sale price on such
date, or, if no sale takes place on such date, the average of the closing bid
and asked prices on such date, in each case as officially reported on the NYSE
or, if not so reported, on the principal national securities exchange on which
such stock is listed or it not listed or admitted to trading, the average of the
closing bid and asked prices of such stock in the over-the-counter market as
reported by NASDAQ or a similar organization; and the term "Acquisition Price"
shall mean the consideration per share to be paid for or received by the holders
of the previously outstanding shares of the Stock in accordance with the terms
of the Transaction, determined (x) in the case where the holders of the
previously outstanding Stock received solely shares of the Acquirer's Stock in
the Transaction, by multiplying the Market Value of the Acquirer's Stock as of
the date immediately
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preceding the Consummation Date by a fraction the numerator of which shall be
the aggregate number of shares of the Acquirer's Stock to be received in the
Transaction in exchange for all of the previously outstanding shares of the
Stock and the denominator of which shall be the aggregate number of such
previously outstanding shares of the Stock, and (y) in any other case, by
dividing the aggregate fair market value (using Market Value for any shares of
the Acquirer's Stock), as of the date immediately preceding the Consummation
Date, of the aggregate consideration to be received by the holders of such
previously outstanding shares of Stock by the number of shares of such
previously outstanding Stock. The requirements referred to in clause (2) of this
Section 6G with reference to the Acquiring Company or to a corporation (herein
referred to as a "Parent") which directly or indirectly controls the Acquiring
Company are as follows: (aa) its common stock is listed on the NYSE or a
principal national securities exchange or bid and asked prices are reported with
respect thereto by NASDAQ or a similar organization and such common stock
continues to meet such requirements for listing thereon, (bb) it is required to
file, and in each of its three fiscal years immediately preceding the
Consummation Date has filed, reports with the Commission pursuant to Section 13
or 15(d) of the Exchange Act, and (cc) in the case of a Parent, such Parent is
required to include the Acquiring Company in the consolidated financial
statements contained in the Parent's Annual Report on Form 10-K and is not
itself included in the consolidated financial statements of any other person
(other than its consolidated subsidiaries). Notwithstanding anything contained
in the Warrants to the contrary, the Company shall not effect any Transaction
unless prior to or simultaneously with the consummation of such Transaction the
survivor or successor corporation (if other than the Company) resulting from
such Transaction shall (xx) assume by written instrument executed and delivered
to each Warrantholder, the obligation to deliver to such Warrantholder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such Warrantholder may be entitled to receive, and containing the
express assumption of such successor corporation of the due and punctual
performance and observance of every provision of this Warrant to be performed
and observed by the Company and of all liabilities and obligations of the
Company hereunder, and (yy) deliver to the Warrantholders an opinion of counsel,
in form and substance reasonably satisfactory to the Warrantholders, to the
effect that such written instrument has been duly authorized, executed and
delivered by such successor corporation and constitutes a legal, valid and
binding instrument enforceable (subject to applicable bankruptcy and other
similar laws affecting the enforcement, of creditors, rights generally) against
such successor corporation in accordance with its terms, and to such further
effects as the Warrantholders may reasonably request.
H. Exceptions to Adjustment of Purchase Price. Anything herein to
the contrary notwithstanding, the Company shall not be required to make any
adjustment of the Purchase Price in the case of the issuance of the Warrants or
the issuance of shares of
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the Stock upon exercise of the Warrants or any adjustment of the exercise price
with respect thereto.
I. Treasury Shares. The number of shares of the Stock outstanding
at any time shall not include shares owned or held by or for the account of the
Company, and the disposition of any such shares shall be considered an issue or
sale of the Stock for the purposes of this Section 6.
J. Officers' Certificate. Upon each adjustment of the Purchase
Price and upon each change in the number of shares of the Stock issuable upon
the exercise of this Warrant, and in the event of any change in the rights of
the holder of this Warrant by reason of other events herein set forth, then and
in each such case, the Company will promptly mail to the registered holder of
this Warrant an Officers' Certificate stating the adjusted Purchase Price and
the new number of shares so issuable, or specifying the other shares of stock,
securities or assets and the amount thereof receivable as a result of such
change in rights, and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
K. Company to Prevent Dilution. In case at any time or from time
to time conditions arise by reason of action taken by the Company, which in the
opinion of its Board of Directors, are not adequately covered by the provisions
of this Section 6, and which might materially and adversely affect the exercise
rights of the registered holders of Warrants, the Board of Directors of the
Company shall appoint a firm of independent certified public accountants of
recognized national standing, which shall give their opinion upon the
adjustment, if any, on a basis consistent with the standards established in the
other provisions of this Section 6, necessary with respect to the Purchase
Price, so as to preserve, without dilution, the exercise rights of the
registered holders of the Warrants. Upon receipt of such opinion, the Board of
Directors of the Company shall forthwith make the adjustments described therein.
SECTION 7. OPTIONAL REDUCTION OF THE PURCHASE PRICE. The Company
shall have the right, at any time or from time to time, at its election, to
reduce pro rata, the Purchase Price then in effect under all the Warrants then
outstanding for such period or periods of time as the Board of Directors of the
Company may determine. In each such case, the Company shall deliver to all
Warrantholders a certificate of an officer of the Company stating (i) the
election of the Company to reduce the Purchase Price in accordance with this
Section 7, specifying the Purchase Price so reduced, (ii) that such election is
irrevocable during the period below referred to, and (iii) the period in which
such reduced Purchase Price shall be in effect, which period shall commence not
less than 30 days after such certificate is delivered to the Warrantholders.
Failure to receive such certificate, or any defect therein, shall not affect the
validity of the reduction of the Purchase Price during such period. No reduction
of the Purchase Price
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pursuant to the provisions of this Section 7 shall be deemed for the purposes of
Section 6 to alter or adjust the Purchase Price or to increase the number of
shares then purchasable upon the exercise of the Warrants.
SECTION 8. SPECIAL AGREEMENTS OF THE COMPANY. The Company covenants
and agrees that:
A. Will Reserve Shares. The Company will authorize, reserve and
set apart and have available for issuance at all times, free from preemptive
rights, including, without limitation, rights derived from rights offerings,
that number of shares of the Stock which is deliverable upon the exercise of the
Warrants, and the Company will have at all times any other rights or privileges
provided for therein sufficient to enable it at any time to fulfill all its
obligations hereunder.
B. Will Avoid Certain Actions. The Company will not, by amendment
of its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, issue or sale of securities or otherwise, avoid
or take any action which would have the effect of avoiding the observance or
performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in carrying out all of the
provisions of this Warrant and in taking all such action as may be necessary or
appropriate in order to protect the rights of the registered holders of this
Warrant against dilution or other impairment, and in particular, will not permit
the par value, if any, of any share of the Stock, to be or become greater than
the then effective Purchase Price.
C. Will Secure Government Approvals. If any shares of the Stock
required to be reserved for the purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal
law (other than the Securities Act) or under any state law before such shares
may be issued upon exercise of this Warrant, the Company will, at its expense,
as expeditiously as possible use its best effort to cause such shares to be duly
registered or approved, as the case may be.
D. Will List on Securities Exchange and NASDAQ. At any time when
any of the Stock is registered under the Exchange Act, the Company will, at its
expense, obtain and maintain the approval for listing in any national securities
exchange (as defined in the Exchange Act) or NASDAQ upon official notice of
issuance of any shares of the Stock receivable upon the exercise of the Warrants
at the time outstanding and maintain the listing of such shares after their
issuance; and the Company will so list on such national securities exchange or
NASDAQ, as the case may be, will register under the Exchange Act (and any
similar state statute then in effect), and will maintain such listing of, any
other securities that at any time are issuable upon exercise of the Warrants, if
and
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at the time that any securities of the Company have been registered under the
Exchange Act.
E. Will Enter into Separate Warrant Agreement. Prior to any
disposition of Warrants, the Company will, if requested by the Warrantholders so
disposing of such Warrants, execute and deliver to a bank or trust company
selected by the Company and satisfactory to such Warrantholders, as Warrant
Agent (herein called the "Warrant Agent"), a separate Warrant agreement in form
and substance reasonably satisfactory to such Warrantholders, providing for the
issuance of Warrants upon countersignature by the Warrant Agent and for the
registration, transfer, exchange and exercise of Warrants, and containing the
substance of the terms and provisions of the respective Warrants and all
customary formal provisions in agreements of that kind. Thereafter any Warrant
may be exchanged for a Warrant or Warrants issued under said separate Warrant
agreement evidencing the same rights as the Warrants surrendered for exchange
and thereafter any reference in Section 5 hereof to "this Warrant," "Warrants,"
"Warrant" or any similar term shall be deemed to include the Warrants so issued
under such separate Warrant agreement. The Company shall pay all costs and
expenses in connection with the execution, delivery and performance of such
separate Warrant agreement, including, without limitation, the fees and expenses
of the Warrant Agent.
G. Will Bind Successors. This Warrant will be binding upon any
corporation succeeding to the Company by merger, consolidation of acquisition of
all or substantially all of the Company's assets.
H. Will Furnish Information. Promptly upon their becoming
available, the Company will deliver to each Warrantholder all reports, proxy
statements and financial statements delivered or sent by the Company to its
stockholders.
SECTION 9. NOTIFICATION BY THE COMPANY. In case at any time:
(1). the Company shall declare upon the Stock any dividend or
other distribution (other than cash dividends which are less than an amount per
share than the most recent cash dividend, if any) to the holders of the Stock;
(2) the Company shall make an offer for subscription pro
rata to the Stock of any additional shares of stock of any class or other
rights;
(3) the Board of Directors of the Company shall authorize
(whether definitively or subject to any conditions) any capital reorganization,
or reclassification of the capital stock of the Company, or consolidation or
merger of the Company with, or sale of all or substantially all of its assets
to, another person;
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(4) the Board of Directors of the Company shall authorize
(whether definitively or subject to any conditions) a voluntary dissolution,
liquidation or winding-up of the Company; or
(5) the Company shall become subject to involuntary
dissolution, liquidation or winding-up;
then, in any one or more of such cases, the Company shall give notice to the
registered holder of this Warrant of the date on which (i) the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights, or (ii) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up shall take
place or be voted upon by stockholders of the Company, as the case may be. Such
notice shall also specify the date as of which the holders of record of the
Stock shall participate in such dividend, distribution or subscription rights,
or shall be entitled to exchange their Stock or securities for other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. Such notice
shall be given not less than 30 and not more than 90 days prior to the action in
question and not less than 30 and not more than 90 days prior to the record date
or the date on which the Company, transfer books are closed in respect thereto
and such notice shall state that the action in question or the record date is
subject to the effectiveness of a registration statement under the Securities
Act, or to a favorable vote of stockholders, if either is required.
SECTION 1O. NOTICES. All notices requested and other communications
required or permitted to be given or delivered to Warrantholders shall be in
writing, and shall be delivered or shall be sent by certified or registered
mail, postage prepaid and addressed, to each Warrantholder at the address shown
on such Warrantholder's Warrant or Warrant Shares, or at such other address as
shall have been furnished to the Company by notice from such Warrantholder. All
notices, requests and other communications required or permitted to be given or
delivered to the Company shall be in writing, and shall be delivered, or shall
be sent by certified or registered mail, postage prepaid and addressed, to the
office of the Company, at Isis Pharmaceuticals, Inc., 2292 Faraday Avenue,
Carlsbad, California 92008, Attention: Secretary, or at such other address as
shall have been furnished to the Warrantholders by notice from the Company.
Unless otherwise indicated herein, all notices shall be deemed to be given
either at the time of the delivery thereof to any officer or employee of such
person entitled to receive such notice at the address of such person for
purposes of this Section 10, or, if mailed at the completion of the fifth full
day following the time of such mailing thereof to such address, as the case may
be.
SECTION 11 - NO RIGHTS OR LIABILITIES AS SHAREHOLDER. This Warrant
shall not entitle any holder hereof to any of the rights of a shareholder of
the
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<PAGE> 103
Company. No provision hereof, in the absence of affirmative action by the holder
hereof to purchase shares of the Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the Purchase Price or as a shareholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
SECTION 12. GOVERNING LAW; CONSENT TO JURISDICTION. This Warrant
shall be governed by, and construed in accordance with, the laws of the State of
New York (without giving effect to the conflict of laws principles thereof). If
any action or proceeding shall be brought by any holder of this Warrant in order
to enforce any right or obligations in respect of this Warrant, the Company
hereby consents and will submit to the jurisdiction of any state or federal
court of competent jurisdiction sitting within the area comprising the Southern
District of New York on the date of this Warrant.
SECTION 13. MISCELLANEOUS. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party (or any predecessor in interest thereof) against which
enforcement of the same is sought. The headings in this Warrant are for purposes
of reference only and shall not affect the meaning or construction of any of the
provisions hereof
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<PAGE> 104
IN WITNESS WHEREOF, ISIS PHARMACEUTICALS, INC. has caused this
Warrant to be signed and delivered in New York City by its duly authorized
officer under its corporate seal, attested by its duly authorized officer, and
to be dated as of October 24, 1997.
ISIS PHARMACEUTICALS, INC.
By ______________________________________
Stanley T. Crooke
Chairman and Chief Executive Officer
[Corporate Seal]
Attest:
_________________________________________
B. Lynne Parshall
Executive Vice President, Chief
Financial Officer and Secretary
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<PAGE> 105
ASSIGNMENT FORM
To Be Executed by the Registered Holder
Desiring to Transfer the Within Warrant of
ISIS PHARMACEUTICALS, INC.
FOR VALUE RECEIVED, the undersigned registered holder hereby sells, assigns and
transfers unto the right to purchase shares of the
Stock covered by the within Warrant, and does hereby irrevocably constitute and
appoint Attorney to transfer the said Warrant on the books of the
Company (as defined in said Warrant), with full power of substitution.
Name of Regis-
tered Holder _________________________________
Signature ____________________________________
Title ________________________________________
Address ______________________________________
______________________________________________
Dated;
In the presence of
________________________________________
NOTICE:
The signature to the foregoing Assignment Form must correspond to
the name as written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
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<PAGE> 106
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
Desiring to Exercise the Within Warrant of
ISIS PHARMACEUTICALS, INC.
The undersigned registered holder hereby exercises the right to
purchase shares of the Stock covered by the within Warrant, according
to the conditions thereof, and herewith makes payment in full of the Purchase
Price of such shares, $ .
Name of Regis-
tered Holder _________________________________
Signature ____________________________________
Title ________________________________________
Address ______________________________________
______________________________________________
Dated; ,
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<PAGE> 1
EXHIBIT 10.20
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(b)(4). 200.83
AND 240.24b-2. * INDICATES OMITTED
MATERIAL THAT IS THE SUBJECT OF A
CONFIDENTIAL TREATMENT REQUEST THAT IS
FILED SEPARATELY WITH THE COMMISSION.
ASSET PURCHASE AGREEMENT
This agreement (hereinafter, "Agreement"), effective as of December 19, 1997
(the "Effective Date"), is made by and between the following parties (which are
collectively referred to in this Agreement as the "Parties"):
GEN-PROBE INCORPORATED, a Delaware Corporation, having a principal place of
business at 10210 Genetic Center Drive, San Diego, CA 92121, U.S.A (hereinafter
"Gen-Probe"); and
ISIS PHARMACEUTICALS, INC., a Delaware Corporation, having a principal place of
business at Carlsbad Research Center, 2292 Faraday Avenue, Carlsbad, California
92008 (hereinafter "Isis")
RECITALS
WHEREAS, Gen-Probe has decided to exit its business related to the research,
development and production of phosphorothioate oligonucleotides as antisense
therapeutic agents; and
WHEREAS, Isis has agreed to acquire from Gen-Probe, and Gen-Probe has agreed to
sell to Isis, substantially all of such business;
NOW, THEREFORE, in consideration of the foregoing premises, mutual covenants and
promises set forth herein and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Agreement, the following words and phrases shall have
the following meanings set forth in this Article I unless the context otherwise
requires. Words in the singular shall include the plural and vice versa.
1.1 "Acquired Assets" shall mean all right, title and interest in and to the
assets listed on Schedule A attached hereto.
1.2 "Acquired Business" shall mean, collectively, the Acquired Assets and the
Assumed Liabilities, which together represent substantially all the business of
Gen-Probe related to the Transferred Products.
1.3 "Affiliate" shall mean, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by, or is under common control
with, such Person. A Person shall be regarded as in control of another Person if
it
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<PAGE> 2
owns, or directly or indirectly controls, more than fifty percent (50%) of the
voting stock or other ownership interest of the other Person, or if it directly
or indirectly possesses the power to direct or cause the direction of the
management and policies of the other Person by any means whatsoever.
1.4 "Assumed Liabilities" shall mean all liabilities and obligations with
respect to the Acquired Assets which accrue or arise from and after the Closing,
including without limitation all liabilities and obligations under the NTIS
Agreements and the other agreements included within the Acquired Assets.
1.5 "Calendar Half Year" shall mean, for each calendar year, the six months
ending June 30th and December 31st of such year, without regard to whether such
dates are otherwise business days.
1.6 "Calendar Year" shall mean any calendar year commencing on January 1 and
ending on December 31; provided, however, that the 1997 Calendar Year shall be
the period commencing on the date hereof and ending on December 31, 1997.
1.7 "Closing" shall have the meaning set forth in Section 2.5 below.
1.8 "Collaborative Partner" shall mean, with respect to Isis, any Third Party
that is a party to any drug discovery, development or commercialization
collaboration agreement or arrangement with Isis.
1.9 "Exchange Rate" shall mean, with respect to any amount to be converted
from a foreign currency to U.S. Dollars hereunder, at the conversion rate
existing in the United States (as reported in the Wall Street Journal) on the
last working day of the Calendar Half Year preceding the applicable Calendar
Half Year. Such payments shall be without deduction of exchange, collection, or
other charges.
1.10 "Field" shall mean the research, development, production, marketing, and
distribution of phosphorothioate oligonucleotides as antisense therapeutic
agents.
1.11 "First Commercial Sale" shall mean the initial transfer by Isis of a
Transferred Product for value to a Third Party and not for demonstration,
certification, testing or promotional purposes.
1.12 "Gen-Probe Licensed Patents" shall mean the patents and patent
applications set forth in Exhibit D, which is hereby incorporated by reference
into this Agreement, together with all patents, foreign and domestic, that have
issued or in the future issue therefrom, including utility, model and design
patents and certificates of invention; and all divisionals, continuations,
continuations-in-part, reissues, renewals, re-examination, extensions or
additions to any such patents
2
<PAGE> 3
and patent applications; all to the extent and only to the extent that Gen-Probe
has the right to grant licenses, immunities or other rights thereunder as of the
date of this Agreement.
1.13 "Gen-Probe Net Sales" shall mean that portion of the Net Sales that is
attributable to Gen-Probe Products of the amount billed or invoiced on sales of
any Transferred Products sold in or made in the territory, with no deduction
for corporate taxes and/or franchise or corporate income taxes, (for any
Transferred Product transferred for consideration other than cash, except
Gen-Probe Products transferred for research, clinical trials, compassionate use
programs or marketing samples, the sales price shall be deemed to be the average
price at which identical Transferred Products were sold by Isis, its
sublicensees, Collaborative Partners or its Affiliates in such country during
such Calendar Half Year in "arms-length" transactions) less:
(a) Customary trade, quantity or cash discounts and nonaffiliated
brokers' or agents' commissions actually allowed and taken;
(b) Amounts repaid or credited by reason of rejections, recalls or
returns;
(c) Any freight or other transportation costs, insurance charges,
duties, tariffs and all sales and excise taxes and other governmental
charges based directly on sales or turnover or delivery of material
produced under this Agreement.
1.14 "Gen-Probe Product" shall mean a product in the Field that falls within
the scope of one or more Valid Claims of the Gen-Probe Licensed Patents.
1.15 "NTIS Agreements" shall mean, collectively, the following three
agreements, appended hereto as exhibits and hereby made a part of this
Agreement:
(a) the Settlement Agreement dated on or about October 17, 1995
among the Public Health Service, Lynx Therapeutics, Inc.,
Genta, Inc., and Gen-Probe (attached hereto as Exhibit A);
(b) the Amended License Agreement dated on or about October 17,
1995 between the Public Health Service and Gen-Probe (attached
hereto as Exhibit B); and
(c) the Second License Amendment dated on or about July 24, 1996
between the Public Health Service and Gen-Probe (attached
hereto as Exhibit C).
1.16 "NTIS Licensed Patents" shall mean:
(a) U.S. patent applications and patents listed in Exhibit E, all
divisions and continuations of these applications, all patents issuing from such
3
<PAGE> 4
applications, divisions, and continuations, and any reissues, reexaminations,
and extensions of all such patents;
(b) to the extent that the following contain one or more claims
directed to the invention or inventions disclosed in (a) above: i)
continuations-in-part of (a) above; ii) all divisions and continuations of these
continuations-in-part, divisions, and continuations; iii) all patents issuing
from such continuations-in-part, divisions, and continuations; and iv) any
reissues, reexaminations, and extensions of all such patents;
(c) to the extent that the following contain one or more claims
directed to the invention or inventions disclosed in (a) above: all counterpart
foreign applications and patents to (a) and (b) above, including those listed in
Exhibit D.
NTIS Licensed Patents shall also include (b) or (c) above to the extent that
they contain one or more claims directed to new matter which is not subject
matter disclosed in (a) above.
1.17 "NTIS Product" shall mean a phosphorothioate oligodeoxyribonucleotide
composition and a carrier, or any other substance or composition of matter,
encompassed within the scope of a claim in a patent within the NTIS Licensed
Patents.
1.18 "Net Sales" shall mean the amount billed or invoiced on sales of any NTIS
Products sold in or made in the Territory, with no deduction for corporate taxes
and/or franchise or corporate income taxes, (for any NTIS Product transferred
for consideration other than cash, except NTIS Product transferred for research,
clinical trials, compassionate use programs or marketing samples, the sales
price shall be deemed to be the average price at which identical NTIS Product
were sold by Isis, its sublicensees, Collaborative Partners or its Affiliates in
such country during such Calendar Half Year in "arms-length" transactions) less:
(a) Customary trade, quantity or cash discounts and nonaffiliated
brokers' or agents' commissions actually allowed and taken;
(b) Amounts repaid or credited by reason of rejections, recalls or
returns;
(c) Any freight or other transportation costs, insurance charges,
duties, tariffs and all sales and excise taxes and other governmental
charges based directly on sales or turnover or delivery of material
produced under this Agreement.
1.19 "Person" shall mean an individual, corporation, limited liability company,
partnership, trust, business trust, association, joint stock company, joint
venture,
4
<PAGE> 5
pool, syndicate, sole proprietorship, unincorporated organization, governmental
authority or any other form of entity not specifically listed herein.
1.20 "Territory" shall mean all countries in which an NTIS Licensed Patent or a
Gen-Probe Licensed Patent subsists.
1.21 "Third Party" shall mean, with respect to a Party, any corporation or
other business entity that is not an Affiliate of such Party.
1.22 "Transferred Products" shall mean, collectively, NTIS Products and
GenProbe Products.
1.23 "U.S. Dollar" shall mean the United States dollar.
1.24 "Valid Patent Claim" shall mean either: (a) a claim of an issued and
unexpired patent included within the Gen-Probe Licensed Patents, which has not
been held permanently revoked, unenforceable or invalid by a decision of a court
or other governmental agency of competent jurisdiction, unappealable or
unappealed within the time allowed for appeal, and which has not been admitted
to be invalid or unenforceable through reissue or disclaimer or otherwise; or
(b) a claim of a pending patent application included within the Gen-Probe
Licensed Patents, which claim was filed in good faith and has not been abandoned
or finally disallowed without the possibility of appeal or refiling of such
application.
ARTICLE 11
THE TRANSACTION
2.1 Purchase and Sale of Assets. On and subject to the terms and conditions of
this Agreement, Isis agrees to purchase from Gen-Probe, and Gen-Probe agrees to
sell, transfer, convey, assign and deliver to Isis, all of the Acquired Assets
at the Closing for the consideration specified below in Article IV.
2.2 Assumption of Liabilities. On and subject to the terms and conditions of
this Agreement, Isis agrees to assume and fully discharge in a due and timely
manner all of the Assumed Liabilities from and after the Closing. Isis will not
assume or have any responsibility, however, with respect to any other obligation
or liability of Gen-Probe not included within the definition of Assumed
Liabilities
2.3 Cooperation. Gen-Probe and Isis shall cooperate to obtain all necessary or
appropriate NIH approvals respecting the assignment set forth in this Article
II.
2.4 Warranties.
2.4.1 Gen-Probe warrants that the NTIS Agreements and licenses are current
and in good standing, including but not limited to, full payment of all fees and
other monetary obligations up to and including December 31, 1997.
5
<PAGE> 6
2.4.2 Gen-Probe warrants that it is transferring all of its right and
interests in the NTIS Agreements.
2.5 Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place on or about December 19, 1997, but in no event
later than December 29, 1997.
ARTICLE III
GRANT
3.1 License Grant. Subject to the terms and conditions set forth herein, at
the Closing, Gen-Probe shall grant to Isis and its Affiliates an exclusive,
perpetual license within the Field to the Gen-Probe Licensed Patents, to make,
have made, use, import, have sold and sell Gen-Probe Products.
3.2 Limitation of Rights. Isis acknowledges that its rights under Gen-Probe
Licensed Patents are limited to those expressly granted herein and that Isis is
not granted the right to sell, transfer, or otherwise make available to Third
Parties the Gen-Probe Licensed Patents or any products other than Gen-Probe
Products.
3.3 Sublicensing. The license rights granted by Gen-Probe to Isis under this
Article III may be sublicensed by Isis only with the prior written consent of
Gen-Probe, which consent shall not be unreasonably withheld, and only to its
Affiliates, Collaborative Partners or suppliers (subject to all of the
limitations and restrictions contained herein) in connection with the
development, design or supply of products, components or materials to Isis or
its Affiliates for or in connection with the activities licensed under this
Article 3.
ARTICLE IV
CONSIDERATION
As consideration for the sale of the Acquired Business and the license to
the Gen-Probe Licensed Patents granted herein, Isis agrees:
(1) to pay Gen-Probe (*) at the Closing, contingent upon receiving
no objections to the sale from NTIS, NIH, Public Health Service and/or any other
government agency before Closing.
(2) to pay Gen-Probe further contingent consideration equal to
( * ) made by Isis and/or its Affiliates, Collaborative Partners
and sublicensees; and,
6
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 7
(3) to pay Gen-Probe further contingent consideration equal to
( * ) made by Isis, and/or its Affiliates, Collaborative
Partners, and its permitted sublicensees.
By way of example and for avoidance of doubt, the highest contingent
consideration Gen-Probe could receive is 2% if a product used both NTIS Licensed
Patents and the Gen-Probe Licensed Patents.
ARTICLE V
REPORTS AND ACCOUNTING
5.1 Records. During the term of this Agreement, Isis shall keep, and cause its
Affiliates and permitted licensees and sublicensees to keep, complete and
accurate records in sufficient detail to property reflect all gross sales, Net
Sales, and Gen-Probe Net Sales and to enable the contingent consideration
payable hereunder to be determined. Such records shall be maintained for at
least thirty-six (36) months after the payment to which the records apply has
been made.
5.2 Reports. Isis agrees to submit to Gen-Probe, within sixty (60) days after
each Calendar Half Year ending June 30th and December 31st, reports setting
forth for the preceding six (6) month period the amount of Transferred Product
sold or otherwise disposed of (except Transferred Product scrapped prior to
shipment from its place of manufacture) for value by Isis and its included
Affiliates, Collaborative Partners, licensees and sublicensees in the Territory,
the Net Sales and Gen-Probe Net Sales thereof, and the amount of contingent
consideration due thereon; and with each such report, Isis agrees to pay the
amount of such contingent consideration due. If no such contingent consideration
is due to Gen-Probe for any report period, the written report shall so state.
5.3 Audits.
5.3.1 Upon the written request of Gen-Probe and not more than once in each
Calendar Year, Isis shall permit an independent certified public accounting
firm, selected by Gen-Probe, at Gen-Probe's expense, to have access during
normal business hours to such of the records of Isis as may be reasonably
necessary to verify the accuracy of the contingent consideration reports
hereunder for any year ending not more than thirty-six (36) months prior to the
date of such request.
5.3.2. If such accounting firm concludes that additional contingent
consideration was owed during such period, Isis shall pay the additional
contingent consideration within thirty (30) days of the date Gen-Probe delivers
to Isis such accounting firm's written report so concluding. The fees charged by
such accounting firm shall be paid by Gen-Probe; provided, however, that if any
7
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 8
audit performed under this Section reveals an underpayment in excess of five
percent (5%) in any Calendar Half Year, Isis shall bear the full cost of such
audit.
5.3.3 Isis shall include in each sublicense of the Gen-Probe Licensed
Patents and the NTIS Patents granted by it pursuant to this Agreement, a
provision requiring the sublicensee, to make reports to Isis and to keep and
maintain records of sales made pursuant to such sublicense. Isis shall grant
Gen-Probe's accountant access to all sublicensee records maintained by Isis
pursuant to Section 5.3.1.
5.4 Confidential Financial Information. Gen-Probe shall treat all financial
information subject to review under this Article V or under any sublicense
agreement as confidential, and shall require its accounting firm to retain all
such financial information in confidence.
ARTICLE VI
PAYMENTS
6.1 Payment Terms. Contingent consideration shown to have accrued by each
report provided for under Article V above shall be due and payable on the date
such report is due. Payment of contingent consideration in whole or in part may
be made in advance of such due date.
6.2 Payment Method. Except as provided in this Section 6.2, all payments by
Isis to Gen-Probe under this Agreement shall be paid in U. S. Dollars at the
Exchange Rate, and all such payments shall be originated from a United States
bank located in the United States and made by bank wire transfer in immediately
available funds to such account as Gen-Probe shall designate before such payment
is due. Upon Gen-Probe's election made in writing not less than thirty (30) days
prior to any payment date, Isis shall pay all contingent consideration owing to
Gen-Probe hereunder in the currency in which such contingent consideration
accrued, without conversion into U. S. Dollars.
6.3 Exchange Control. If at any time legal restrictions prevent the prompt
remittance of part or all contingent consideration with respect to any country
where the Transferred Products are sold, payment shall be made through such
lawful means or methods as Gen-Probe reasonably shall determine.
6.4 Late Payments. Any payments by Isis that are not paid on or before the
date such payments are due under this Agreement shall bear interest, to the
extent permitted by law, at an annual rate of two percentage points above the
annual prime rate of interest most recently declared by Wells Fargo Bank (or its
successor), calculated based on the number of days that payment is delinquent.
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<PAGE> 9
ARTICLE VII
CONFIDENTIALITY
Gen-Probe and Isis shall not disclose, except as required elsewhere in this
Agreement, any terms or conditions of this Agreement to any Third Party without
the prior consent of the other party. Notwithstanding the foregoing, within
thirty (30) days after execution of the Agreement, Isis and Gen-Probe shall
agree upon the substance of information that can be used to describe the terms
of this transaction and the timing of any release of said agreed upon
information, and Isis and Gen-Probe may disclose such information only in
conformance with this agreed upon timing and substance.
ARTICLE VIII
PATENTS AND PATENT APPLICATIONS
8.1 Prosecution and Maintenance. Gen-Probe shall be responsible for and shall
control, at its sole discretion and expense, the preparation, filing,
prosecution, defense and maintenance of all patents and patent applications
included in the Gen-Probe Licensed Patents. Gen-Probe shall be under no
obligation to prosecute, defend and/or maintain any of the Gen-Probe Licensed
Patents. Should Gen-Probe elect not to prosecute, defend and/or maintain any
Gen-Probe Licensed Patent for which Isis has been granted an exclusive license
under Article III herein, Gen-Probe shall provide Isis with sixty (60) days
notice of such decision and Isis shall have the right, with notification in
writing to GenProbe within thirty (30) days of receiving Gen-Probe's notice, to
choose to defend, prosecute and/or maintain such Gen-Probe Licensed Patents at
Isis's sole expense. Gen-Probe agrees to cooperate with Isis in such action. If
Isis does not respond within thirty (30) days, Gen-Probe shall have no further
obligation or duty with regard to the subject patents.
8.2 Notification of Infringement. Isis shall notify Gen-Probe, within two (2)
weeks of Isis receiving notification or knowledge, of any infringement known to
Isis of the Gen-Probe Licensed Patents and shall provide Gen-Probe with the
available evidence, if any, of such infringement.
8.3 Enforcement of Patent Rights. Gen-Probe, at its sole expense, shall have
the right to determine the appropriate course of action to enforce the Gen-Probe
Licensed Patents or otherwise abate the infringement thereof, to take (or
refrain from taking) appropriate action to enforce the Gen-Probe Licensed
Patents, to control any litigation or other enforcement action and to enter
into, or permit, the settlement of any such litigation or other enforcement
action with respect to the Gen-Probe Licensed Patents. Isis shall fully
cooperate with Gen-Probe in the planning and execution of any action to enforce
the Gen-Probe Licensed Patents. Should Gen-Probe elect not to take action to
enforce the Gen-Probe Licensed Patents or otherwise abate the infringement
thereof, Gen-Probe shall provide Isis with notice of such decision within sixty
(60) days of such decision,
9
<PAGE> 10
and then Isis shall, at its sole expense, have the right to enforce the
Gen-Probe Licensed Patents as Isis determines is appropriate, provided, however,
that all pleadings, discovery, motion practice and responses thereto relating to
the construction of patent claims, or application of prior art thereto, shall be
submitted to Gen-Probe for its review and timely approval before being filed in
any such action or proceeding and, provided further, that Isis shall keep
Gen-Probe reasonably informed of developments in such action or proceeding.
ARTICLE IX
DISCLAIMER OF WARRANTIES
9.1 THE NTIS LICENSED PATENTS AND THE GEN-PROBE LICENSED PATENTS, TO THE
EXTENT LICENSED HEREUNDER, ARE PROVIDED ON AN "AS IS" BASIS AND GEN-PROBE MAKES
NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OTHER THAN THOSE
WARRANTIES WHICH APPEAR IN SECTION 2.4, WITH RESPECT THERETO. BY WAY OF EXAMPLE
BUT NOT OF LIMITATION, GEN-PROBE MAKES NO REPRESENTATIONS OR WARRANTIES:
(a) OF COMMERCIAL UTILITY;
(b) OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE;
(c) OF THE VALIDITY OR SCOPE OF ANY PATENT WITHIN THE NTIS LICENSED
PATENTS OR THE GEN-PROBE LICENSED PATENTS;
(d) THAT THE PRACTICE OF THE NTIS LICENSED PATENTS OR THE GEN-PROBE
LICENSED PATENTS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY OR PROPERTY
RIGHTS OF THIRD PARTIES; OR
(e) THAT THE NTIS LICENSED PATENTS OR THE GEN-PROBE LICENSED PATENTS ARE
FREE FROM INFRINGEMENT BY THIRD PARTIES.
9.2 NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS:
(a) AN OBLIGATION TO BRING OR PROSECUTE ACTIONS OR SUITS AGAINST THIRD
PARTIES FOR INFRINGEMENT;
(b) AN OBLIGATION OF GEN-PROBE TO MAINTAIN ANY PATENT OR CONTINUE TO
PROSECUTE ANY PATENT APPLICATION INCLUDED WITHIN THE NTIS LICENSED PATENTS OR
THE GEN-PROBE LICENSED PATENTS IN ANY COUNTRY;
10
<PAGE> 11
(c) AN OBLIGATION OF EITHER PARTY TO FURNISH ANY CONFIDENTIAL
INFORMATION OR KNOW-HOW TO THE OTHER PARTY EXCEPT AS SPECIFIED HEREIN;
(d) CREATING ANY AGENCY, PARTNERSHIP, JOINT VENTURE OR SIMILAR
RELATIONSHIP BETWEEN GEN-PROBE AND ISIS; OR
(e) CONFERRING BY IMPLICATION, ESTOPPEL OR OTHERWISE ANY LICENSE,
AGREEMENT, IMMUNITY OR RIGHT UNDER ANY PATENT OF GEN-PROBE OTHER THAN THOSE
SPECIFIED IN THIS AGREEMENT.
9.3 GEN-PROBE SHALL NOT BE LIABLE TO ISIS, ISIS' SUCCESSORS OR ASSIGNS OR ANY
THIRD PARTY WITH RESPECT TO ANY CLAIM ARISING FROM THE USE OF THE NTIS LICENSED
PATENTS OR THE GEN-PROBE LICENSED PATENTS, OR ANY CLAIM FOR LOSS OF PROFITS,
LOSS OR INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES OF ANY KIND.
ARTICLE X
TERM AND TERMINATION
10.1 Term. Unless sooner terminated as provided herein, this Agreement shall
begin on December 19, 1997 and shall remain in effect until the last payment of
the final contingent payment owed on the last to expire of the NTIS Licensed
Patents and the Gen-Probe Licensed Patents, unless earlier terminated as
provided in this Article X.
10.2 Termination for Cause. Except as otherwise provided in Article XII, either
party may terminate the Agreement upon or after the breach of any material
provision of the Agreement by the other party if the other party has not cured
such breach within thirty (30) days after notice thereof by the non-breaching
party, unless the breach is not curable within thirty (30) days in which case
breaching party must be taking reasonable and timely steps to cure said breach.
In the event that after the Closing, either party terminates this Agreement
under this Article X, the provisions listed in Section 10.4 shall survive such
termination and such termination shall not affect (i) the assignment and
assumption of the Acquired Business pursuant to Article 11, (ii) the obligation
of Isis to continue paying contingent consideration to Gen-Probe pursuant to
Articles IV, V and VI, or (iii) Isis's indemnification and insurance obligations
pursuant to Article XI.
10.3 Termination by the Public Health Service. In the event that the Public
Health Service terminates the Amended License Agreement in accordance with
Article XI of the Amended License Agreement, all rights assigned herein with
respect to such Amended License Agreement and all duties assumed by either party
with respect to such Amended License Agreement only and not with respect to any
other obligation hereunder, shall terminate effective as of the date
11
<PAGE> 12
of termination by the Public Health Service. Gen-Probe shall have no liability
for such termination, except as specifically set forth in this Agreement, or for
any action taken by any other co-exclusive licensee of the NTIS Licensed
Patents.
10.4 Survival. Upon the expiration or termination of this Agreement, the
following provisions of this Agreement shall survive: Articles I, II, IV, V, VI,
VII, IX, X, XI, XII and XIV.
ARTICLE XI
INDEMNIFICATION AND INSURANCE
11.1 Indemnification-Isis. Isis shall indemnify and hold Gen-Probe harmless
from all claims, demands, liabilities, product liability, damages and expenses,
including attorneys' fees and costs arising out of any breach of the Agreement
by Isis, including but not limited to, manufacturing, use or sale of the
Transferred Products or any act or omission of Isis, its Affiliates or
sublicenses in connection with its activities contemplated by the Agreement.
11.2 Indemnification-Gen-Probe. Gen-Probe shall indemnify and hold Isis
harmless from all claims, demands, liabilities, damages and expenses, including
attorneys' fees and costs arising out of any breach of the Agreement by
Gen-Probe, including a breach of Gen-Probe's representation that it is
transferring substantially all of the business of Gen-Probe related to NTIS
Products to Isis ("Transfer Representation").
11.3 Insurance. Isis shall procure and maintain in full force and effect, at
all times during the term of this Agreement, the following insurance through
companies rated no less than B+ VII under Best's most recent rating guide:
Comprehensive General Liability and Product Liability insurance
covering the research, development, manufacture and sales of Transferred
Products by Isis with a combined single limit of Five Million Dollars for
bodily injury, death and property damage. Said liability insurance policy
shall name as additional insured Gen-Probe Incorporated. Said liability
insurance shall recognize and insure performance by Isis of the indemnity
provisions, to the extent possible, herein contained in such amount as is
stated herein, which insurance shall name Gen-Probe as an additional
insured. Isis shall maintain such insurance for so long as it continues to
research, develop, manufacture or sell any Transferred Products, and
thereafter for so long as Isis maintains insurance for itself covering
such research, development, manufacture or sales.
No later than thirty (30) days after execution of this Agreement, Isis
shall provide Gen-Probe with a valid certificate of insurance confirming
purchase of said insurance and the inclusion of Gen-Probe Incorporated as an
additional
12
<PAGE> 13
insured. The certificate will further confirm that at least thirty (30) days
prior written notice will be furnished to Gen-Probe by the insurer before any
material change, cancellation, or non-renewal of the policy. It is further
agreed that any coverage extended by reason of this paragraph shall be primary
and that any similar insurance maintained by Gen-Probe for its own protection
shall be secondary or excess and not contributing insurance.
ARTICLE XII
ARBITRATION
Any controversy, claim or dispute existing out of or relating to this
Agreement, or the breach thereof, shall be resolved by binding arbitration in
San Diego County, State of California and any judgment upon the award rendered
by arbitration may be entered in any Court having jurisdiction. If arbitration
is necessary pursuant to this paragraph, the Parties shall agree upon a single
arbitrator. If the Parties are unable to agree on an arbitrator, then they will
obtain nominations of three potential arbitrators from JAMS/Endispute and each
party will have the right to strike one candidate's name from the list.
JAMS/Endispute will then designate the arbitrator. Any arbitration award shall
also include, but shall not be limited to, any and all court or arbitration
costs, attorney fees and any other costs or charges reasonably necessary to
adjudicate the controversy, in addition to any and all damages deemed fair by
the Arbitrator(s). Nothing contained herein shall deprive any party of its right
to obtain injunctive or other equitable relief.
ARTICLE XIII
FORCE MAJEURE
Neither party shall be held liable or responsible to the other party nor
be deemed to have defaulted under or breached the Agreement for failure or delay
in fulfilling or performing any term of the Agreement to the extent, and for so
long as, such failure or delay, other than the payment of money, is caused by or
results from causes beyond the reasonable control of the affected party
including but not limited to fire, floods, embargoes, war, acts of war (whether
war be declared or not), insurrections, riots, civil commotions, strikes,
lockouts or other labor disturbances, acts of God or acts, omissions or delays
in acting by any governmental authority or other party.
ARTICLE XIV
MISCELLANEOUS
14.1 Notices. Any consent, notice or report required or permitted to be given
or made under the Agreement by one of the Parties hereto to the other party
shall be in writing, delivered personally or by facsimile (and promptly
confirmed by personal delivery, prepaid registered or certified mail or
courier), prepaid registered or certified mail or courier, addressed to such
other party at its
13
<PAGE> 14
address indicated below, or to such other address as the addressee shall have
last furnished in writing to the addressor and (except as otherwise provided in
the Agreement) shall be effective upon delivery to the addressee as confirmed by
written proof of receipt.
If to Gen-Probe:
Gen-Probe Incorporated
10210 Genetic Center Drive
San Diego, California 92121
Attention: President
Facsimile: (619) 410-8901
cc: General Counsel
If to Isis:
Isis Pharmaceuticals, Inc.
Carlsbad Research Center
2292 Faraday Avenue
Carlsbad, California 92008
Attention: President
Facsimile: (619) 931-9639
cc: General Counsel
14.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to its
conflicts of law principles. The Parties hereby consent to the venue and
jurisdiction of such laws and courts.
14.3 Assignment. This Agreement may not be assigned by either party without the
prior written consent of the other party, except that either party may assign
this Agreement to any of its Affiliates or to a successor in connection with the
merger, consolidation, or sale of all or substantially all of its assets or that
portion of its business pertaining to the subject matter of this Agreement, with
prompt written notice to the other party of any such assignment.
14.4 Irreparable Harm. The Parties agree that irreparable damage will occur in
the event that the provisions of Articles II, III and VII are not specifically
enforced. In the event of a breach or threatened breach of any such provisions,
the parties agree that the non-breaching party shall, in addition to all other
remedies, be entitled to temporary or permanent injunction, without showing any
actual damage or that monetary damages would not provide an adequate remedy and
without the necessity of posting any bond, and/or a decree for specific
performance, in accordance with the provisions hereof.
14.5 Waivers and Amendments. No change, modification, extension, termination or
waiver of this Agreement, or any of the provisions, shall be valid unless made
in writing and signed by authorized representatives of both Parties.
14
<PAGE> 15
14.6 Attorneys' Fees. If either party hereto commences an arbitration or other
action against the other party to enforce any of the terms hereof or because of
the breach by such other party of any of the terms hereof, the prevailing party
shall be entitled, in addition to any other relief granted, to all actual
out-of-pocket costs and expenses incurred by such prevailing party in connection
with such action, including, without limitation, all reasonable attorneys' fees,
and a right to such costs and expenses shall be deemed to have accrued upon the
commencement of such action and shall be enforceable whether or not such acting
is prosecuted to judgment.
14.7 Entire Agreement. This Agreement embodies the entire understanding between
the Parties and supersedes any prior understanding and agreements between them
respecting the subject matter hereof. There are no representations, agreements,
arrangements or understandings, oral or written, between the Parties relating to
the subject matter of this Agreement which are not fully expressed herein.
14.8 Severability. Any of the provisions of this Agreement which are determined
to be invalid or unenforceable in any jurisdiction shall be ineffective to the
extent of such invalidity or unenforceability in such jurisdiction, without
rendering invalid or unenforceable the remaining provisions hereof and without
affecting the validity or enforceability of any of the terms of this Agreement
in any other jurisdiction.
14.9 Waiver. The waiver by either party hereto of any right hereunder or the
failure to perform or of a breach by the other party shall not be deemed a
waiver of any other right hereunder or of any other breach or failure by said
other party whether of a similar nature or otherwise.
14.10 Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have hereunto have affixed their
authorized signatures.
GEN-PROBE INCORPORATED ISIS PHARMACEUTICALS, INC.
By: H.L. NORDHOFF By: B. LYNNE PARSHALL
--------------------------- ----------------------------
Name: H.L. Nordhoff Name: B. Lynne Parshall
--------------------------- ----------------------------
Title: CEO Title: EXECUTIVE VICE PRESIDENT
--------------------------- ----------------------------
15
<PAGE> 16
SCHEDULE A
"ACQUIRED ASSETS"
* The NTIS Agreements and all rights thereunder in and to the NTIS Licensed
Patents;
* Any sublicenses granted with respect to the NTIS Agreements, any rights
thereunder, remedies against infringements thereof, and rights to
protection of interests therein under the laws of all jurisdictions;
* All records, ledgers, files, documents, correspondence, lists, drawings,
and specifications, studies, reports, and other printed or written
materials related to the NTIS Agreements in Gen-Probe's possession which
postdate the Amended License Agreement between Gen-Probe and the Public
Health Service;
* Tangible personal property (including machinery, equipment, inventories of
raw materials and supplies, manufactured and purchased parts), if any,
used by Gen-Probe exclusively to research, develop and produce the
Transferred Products;
* Accounts, notes, and other receivables, if any, owed to Gen-Probe solely
in connection with the research, development and production of the
Transferred Products; and
* Any good will associated with Gen-Probe's business related to the
Transferred Products.
16
<PAGE> 17
EXHIBIT A
[*CONFIDENTIAL TREATMENT REQUESTED FOR
ENTIRE CONTENTS OF EXHIBIT A]
<PAGE> 18
EXHIBIT B
[*CONFIDENTIAL TREATMENT REQUESTED FOR
ENTIRE CONTENTS OF EXHIBIT B]
<PAGE> 19
EXHIBIT C
[*CONFIDENTIAL TREATMENT REQUESTED FOR
ENTIRE CONTENTS OF EXHIBIT C]
<PAGE> 20
EXHIBIT D
GEN-PROBE LICENSED PATENTS
<PAGE> 21
EXHIBIT D
1. OLIGONUCLEOTIDES WITH ACTIVITY AGAINST HUMAN IMMUNODEFICIENCY VIRUS
(U.S. Application Serial No. 08/094,390, filed 7/19/93 - abandoned)
Continuation-In-Part Application filed 7/19/94, Serial No. 08/279,751 -
Issued 5/13/97 as Patent No. 5,629,413 - expires 5/13/2014
2. ( * )
3. COMPOUNDS AND METHODS OF INHIBITING PROPAGATION OF HUMAN IMMUNNODEFICIENCY
VIRUS
(U.S. Application Serial No. 08/277,857, filed 7/19/94 - Allowed -
Awaiting Issuance)
4. ( * )
5. ENZYMATIC SYNTHESIS OF OLIGONUCLEOTIDES; USING DIGESTIBLE TEMPLATES
(U.S. Application Serial No. 08/484,519, filed 6/7/95 - pending)
6. ENZYMATIC SYNTHESIS OF A PLURALITY OF OLIGONUCLEOTIDES FROM A SINGLE
TEMPLATE
(U.S. Application Serial No. 08/484,668, filed 6/7/95, abandoned
and File-Wrapped as 08/850,951, filed 5/5/97 - pending)
7. THE USE OF RESTRICTION ENDONUCLEASE SEQUENCES USEFUL FOR CLEAVING
PHOSPHOROTHIOATE OLIGONUCLEOTIDES
(U.S. Application Serial No. 08/484,816, filed 6/7/95 - Issued 7/29/97 as
Patent No. 5,652,126 - expires 6/7/2015)
8. ENZYMATIC SYNTHESIS OF PHOSPHOROTHIOATE OLIGONUCLEOTIDES USING RESTRICTION
ENDONUCLEASES
(U.S. Application Serial No. 08/476,625, filed 6/7/95 - Allowed -
Awaiting Issuance)
9. ENZYMATIC SYNTHESIS OF OLIGONUCLEOTIDES USING 3'-RIBONUCLEOTIDE PRIMERS
(U.S. Application Serial No. 08/477,228, filed 6/7/95, abandoned and
File-Wrapped on 10/10/97 - Serial No. to be assigned - pending)
a.) TEMPLATE AND PRIMER BASED SYNTHESIS OF ENZYMATICALLY CLEAVABLE
OLIGONUCLEOTIDES
(Consolidated European Application - Nos. 5, 6, 7, 8 & 9) - EPO
Publication No. EPO 747 479 - published 12/11/96
10. OLIGONUCLEOTIDES SPECIFIC FOR CYTOKINE SIGNAL TRANSDUCER GP130 MRNA
(U.S. Application Serial No. 08/476,634, filed 6/7/95 - Issued 10/7/97 as
Patent No. 5,674,995 - expires 6/7/2015)
10/3/97 a Continuation Application was filed claiming priority to
08/476,634, Serial No. to be assigned
Page 1 of 2
<PAGE> 22
EXHIBIT D (CONT.)
11. METHOD FOR INHIBITING CELLULAR PROLIFERATION USING ANTISENSE
OLIGONUCLEOTIDES TO GP13O MRNA
(U.S. Application Serial No.08/484,518, filed 6/7/95 - allowed - awaiting
issuance)
a. OLIGONUCLEOTIDES SPECIFIC For CYTOKINE SIGNAL TRANSDUCER GP13O MRNA
(Consolidated European Application - Nos. 10 & 11)
EPO Publication No. EPO 747 480, published 12/11/96
12. OLIGONUCLEOTIDES SPECIFIC FOR INTERLEUKIN 6 RECEPTOR MRNA AS INHIBITORS OF
DISEASE - ASSOCIATED CELLULAR PROLIFERATION
(U.S. Application Serial No. 08/484,666, filed 6/7/95 - Abandoned)
13. METHOD FOR INHIBITING CELLULAR PROLIFERATION USING ANTISENSE
OLIGONUCLEOTIDES TO INTERLEUKIN-6 RECEPTOR MRNA
(U.S. Application Serial No. 08/486,408, filed 6/7/95 - Allowed - Awaiting
Issuance) - Considering filing a Continuation Application before issuance
a. METHOD AND ANTISENSE OLIGONUCLEOTIDES TO INTERLEUKIN-6 RECEPTOR MRNA
FOR INHIBITING CELLULAR PROLIFERATION
(Consolidated European Application - Nos. 12 & 13)
EPO Publication No. EPO 747 386, published 12/11/96
Page 2 of 2
<PAGE> 23
EXHIBIT E
NTIS LICENSED PATENTS
<PAGE> 24
EXHIBIT E
United States
U.S. Patent Application 07/030,073 (now abandoned), filed on March 25, 1987 and
entitled "Phosphorothioated Analogues of Oligodeoxyribonucleotides as
Inhibitors for the Replication and Cytopathic Effects of HTLV-III"
U.S. Patent 5,276,019 (filed on October 17, 1988 as U.S. Patent Application
07/159,017, which is a continuation-in-part of U.S. Patent Application
07/030,073), issued on January 4, 1994 and entitled "Inhibitors for
Replication of Retroviruses and for the Expression of Oncogene Products"
U.S. Patent 5,268,717 (filed on November 16, 1992 as U.S. Patent Application
07/976,777, which is a divisional of U.S. Patent Application 07/159,017),
issued on February 15, 1994 and entitled "Inhibitors for Replication of
Retroviruses and for the Expression of Oncogene Products"
U.S. Patent 5,264,423 (filed on November 16, 1992 as U.S. Patent Application
07/976,733, which was a continuation of U.S. Patent Application 07/159,017),
issued on November 23, 1993 and entitled "Inhibitors for Replication of
Retroviruses and for the Expression of Oncogene Products"
Foreign
PCT/US88/01024 filed on March 24, 1988
Australia - 15717/88
Canada - 562318
EPO - 88302617.1
Israel - 85827
Japan - Sho 63-503266
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-72124, 33-75068 and 33-96138 and Form S-8 No. 33- 51236,
33-42970, 33-42356, 33-54840, 33-58450, 33-43330, 33-75150, 33-90780 and
333-05825) of Isis Pharmaceuticals, Inc. of our report dated January 23, 1998,
with respect to the financial statements of Isis Pharmaceuticals, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
San Diego, California
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information derived from the Company's
audited Balance Sheet as of December 31, 1997 and audited Statements of
Operations for the Twelve Months Ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 38,102
<SECURITIES> 48,684
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 89,150
<PP&E> 18,785
<DEPRECIATION> 0
<TOTAL-ASSETS> 117,881
<CURRENT-LIABILITIES> 26,577
<BONDS> 56,452
0
0
<COMMON> 27
<OTHER-SE> 34,825
<TOTAL-LIABILITY-AND-EQUITY> 117,881
<SALES> 0
<TOTAL-REVENUES> 36,537
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 64,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,585
<INCOME-PRETAX> (31,066)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,066)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,066)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
