<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INHALE THERAPEUTIC SYSTEMS, INC.
(Exact Name Of Registrant As Specified In Its Charter)
<TABLE>
<S> <C>
DELAWARE 94-3134940
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification
Organization) No.)
</TABLE>
INHALE THERAPEUTIC SYSTEMS, INC.
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
(650) 631-3100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT B. CHESS
CO-CHIEF EXECUTIVE OFFICER
INHALE THERAPEUTIC SYSTEMS, INC.
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
(650) 631-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
MARK P. TANOURY, ESQ.
JOHN M. GESCHKE, ESQ.
Cooley Godward LLP
3000 Sand Hill Road
Building 3, Suite 230
Menlo Park, CA 94025
(650) 843-5000
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE AGGREGATE PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
6 3/4% Convertible Subordinated
Debentures due October 13, 2006................. $93,625,000 100%(1)(2) $93,625,000(1) $24,717
Common Stock, $.0001 par value per share.......... 2,925,095(3) --(4) --(4) --(4)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(i) of the Securities Act of 1933.
(2) Exclusive of accrued interest and distributions, if any.
(3) This number represents the number of shares of common stock that are
initially issuable upon conversion of the 6 3/4% Convertible Subordinated
Debentures due October 13, 2006 registered hereby. For purposes of
estimating the number of shares of common stock to be included of the
Debentures, Inhale calculated the number of shares issuable upon conversion
of the debentures based on a conversion price of $32.0075 shares per share
of common stock. In addition, the shares set forth in the table, pursuant to
Rule 416 under the Securities Act of 1933, as amended, the amount to be
registered includes an indeterminate number of shares of common stock
issuable upon conversion of the debentures, as this amount may be adjusted
as a result of stock splits, stock dividends and antidilution provisions.
(4) No additional consideration will be received for the common stock and
therefore, no registration fee is required pursuant to Rule 457(i).
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PROSPECTUS DATED JANUARY 6, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
P R O S P E C T U S
INHALE THERAPEUTIC SYSTEMS, INC.
$93,625,000
of 6 3/4% Convertible Subordinated Convertible Debentures due October 13, 2006
and 2,925,095 Shares of Common Stock Issuable Upon Conversion of the Debentures
------------------------
This prospectus relates to 6 3/4% Convertible Subordinated Debentures due
October 13, 2006 of Inhale Therapeutic Systems, Inc., a Delaware corporation,
held by certain security holders who may offer for sale the debentures and the
shares of our common stock into which the debentures are convertible at any time
at market prices prevailing at the time of sale or at privately negotiated
prices. The selling security holders may sell the debentures or the common stock
directly to purchasers or through underwriters, broker-dealers or agents, who
may receive compensation in the form of discounts, concessions or commissions.
The holders of the debentures may convert the debentures into shares of our
common stock at any time at a conversion price of $32.0075 per share of common
stock. After October 13, 2002, we may redeem the debentures, in whole or in
part, at the redemption prices set forth in the section entitled "Description of
the Debentures--Optional Redemption by Inhale."
In the event of a Change of Control, as defined in the section entitled
"Description of the Debentures--Repurchase at Option of Holders upon a Change in
Control," each holder of the debentures may require us to repurchase the
debentures at 100% of the principal amount of the debentures plus accrued
interest. At our option, we may repurchase the debentures for cash or common
stock.
The debentures are general, unsecured obligations that are subordinated in
right of payment to all of our existing and future senior indebtedness. See
"Description of the Debentures--Subordination".
Our common stock currently trades on the Nasdaq National Market under the
symbol "INHL". The last reported sale price on January 5, 2000 was $44.03 per
share.
Our 6 3/4% Convertible Subordinated Debentures are currently eligible for
trading on the PORTAL Market of the Nasdaq Stock Market.
Investing in our common stock or our convertible subordinated debentures
involves a high degree of risk. Please carefully consider the "Risk Factors"
beginning on page 2 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2000
In connection with this offering, no person is authorized to give any
information or to make any representations not contained in this prospectus. If
information is given or representations are made, you may not rely on that
information or representations as having been authorized by us. This prospectus
is neither an offer to sell nor a solicitation of an offer to buy any securities
other than those registered by this prospectus, nor is it an offer to sell or a
solicitation of an offer to buy securities where an offer or solicitation would
be unlawful. You may not imply from the delivery of this prospectus, nor from
any sale made under this prospectus, that our affairs are unchanged since the
date of this prospectus or that the information contained in this prospectus is
correct as of any time after the date of this prospectus.
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE INFORMATION IN THIS PROSPECTUS UNDER THE HEADING "RISK
FACTORS."
THE COMPANY
We have created a drug delivery system to easily and painlessly deliver a
wide range of drugs, including peptides, proteins, and other molecules, by
inhalation to the deep lung for treatment of systemic and respiratory diseases.
We are using this system principally to enable non-invasive delivery of
macromolecule drugs currently administered by injection. Our most advanced
program is inhaleable insulin, which is sponsored by Pfizer Inc. Pfizer
commenced dosing for Phase III human clinical trials in June 1999. In addition
to our insulin program with Pfizer, we have development collaborations with
Biogen, Inc., Centeon L.L.C. (a joint venture of Hoechst Marion Roussel AG and
Rhone-Poulenc Rorer, Inc., which have now merged to form Aventis), and Eli Lilly
and Company. We also have early stage feasibility and research collaborations
with several other companies and have tested six drugs in human clinical trials.
Currently there are approximately 35 macromolecule drugs marketed in the
United States and about 120 others in human clinical trials. Sales of the top 15
genetically engineered protein drugs (a subset of macromolecule drugs) were
estimated at $14 billion worldwide in 1997. Most of these drugs are currently
delivered by injection. Injections are undesirable for numerous reasons
including patient discomfort, inconvenience and risk of infection. Poor patient
acceptance of, and compliance with, injectable therapies can lead to increased
incidence of medical complications and higher disease management costs.
Alternatives to injection such as oral, transdermal and nasal delivery have to
date been shown generally to be commercially unattractive due to low natural
bioavailability--the amount of drug absorbed from the delivery site into the
bloodstream relative to injection. As an alternative to the invasiveness of
injection, we believe a deep lung inhalation delivery system could expand the
market for macromolecule drug therapies by increasing patient acceptance and
improving compliance and may enable new therapeutic uses of certain
macromolecule drugs.
We have created a proprietary technology platform integrating customized
formulation, dry powder processing and packaging with a proprietary inhalation
device to enable efficient, reproducible delivery of macromolecule drugs for
systemic and local lung indications. For specific drug products, we formulate
and process bulk drugs supplied by collaborative partners into dry powders which
are packaged into individual dosing units referred to as blisters. The blisters
are designed to be loaded into our device, which patients then activate to
inhale the aerosolized drugs. We have developed a inhalation device that is
being used several times per day for several months in outpatient trials for
insulin. In addition, we have demonstrated room temperature stability of a year
or more for a number of macromolecule drugs, and have scaled-up our powder
processing and packaging for late stage clinical trials and small scale
commercial production for certain drugs.
Our most advanced product is inhaleable insulin for Type 1 and Type 2
diabetes, which is being developed through a collaborative program with Pfizer.
Insulin and insulin delivery systems sales were estimated to be $3.2 billion in
1998. Data published by Pfizer and clinical investigators from a 190 person
Phase Ilb human clinical trial using our drug delivery system showed that
inhaleable insulin provided statistically equivalent control of diabetes when
compared with injectable mealtime insulin for diabetics on insulin, and improved
control of diabetes for patients poorly controlled on oral therapies. Pfizer
initiated dosing for Phase III trials in June 1999. These trials are expected to
involve over 117 clinical sites. In November 1998, Pfizer announced that it
entered into a co-development and co-promotion arrangement with Hoechst for
inhaleable insulin. Hoechst subsequently announced that Hoechst and Pfizer would
construct a jointly-owned manufacturing facility estimated to cost over
1
<PAGE>
$160 million for the supply of insulin for pulmonary delivery. We will receive
royalties on inhaleable insulin products marketed by Pfizer and Hoechst as well
as revenues for supplying devices and powders.
Our development strategy is to focus our efforts on applying our pulmonary
delivery system primarily to drugs for systemic and local lung diseases that
either have proven efficacy and are approved for delivery by injection or are in
late stage clinical trials. Our business strategy is to work with collaborative
partners to develop and commercialize macromolecule drugs for deep lung
delivery. In a typical collaboration, our partner will provide the drug, fund
clinical development, and market the resulting commercial product. We will
supply the delivery system and receive revenues from powder manufacturing,
device supply, and royalties from sales of any commercial products. Prior to
commercialization, we receive revenues from our partners for research and
development funding and progress payments upon achievement of certain
developmental milestones.
In addition to Pfizer's sponsorship of inhaleable insulin, we have active
pulmonary delivery development programs with Biogen for
AVONEX-Registered Trademark-, an interferon beta drug used in the treatment of
multiple sclerosis; Centeon for an alpha-1 proteinase inhibitor for genetic
emphysema; and Lilly for a proprietary compound. These and other ongoing
projects in various stages of research, formulation and clinical development
have been selected as focus programs by us because we believe our approach may
have significant advantages over current therapies. We anticipate that any
product that may be developed would be commercialized with a collaborative
partner and believe our partnering strategy will enable us to reduce the
investment required to develop a large and diversified potential product
portfolio.
Our principal executive offices are located at 150 Industrial Road, San
Carlos, CA 94070. Our telephone number is (650) 631-3100. We maintain an
Internet home page at www.inhale.com. The contents of our web page are not a
part of this prospectus.
RECENT EVENTS
In November 1999, we entered into an agreement with Alliance Pharmaceutical
Corp. to acquire its PulmoSpheres-Registered Trademark- technology and other
related assets for particle formation and powder processing. In exchange for the
PulmoSpheres-Registered Trademark- technology and related assets and a number of
shares of Alliance common stock having a market value of $5.0 million, we paid
Alliance $15.0 million in cash and a number of shares of our common stock having
a market value of $5.0 million. Alliance will also have the right to additional
substantial payments upon the achievement of certain milestones and royalties on
a defined number of products commercialized using the technology.
2
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INVESTORS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT
IN THE NOTES OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES. THIS
PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT ARE "FORWARD-LOOKING
STATEMENTS" FOR PURPOSES OF THESE PROVISIONS, INCLUDING ANY PROJECTIONS OF
EARNINGS, REVENUES OR OTHER FINANCIAL ITEMS, ANY STATEMENTS OF THE PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ANY STATEMENTS CONCERNING
PROPOSED NEW PRODUCTS OR SERVICES, ANY STATEMENTS REGARDING FUTURE ECONOMIC
CONDITIONS OR PERFORMANCE AND ANY STATEMENT OF ASSUMPTIONS UNDERLYING ANY OF THE
FOREGOING. IN SOME CASES, FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE
USE OF TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECTS", "PLANS", "ANTICIPATES",
"ESTIMATES", "POTENTIAL", OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
COMPARABLE TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, THERE CAN BE NO
ASSURANCE THAT SUCH EXPECTATIONS OR ANY OF THE FORWARD-LOOKING STATEMENTS WILL
PROVE TO BE CORRECT AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
PROJECTED OR ASSUMED IN THE FORWARD-LOOKING STATEMENTS. OUR FUTURE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, AS WELL AS ANY FORWARD-LOOKING STATEMENTS,
ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO
THE RISK FACTORS SET FORTH BELOW AND FOR THE REASONS DESCRIBED ELSEWHERE IN THIS
PROSPECTUS. ALL FORWARD-LOOKING STATEMENTS AND REASONS WHY RESULTS MAY DIFFER
INCLUDED IN THIS PROSPECTUS ARE MADE AS OF THE DATE HEREOF AND WE ASSUME NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENT OR REASON WHY ACTUAL
RESULTS MIGHT DIFFER.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS COMMERCIALLY FEASIBLE.
We are in an early stage of development. There is a risk that our deep lung
drug delivery technology will not be commercially feasible. Even if our deep
lung delivery technology is commercially feasible, it may not be commercially
accepted across a range of large and small molecule drugs. We have tested six
deep lung delivery formulations in humans, but many of our potential
formulations have not been tested in humans.
Many of the underlying drug compounds contained in our deep lung
formulations have been tested in humans by other companies using alternative
delivery routes. Our potential products require extensive research, development
and preclinical (animal) and clinical (human) testing. Our potential products
also may involve lengthy regulatory review before they can be sold. We do not
know if, and cannot assure you that, any of our potential products will prove to
be safe and effective or meet regulatory standards. There is a risk that any of
our potential products will not be able to be produced in commercial quantities
at acceptable cost or marketed successfully. Our failure to achieve commercial
feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or, together with partners, successfully market products will
negatively impact our revenues and results of operations.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS EFFICIENT.
We may not be able to achieve the total system efficiency needed to be
competitive with alternative routes of delivery. Total system efficiency is
determined by the amount of drug loss during manufacture, in the delivery
device, in reaching the site of absorption, and during absorption from that site
into the bloodstream. Deep lung bioavailability is the percentage of a drug that
is absorbed into the bloodstream when that drug is delivered directly to the
lungs as compared to injection. Bioavailability is the initial screen for
whether deep lung delivery of any systemic drug is commercially feasible. We
would not consider a drug to be a good candidate for development and
commercialization if its drug loss is excessive at any one stage or cumulatively
in the manufacturing and delivery process or if its deep lung bioavailability is
too low.
3
<PAGE>
WE DO NOT KNOW IF OUR DEEP LUNG DRUG FORMULATIONS ARE STABLE.
We may not be able to identify and produce powdered versions of drugs that
retain the physical and chemical properties needed to work with our delivery
device. Formulation stability is the physical and chemical stability of the drug
over time and under various storage, shipping and usage conditions. Formulation
stability will vary with each deep lung formulation and the type and amount of
ingredients that are used in the formulation. Problems with powdered drug
stability would negatively impact our ability to develop and market our
potential products or obtain regulatory approval.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS SAFE.
We may not be able to prove potential products to be safe. Our products
require lengthy laboratory, animal and human testing. Most of our products are
in preclinical testing or the early stage of human testing. If we find that any
product is not safe, we will not be able to commercialize the product. The
safety of our deep lung formulations will vary with each drug and the
ingredients used in its formulation.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM PROVIDES CONSISTENT DOSES
OF MEDICINE.
We may not be able to provide reproducible dosages of stable formulations
sufficient to achieve clinical success. Reproducible dosing is the ability to
deliver a consistent and predictable amount of drug into the bloodstream over
time both for a single patient and across patient groups. Reproducible dosing
requires the development of:
- an inhalation device that consistently delivers predictable amounts of dry
powder formulations to the deep lung;
- accurate unit dose packaging of dry powder formulations; and
- moisture resistant packaging.
We may not be able to develop reproducible dosing of any potential product.
The failure to do so means that we would not consider it a good candidate for
development and commercialization.
WE DEPEND ON PARTNERS FOR REGULATORY APPROVALS AND COMMERCIALIZATION OF OUR
PRODUCTS.
Since we are in the business of developing technology for delivering drugs
to the lungs and licensing this technology to companies that make and sell
drugs, we do not have the people and other resources to do the following things:
- make bulk drugs to be used as medicines;
- design and carry out large scale clinical studies;
- prepare and file documents necessary to obtain government approval to sell
a given drug product; and
- market and sell our products when and if they are approved.
When we sign a license agreement to develop a product with a drug company,
the drug company agrees to do some or all of the things described above. If our
partner fails to do any of these things, we cannot complete the development of
the product.
WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS OR AT
ALL.
There is a risk that we will not obtain regulatory approval for our products
on a timely basis, or at all. Our products must undergo rigorous animal and
human testing and an extensive review process mandated by the United States Food
and Drug Administration ("FDA") and equivalent foreign
4
<PAGE>
authorities. This process generally takes a number of years and requires the
expenditure of substantial resources although the time required for completing
such testing and obtaining such approvals is uncertain. We have not submitted
any of our products to the FDA for marketing approval. We have no experience
obtaining such regulatory approval.
In addition, we may encounter delays or rejections based upon changes in FDA
policy, including policy relating to good manufacturing practice compliance,
during the period of product development. We may encounter similar delays in
other countries.
Even if regulatory approval of a product is granted, the approval may limit
the indicated uses for which we may market our product. In addition, our
marketed product, our manufacturing facilities and Inhale, as the manufacturer,
will be subject to continual review and periodic inspections. Later discovery
from such review and inspection of previously unknown problems may result in
restrictions on our product or on us, including withdrawal of our product from
the market. The failure to obtain timely regulatory approval of our products,
any product marketing limitations or a product withdrawal would negatively
impact our revenues and results of operations.
WE DO NOT KNOW IF OUR TECHNOLOGIES CAN BE INTEGRATED SUCCESSFULLY TO BRING
PRODUCTS TO MARKET.
We may not be able to integrate all of the relevant technologies to provide
a deep lung drug delivery system. Our integrated approach to systems development
relies upon several different but related technologies:
- dry powder formulations;
- dry powder processing technology;
- dry powder packaging technology; and
- a deep lung delivery device.
At the same time we must:
- establish collaborations with partners;
- perform laboratory and clinical testing of potential products; and
- scale-up our manufacturing processes.
We must accomplish all of these steps without delaying any aspect of
technology development. Any delay in one component of product or business
development could delay our ability to develop, obtain approval of or market
therapeutic products using our deep lung delivery technology.
WE MAY NOT BE ABLE TO MANUFACTURE OUR PRODUCTS IN COMMERCIAL QUANTITIES.
POWDER PROCESSING. We have no experience manufacturing products for
commercial purposes. We have only performed powder processing on the small scale
needed for testing formulations and for early stage and larger clinical trials.
We may encounter manufacturing and control problems as we attempt to scale-up
powder processing facilities. We may not be able to achieve such scale-up in a
timely manner or at a commercially reasonable cost, if at all. Our failure to
solve any of these problems could delay or prevent late stage clinical testing
and commercialization of our products and could negatively impact our revenues
and results of operations.
To date, we have relied on one particular method of powder processing. There
is a risk that this technology will not work with all drugs or that the cost of
drug production will prohibit the commercial viability of certain drugs.
Additionally, there is a risk that any alternative powder processing methods we
may pursue will not be commercially practical for aerosol drugs or that we will
not have, or be able to acquire the rights to use, such alternative methods.
5
<PAGE>
POWDER PACKAGING. Our fine particle powders and small quantity packaging
require special handling. We have designed and qualified automated filling
equipment for small and moderate quantity packaging of fine powders. We face
significant technical challenges in scaling-up an automated filling system that
can handle the small dose and particle sizes of our powders in commercial
quantities. There is a risk that we will not be able to scale-up our automated
filling equipment in a timely manner or at commercially reasonable costs. Any
failure or delay in such scale-up would delay product development or bar
commercialization of our products and would negatively impact our revenues and
results of operations.
INHALATION DEVICE. We face many technical challenges in further developing
our inhalation device to work with a broad range of drugs, to produce such a
device in sufficient quantities and to adapt the device to different powder
formulations. In addition, we are attempting to develop a smaller inhalation
device, which presents particular technical challenges. There is a risk that we
will not successfully achieve any of these things. Our failure to overcome any
of these challenges would negatively impact our revenues and results of
operations.
For late stage clinical trials and initial commercial production, we intend
to use one or more contract manufacturers to produce our drug delivery device.
There is a risk that we will not be able to enter into or maintain arrangements
with any potential contract manufacturers. Our failure to do so would negatively
impact our revenues and results of operations.
WE DEPEND ON KEY SUPPLIERS FOR OUR INHALATION DEVICE AND BULK DRUGS.
We plan to subcontract the manufacture of our pulmonary delivery device
before commercial production of our first product. We have identified contract
manufacturers that we believe have the technical capabilities and production
capacity to manufacture our devices and which can meet the requirements of good
manufacturing practices. We cannot assure you that we will be able to obtain and
maintain satisfactory contract manufacturing on commercially acceptable terms,
if at all. Our dependence on third parties for the manufacture of our inhalation
device may negatively impact our cost of goods and our ability to develop and
commercialize products on a timely and competitive basis.
We obtain the bulk drugs we use to formulate and manufacture the dry powders
for our deep lung delivery system from sole sources of supply. For example, with
respect to our source of bulk insulin, we have entered into a collaborative
agreement with Pfizer which has, in turn, entered into an agreement with Hoechst
to manufacture biosynthetic recombinant insulin. Under the terms of their
agreement, Pfizer and Hoechst agreed to construct a jointly owned manufacturing
plant in Frankfurt, Germany. Until its completion, Pfizer will provide us with
insulin from Hoechst's existing plant. If our sole source suppliers fail to
provide bulk drugs in sufficient quantities when required, our revenues and
results of operations will be negatively impacted.
WE DO NOT KNOW IF THE MARKET WILL ACCEPT OUR DEEP LUNG DRUG DELIVERY SYSTEM.
The commercial success of our potential products depends upon market
acceptance by health care providers, third-party payors like health insurance
companies and Medicare, and patients. Our products under development use a new
method of drug delivery and there is a risk that our potential products will not
be accepted by the market. Market acceptance will depend on many factors,
including:
- the safety and efficacy results of our clinical trials;
- favorable regulatory approval and product labeling;
- the frequency of product use;
- the availability of third-party reimbursement;
- the availability of alternative technologies; and
6
<PAGE>
- the price of our products relative to alternative technologies.
There is a risk that health care providers, patients or third-party payors
will not accept our deep lung drug delivery system. If the market does not
accept our potential products, our revenues and results of operations would be
significantly and negatively impacted.
IF OUR PRODUCTS ARE NOT COST EFFECTIVE, GOVERNMENT AND PRIVATE INSURANCE PLANS
WILL NOT PAY FOR OUR PRODUCTS.
In both domestic and foreign markets, sales of our products under
development will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. In
addition, such third-party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Legislation and regulations affecting the pricing of pharmaceuticals may change
before our proposed products are approved for marketing. Adoption of such
legislation and regulations could further limit reimbursement for medical
products. A government third-party payor decision not to provide adequate
coverage and reimbursements for our products would limit market acceptance of
such products.
WE EXPECT TO CONTINUE TO LOSE MONEY FOR THE NEXT SEVERAL YEARS.
We have never been profitable and, through September 30, 1999, have incurred
a cumulative deficit of approximately $74.3 million. We expect to continue to
incur substantial and increasing losses over at least the next several years as
we expand our research and development efforts, testing activities and
manufacturing operations, and as we further expand our late stage clinical and
early commercial production facility. All of our potential products are in
research or in the early stages of development except for our insulin
collaboration. We have generated no revenues from approved product sales. Our
revenues to date have consisted primarily of payments under short-term research
and feasibility agreements and development contracts. To achieve and sustain
profitable operations, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, introduce, market and sell products
using our deep lung drug delivery system. There is a risk that we will not
generate sufficient product or contract research revenue to become profitable or
to sustain profitability.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We anticipate that our existing capital resources will enable us to maintain
currently planned operations through at least the next 18 months. However, this
expectation is based on our current operating plan, which is expected to change
as a result of many factors, and we may need additional funding sooner than
anticipated. In addition, we may choose to raise additional capital due to
market conditions or strategic considerations, even if we believe we have
sufficient funds for our current or future operating plans. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to our
stockholders.
We have no credit facility or other committed sources of capital. To the
extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the development
and commercialization of our technologies. Such funds may not be available on
favorable terms, or at all. In particular, our substantial leverage may limit
our ability to obtain additional financing. If adequate funds are not available
on reasonable terms, we may be required to curtail operations significantly or
to obtain funds by entering into financing, supply or collaboration agreements
on unattractive terms. Our inability to raise capital could negatively impact
our business.
7
<PAGE>
OUR PATENTS MAY NOT PROTECT OUR PRODUCTS AND OUR PRODUCTS MAY INFRINGE ON
THIRD-PARTY PATENT RIGHTS.
We have filed patent applications covering certain aspects of our device,
powder processing technology, and powder formulations and deep lung route of
delivery for certain molecules, and we plan to file additional patent
applications. We currently have 45 issued U.S. and foreign patents that cover
certain aspects of our technology and we have a number of patent applications
pending. There is a risk that any of the patents applied for will not issue, or
that any patents that issue or have issued will not be valid and enforceable.
Enforcing our patent rights would be time consuming and costly.
Our access or our partners' access to the drugs to be formulated will affect
our ability to develop and commercialize our technology. Many drugs, including
powder formulations of certain drugs that are presently under development by us,
are subject to issued and pending U.S. and foreign patents that may be owned by
our competitors. We know that there are issued patents and pending patent
applications relating to the deep lung delivery of large molecule drugs,
including several for which we are developing deep lung delivery formulations.
This situation is highly complex, and the ability of any one company, including
Inhale, to commercialize a particular drug is unpredictable.
We intend generally to rely on the ability of our partners to provide access
to the drugs that are to be formulated by us for deep lung delivery. There is a
risk that our partners will not be able to provide access to such drug
candidates. Even if such access is provided, there is a risk that our partners
or we will be accused of, or determined to be, infringing a third-party's patent
rights and will be prohibited from working with the drug or be found liable for
damages that may not be subject to indemnification. Any such restriction on
access to drug candidates or liability for damages would negatively impact our
revenues and results of operations.
OUR COMPETITORS MAY DEVELOP AND SELL BETTER DRUG DELIVERY SYSTEMS.
We are aware of other companies engaged in developing and commercializing
pulmonary drug delivery systems and enhanced injectable drug delivery systems.
Many of these companies have greater research and development capabilities,
experience, manufacturing, marketing, financial and managerial resources than we
do and represent significant competition for us. Acquisitions of or
collaborations with competing drug delivery companies by large pharmaceutical
companies could enhance our competitors' financial, marketing and other
resources. Accordingly, our competitors may succeed in developing competing
technologies, obtaining regulatory approval for products or gaining market
acceptance before us. Developments by others could make our products or
technologies uncompetitive or obsolete. Our competitors may introduce products
or processes competitive with or superior to ours.
INVESTORS SHOULD BE AWARE OF INDUSTRY-WIDE RISKS.
In addition to the risks associated specifically with our business described
above, investors should also be aware of general risks associated with drug
development and the pharmaceutical industry. These include, but are not limited
to:
- changes in and compliance with government regulations;
- handling of hazardous materials;
- hiring and retaining qualified people; and
- insuring against product liability claims.
WE MAY NOT ACHIEVE YEAR 2000 COMPLIANCE.
We are aware of the issues associated with the programming code in existing
computer systems as the Year 2000 approaches. The Year 2000 ("Y2K") problem is
pervasive and complex as virtually every computer operation may be affected in
some way by the rollover of the two digit year value to "00."
8
<PAGE>
The issue is whether systems will properly recognize date sensitive information
when the year changes to 2000. If our software and firmware with date-sensitive
functions are not Y2K compliant, they may recognize a date with "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, interruptions in manufacturing operations, or a temporary inability to
process transactions or engage in similar normal business activities.
To date, we have experienced no material Year 2000 problems. We have
developed a comprehensive contingency plan to address situations that may result
if we are unable to achieve Y2K readiness of our critical operations. As we
experienced no signficant problems relating to our operations as the year
changed to 2000, we have not yet had to implement this contingency plan.
Nevertheless, we cannot assure you that our contingency plan will adequately
address all issues that may arise in the year 2000.
Prior to January 1, 2000, we conducted formal communication with significant
vendors and suppliers to determine the extent to which our operations are
vulnerable to those third parties' failure to remediate their own Y2K issues.
While we have not experienced any material problems with any significant vendor
since January 1, 2000, in the event that any of our significant suppliers do not
successfully achieve Y2K compliance in a timely manner, our business or
operations could be negatively affected. We cannot assure you that the systems
of other companies on which our systems rely were converted on a timely basis
and will not have a future adverse effect on our operations.
We are also vulnerable to external forces that might generally affect
industry and commerce, such as utility and transportation company Y2K compliance
failures and related service interruptions, although we have not experienced any
material disruptions since January 1, 2000. The failure by us or our suppliers
to develop and implement successfully appropriate plans should Year 2000
problems continue to develop could have a negative impact on our operations and
financial condition.
WE EXPECT OUR STOCK PRICE TO REMAIN VOLATILE.
Our stock price is volatile. In the last twelve months, based on closing
prices on the Nasdaq National Market, our stock price ranged from $23.00 to
$44.03. We expect it to remain volatile. A variety of factors may have a
significant effect on the market price of our common stock, including:
- fluctuations in our operating results;
- announcements of technological innovations or new therapeutic products;
- announcement or termination of collaborative relationships by Inhale or
our competitors;
- governmental regulation;
- clinical trial results or product development delays;
- developments in patent or other proprietary rights;
- public concern as to the safety of drug formulations developed by Inhale
or others; and
- general market conditions.
Any litigation instigated against us as a result of this volatility could
result in substantial costs and a diversion of our management's attention and
resources, which could negatively impact our financial condition, revenues and
results of operations.
THE DEBENTURES ARE SUBORDINATED TO ANY EXISTING AND FUTURE SENIOR DEBT
The debentures are contractually subordinated in right of payment to our
existing and future Senior Debt. As of September 30, 1999, we had approximately
$4.9 million of Senior Debt. The
9
<PAGE>
indenture does not limit the creation of additional Senior Debt (or any other
indebtedness). In connection with the expansion of our facilities, we expect
that we may significantly increase our Senior Debt in the near future. Any
significant additional indebtedness incurred may materially adversely impact our
ability to service our debt, including the debentures. Due to the subordination
provisions, in the event of our insolvency, funds which we would otherwise use
to pay the holders of the debentures will be used to pay the holders of Senior
Debt to the extent necessary to pay the Senior Debt in full. As a result of
these payments, our general creditors may recover less, ratably, than the
holders of our Senior Debt and such general creditors may recover more, ratably,
than the holders of our debentures or our other subordinated indebtedness. In
addition, the holders of our Senior Debt may, under certain circumstances,
restrict or prohibit us from making payments on the debentures.
SUBSTANTIAL INDEBTEDNESS MAY ADVERSELY AFFECT OUR CASH FLOW.
As of September 30, 1999, we had approximately $4.9 million in long-term
debt. Upon closing of the offering of the debentures, our long-term debt
increased by approximately $108 million. This increased indebtedness has and
will continue to impact us by:
- significantly increasing our interest expense and related debt service
costs;
- making it more difficult to obtain additional financing; and
- constraining our ability to react quickly in an unfavorable economic
climate.
Currently, we are not generating sufficient cash flow to satisfy the annual
debt service payments that will be required as a result of the consummation of
sale of the debentures. This may require us to use a portion of the proceeds
from the sale of the debentures to pay interest or borrow additional funds or
sell additional equity to meet our debt service obligations. If we are unable to
satisfy our debt service requirements, substantial liquidity problems could
result, which would negatively impact our future prospects.
OUR ABILITY TO REPURCHASE DEBENTURES, IF REQUIRED, MAY BE LIMITED.
In certain circumstances involving a Change of Control, the holders of the
debentures may require us to repurchase some or all of the holder's debentures.
We cannot assure you that we will have sufficient financial resources at such
time or would be able to arrange financing to pay the repurchase price of the
debentures. Our ability to repurchase the debentures in such event may be
limited by law, the indenture, by the terms of other agreements relating to our
Senior Debt and as such indebtedness and agreements may be entered into,
replaced, supplemented or amended from time to time. We may be required to
refinance our Senior Debt in order to make such payments. We may not have the
financial ability to repurchase the debentures if payment for our Senior Debt is
accelerated.
AN ACTIVE TRADING MARKET FOR THE DEBENTURES MAY NOT DEVELOP.
The debentures are a new issue of securities for which there is currently no
trading market. Although the debentures are eligible for trading in the PORTAL
market, we cannot predict whether an active trading market for the debentures
will develop or be sustained. If an active market for the debentures fails to
develop or be sustained, the trading price of the debentures could fall. If an
active trading market were to develop, the debentures could trade at prices that
may be lower than the initial offering price of the debentures. Whether or not
the debentures will trade at lower prices depends on many factors, including:
- prevailing interest rates and the markets for similar securities;
- general economic conditions; and
- our financial condition, historic financial performance and future
prospects.
10
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 to register
the debentures and common stock offered by this prospectus. However, this
prospectus does not contain all of the information contained in the registration
statement and the exhibits and schedules to the registration statement. We
strongly encourage you to carefully read the registration statement and the
exhibits and schedules to the registration statement. We also file annual,
quarterly and special reports, proxy statements and other information with the
SEC.
You may inspect and copy such material at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, as well as at the SEC's regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. You may also obtain copies of such material from the SEC
at prescribed rates by writing to the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
Website at www.sec.gov.
If at any time during the two-year period following October 13, 1999, we are
not subject to the information requirements of Section 13 or 15(d) of the
Exchange Act, we will furnish to holders of the debentures, to holders of common
stock issued upon conversion thereof and to prospective purchasers thereof the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act in order to permit compliance with Rule 144A in connection with
resales of such debentures and common stock issued upon conversion thereof.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information contained in
documents that we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information in this prospectus supersedes information incorporated by reference
that we filed with the SEC prior to the date of this prospectus, while
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
1. Our Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
filed on March 29, 1999, including all material incorporated by reference
therein;
2. Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999, filed on May 14, 1999, including all material incorporated by
reference therein;
3. Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1999, filed on August 13, 1999, including all material incorporated by
reference therein;
4. Our Quarterly Report on form 10-Q for the fiscal quarter ended
September 30, 1999, filed on November 12, 1999, including all material
incorporated by reference therein;
5. Our Current Report on Form 8-K, filed on October 4, 1999;
6. Our Current Report on Form 8-K, filed on October 5, 1999;
7. All other reports filed by us pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 1998, including all material incorporated by
reference therein; and
8. The description of the common stock contained in our Registration Statement
on Form 8-A.
11
<PAGE>
You may request a copy of these filings, at no cost to you, by writing or
telephoning us at: Inhale Therapeutic Systems, Inc. Attention: Investor
Relations, 150 Industrial Road, San Carlos, CA 94070 Telephone (650) 631-3100.
Our common stock is quoted on the Nasdaq National Market under the symbol
"INHL". The last reported sales price of the common stock on the Nasdaq National
Market ("Nasdaq") on January 5, 2000 was $44.03 per share. You may inspect
reports and other information concerning us at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
You should rely only on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the notes or the shares of
common stock offered hereby. See "Selling Security Holders".
RATIO OF EARNINGS TO FIXED CHARGES
We have not presented a ratio of earnings to fixed charges because we had no
earnings for the relevant periods. Fixed charges were approximately $185,000,
$158,000, $196,000, $435,000 and $1,065,000 for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, respectively, and $803,000 and $890,000 for the
nine months ended September 30, 1998 and 1999, respectively.
12
<PAGE>
BUSINESS
OVERVIEW
Inhale is creating a drug delivery system to deliver a wide range of drugs,
including peptides, proteins and other molecules, by inhalation to the deep
lung. Inhale is using this system principally to enable non-invasive delivery of
macromolecule drugs currently administered by injection. Inhale has a variety of
drug delivery programs in development with partners such as Pfizer, Biogen,
Centeon and others and has tested six drugs in human clinical trials. Inhale's
lead program is inhaleable insulin sponsored by Pfizer. Pfizer commenced dosing
for Phase III clinical trials in June 1999. This trial is expected to utilize at
least 117 clinical sites.
Currently there are approximately 35 macromolecule drugs marketed in the
United States and about 120 others in human clinical trials. Sales of the top 15
genetically engineered protein drugs, which are a subset of macromolecule drugs,
were estimated at $14 billion worldwide in 1997. Most of these drugs are
currently delivered by injection. Injections are undesirable for numerous
reasons including patient discomfort, inconvenience and risk of infection. Poor
patient acceptance of, and compliance with, injectable therapies can lead to
increased incidence of medical complications and higher disease management
costs. Alternatives to injection such as oral, transdermal and nasal delivery
have to date been shown generally to be commercially unattractive due to low
natural bioavailability--the amount of drug absorbed from the delivery site into
the bloodstream relative to injection. As an alternative to the invasiveness of
injection, Inhale believes a deep lung or pulmonary delivery system could expand
the market for macromolecule drug therapies and may enable new therapeutic uses
of certain macromolecule drugs.
Inhale is creating a proprietary platform integrating customized
formulation, dry powder processing and packaging with a proprietary inhalation
device to enable efficient, reproducible delivery of macromolecule drugs for
systemic and local lung indications. For specific drug products, Inhale
formulates and processes bulk drugs supplied by collaborative partners into dry
powders which are packaged into individual dosing units referred to as blisters.
The blisters are designed to be loaded into Inhale's device, which patients then
activate to inhale the aerosolized drugs. Inhale has developed a inhalation
device that is being used several times per day, for several months in
outpatient trials for insulin. In addition, Inhale has demonstrated room
temperature stability of a year or more for a number of macromolecule drugs, and
has scaled-up its powder processing and packaging for late stage clinical trials
and small scale production for certain drugs.
As an alternative to invasive delivery techniques, Inhale believes that a
deep lung delivery system could potentially expand the market for macromolecule
drug therapies by increasing patient acceptance and improving compliance, which
in turn could decrease medical complications and the associated costs of disease
management. Additionally, deep lung delivery may enable new therapeutic uses of
certain macromolecule drugs. Inhale is focusing development efforts on applying
its pulmonary delivery system primarily to drugs for systemic and local lung
diseases that either have proven efficacy and are approved for delivery by
injection or are in late stage clinical trials.
A cornerstone of Inhale's business strategy is to work with collaborative
partners to develop and commercialize macromolecule drugs for deep lung
delivery. In a typical collaboration, Inhale's partner will support the
application of Inhale's technology to a particular drug by providing the drug,
funding clinical development, and marketing the resulting commercial product.
Inhale typically will supply the delivery system and receive research and
development and progress payments during development, and receive revenues from
powder manufacturing, device supply, and royalties from sales of any commercial
products.
In addition to Pfizer's sponsorship of inhaleable insulin, Inhale has active
development programs with several other corporate partners. Inhale's most recent
collaboration is with Biogen for pulmonary
13
<PAGE>
delivery of AVONEX-Registered Trademark- a leading drug used for the treatment
of multiple sclerosis. Inhale is also engaged in development collaborations with
Centeon on alpha-1 proteinase inhibitor for genetic emphysema, and with Lilly
for an undisclosed macromolecule. Inhale is also engaged in early stage
feasibility and research programs with respect to other compounds. Inhale
anticipates that any product that may be developed would be commercialized with
a collaborative partner and believes its partnering strategy will enable it to
reduce the investment required to develop a large and diversified potential
product portfolio.
THE OPPORTUNITY FOR DEEP LUNG DRUG DELIVERY
MACROMOLECULES
Innovations in biotechnology and recombinant techniques have led to a large
increase in the number of macromolecule drugs over the last several years. These
drugs, which are identical or similar to the body's natural molecules, are
enabling new therapies for many previously untreated or poorly treated diseases.
Currently, approximately 35 macromolecule drugs are approved for marketing in
the United States and approximately 120 additional macromolecule drugs are in
human clinical trials, many for chronic and subchronic diseases. Sales of
genetically engineered protein drugs were estimated at $14 billion worldwide in
1997.
Due principally to their large size, most macromolecules typically have been
delivered by injection. Drug injections administered in hospitals or doctors'
offices can be expensive and inconvenient to patients. Many patients find
self-injectable therapies unpleasant. As a result, such therapies for many
chronic and subchronic diseases meet with varying degrees of patient acceptance
and compliance with the prescribed regimens. Poor acceptance and compliance can
lead to increased incidence of medical complications and potentially higher
disease management costs. In addition, some elderly, infirm or pediatric
patients cannot administer their own injections and require assistance, thereby
increasing both inconvenience to these patients and the cost of therapy.
Medical science, health care providers and consumers have been searching for
alternatives to injection as a means of delivery of macromolecules used in the
systemic treatment of chronic and subchronic diseases. Several non-invasive
routes of delivery are being explored for macromolecule drugs, including oral,
transdermal, nasal and pulmonary.
Oral delivery is a common method of delivery for many small molecule drugs.
However, drug delivery scientists generally believe that oral delivery provides
extremely low delivery system efficiency for most macromolecules due primarily
to the low natural permeability to macromolecules of the gastrointestinal tract.
In addition, Inhale believes that dosage reproducibility for oral delivery of
macromolecules may be very poor because of their low oral bioavailability. While
several companies are working on oral delivery for macromolecule drugs, no
commercially viable system is currently being marketed.
Passive transdermal delivery using "patch" technology has not been
successful to date since the skin is even less naturally permeable to
macromolecules than the gastrointestinal tract. No macromolecule drugs have been
approved for marketing in the United States utilizing patch technology. Certain
peptides and proteins can be transported across the skin barrier into the
bloodstream using high pressure "needle-less" injection devices. The devices,
which inject proteins like insulin through the skin into the body, have been
available for many years. However, Inhale believes these devices have not been
well accepted due to patient discomfort and relatively high cost.
The nasal route has been shown to have low and variable bioavailability for
proteins and peptides, which is a major limitation for the nasal administration
of such drugs. As a result of these limitations, penetration enhancers are often
used with nasal delivery to achieve higher bioavailability; these
14
<PAGE>
enhancers may cause local irritation to the nasal tissue and result in safety
concerns with long-term use. Only four peptides, have been approved for
marketing in the United States utilizing nasal delivery.
Pulmonary drug delivery systems, such as metered-dose inhalers ("MDIs"),
existing dry powder inhalers and nebulizers, are used primarily to deliver drugs
to the airways of the lung for local lung applications. Approximately 35 drugs
are approved for marketing by the FDA for delivery into the lung, but none of
these pulmonary drug delivery systems was designed to optimize drug delivery to
the deep lung for absorption into the bloodstream. MDIs, dry powder inhalers and
nebulizers currently typically deliver only a fraction of the drug to the deep
lung, with most of the drug being lost in the delivery device or in the mouth
and throat. Consequently, Inhale believes that the total efficiency of such
systems is generally not high enough to be commercially feasible for systemic
delivery of most macromolecule drugs.
In addition, pulmonary drug delivery devices currently do not provide the
dosage reproducibility and formulation stability generally needed for
commercially viable systemic macromolecule drug delivery. Inhale believes that
many MDI and dry powder systems do not provide the deep lung dosage
reproducibility necessary for many systemic applications because the patient
must coordinate the breathing maneuver with the generation of the aerosol.
Further, Inhale believes that many macromolecules currently cannot be formulated
for use in MDI systems, since macromolecule drugs could be denatured by the MDI
formulating ingredients. In addition, Inhale believes that some macromolecules
may be inactivated by nebulization and that many dry powder systems do not
provide the protection needed for long-term stability that may be needed for
macromolecule formulations.
Inhale believes that an efficient and reproducible deep lung delivery system
for systemic macromolecule drugs used in the treatment of chronic and subchronic
diseases represents a significant commercial opportunity. Such a system could
improve patient acceptance of systemic macromolecule drug therapy and compliance
with prescribed regimens, thereby improving therapeutic outcomes and reducing
the costs of administration and treatment of disease. Additionally, pulmonary
delivery may enable new therapeutic uses of certain macromolecule drugs.
Inhale also believes that opportunities for a deep lung delivery system
exist in the delivery of macromolecules for local lung diseases due to the
limitations of current pulmonary devices. Biotechnology and pharmaceutical
companies are developing new macromolecule drugs for pulmonary diseases such as
asthma, cystic fibrosis, emphysema, lung cancer, pneumonia and bronchitis.
Pulmonary delivery is the preferred route for treating most lung diseases since
much smaller amounts of certain drugs generally are needed than for systemic
administration and the drug can be applied directly to the site of action,
thereby potentially reducing systemic side effects.
OTHER MOLECULES
In addition to developing a deep lung delivery system for macromolecules,
Inhale is investigating opportunities for leveraging its technology for small
molecules where there is a clear, demonstrable need for an alternative drug
delivery system and where Inhale's existing technology can be applied without
significant modification. Examples include molecules that require rapid systemic
absorption for efficacy (i.e., analgesics and antiemetics), molecules that
undergo massive first pass metabolism by the oral route or molecules used for
local lung delivery for diseases such as asthma that are currently delivered by
sub-optimal aerosol systems.
MDIs, existing dry powder inhalers and nebulizers have been used primarily
to deliver drugs to the airways of the lung for local lung applications. Some of
the problems associated with traditional small molecule aerosol delivery systems
include poor reproducibility, low efficiency, low drug payload per puff, poor
moisture barrier and, in the case of wet systems, long dosing time and microbial
growth.
15
<PAGE>
Inhale believes that its technology could be used to address these problems
by providing efficient dispersion of the drug into the lungs, reproducible
delivery of a consistent and predictable amount of drug into the bloodstream,
and a strong moisture barrier in the blister packs. Inhale further believes its
technology could potentially be applied economically in market segments where it
is essential that significant drug doses reach the lung. Large amounts of drugs
taken orally or through inefficient inhalers can result in side effects which
could be avoided or reduced through more efficient pulmonary delivery.
STRATEGY
Inhale's goal is to become the leading drug delivery company in the field of
pulmonary delivery of macromolecules. In addition, Inhale is leveraging its
technology base for other applications where its system can provide significant
market advantages. Inhale's strategy incorporates the following principal
elements:
- DEVELOP A BROADLY APPLICABLE DEEP LUNG DELIVERY SYSTEM. Inhale is
developing its non-invasive deep lung drug delivery system to be
applicable to a wide range of peptides, proteins and other molecules
currently delivered by injection or poorly delivered by inhalation or
other routes. Inhale intends to develop an effective non-invasive delivery
alternative that can: (1) expand market penetration for existing
therapeutics currently delivered by injection, infusion or other routes;
(2) commercialize new indications by using deep lung delivery as a new
route of administration; and (3) extend existing patents or seek new
patents to gain important competitive advantages for Inhale and its
partners.
- BUILD COMPETITIVE ADVANTAGE THROUGH AN INTEGRATED SYSTEMS APPROACH. Inhale
is developing a commercially viable deep lung delivery system through an
integrated systems solution. Inhale combines its expertise in aerosol
engineering, chemical engineering, mechanical engineering, aerosol
science, protein formulations, fine powder processing and powder filling,
and pulmonary physiology and biology to build a proprietary,
fully-integrated system for pulmonary delivery of therapeutic drugs.
Inhale believes that building expertise in technology across several
disciplines provides it with a significant competitive advantage.
- PARTNER WITH PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES. Inhale's strategy
is to market its proposed products through collaborative partners. Inhale
is seeking to work with partners that have significant clinical
development and marketing resources, and currently has collaborations with
several large pharmaceutical and biotechnology companies. For patented
drug products, Inhale intends to partner with owners or licensees from the
outset of the project. For drugs that are off-patent or licensed-in,
Inhale may perform initial feasibility screening work, formulations
development and early stage human clinical trials before entering into a
partner relationship for further development. Inhale believes this
partnering strategy enables it to reduce its cash requirements while
developing a large and diversified potential product portfolio.
- FOCUS ON APPROVED OR LATE STAGE DRUGS. To date, Inhale has focused
primarily on drugs that either have proven efficacy and are approved for
marketing or are in late stage clinical trials. Inhale believes that
working primarily with drugs with demonstrated efficacy reduces the
technical risk of its projects. In the future, Inhale anticipates working
on drugs at earlier stages of development.
- EXPAND MANUFACTURING CAPABILITY. Inhale intends to formulate, manufacture
and package dry powders for most of its drugs and to subcontract
manufacturing of its inhalation device. Inhale believes that this strategy
will provide manufacturing economies of scale across a range of
therapeutic products and expand capacity for additional partnerships and
commercial scale production.
16
<PAGE>
INHALE'S DEEP LUNG DRUG DELIVERY SYSTEM
Inhale believes that the following criteria are necessary for a commercially
viable non-invasive deep lung drug delivery system:
- SYSTEM EFFICIENCY/COST. The system must attain a certain minimum
efficiency in delivering a drug to the bloodstream as compared to
injection. Bioavailability (the percentage of drug absorbed into the
bloodstream from the lungs relative to that absorbed from injection) is
the most important element of system efficiency. Total system efficiency
is critical due to the high cost of macromolecule drugs. Total delivery
system efficiency is determined by the amount of drug loss during
manufacture, in the delivery device, in reaching the site of absorption,
and during absorption from that site into the bloodstream. Inhale believes
that for most systemic macromolecule drugs, a non-invasive delivery system
must show total delivery system efficiency of at least 5% to 25% compared
to injection for the system to be commercially viable.
- REPRODUCIBILITY: The system must deliver a consistent and predictable
amount of drug to the lung and into the bloodstream.
- FORMULATION STABILITY. Formulations used in the system must remain
physically and chemically stable over time and under a range of storage,
shipping and usage conditions.
- SAFETY. The system should not introduce local toxicity problems during
chronic or subchronic use by a wide patient population.
- CONVENIENCE. The system must be convenient to the patient in terms of
comfort, ease of operation, transportability and required dosage time.
Inhale approaches pulmonary drug delivery with the objective of maximizing
overall delivery system efficiency while addressing commercial requirements for
reproducibility, formulation stability, safety and convenience. To achieve this
goal, Inhale's delivery system integrates customized drug formulations with its
proprietary inhalation device. Inhale combines an understanding of lung biology,
aerosol science, chemical engineering, mechanical engineering and protein
formulations in its system development efforts. Inhale believes that this
interdisciplinary capability provides an important competitive advantage.
Inhale has chosen to base its deep lung delivery system on dry powders for
several reasons. Many proteins are more stable in dry powders than in liquids.
In addition, dry powder aerosols can carry approximately five times more drug in
a single breath than MDIs and, for many drugs, at least 25 times more than
currently marketed liquid or nebulizer systems. Inhale believes that a dry
powder system for drugs requiring higher doses, such as insulin and alpha-1
proteinase inhibitor, could decrease dosing time as compared with nebulizers.
Inhale takes bulk drugs supplied by partners and formulates and processes
them into fine powders that are then packaged into individual blisters. The
blisters are designed to be loaded into Inhale's device, which patients activate
to inhale the aerosolized drugs. Once inhaled, the aerosol particles are
deposited in the deep lung, dissolved in the alveolar fluid and absorbed into
the bloodstream. Although Inhale is in the advanced stages of developing its
system technologies, there can be no assurance that Inhale's products will ever
be successfully commercialized.
FORMULATIONS
Each macromolecule drug poses different formulation challenges due to
varying chemical and physical characteristics and dosing requirements. This
requires significant optimization work for each specific drug. Inhale has
assembled a team with expertise in protein formulations, powder science and
aerosol science and is applying this expertise to develop proprietary techniques
and methods that it believes will produce stable, fillable and dispersible dry
powder drug formulations. Inhale has several
17
<PAGE>
protein powders with on-going room temperature stability (both chemical and
physical) of more than one year. Through its work with numerous macromolecules,
Inhale is developing an extensive body of knowledge on aerosol dry powder
formulations, including knowledge relating to powder flow characteristics and
solubility within the lung, as well as physical and chemical properties of
various excipients. Inhale has filed and expects to continue to file patent
applications on several of its formulations and, though strategic acquisitions,
has acquired rights to certain U.S. and foreign patents and patent application
relating to stabilization of macromolecule drugs in dry formulations.
POWDER PROCESSING
Inhale is modifying standard powder processing equipment and developing
custom techniques to enable it to consistently produce fine dry powders with
particle diameters of between one and five microns without drug degradation or
significant loss of expensive bulk drug. Inhale has scaled up powder processing
to sufficient levels for producing test powders for late stage clinical trials
and small volume marketed products, if any. Inhale is in the process of scaling
up its powder processing systems in order to produce quantities sufficient for
commercial production of products Inhale believes it will need to supply in high
volumes, such as insulin. However, there can be no assurance that Inhale will be
successful in further scaling up its powder processing on a timely basis or at a
reasonable cost, or that the powder processing system will be applicable for
every drug.
POWDER PACKAGING
Fine particle powders have special handling requirements that are different
from those for larger particles. Current commercial filling and packaging
systems are designed for filling larger particle powders and therefore must be
modified to dispense finer particles more accurately and in the small quantities
required. Initially, powder filling was performed manually. Inhale has since
developed and qualified a proprietary automated filling system suitable for use
in clinical trials and initial production quantities for certain products.
Inhale is also developing with Pfizer a proprietary, high capacity system for
production use.
INHALATION DEVICE
Inhale's proprietary pulmonary delivery device is designed to provide deep
lung delivery of therapeutic powders in a reproducible, safe and efficient
manner. The first of a series of patents covering the device was granted in the
United States in October 1995. To achieve its objectives, Inhale has designed
its pulmonary delivery device to perform the following:
- EFFECTIVELY DISPERSE FINE PARTICLES INTO AN AEROSOL CLOUD. Fine powders
have different dispersion requirements or characteristics than large
powders. Most current dry powder inhalers use larger powders and are not
efficient in dispersing powders with diameters of one to five microns.
Inhale has developed and is refining its dispersion system for its device
specifically for fine powders. Inhale's device has been designed to
efficiently remove powders from the packaging, effectively break up the
powder particles and create an aerosol cloud while maintaining the
integrity of the macromolecule drug.
- EFFICIENTLY AND REPRODUCIBLY DELIVER THE AEROSOL CLOUD TO THE DEEP LUNG.
Inhale has developed a proprietary aerosol cloud handling system in its
device that facilitates deep lung powder deposition and reproducible
patient dosing. The handling system design is intended to enable the
aerosolized particles to be transported from the device to the deep lung
during a patient's breath, reducing losses in the throat and upper
airways. In addition, the aerosol cloud handling system, in conjunction
with the dispersion mechanism and materials used in the device, is
designed to reduce powder loss in the device itself.
18
<PAGE>
- ELIMINATE THE USE OF PROPELLANTS TO AVOID ASSOCIATED ENVIRONMENTAL
CONCERNS AND FORMULATION DIFFICULTIES. Unlike MDIs, Inhale's device does
not use propellants. The oily surfactants required to stabilize propellant
formulations can cause aggregation of macromolecules. Current
chlorofluorocarbon propellants, which are used in most commercial MDI
systems, are being phased out in many countries due to environmental
concerns.
The success of Inhale's deep lung drug delivery system for any drug will
depend upon Inhale achieving sufficient formulation stability, safety dosage
reproducibility and system efficiency (measured by the percentage of bulk drug
entering the manufacturing process that eventually is absorbed into the
bloodstream relative to that administered by injection for systemic indications,
or the amount of drug delivered to the lung tissue for local lung indications).
The initial screening factor for the feasibility of pulmonary delivery of any
systemic macromolecule drug is pulmonary bioavailability, which measures the
percentage of the drug absorbed into the bloodstream when delivered directly to
the lungs relative to injection. In addition, a certain percentage of each drug
dose may be lost at various stages of the manufacturing and pulmonary delivery
process, including drug formulation, dry powder processing, packaging, and in
moving the drug from a delivery device into the lungs. Excessive drug loss at
any one stage or cumulatively in the manufacturing and delivery process would
render a drug commercially unfeasible for pulmonary delivery. Formulation
stability (the physical and chemical stability of the formulated drug over time
and under various storage, shipping and usage conditions) and safety will vary
with each macromolecule and the type and amount of excipients, that are used in
the formulation. Reproducible dosing (the ability to deliver a consistent and
predictable amount of drug into the bloodstream over time both for a single
patient and across patient groups) requires the development of an inhalation
device that consistently delivers predictable amounts of dry powder formulations
to the deep lung, accurate unit dose packaging of dry powder formulations and
moisture resistant packaging. There can be no assurance that Inhale will be able
to successfully develop such an inhalation device or overcome such other
obstacles to reproducible dosing.
CLINICAL STATUS SUMMARY
The following table sets forth, for both Inhale's partner development
programs and Inhale's programs available or expected to be available for
partnering, the drug currently in development, the indication(s) for the
particular drug, its present stage of clinical development and, with respect to
Inhale's partner development programs, the identity of Inhale's corporate
partner for such drug.
PARTNER DEVELOPMENT PROGRAMS
<TABLE>
<CAPTION>
CLINICAL
DRUG INDICATION(S) STATUS(1) PARTNER
- -------------------------------------------------------- ------------------------- ---------------- ----------
<S> <C> <C> <C>
Insulin................................................. Type 1 and 2 Diabetes Phase III Pfizer
Alpha-1 Proteinase Inhibitor............................ Genetic Emphysema Preclinical Centeon
AVONEX-Registered Trademark-............................ Multiple Sclerosis Preclinical Biogen
Undisclosed Protein..................................... Not Released Preclinical Lilly
PTH..................................................... Osteoporosis Phase I Lilly
</TABLE>
19
<PAGE>
PROGRAMS AVAILABLE OR EXPECTED TO BE AVAILABLE FOR PARTNERING
<TABLE>
<CAPTION>
CLINICAL
DRUG INDICATION(S) STATUS(1)
- -------------------------------------------------------------------- ------------------------- ----------------
<S> <C> <C>
Calcitonin.......................................................... Osteoporosis, Bone Pain, Phase I
Paget's Disease
Interleukin-1 Receptor.............................................. Asthma Phase I/II
Undisclosed Non-Protein, Non-Peptide................................ Not Released Phase II
Undisclosed Non-Protein, Non-Peptide................................ Not Released Phase I
Undisclosed Non-Protein, Non-Peptide................................ Not Released Preclinical
</TABLE>
- ------------------------
(1) Clinical Status means:
Phase III: broad out-patient clinical trials conducted to obtain
information regarding specific patient groups conducted
following encouraging safety and efficacy trials
Phase II: human clinical trials to establish dosing and efficacy in
patients
Phase I: human clinical trials to test safety, and for drugs with systemic
applications, also tests bioavailability compared with injection
in healthy subjects
Preclinical: formulation development and animal testing in preparation for
human clinical trials
INHALE'S PARTNER DEVELOPMENT PROGRAMS
In general, Inhale's partnership arrangements provide funding for
development, payments upon the achievement of certain milestones and royalty and
manufacturing revenues upon the commencement of commercial sales. The
arrangements are cancelable by the partner at any time without significant
penalty.
INSULIN PROGRAM
Insulin is a protein hormone naturally secreted by the pancreas to induce
the removal of glucose from the blood. Diabetes, the inability of the body to
properly regulate blood glucose levels, is caused by insufficient production of
insulin by the pancreas or insufficient use of the insulin that is secreted.
Over time, high blood glucose levels can lead to failure of the microvascular
system, which may lead to blindness, loss of circulation, kidney failure, heart
disease or stroke. Insulin currently is marketed only in injectable form.
Insulin is supplied by various manufacturers, including Lilly, Novo-Nordisk A/S
and Hoechst; however, Hoechst is currently the only supplier of biosynthetic
recombinant insulin.
According to the Centers for Disease Control and Prevention, more than
16 million people in the United States have diabetes (10.3 million are diagnosed
with diabetes, another 5.4 million have undiagnosed diabetes), and 798,000 new
cases are diagnosed each year. All Type 1 diabetics, estimated at between 5% and
15% of all diabetics, require insulin therapy. Type 1 diabetics generally
require both a baseline treatment of long-acting insulin and multiple treatments
of regular, or short acting, insulin throughout the day. Type 2 diabetics,
depending on the severity of their case, may or may not require insulin therapy.
Type 2 diabetics who use insulin are best treated with regular insulin and
sometimes require long-acting insulin as well. Many Type 2 patients who do not
require insulin to survive but would benefit from it are reluctant to start
treatment because of the inconvenience and unpleasantness of injections.
Regular insulin is generally administered 30 minutes before mealtimes and
generally is given only twice a day. A ten-year study by the National Institutes
of Health ("NIH"), however, demonstrated that the side effects of diabetes could
be significantly reduced by dosing more frequently. The NIH study recommended
dosing regular insulin three to four times per day, a regimen which would more
closely
20
<PAGE>
mirror the action of naturally produced insulin in non-diabetics. However, many
patients are reluctant to increase their number of doses because they find
injections unpleasant and inconvenient.
Pursuant to a collaborative agreement originally entered into January 1995,
Inhale and Pfizer are developing a regular insulin that can be administered in
one to three blisters using Inhale's deep lung drug delivery system. Inhale
believes that its deep lung drug delivery system could provide increased user
convenience and result in greater patient compliance by eliminating some
injections for Type 1 and Type 2 patients and all injections for some Type 2
patients. In addition, Inhale believes that pulmonary delivery could yield
medical advantages by providing a more rapid acting insulin than certain current
injectable products.
Through its collaboration with Inhale, Pfizer conducted Phase I and Phase
IIa clinical trials which indicated that pulmonary insulin was absorbed
systemically and reduced glucose levels and provides the same control of
diabetes as does injected insulin. In October 1996, Pfizer initiated a
multi-site Phase Ilb outpatient trial with 190 patients with Type 1 and Type 2
diabetes. In June 1998, Pfizer announced the results of Phase Ilb trials. In 70
Type 1 diabetics treated with either inhaleable or conventional injected insulin
therapy for three months, the levels of hemoglobin A1c, the best index of blood
glucose control, were statistically equivalent. Virtually identical results were
obtained in a group of Type 2 diabetics. In September 1998, Pfizer released
additional Phase Ilb data from the inhaleable insulin trials which indicated
that results from 56 of 69 patients in a three-month trial showed that
individuals with Type 2 diabetes can markedly improve their glycemic control
without insulin injections by combining Inhale's pulmonary insulin with oral
diabetes agents.
In November 1998, Pfizer and Hoechst announced that they entered into
worldwide agreements to manufacture insulin and to co-develop and co-promote
inhaled insulin. Under the terms of the agreement, Pfizer and Hoechst agreed to
construct a jointly owned manufacturing plant in Frankfurt, Germany. Until its
completion, Pfizer will provide Inhale with biosynthetic recombinant insulin
from Hoechst's existing plant for powder processing. Inhale will continue to
have responsibility for manufacturing powders and supplying devices and will
receive a royalty on inhaleable insulin products marketed jointly by Pfizer and
Hoechst. Later in the same month, Pfizer held a meeting for 117 Phase III sites
of the inhaleable insulin trials and in June 1999, Pfizer began dosing for the
Phase III clinical trials.
In January 1995 and October 1996, Pfizer made two $5 million equity
investments in Inhale at a 25% premium to the market price of Inhale stock at
the time of each investment.
ALPHA-1 PROTEINASE INHIBITOR PROGRAM
In January 1997, Inhale entered into a collaborative agreement with Centeon
to develop a pulmonary formulation of alpha-1 proteinase inhibitor to treat
patients with alpha-1 antitrypsin deficiency, or genetic emphysema. Alpha-1
proteinase inhibitor is approved in the United States and several European
countries for augmentation treatment of alpha-1 antitrypsin deficiency. Current
treatment is given by systemic intravenous infusion on a weekly basis. This
"replacement therapy" consists of a concentrated form of alpha-1 proteinase
inhibitor derived from human plasma. Under the terms of the collaboration,
Centeon will receive commercialization rights worldwide excluding Japan and
Inhale will receive royalties on product sales, an up-front signing fee and up
to an estimated $15 million in research and development funding and milestone
payments. Centeon will manufacture the active ingredient for use in Inhale's
delivery device. Inhale will manufacture and package the dry powder and supply
inhalation devices to Centeon for commercialization and marketing.
The two companies have completed preclinical work that indicates Inhale's
dry powder formulation of Centeon's alpha-1 proteinase inhibitor has the
potential to significantly improve the efficiency of delivery compared with
current infusion therapy. Inhale believes its pulmonary delivery system could
significantly reduce the amount of drug needed for genetic emphysema therapy
since alpha-1 proteinase
21
<PAGE>
inhibitor could be delivered directly to the lung. Centeon is currently
negotiating to secure rights under patents that have been granted in Europe
directed to aerosol formulations for the treatment of the lung containing serine
protease inhibitors, including alpha-1 proteinase inhibitor.
AVONEX-Registered Trademark- Program
In February 1999, Inhale entered into a collaborative agreement with Biogen
to develop pulmonary delivery for Biogen's AVONEX-Registered Trademark-, a drug
used in the treatment of multiple sclerosis. Multiple sclerosis is believed to
be the most common chronic neurological condition of young adults in North
America and Europe. It is estimated that over 250,000 people in the United
States are currently affected by multiple sclerosis and that approximately
10,000 new cases are diagnosed annually in the United States. Under the terms of
the agreement, Inhale will receive royalties on product sales, an up-front
signing fee, and up to an estimated $25 million in research and development
funding and potential progress payments. Biogen will provide bulk
AVONEX-Registered Trademark- to Inhale for formulation into a dry powder which
is stable at room temperature. Inhale will manufacture and package the dry
powder and supply inhalation devices. Biogen will be responsible for clinical
trials, marketing and commercialization.
PROPRIETARY MOLECULE PROGRAM WITH LILLY
In January 1998, Lilly and Inhale entered into a collaborative agreement to
develop pulmonary delivery for an undisclosed protein product based on Inhale's
deep lung drug delivery system. Under the terms of the agreement, Inhale will
receive funding of up to $20 million in research, development and milestone
payments. Lilly will receive global commercialization rights for the pulmonary
delivery of the products with Inhale receiving royalties on any marketed
products. Inhale will manufacture packaged powders for, and supply inhalation
devices to, Lilly.
PTH PROGRAM
In January 1997, Inhale entered into a collaborative agreement with Lilly to
develop pulmonary delivery for a selected Lilly osteoporosis drug, parathyroid
hormone (PTH 1-34). Osteoporosis is estimated to affect approximately
25 million Americans, mostly women. If not prevented or left untreated,
osteoporosis can progress painlessly until a bone breaks. As many as 35,000
people die each year from a cause associated with hip fractures, primarily due
to complications that result from surgery or from being confined to bed.
Under the terms of its agreement with Lilly, Inhale will receive up to an
estimated $20 million in initial fees, funding for research and progress
payments. Lilly will receive global commercialization rights for the pulmonary
delivery of the products, with Inhale receiving royalties on any marketed
products. Inhale will manufacture and package product with bulk drug supplied by
Lilly and supply the inhalation devices.
In late 1998, unexpected observations from a long-term test in rats of the
injectable version of this osteoporosis drug led Lilly to suspend further
clinical development of the injectable and pulmonary versions of PTH pending
further analysis. Inhale is maintaining a minimum development effort in its
pulmonary program pending further direction from Lilly. Depending on the
continued evaluations by Lilly, this inhalation program could be re-initiated,
suspended for an extended period, or possibly terminated. Inhale does not
currently believe that this program will be re-initiated by Lilly in the near
future, if at all.
INHALE'S PROGRAMS AVAILABLE OR EXPECTED TO BE AVAILABLE FOR PARTNERING
CALCITONIN PROGRAM
Inhale is funding a proprietary program to develop deep lung delivery of
calcitonin for the treatment of osteoporosis, bone pain and Paget's disease.
Calcitonin is a peptide hormone secreted by
22
<PAGE>
the thyroid gland that inhibits bone resorption and lowers serum calcium.
Calcitonin is available in two forms, fish and human. Calcitonin is administered
daily or every other day by injection in the United States. In the United
States, salmon calcitonin is approved for the treatment of postmenopausal
osteoporosis, Paget's disease, hypercalcemia of cancer and bone pain. Human
calcitonin is approved for Paget's disease and bone pain. Paget's disease is a
chronic disorder of the adult skeleton, in which localized areas of bone become
hyperactive and are replaced by a softened and enlarged bone structure. About 3%
of Caucasians in the United States over age 60 have Paget's disease.
Hypercalcemia occurs as a result of excessive serum calcium levels caused by
hyperparathyroidism and malignancy. It occurs in approximately 10-20% of cancer
patients.
In April 1997, Inhale announced the successful completion of Phase I
clinical trials to determine the safety and bioavailability of pulmonary
delivery of a dry powder, aerosolized form of salmon calcitonin as a potential
treatment for osteoporosis, Paget's disease, hypercalcemia and other bone
diseases. The single-dose study conducted in the United Kingdom with a total of
36 fasted normal volunteers indicated that the drug was systemically absorbed
through the pulmonary route when delivered with Inhale's system. Inhale is
continuing work on this program while it seeks a partner for further clinical
development.
INTERLEUKIN-1 RECEPTOR PROGRAM
Interleukin-1 receptor is a cytokine that helps initiate the inflammatory
response to foreign pathogens. Inhale collaborated with Immunex to develop
pulmonary delivery of a therapeutic product for asthma. Initial formulation
development and animal toxicology have been completed, and the two companies
successfully completed Phase I/II trials demonstrating pulmonary delivery. This
program is awaiting further work and/or licensing by Immunex.
MOLECULE PROGRAMS WITH BAXTER
In March 1996, Inhale entered into a collaborative agreement with Baxter
International Inc. to use Inhale's dry powder pulmonary delivery system as a
technology platform for developing and launching therapeutic products. In
connection with the collaboration, Baxter made a $20 million equity investment
in Inhale at a 25% premium to the market price of Inhale stock at the time of
the investment. Baxter received worldwide commercialization rights for four
non-protein/peptide drugs in exchange for up to an estimated $60 million in
research and development funding and progress payments. In April 1998, Inhale
announced that the first two compounds from its collaboration with Baxter had
successfully completed Phase I and Phase II trials respectively. In addition, it
was announced that the program would focus on the product that had completed
Phase I as it was the product with the most commercial potential. The technology
from one of the three remaining products was returned to Inhale, leaving the
development of the other two compounds on hold. In October 1998, Inhale
announced that it had reached an agreement with Baxter to amend their
collaborative agreement to facilitate signing a new corporate partner to fund
further development and commercialization of the undisclosed compound that had
been their focus since April 1998. Baxter's obligations under that amendment
expired in September 1999. As a result, rights to the compounds reverted to
Inhale and are now available for other partnering opportunities.
OTHER PROGRAMS
In addition to the above mentioned programs, Inhale has and continues to
conduct feasibility studies with respect to additional drug formulations both
for its own account and in cooperation with potential partners. Inhale will
continue to pursue these and other feasibility programs to determine the
potential for collaborative development programs with respect to these drugs.
Included among such studies is initial research on a long-acting inhaleable
insulin. Some diabetic patients require a long-acting insulin to maintain
baseline insulin levels. A long-acting, inhaleable form of insulin could be
23
<PAGE>
used by these patients as a supplement to short-acting, mealtime inhaleable
insulin. This program is part of a broader sustained release program announced
by Inhale in January 1999.
MANUFACTURING
Inhale generally plans to formulate, manufacture and package the powders for
its deep lung delivery products and to subcontract the manufacture of its
proprietary pulmonary delivery devices. Under its collaborative agreement with
Pfizer to develop inhaleable insulin, Inhale will be the primary manufacturer of
insulin powders and Pfizer will be primarily responsible for filling blisters.
The terms of the collaborative agreement with Pfizer provide that prior to the
commercialization of its first products, Inhale must build and have validated a
powder processing and packaging facility and must select and have validated a
device manufacturer or manufacturers. Inhale believes its manufacturing strategy
will enable it to achieve the following:
- provide economies of scale by utilizing manufacturing capacity for
multiple products;
- improve its ability to retain any manufacturing know-how; and
- allow its customers to bring pulmonary delivery products to market faster.
Inhale has built a powder processing and packaging facility in San Carlos,
California capable of producing powders in quantities sufficient for human
clinical trials and commercial launch. This facility has been inspected and
licensed by the State of California and is used to manufacture and package
powders under current good manufacturing practices. Inhale intends to expand the
facility to meet its future commercial manufacturing commitments.
Inhale is working to further scale up its powder processing to a larger
production scale system and to further develop the necessary powder packaging
technologies. Fine particle powders and small quantity powder packaging (such as
those to be used in Inhale's delivery system) require special handling. Current
commercial packaging systems are designed for filling larger quantities of
larger particle powders and therefore must be modified to dispense finer
particles in the small quantities required by Inhale. Inhale has developed and
validated a proprietary prototype automated filling system which Inhale believes
is capable of supporting its requirements through Phase III trials and into
commercial production for some products. Inhale is developing a higher capacity
automated filling unit capable of filling blisters on a production scale for
moderate and large volume products. Inhale faces significant technical
challenges in developing an automated, commercial-scale filling system that can
accurately and economically handle the small dose and particle sizes of its
powders. There can be no assurance that Inhale will be able to develop or
acquire the technology necessary to develop successfully any such system in a
timely manner or at commercially reasonable cost. Any failure or delay in
developing such technology would delay product development or bar
commercialization of Inhale's products and would have a material adverse effect
on Inhale.
A new inhalation device has been developed for commercial use and is being
used in the Phase III insulin and other trials in 1999. Inhale plans to
subcontract the manufacture of its pulmonary delivery device before commercial
production of its first product. Inhale has identified contract manufacturers
that it believes have the technical capabilities and production capacity to
manufacture its devices and which can meet the requirements of current good
manufacturing practices. There can be no assurance that Inhale will be able to
obtain and maintain satisfactory contract manufacturing on commercially
acceptable terms, if at all. Inhale's dependence upon third parties for the
manufacture of its inhalation device may adversely affect Inhale's cost of goods
and its ability to develop and commercialize products on a timely and
competitive basis.
24
<PAGE>
GOVERNMENT REGULATION
The research and development, manufacture and marketing of pulmonary drug
delivery systems are subject to regulation by the FDA in the United States and
by comparable regulatory agencies in other countries. These national agencies
and other federal, state and local entities regulate, among other things,
research and development activities and the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of Inhale's products.
The process required by the FDA before a pulmonary drug delivery system may
be marketed in the United States depends on whether the compound has existing
approval for use in other dosage forms. If the drug is a new chemical entity
that has not been approved, the process includes the following:
- preclinical laboratory and animal tests;
- the filing of an Investigational New Drug application ("IND");
- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug in its intended indication; and
- submission to the FDA for approval of a New Drug Application ("NDA") with
respect to drugs or a Biological License Application ("BLA") with respect
to biologics.
If the drug has been previously approved, the approval process is similar,
except that certain toxicity tests normally required for the IND and NDA/BLA
application may not be necessary.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. Pulmonary systems must be formulated according to current good
manufacturing practices, and preclinical safety tests must be conducted by
laboratories that comply with FDA good laboratory practices regulations. The
results of the preclinical tests are submitted to the FDA as part of an IND
application and are reviewed by the FDA before human clinical trials begin. The
IND application becomes effective 30 days after receipt by the FDA, unless the
FDA raises objections.
Clinical trials involve the administration of the drug to healthy volunteers
or to patients under the supervision of, a qualified principal investigator.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part
of the IND. Each clinical study is conducted under the auspices of an
independent Institutional Review Board ("IRB"). The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the product generally is tested for safety, dosage
tolerance, pharmacokinetics, absorption, metabolism and excretion. Phase II
involves studies in a limited patient population to:
- determine the efficacy of the product for specific, targeted indications;
- determine dosage tolerance and optimal dosage; and
- identify possible adverse effects and safety risks.
When Phase II evaluations demonstrate that dosing the drug by the pulmonary
system is effective and has an acceptable safety profile, Phase III trials are
undertaken to evaluate further clinical efficacy and safety within an expanded
patient population at geographically dispersed clinical study sites. The FDA,
the clinical trial sponsor, the investigator or the IRB may suspend clinical
trials at any time if it believes that clinical subjects are being exposed to an
unacceptable health risk.
25
<PAGE>
The results of product development, preclinical studies and clinical studies
are submitted to the FDA as an NDA/BLA for approval of the marketing and
commercial shipment of the pulmonary system. The FDA may deny an NDA/BLA if
applicable regulatory criteria are not satisfied or may require additional
clinical testing. Even if such data is submitted, the FDA may ultimately decide
that the NDA/BLA does not satisfy the criteria for approval. Product approvals
may be withdrawn if compliance with regulatory standards are not maintained or
if problems occur after the product reaches the market. The FDA may require
testing and surveillance programs to monitor the effect of pulmonary systems
that have been commercialized, and has the power to prevent or limit future
marketing of the product based on the results of these post-marketing programs.
Each domestic drug product manufacturing establishment must be registered
with, and approved by, the FDA. Drug product manufacturing establishments
located in California also must be licensed by the State of California.
Establishments handling controlled substances must be licensed by the United
States Drug Enforcement Administration ("DEA"). Domestic manufacturing
establishments are subject to biennial inspections by the FDA for current good
manufacturing practices compliance. Inhale is also subject to U.S. federal,
state and local regulations regarding workplace safety, environmental protection
and hazardous and controlled substance controls, among others.
Many of the drugs with which Inhale is working are already approved for
marketing by the FDA. Inhale believes that when working with approved drugs, the
approval process for delivery by pulmonary delivery may require less time and
fewer tests than for new chemical entities. However, Inhale expects that its
formulations often will use excipients not currently approved for pulmonary use.
Use of these excipients will require additional toxicological testing that may
increase the costs of, or lengthen the time in, gaining regulatory approval. In
addition, regulatory procedures applicable to Inhale's products may change as
regulators gain experience in the area of macromolecules, and any such changes
may delay or increase the cost of regulatory approval.
Inhale's device will not be developed as an independent product but will be
an inseparable part of the deep lung drug delivery system for each specific
molecule. Prior to or at the time of submission of the IND, the FDA Center and
division within the Center will be identified to be responsible for the review
of the IND and NDA/BLA. In the case of Inhale's products, either the Center for
Drug Evaluation and Research or the Center for Biologics Evaluation and
Research, in consultation with the Center for Devices and Radiological Health,
will be involved in the review. However, one Center is designated as the Center
which has the lead responsibility for regulating the product. The jurisdiction
within the FDA is based on the primary mode of action of the drug and is
identified in the FDA's intercenter agreement.
Inhale expects that its partners generally will be responsible for clinical
and regulatory approval procedures, but Inhale may participate in this process
by submitting to the FDA or to each partner portions of the Drug Master File
being developed and to be maintained by Inhale which contains data concerning
the manufacturing processes for the product. The regulatory review process
generally takes a number of years and requires the expenditure of substantial
resources. Inhale's ability to manufacture and sell products developed under
contract depends upon the partner's completion of satisfactory clinical trials
and obtaining marketing approvals. Inhale may prepare and submit an IND
application and perform initial clinical studies before licensing the product to
a partner. Inhale's business strategy contemplates performing more of these
studies in the future.
Sales of Inhale's products outside the United States are subject to
regulatory requirements governing human clinical trials and marketing approval
for drugs and pulmonary delivery systems. Such requirements vary widely from
country to country.
Prior to marketing a new dosage form of any drug, including one developed
for use with Inhale's pulmonary drug delivery system, the product must undergo
rigorous preclinical and clinical testing and an extensive review process
mandated by the FDA and equivalent foreign authorities regardless of
26
<PAGE>
whether or not such drug was already approved for marketing in another dosage
form. These processes generally take a number of years and require the
expenditure of substantial resources. None of Inhale's proposed products has
been submitted to the FDA for marketing approval. Inhale has no experience
obtaining such regulatory approval, does not have the expertise or other
resources to do so and intends to rely on its partners to fund clinical testing
and to obtain product approvals.
PATENTS AND PROPRIETARY RIGHTS
Inhale's policy is to apply for patent protection for the technology,
inventions and improvements deemed important to the development of its business.
Inhale also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to maintain and further develop its
competitive position. Inhale plans to defend aggressively its proprietary
technology and any issued patents.
Inhale expects that its integrated system for the development of pulmonary
delivery technology for macromolecule drugs will yield innovations in dry powder
formulations, powder processing, powder packaging and device design. It is
Inhale's strategy to build proprietary positions in each of its technological
areas. Inhale's success will depend in part upon its ability to protect its
proprietary technology from infringement, misappropriation, duplication and
discovery. Inhale has filed patent applications covering certain aspects of its
device and powder processing technology and powder formulations and pulmonary
route of delivery for certain molecules, and plans to file additional patent
applications. There can be no assurance that any of the patents applied for by
Inhale will issue, or that any patents that issue will be valid and enforceable.
Even if such patents are enforceable, Inhale anticipates that any attempt to
enforce its patents could be time consuming and costly.
Inhale currently has 45 issued U.S. and foreign patents covering certain
aspects of its technology and has a number of patent applications pending. Among
the significant and more recent patents received by Inhale from the United
States Patent and Trademark Office (the "PTO") are the following:
- Patent No. 5,458,135 (October 17, 1995) for certain claims covering the
use of its device in a method for delivering powder formulations of drugs
to the lung.
- Patent No. 5,607,915 (March 4, 1997) for pulmonary delivery of active
fragments of parathyroid hormone (PTH) 1-34.
- Patent No. 5,654,007 (August 5, 1997) for a system and methods for
processing fine dispersible powders for easier processing.
- Patent No. 5,740,794 (April 21, 1998) for a method and means to access a
packaged drug, to break up a dry powder drug into particles with
compressed air (aerosolize), and to transport the aerosolized drug into a
holding chamber.
- Patent No. 5,775,320 (July 7, 1998) for a method and means for dispersing
a dry-powder or liquid drug, and transferring the drug in its aerosolized
"cloud" form to a holding chamber where it is held until a patient is
ready to inhale, as well as a method and means to pull in atmospheric
"chase" air following the initial inhalation to help push the drug into
the deep lung.
- Patent No. 5,780,014 (July 14, 1998) for methods and means for pulmonary
delivery of dry powder alpha-1 proteinase inhibitor for administration to
a patient.
- Patent No. 5,785,049 (July 28, 1998) for approximately 50 claims directed
to methods and means for aerosolizing dry powders through use of a high
pressure gas stream to draw dry powder from a receptacle such as a blister
and for which Inhale utilizes the design described therein to achieve
efficient aerosolization of fine dry powders to enable deep lung delivery
for systemic absorption.
27
<PAGE>
- Patent No. 5,826,633 (October 27, 1998) relating to Inhale's powder
handling technologies, including the process of transferring fine powder
particles into blister packs in an un-compacted state so that they can be
easily dispersed in Inhale's pulmonary delivery system.
- Patent No. 5,928,469 (July 27, 1999) for a method for preparing storage
stable compositions. In this method, a material to be stored and a glass
forming substance are spray-dried to form stable particles
- Patent No. 5,976,574 (November 2, 1999) for a process for spray-drying
hydrophobic drugs in organic solvent suspensions.
- Patent No. 5,985,248 (November 16, 1999) for a process for spray-drying a
hydrophobic drug and a hydrophilic excipient in an organic solvent and
compositions formed by the process.
- Patent No. 5,994,314 (November 30, 1999) for dry powder nucleic acid
compositions and methods for their preparation
- Patent No. 5,997,848 (December 7, 1999) for pulmonary administration of
dry powder insulin which is rapidly absorbed through the alveoli into the
systemic circulation
In October 1999, Inhale and Alliance entered into an agreement for Inhale to
acquire Alliance's PulmoSpheres-Registered Trademark- technology and other
related assets for particle formation and powder processing and in
November 1999, the acquisition was completed. The
PulmoSpheres-Registered Trademark- technology utilizes an emulsification process
to produce a powder having characteristics that Inhale believes may improve
efficiency and reproducibility for drugs delivered to the lung through
alternative technologies such as MDIs as well as potentially improve drug
delivery through Inhale's proprietary deep lung drug delivery system. The assets
acquired included Alliance's intellectual property portfolio for
PulmoSpheres-Registered Trademark- consisting of, among other things, several
patent applications. With respect to applications of the
PulmoSpheres-Registered Trademark- technology outside the respiratory field,
Inhale has licensed the technology back to Alliance. While Alliance has made
several representations in its agreement with Inhale regarding its ownership
rights of the PulmoSpheres-Registered Trademark- technology, it is possible that
third parties might assert claims challenging Alliance's rights, and thus
Inhale's rights. Even if Inhale can defend its rights successfully, the
uncertainty regarding the status of its rights during the time any such
litigation is pending may prevent Inhale from using the underlying technology.
In April 1998, Inhale and Initiatech Inc. signed an agreement under which
Inhale will license technology, intellectual property, and patents for
protecting biologically active compounds in the dry state. Inhale plans to use
this technology to expand its current technology base in stabilizing dry powder
aerosol formulations for peptides, proteins, and other macromolecules at room
temperature. Inhale's license is exclusive for the fields of respiratory
delivery of pharmaceutical products and for any delivery form of insulin. The
license includes rights to two issued U.S. patents and a Canadian patent
covering the protection of biological materials from degradation. Initiatech has
licensed exclusive rights to this technology from the Boyce Thompson Institute
for Plant Research Inc., (BTI) including the right to sub-license.
In June 1997, Inhale acquired the intellectual property portfolio of the
BioPreservation Division of Pafra. This portfolio includes issued U.S. and
foreign Letters Patents and pending applications relating to the stabilization
of macromolecule drugs in dry formulations. An application for reissue of the
original U.S. patent included in this portfolio is pending in the PTO. There can
be no assurance that Inhale will be successful in obtaining a reissued patent. A
second U.S. patent issued on July 27, 1999. A granted European patent included
in this portfolio was the subject of an opposition proceeding before the
European Patent Office. The opposition hearing was held on December 16, 1999.
Inhale successfully defended the patent and its method claims relating to glass
stabilization technology against four opposing parties. There can be no
assurance that any of the other Pafra patent applications will issue, or that
any Pafra patents will be held to be valid and enforceable. The inability to
obtain or defend the Pafra patents could have a material adverse effect on
Inhale.
28
<PAGE>
Inhale has obtained license rights to certain know-how and patent
applications owned by Genentech, Inc. covering formulations and powder
processing and pulmonary delivery of certain molecules, which it believes could
be important to the development of its business. These license rights are
worldwide, nonexclusive, sublicensable and royalty free. In 1997, Genentech
successfully defended an opposition proceeding involving a pending European
patent licensed to Inhale. Recently, this decision was upheld on appeal. The
pending patent covers the pulmonary delivery of cytokines and growth factors.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including Inhale, are uncertain and involve complex legal and factual
issues. Additionally, the coverage claimed in a patent application can be
significantly reduced before the patent is issued. As a consequence, Inhale does
not know whether any of its patent applications will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, Inhale
cannot be certain that it was the first inventor of inventions covered by its
issued patents or pending patent applications or that it was the first to file
patent applications for such inventions. Moreover, Inhale may have to
participate in interference proceedings declared by the PTO to determine
priority of invention, which could result in substantial cost to Inhale, even if
the eventual outcome is favorable. An adverse outcome could subject Inhale to
significant liabilities to third parties, require disputed rights to be licensed
from or to third parties or require Inhale to cease using the technology in
dispute.
Inhale is aware of numerous pending and issued U.S. and foreign patent
rights and other proprietary rights owned by third parties that relate to
aerosol devices and delivery, pharmaceutical formulations, dry powder processing
technology and the pulmonary route of delivery for certain powder formulations
of macromolecules. Inhale cannot predict with any certainty which, if any,
patent references will be considered relevant to its technology by authorities
in the various jurisdictions where such rights exist, nor can Inhale predict
with certainty which, if any, of these rights will or may be asserted against it
by such third parties. There can be no assurance that Inhale can obtain any
license to any technology that it determines it needs, on reasonable terms, if
at all, or that Inhale could develop or otherwise obtain alternate technology.
The failure to obtain licenses if needed would have a material adverse effect on
Inhale.
Inhale also relies upon trade secret protection for its confidential and
proprietary information. No assurance can be given that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Inhale's trade secrets or disclose such
technology, or that Inhale can meaningfully protect its trade secrets.
Third parties from time to time have asserted or may assert that Inhale is
infringing their proprietary rights based upon issued patents, trade secrets or
know-how that they believe cover Inhale's technology. In addition, future
patents may issue to third parties which Inhale's technology may infringe.
Inhale could incur substantial costs in defending itself and its partners
against any such claims. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief which could effectively block
Inhale's ability to further develop or commercialize some or all of its products
in the United States and abroad, and could result in the award of substantial
damages. In the event of a claim of infringement, Inhale and its partners may be
required to obtain one or more licenses from third parties. There can be no
assurance that Inhale or its partners will be able to obtain such licenses at a
reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such
required license could have a material adverse effect on Inhale.
Inhale's ability to develop and commercialize its technology will be
affected by its or its partners' access to the drugs which are to be formulated.
Many biopharmaceutical drugs, including some of those which are presently under
development by Inhale, are subject to issued and pending United States and
foreign patent rights which may be owned by competing entities. There are issued
patents and pending patent applications relating to the pulmonary delivery of
macromolecule drugs, including several for
29
<PAGE>
which Inhale is developing pulmonary delivery formulations. Inhale intends
generally to rely on the ability of its partners to provide access to the drugs
which are to be formulated for pulmonary delivery. There can be no assurance,
however, that Inhale's partners will be able to provide access to drug
candidates for formulation for pulmonary delivery or that, if such access is
provided, Inhale or its partners will not be accused of, or determined to be,
infringing a third party's rights and will not be prohibited from working with
the drug or be found liable for damages that may not be subject to
indemnification. Any such restriction on access or liability for damages would
have a material adverse effect on Inhale.
It is Inhale's policy to require its employees and consultants, outside
scientific collaborators, sponsored researchers and other advisors who receive
confidential information from Inhale to execute confidentiality agreements upon
the commencement of employment or consulting relationships with Inhale. These
agreements provide that all confidential information developed or made known to
the individual during the course of the individual's relationship with Inhale is
to be kept confidential and not disclosed to third parties except in specific
circumstances. The agreements provide that all inventions conceived by an
employee shall be the property of Inhale. There can be no assurance, however,
that these agreements will provide meaningful protection or adequate remedies
for Inhale's trade secrets in the event of unauthorized use or disclosure of
such information.
COMPETITION
Inhale believes that products developed using its technology will compete on
the basis of system efficiency, dosage reproducibility, safety, patient
convenience and cost. There is intense competition to develop a solution to the
non-invasive delivery of drugs from several drug delivery and pharmaceutical
companies, many of which are much larger and have far greater resources than
Inhale. These include companies working on developing systems for other
non-invasive routes of delivery, such as oral, transdermal, bucal, nasal, and
needle-less injections, as well as companies working on pulmonary delivery
systems. In addition, several companies are working on sustained release
injectable systems. While these latter systems involve injections, the lower
number of injections could be competitive with Inhale's pulmonary delivery
technology in certain applications. Inhale believes its technology and
integrated pulmonary delivery systems approach provides it with important
competitive advantages in the delivery of drugs compared with currently known
alternatives. However, new drugs or further developments in alternative drug
delivery methods may provide greater therapeutic benefits for a specific drug or
indication, or may offer comparable performance at lower cost than Inhale's
proprietary deep lung drug delivery system.
With respect to pulmonary delivery, several companies are marketing and
developing dry powder, MDI, liquid and nebulizer devices that could have
applications for drug delivery, including Dura Pharmaceuticals, Inc. and Aradigm
Corporation, which also have collaborative arrangements with corporate partners
for the development of pulmonary delivery systems for insulin. Several of these
companies may have or may be developing dry powder devices that could be used
for pulmonary delivery of macromolecules. There can be no assurance that
competitors will not introduce products or processes competitive with or
superior to those of Inhale. Inhale intends to monitor competitive device
activities and continue to focus its activities on those products for which
Inhale believes it has and can maintain a competitive advantage. If a device is
developed that is superior to Inhale's for certain applications, Inhale may seek
to obtain a license to allow Inhale's partners to use such device with
Inhale-developed powders, although there can be no assurance that Inhale would
be able to do so.
Inhale's success depends upon maintaining a competitive advantage in the
development of products and technologies for pulmonary delivery of
pharmaceutical drugs. If a competing company were to develop or acquire rights
to a better dry powder pulmonary delivery device or fine powder processing
technology, a better system for efficiently and reproducibly delivering
macromolecule drugs to the deep lung, a non-invasive drug delivery system which
is more attractive for delivery drugs to the
30
<PAGE>
deep lung, a non-invasive drug delivery system which is more attractive for the
delivering of drugs than pulmonary delivery, or an invasive delivery system
which overcomes some of the drawbacks of current invasive systems for chronic or
subtonic indications (such as sustained release system), Inhale's business would
be negatively impacted.
Inhale is in competition with pharmaceutical, biotechnology and drug
delivery companies, hospitals, research organizations, individual scientists and
nonprofit organizations engaged in the development of alternative drug delivery
systems or new drug research and testing, as well as with entities producing and
developing injectable drugs. Inhale is aware of a number of companies currently
seeking to develop new products and non-invasive alternatives to injectable drug
delivery, including oral delivery systems, intranasal delivery systems,
transdermal systems, bucal and colonic absorption systems. Several of these
companies may have developed or are developing dry powder devices that could be
used for pulmonary delivery of macromolecules. Many of these companies and
entities have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than Inhale and
represent significant competition for Inhale. Acquisitions of competing drug
delivery companies by large pharmaceutical companies could enhance competitors'
financial, marketing and other resources. Accordingly, Inhale's competitors may
succeed in developing competing technologies, obtaining FDA approval for
products or gaining market acceptance more rapidly than Inhale. Developments by
others may render Inhale's products or technologies noncompetitive or obsolete.
EMPLOYEES AND CONSULTANTS
As of September 30, 1999, Inhale had 306 full time employees, of which 248
were engaged in research and development (including manufacturing) activities
and 58 were engaged in general administration and business development. Two
hundred fifty-one of the employees hold advanced degrees, of which 50 are
Ph.D.s. Inhale employs scientists and engineers with expertise in the areas of
pulmonary biology, aerosol science, mechanical engineering, protein chemistry
and chemical engineering. None of Inhale's employees are covered by a collective
bargaining agreement and Inhale has experienced no work stoppages. Inhale
believes that it maintains good relations with its employees.
To complement its own expertise, Inhale utilizes specialists in regulatory
affairs, pulmonary toxicology, process engineering, manufacturing, quality
assurance, device design, clinical trial design and business development. These
individuals include certain of Inhale's scientific advisors (see "Management"
below) as well as independent consultants.
FACILITIES
Inhale currently leases approximately 165,000 feet in San Carlos, California
and 20,000 square feet in Palo Alto, California. The Palo Alto facility is used
for research, development and administration. The lease has a five-year term,
and expires on May 31, 2003.
The San Carlos facility is leased pursuant to a 15-year lease agreement. The
San Carlos facility serves as the Company's corporate headquarters and is used
for research and development, manufacturing and administration. The lease
provides Inhale with an option to lease approximately 80,000 additional square
feet in the same facility. This manufacturing facility operates under current
good manufacturing practices and has been approved and licensed by the State of
California to manufacture clinical supplies for use in human clinical trials.
In October 1998, Inhale acquired 4.7 acres of land adjacent to its San
Carlos facility. Inhale intends to use this property to expand future
operations. In October 1999, Inhale commenced construction of a 85,000 square
foot facility on this site to expand its administrative offices and research and
development capacity.
31
<PAGE>
DESCRIPTION OF THE DEBENTURES
The debentures were issued under an indenture between us and Chase Manhattan
Bank and Trust Company, National Association, as trustee, dated October 13,
1999. The terms of the debentures include those provided in the indenture and
those provided in the registration rights agreement, which we entered into with
the initial purchasers of the debentures on October 13, 1999.
The following description of provisions of the debentures is not complete
and is subject to, and qualified in its entirety by reference to, the
debentures, the indenture and the registration rights agreement.
GENERAL
The debentures are general unsecured obligations of Inhale and rank junior
in right of payment to all of our existing and future Senior Debt and are
convertible into our common stock as described under "--Conversion Rights"
below. The debentures will mature on October 13, 2006, unless earlier redeemed
by us or repurchased by us at the option of the holder upon the occurrence of a
Change of Control (as defined below).
The debentures bear interest from October 13, 1999 at the rate of 6 3/4% per
year, subject to adjustment upon the occurrence of a Reset Transaction. See
"--Interest Rate Adjustments" below. Interest is payable semi-annually on
April 13 and October 13 of each year to holders of record at the close of
business on the preceding March 31 and September 30, respectively, beginning
April 13, 2000. We may pay interest on debentures represented by certificated
debentures by check mailed to such holders. However, a holder of debentures with
an aggregate principal amount in excess of $5,000,000 will be paid by wire
transfer in immediately available funds at the election of such holder. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Principal will be payable, and the debentures may be presented for
conversion, registration of transfer and exchange, without service charge, at
our office or agency in New York City, which shall initially be the office or
agency of the trustee in New York, New York. See "--Form, Denomination and
Registration" for information as to debentures held by QIBs (as defined below).
The indenture does not contain any financial covenants or any restrictions
on the payment of dividends, the repurchase of our securities or the incurrence
of Senior Debt or any other indebtedness. The indenture also does not contain
any covenants or other provisions that afford protection to holders of
debentures in the event of a highly leveraged transaction or a Change in Control
of Inhale except to the extent described under "--Repurchase at Option of
Holders Upon a Change of Control" below.
INTEREST RATE ADJUSTMENTS
If a Reset Transaction occurs, the interest rate will be adjusted to equal
the Adjusted Interest Rate from the effective date of such Reset Transaction to,
but not including, the effective date of any succeeding Reset Transaction.
A "Reset Transaction" means:
- a merger, consolidation or statutory share exchange to which the entity
that is the issuer of the common stock into which the debentures are then
to be convertible into is a party;
- a sale of all or substantially all the assets of that entity;
- a recapitalization of that common stock; or
- a distribution described in clause (4) of the fourth paragraph under
"--Conversion Rights" below,
32
<PAGE>
after the effective date of which transaction or distribution the debentures
would be convertible into:
- shares of an entity the common stock of which had a dividend yield for the
four fiscal quarters of such entity immediately preceding the public
announcement of the transaction or distribution that was more than 2.5%
higher than the dividend yield on our common stock (or other common stock
then issuable upon conversion of the debentures) for the four fiscal
quarters preceding the public announcement of the transaction or
distribution; or
- shares of an entity that announces a dividend policy prior to the
effective date of the transaction or distribution which policy, if
implemented, would result in a dividend yield on that entity's common
stock for the next four fiscal quarters that would result in such a 2.5%
increase.
The "Adjusted Interest Rate" with respect to any Reset Transaction will be
the rate per year that is the arithmetic average of the rates quoted by two
dealers engaged in the trading of convertible securities selected by us or our
successor as the rate at which interest should accrue so that the fair market
value, expressed in dollars, of a debenture immediately after the later of
- the public announcement of the Reset Transaction or
- the public announcement of a change in dividend policy in connection with
the Reset Transaction
will equal the average Trading Price of a debenture for the 20 trading days
preceding the date of public announcement of the Reset Transaction However, the
Adjusted Interest Rate will not be less than 6 3/4% per year.
For purposes of the definition of Reset Transaction, the dividend yield on
any security for any period means the dividends paid or proposed to be paid
pursuant to an announced dividend policy on the security for that period divided
by, if with respect to dividends paid on that security, the average Closing
Price (as defined in the indenture) of the security during that period and, if
with respect to dividends proposed to be paid on the security, the Closing Price
of such security on the effective date of the related Reset Transaction.
The "Trading Price" of a security on any date of determination means:
- the closing sale price (or, if no closing sale price is reported, the last
reported sale price) of a security (regular way) on the New York Stock
Exchange ("NYSE") on that date;
- if that security is not listed on the NYSE on that date, the closing sale
price as reported in the composite transactions for the principal U.S.
securities exchange on which that security is listed;
- if that security is not so listed on a U.S. national or regional
securities exchange, the closing sale price as reported by the Nasdaq
National Market;
- if that security is not so reported, the last price quoted by Interactive
Data Corporation for that security or, if Interactive Data Corporation is
not quoting such price, a similar quotation service selected by us;
- if that security is not so quoted, the average of the mid-point of the
last bid and ask prices for that security from at least two dealers
recognized as market-makers for that security; or
- if that security is not so quoted, the average of that last bid and ask
prices for that security from a dealer engaged in the trading of
convertible securities.
33
<PAGE>
FORM, DENOMINATION AND REGISTRATION
The debentures were issued in fully registered form, without coupons, in
denominations of $1,000 principal amount and whole multiples of $1,000.
The debentures are evidenced by a global debenture deposited with the
trustee as custodian for The Depository Trust Company, New York, New York
("DTC"), and registered in the name of Cede & Co. as DTC's nominee. Record
ownership of the global debenture may be transferred, in whole or in part, only
to another nominee of DTC or to a successor of DTC or its nominee, except as set
forth below.
A "qualified institutional buyer," as defined in rule 144A under the
Securities Act ("QIB") may hold its interests in the global debenture directly
through DTC if such QIB is a participant in DTC, or indirectly through
organizations which are direct DTC participants. Transfers between direct DTC
participants will be effected in the ordinary way in accordance with DTC's rules
and will be settled in same-day funds. QIBs may also beneficially own interests
in the global debenture held by DTC through certain banks, brokers, dealers,
trust companies and other parties that clear through or maintain a custodial
relationship with a direct DTC participant, either directly or indirectly.
So long as Cede & Co., as nominee of DTC, is the registered owner of the
global debenture, Cede & Co. for all purposes will be considered the sole holder
of the global debenture. Except as provided below, owners of beneficial
interests in the global debenture will not be entitled to have certificates
registered in their names, will not receive or be entitled to receive physical
delivery of certificates in definitive form, and will not be considered holders
thereof. The laws of some states require that certain persons take physical
delivery of securities in definitive form. Consequently, the ability to transfer
a beneficial interest in the global debenture to such persons may be limited.
We will wire, through the facilities of the trustee, principal, premium, if
any, and interest payments on the global debenture to Cede & Co., the nominee
for DTC, as the registered owner of the global debenture. Inhale, the trustee
and any paying agent will have no responsibility or liability for paying amounts
due on the global debenture to owners of beneficial interests in the global
debenture.
It is DTC's current practice, upon receipt of any payment of principal of
and premium, if any, and interest on the global debenture, to credit
participants' accounts on the payment date in amounts proportionate to their
respective beneficial interests in the debentures represented by the global
debenture, as shown on the records of DTC, unless DTC believes that it will not
receive payment on the payment date. Payments by DTC participants to owners of
beneficial interests in debentures represented by the global debenture held
through DTC participants will be the responsibility of DTC participants, as is
now the case with securities held for the accounts of customers registered in
"street name."
If you would like to convert your debentures into common stock pursuant to
the terms of the debentures, you should contact your broker or other direct or
indirect DTC participant to obtain information on procedures, including proper
forms and cut-off times, for submitting those requests.
Because DTC can only act on behalf of DTC participants, who in turn act on
behalf of indirect DTC participants and other banks, your ability to pledge your
interest in the debentures represented by global debenture to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interest, may be affected by the lack of a physical certificate.
Neither Inhale nor the trustee (nor any registrar, paying agent or
conversion agent under the indenture) will have any responsibility for the
performance by DTC or direct or indirect DTC participants of their obligations
under the rules and procedures governing their operations. DTC has advised us
that it will take any action permitted to be taken by a holder of debentures,
including, without limitation, the presentation of debentures for conversion as
described below, only at the
34
<PAGE>
direction of one or more direct DTC participants to whose account with DTC
interests in the global debenture are credited and only for the principal amount
of the debentures for which directions have been given.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created
to hold securities for DTC participants and to facilitate the clearance and
settlement of securities transactions between DTC participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations such as the initial purchasers of
the debentures. Certain DTC participants or their representatives, together with
other entities, own DTC. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through,
or maintain a custodial relationship with, a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global debenture among DTC participants, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
us within 90 days, we will cause debentures to be issued in definitive form in
exchange for the global debenture. None of Inhale, the trustee or any of their
respective agents will have any responsibility for the performance by DTC,
direct or indirect DTC participants of their obligations under the rules and
procedures governing their operations, including maintaining, supervising or
reviewing the records relating to, or payments made on account of, beneficial
ownership interests in global debentures.
DTC's management is aware that some computer applications, systems and the
like for processing data that are dependent upon calendar dates, including dates
before, on or after January 1, 2000, may encounter "Year 2000 problems." DTC has
informed DTC participants and other members of the financial community that it
has developed and is implementing a program so that its systems, as the same
relates to the timely payment of distributions, including principal and interest
payments, to securityholders, book-entry deliveries and settlement of trades
within DTC, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to, issuers and their agents, as
well as third-party vendors from whom DTC licenses software and hardware, and
third-party vendors on whom DTC relies for information or the provision of
services, including telecommunications and electrical utility service providers,
among others. DTC has informed DTC participants and other members of the
financial community that it is contacting and will continue to contact
third-party vendors from whom DTC acquires services to (1) impress upon them the
importance of such services being Year 2000 compliant and (2) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, DTC is in the process of developing such
contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
35
<PAGE>
CONVERSION RIGHTS
The holders of debentures may, at any time prior to the close of business on
the final maturity date of the debentures, convert any outstanding debentures
(or portions thereof) into our common stock, initially at the conversion price
set forth on the cover page of this prospectus, subject to adjustment as
described below. Holders may convert debentures only in denominations of $1,000
and whole multiples of $1,000. Except as described below, no adjustment will be
made on conversion of any debentures for interest accrued thereon or dividends
paid on any common stock.
If debentures are converted after a record date for an interest payment but
prior to the next interest payment date, those debentures, other than debentures
called for redemption, must be accompanied by funds equal to the interest
payable on the next interest payment date on the principal amount so converted.
No payment will be required if we exercise our right to redeem such debentures
on a redemption date that is an interest payment date. We are not required to
issue fractional shares of common stock upon conversion of debentures and
instead will pay a cash adjustment based upon the market price of our common
stock on the last business day before the date of the conversion. In the case of
debentures called for redemption, conversion rights will expire at the close of
business on the second business day preceding the date fixed for redemption,
unless we default in payment of the redemption price.
A holder may exercise the right of conversion by delivering the debenture to
be converted to the specified office of a conversion agent, with a completed
notice of conversion, together with any funds that may be required as described
in the preceding paragraph. The conversion date will be the date on which the
debentures, the notice of conversion and any required funds have been so
delivered. A holder delivering a debenture for conversion will not be required
to pay any taxes or duties relating to the issuance or delivery of the common
stock for such conversion, but will be required to pay any tax or duty which may
be payable relating to any transfer involved in the issuance or delivery of the
common stock in a name other than the holder of the debenture. Certificates
representing shares of common stock will be issued or delivered only after all
applicable taxes and duties, if any, payable by the holder have been paid. If
any debenture is converted within two years after its original issuance, the
common stock issuable upon conversion will not be issued or delivered in a name
other than that of the holder of the debenture unless the applicable
restrictions on transfer have been satisfied.
The initial conversion price will be adjusted for certain events, including:
1) the issuance of our common stock as a dividend or distribution on our
common stock;
2) certain subdivisions and combinations of our common stock;
3) the issuance to all holders of our common stock of certain rights or
warrants to purchase our common stock (or securities convertible into our
common stock) at less than (or having a conversion price per share less
than) the current market price of our common stock;
4) the dividend or other distribution to all holders of our common stock or
shares of our capital stock (other than common stock) or evidences of our
indebtedness or our assets (including securities, but excluding those
rights and warrants referred to above and dividends and distributions in
connection with a reclassification, change, consolidation, merger,
combination, sale or conveyance resulting in a change in the conversion
consideration pursuant to the second succeeding paragraph or dividends or
distributions paid exclusively in cash);
5) dividends or other distributions consisting exclusively of cash to all
holders of our common stock to the extent that such distributions,
combined together with (A) all other such all-cash distributions made
within the preceding 12 months for which no adjustment has been made plus
(B) any cash and the fair market value of other consideration paid for
any tender offers by us or any of our subsidiaries for our common stock
concluded within the preceding
36
<PAGE>
12 months for which no adjustment has been made, exceeds 10% of our
market capitalization on the record date for such distribution; market
capitalization is the product of the then current market price of our
common stock times the number of shares of our common stock then
outstanding; and
6) the purchase of our common stock pursuant to a tender offer made by us
or any of our subsidiaries to the extent that the same involves an
aggregate consideration that, together with (A) any cash and the fair
market value of any other consideration paid in any other tender offer by
us or any of our subsidiaries for our common stock expiring within the
12 months preceding such tender offer for which no adjustment has been
made plus (B) the aggregate amount of any all-cash distributions referred
to in clause (5) above to all holders of our common stock within
12 months preceding the expiration of tender offer for which no
adjustments have been made, exceeds 10% of our market capitalization on
the expiration of such tender offer.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect at such time. Any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or carrying the right to purchase any of the foregoing.
In the case of
- any reclassification or change of our common stock (other than changes
resulting from a subdivision or combination) or
- a consolidation, merger or combination involving us or a sale or
conveyance to another corporation of all or substantially all of our
property and assets,
in each case as a result of which holders of our common stock are entitled to
receive stock, other securities, other property or assets (including cash or any
combination thereof) with respect to or in exchange for our common stock, the
holders of the debentures then outstanding will be entitled thereafter to
convert those debentures into the kind and amount of shares of stock, other
securities or other property or assets (including cash or any combination
thereof) which they would have owned or been entitled to receive upon such
reclassification, change, consolidation, merger, combination, sale or conveyance
had such debentures been converted into our common stock immediately prior to
such reclassification, change, consolidation, merger, combination, sale or
conveyance. We may not become a party to any such transaction unless its terms
are consistent with the foregoing.
If a taxable distribution to holders of our common stock or other
transaction occurs which results in any adjustment of the conversion price, the
holders of debentures may, in certain circumstances, be deemed to have received
a distribution subject to U.S. income tax as a dividend. In certain other
circumstances, the absence of an adjustment may result in a taxable dividend to
the holders of common stock. See "Certain United States Federal Income Tax
Considerations."
We may from time to time, to the extent permitted by law, reduce the
conversion price of the debentures by any amount for any period of at least
20 days. In that case we will give at least 15 days' notice of such decrease. We
may make such reductions in the conversion price, in addition to those set forth
above, as our board of directors deems advisable to avoid or diminish any income
tax to holders of our common stock resulting from any dividend or distribution
of stock (or rights to acquire stock) or from any event treated as such for
income tax purposes.
37
<PAGE>
OPTIONAL REDEMPTION BY INHALE
The debentures are not redeemable prior to October 13, 2002. At any time on
or after that date, we may redeem some or all of the debentures on at least 20
but not more than 60 days' notice, at the following prices (expressed in
percentages of the principal amount), together with accrued and unpaid interest
to, but excluding, the date fixed for redemption. However, if a redemption date
is an interest payment date, the semi-annual payment of interest becoming due on
such date shall be payable to the holder of record as of the relevant record
date and the redemption price shall not include such interest payment.
<TABLE>
<CAPTION>
DURING THE TWELVE MONTHS COMMENCING REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
October 13, 2002............................................................ 103.375%
October 13, 2003............................................................ 102.250%
October 13, 2004............................................................ 101.125%
October 13, 2005............................................................ 100.000%
</TABLE>
If we do not redeem all of the debentures, the trustee will select the
debentures to be redeemed in principal amounts of $1,000 or whole multiples of
$1,000 by lot or on a pro rata basis. If any debentures are to be redeemed in
part only, a new debenture or debentures in principal amount equal to the
unredeemed principal portion thereof will be issued. If a portion of a holder's
debentures is selected for partial redemption and the holder converts a portion
of its debentures, the converted portion will be deemed to be taken from the
portion selected for redemption.
No sinking fund is provided for the debentures.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control occurs, each holder of debentures will have the right
to require us to repurchase all of that holder's debentures not previously
called for redemption, or any portion of those debentures that is equal to
$1,000 or a whole multiple of $1,000, on the date that is 45 days after the date
we give notice at a repurchase price equal to 100% of the principal amount of
the debentures to be repurchased, together with interest accrued and unpaid to,
but excluding, the repurchase date.
Instead of paying the repurchase price in cash, we may pay the repurchase
price in common stock. The number of shares of common stock a holder will
receive will equal the repurchase price divided by 95% of the average of the
closing sales prices of our common stock for the five trading days immediately
preceding and including the third day prior to the repurchase date. However, we
may not pay in common stock unless we satisfy certain conditions prior to the
repurchase date as provided in the indenture.
Within 30 days after the occurrence of a Change of Control, we are required
to give notice to all holders of debentures, as provided in the indenture, of
the occurrence of the Change of Control and of their resulting repurchase right.
We must also deliver a copy of our notice to the trustee. To exercise the
repurchase right, a holder of debentures must deliver prior to or on the 30th
day after the date of our notice irrevocable written notice to the trustee of
the holder's exercise of its repurchase right, together with the debentures with
respect to which the right is being exercised.
A "Change of Control" will be deemed to have occurred at such time after the
original issuance of the debentures when the following has occurred:
- the acquisition by any person, including any syndicate or group deemed to
be a "person" under Section 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), of beneficial ownership, directly
or indirectly, through a purchase, merger or other acquisition transaction
or series of transactions of shares of our capital stock entitling that
person to exercise 50% or more of the total voting power of all shares of
our capital stock entitled to vote
38
<PAGE>
generally in elections of directors, other than any acquisition by us, any
of our subsidiaries or any of our employee benefit plans; or
- our consolidation or merger with or into any other person, any merger of
another person into us, or any conveyance, transfer, sale, lease or other
disposition of all or substantially all of our properties and assets to
another person, other than:
1) any transaction (A) that does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of our
capital stock and (B) pursuant to which holders of our capital stock
immediately prior to the transaction have the entitlement to exercise,
directly or indirectly, 50% or more of the total voting power of all
shares of our capital stock entitled to vote generally in the election
of directors of the continuing or surviving person immediately after
the transaction; and
2) any merger solely for the purpose of changing our jurisdiction of
incorporation and resulting in a reclassification, conversion or
exchange of outstanding shares of common stock solely into shares of
common stock of the surviving entity.
However, a Change of Control will not be deemed to have occurred if the
closing sales price per share of our common stock for any five trading days
within the period of 10 consecutive trading days ending immediately after the
later of the Change of Control or the public announcement of the Change of
Control, in the case of a Change of Control under the first clause above, or the
period of 10 consecutive trading days ending immediately before the Change of
Control, in the case of a Change of Control under the second clause above,
equals or exceeds 110% of the conversion price of the debentures in effect on
each such trading day. The beneficial owner shall be determined in accordance
with Rule 13d-3 promulgated by the SEC under the Exchange Act. The term "person"
includes any syndicate or group which would be deemed to be a "person" under
Section 13(d)(3) of the Exchange Act.
Rule 13e-4 under the Exchange Act, as amended, requires the dissemination of
certain information to security holders if an issuer tender offer occurs and may
apply if the repurchase option becomes available to holders of the debentures.
We will comply with this rule to the extent applicable at that time.
We may, to the extent permitted by applicable law, at any time purchase the
debentures in the open market or by tender at any price or by private agreement.
Any debenture so purchased by us may, to the extent permitted by applicable law,
be reissued or resold or may be surrendered to the trustee for cancellation. Any
debentures surrendered to the trustee may not be reissued or resold and will be
canceled promptly.
The foregoing provisions would not necessarily protect holders of the
debentures if highly leveraged or other transactions involving us occur that may
adversely affect holders.
Our ability to repurchase debentures upon the occurrence of a Change in
Control is subject to important limitations. The occurrence of a Change in
Control could cause an event of default under, or be prohibited or limited by,
the terms of Senior Debt that we may incur in the future. As a result, any
repurchase of the debentures would, absent a waiver, be prohibited under the
subordination provisions of the indenture until the Senior Debt is paid in full.
Further, we cannot assure you that we would have the financial resources, or
would be able to arrange financing, to pay the repurchase price for all the
debentures that might be delivered by holders of debentures seeking to exercise
the repurchase right. Any failure by us to repurchase the debentures when
required following a Change in Control would result in an event of default under
the indenture, whether or not such repurchase is permitted by the subordination
provisions of the indenture. Any such default may, in turn, cause a default
under Senior Debt that we may incur in the future. See "--Subordination" below.
39
<PAGE>
SUBORDINATION
The debentures are subordinated in right of payment to the prior payment in
full of all our existing and future Senior Debt. The indenture provides that in
the event of any distribution of our assets upon our dissolution, winding up,
liquidation or reorganization, the holders of our Senior Debt shall first be
paid in respect of all Senior Debt in full in cash or other payment satisfactory
to the holders of Senior Debt before we make any payments of principal of, or
premium, if any, and interest (including liquidated damages, if any) on the
debentures. In addition, if the debentures are accelerated because of an event
of default, the holders of any Senior Debt would be entitled to payment in full
in cash or other payment satisfactory to the holders of Senior Debt of all
obligations in respect of Senior Debt before the holders of the debentures are
entitled to receive any payment or distribution. Under the indenture, we must
promptly notify holders of Senior Debt if payment of the debentures is
accelerated because of an event of default.
The indenture further provides if any default by us has occurred and is
continuing in the payment of principal of or premium, if any, or interest on,
rent or other payment obligations in respect of, any Senior Debt, then no
payment shall be made on account of principal of, premium, if any, or interest
on the debentures (including any liquidated damages), until all such payments
due in respect of that Senior Debt have been paid in full in cash or other
payment satisfactory to the holders of that Senior Debt. During the continuance
of any event of default with respect to any Designated Senior Debt (other than a
default in payment of the principal of or premium, if any, or interest on, rent
or other payment obligations in respect of any Designated Senior Debt),
permitting the holders thereof to accelerate the maturity thereof (or, in the
case of any lease, permitting the landlord either to terminate the lease or to
require us to make an irrevocable offer to terminate the lease following an
event of default thereunder), no payment may be made by us, directly or
indirectly, with respect to principal of or premium, if any, or interest on the
debentures (including any liquidated damages, if any) for 179 days following
written notice to us, from any holder, representative or trustee under any
agreement pursuant to which that Designated Senior Debt may have been issued,
that such an event of default has occurred and is continuing, unless such event
of default has been cured or waived or that Designated Senior Debt has been paid
in full in cash or other payment satisfactory to the holders of that Designated
Senior Debt. However, if the maturity of that Designated Senior Debt is
accelerated (or, in the case of a lease, as a result of such events of default,
the landlord under the lease has given us notice of its intention to terminate
the lease or to require us to make an irrevocable offer to terminate the lease
following an event of default thereunder), no payment may be made on the
debentures until that Designated Senior Debt has been paid in full in cash or
other payment satisfactory to the holders of that Designated Senior Debt or such
acceleration (or termination, in the case of the lease) has been cured or
waived.
By reason of such subordination provisions, in the event of insolvency,
funds which we would otherwise use to pay the holders of debentures will be used
to pay the holders of Senior Debt to the extent necessary to pay Senior Debt in
full in cash or other payment satisfactory to the holders of Senior Debt. As a
result of these payments, our general creditors may recover less, ratably, than
holders of Senior Debt and such general creditors may recover more, ratably,
than holders of debentures.
"Senior Debt" means the principal of, premium, if any, interest (including
all interest accruing subsequent to the commencement of any bankruptcy or
similar proceeding, whether or not a claim for post-petition interest is
allowable as a claim in any such proceeding) and rent payable on or termination
payment with respect to or in connection with, and all fees, costs, expenses and
other amounts accrued or due on or in connection with, our Indebtedness, whether
outstanding on the date of the indenture or subsequently created, incurred,
assumed, guaranteed or in effect guaranteed by us (including all deferrals,
renewals, extensions or refundings of, or amendments, modifications or
supplements to, the foregoing), unless in the case of any particular
Indebtedness, the instrument
40
<PAGE>
creating or evidencing such Indebtedness or the assumption or guarantee thereof
expressly provides that that Indebtedness shall not be senior in right of
payment to the debentures or expressly provides that such Indebtedness is equal
with or junior " to the debentures. However, the term "Senior Debt" shall not
include our Indebtedness to any of our subsidiaries of which we own, directly or
indirectly, a majority of the voting stock.
"Indebtedness" means, with respect to any person:
1) all indebtedness, obligations and other liabilities (contingent or
otherwise) of that person for borrowed money (including obligations in
respect of overdrafts, foreign exchange contracts, currency exchange
agreements, interest rate protection agreements, and any loans or
advances from banks, whether or not evidenced by notes or similar
instruments) or evidenced by bonds, debentures, notes or other
instruments for the payment of money, or incurred in connection with the
acquisition of any property, services or assets (whether or not the
recourse of the lender is to the whole of the assets of such person or to
only a portion thereof), other than any account payable or other accrued
current liability or obligation to trade creditors incurred in the
ordinary course of business in connection with the obtaining of materials
or services;
2) all reimbursement obligations and other liabilities (contingent or
otherwise) of that person with respect to letters of credit, bank
guarantees, bankers' acceptances, surety bonds, performance bonds or
other guaranty of contractual performance;
3) all obligations and liabilities (contingent or otherwise) in respect of
(A) leases of such person required, in conformity with generally accepted
accounting principles, to be accounted for as capitalized lease
obligations on the balance sheet of such person, and (B) any lease or
related documents (including a purchase agreement) in connection with the
lease of real property which provides that such person is contractually
obligated to purchase or cause a third party to purchase the leased
property and thereby guarantee a minimum residual value of the leased
property to the landlord and the obligations of such person under such
lease or related document to purchase or to cause a third party to
purchase the leased property;
4) all obligations of such person (contingent or otherwise) with respect to
an interest rate or other swap, cap or collar agreement or other similar
instrument or agreement or foreign currency hedge, exchange, purchase or
similar instrument or agreement;
5) all direct or indirect guaranties or similar agreements by that person
in respect of, and obligations or liabilities (contingent or otherwise)
of that person to purchase or otherwise acquire or otherwise assure a
creditor against loss in respect of, indebtedness, obligations or
liabilities of another person of the kind described in clauses
(1) through (4);
6) any indebtedness or other obligations described in clauses (1) through
(4) secured by any mortgage, pledge, lien or other encumbrance existing
on property which is owned or held by such person, regardless of whether
the indebtedness or other obligation secured thereby shall have been
assumed by such person; and
7) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation
or liability of the kind described in clauses (1) through (6).
"Designated Senior Debt" means our Senior Debt which, at the date of
determination, has an aggregate amount outstanding of, or under which, at the
date of determination, the holders thereof are committed to lend up to, at least
$25 million and is specifically designated in the instrument evidencing or
governing that Senior Debt as "Designated Senior Debt" for purposes of the
indenture. However, the instrument may place limitations and conditions on the
right of that Senior Debt to exercise the rights of Designated Senior Debt. At
September 30, 1999, we had approximately $4.9 million of Senior Debt and no
Designated Senior Debt. There are no restrictions in the indenture on the
creation of
41
<PAGE>
Senior Debt or any other indebtedness in the future. For information concerning
our potential incurrence of additional Senior Debt, see "Management's Discussion
of and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The debentures are our obligations exclusively and will be, in effect,
subordinated to all Indebtedness (including trade payables) of any subsidiaries
that we own in the future. The indenture does not limit the amount of
Indebtedness or other liabilities any future subsidiaries may incur. Our ability
to make required interest, principal, repurchase, cash conversion or redemption
payments on the debentures may be impaired as a result of the obligations of any
future subsidiaries. Any future subsidiaries would be separate and distinct
legal entities and would have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the debentures or to make any funds available therefor,
whether by dividends, loans or other payments. Any right we have to receive
assets of any of our future subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the holders of the debentures to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors, except to the extent that we are ourselves
recognized as a creditor of that subsidiary, in which case our claims would
still be subordinate to any security interests in the assets of that subsidiary
and any indebtedness of that subsidiary senior to that held by us. There are no
restrictions in the indenture on the ability of any of our future subsidiaries
to incur Indebtedness or other liabilities.
We are obligated to pay reasonable compensation to the trustee and to
indemnify the trustee against any losses, liabilities or expenses incurred by it
in connection with its duties relating to the debentures. The trustee's claims
for such payments will be senior to those of holders of the debentures in
respect of all funds collected or held by the trustee.
EVENTS OF DEFAULT
Each of the following constitutes an event of default under the indenture:
1) our failure to pay when due the principal of or premium, if any, on any
of the debentures at maturity, upon redemption or exercise of a
repurchase right or otherwise, whether or not such payment is prohibited
by the subordination provisions of the indenture;
2) our failure to pay an installment of interest (including liquidated
damages, if any) on any of the debentures for 30 days after the date when
due, whether or not such payment is prohibited by the subordination
provisions of the indenture;
3) our failure to perform or observe any other term, covenant or agreement
contained in the debentures or the indenture for a period of 60 days
after written notice of such failure, requiring us to remedy the same,
shall have been given to us by the trustee or to us and the trustee by
the holders of at least 25% in aggregate principal amount of the
debentures then outstanding;
4) our failure to make any payment by the end of the applicable grace
period, if any, after the maturity of any Indebtedness for borrowed money
in an amount in excess of $5 million (PROVIDED that such failure will not
constitute an event of default if (1) we determine, in good faith, that a
lessor under a lease described in clause (3)(A) of the definition of
Indebtedness set forth under "--Subordination" (that is, a sale/leaseback
transaction) breached a covenant under the lease and we give notice of
the breach to the lessor and the trustee and (2) as a result of the
breach, we withhold payment under the lease) (a "Default Exception"), or
the acceleration of Indebtedness for borrowed money in an amount in
excess of $5 million because of a default with respect to such
Indebtedness (other than a Default Exception) without such Indebtedness
having been discharged or such acceleration having been cured, waived,
rescinded or annulled, in either case, for a period of 30 days after
written notice to us
42
<PAGE>
by the trustee or to us and the trustee by holders of at least 25% in
aggregate principal amount of the debentures then outstanding; and
5) certain events of our bankruptcy, insolvency or reorganization.
The indenture provides that the trustee shall, within 90 days of the
occurrence of a default, give to the registered holders of the debentures notice
of all uncured defaults known to it, but the trustee shall be protected in
withholding such notice if it, in good faith, determines that the withholding of
such notice is in the best interest of such registered holders, except in the
case of a default in the payment of the principal of, or premium, if any, or
interest on, any of the debentures when due or in the payment of any redemption
or repurchase obligation.
If an event of default specified in clause (5) above occurs and is
continuing, then automatically the principal of all the debentures and the
interest thereon shall become immediately due and payable. If an event of
default shall occur and be continuing, other than with respect to clause (5)
above (the default not having been cured or waived as provided under
"--Meetings, Modifications and Waiver" below), the trustee or the holders of at
least 25% in aggregate principal amount of the debentures then outstanding may
declare the debentures due and payable at their principal amount together with
accrued interest, and thereupon the trustee may, at its discretion, proceed to
protect and enforce the rights of the holders of debentures by appropriate
judicial proceedings. Such declaration may be rescinded or annulled either with
the written consent of the holders of a majority in aggregate principal amount
of the debentures then outstanding or a majority in aggregate principal amount
of the debentures represented at a meeting at which a quorum (as specified under
"--Meetings, Modifications and Waiver" below) is present, in each case upon the
conditions provided in the indenture.
The indenture contains a provision entitling the trustee, subject to the
duty of the trustee during default to act with the required standard of care, to
be indemnified by the holders of debentures before proceeding to exercise any
right or power under the indenture at the request of such holders. The indenture
provides that the holders of a majority in aggregate principal amount of the
debentures then outstanding through their written consent, or the holders of a
majority in aggregate principal amount of the debentures then outstanding
represented at a meeting at which a quorum is present by a written resolution,
may direct the time, method and place of conducting any proceeding for any
remedy available to the trustee or exercising any trust or power conferred upon
the trustee.
We are required to furnish annually to the trustee a statement as to the
fulfillment of our obligations under the indenture.
CONSOLIDATION, MERGER OR ASSUMPTION
We may, without the consent of the holders of debentures, consolidate with,
merge into or transfer all or substantially all of our assets to any other
corporation organized under the laws of the United States or any of its
political subdivisions provided that:
- the surviving corporation assumes all our obligations under the indenture
and the debentures;
- at the time of such transaction, no event of default, and no event which,
after notice or lapse of time, would become an event of default, shall
have happened and be continuing; and
- certain other conditions are met.
MEETINGS, MODIFICATIONS AND WAIVER
The indenture contains provisions for convening meetings of the holders of
debentures to consider matters affecting their interests.
43
<PAGE>
The indenture (including the terms and conditions of the debentures) may be
modified or amended by us and the trustee, without the consent of the holder of
any debenture, for the purposes of, among other things:
- adding to our covenants for the benefit of the holders of debentures;
- surrendering any right or power conferred upon us;
- providing for conversion rights of holders of debentures if any
reclassification or change of our common stock or any consolidation,
merger or sale of all or substantially all of our assets occurs;
- providing for the assumption of our obligations to the holders of
debentures in the case of a merger, consolidation, conveyance, transfer or
lease;
- reducing the conversion price, provided that the reduction will not
adversely affect the interests of holders of debentures in any material
respect;
- complying with the requirements of the SEC in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act of 1939,
as amended;
- curing any ambiguity or correcting or supplementing any defective
provision contained in the indenture; provided that such modification or
amendment does not, in the good faith opinion of our board of directors
and the trustee, adversely affect the interests of the holders of the
debentures in any material respect; or
- adding or modifying any other provisions which we and the trustee may deem
necessary or desirable and which will not adversely affect the interests
of the holders of debentures in any material respect.
Modifications and amendments to the indenture or to the terms and conditions
of the debentures may also be made, and past default by us may be waived,
either:
- with the written consent of the holders of at least a majority in
aggregate principal amount of the debentures at the time outstanding or
- by the adoption of a resolution at a meeting of holders by at least a
majority in aggregate principal amount of the debentures represented at
such meeting.
However, no such modification, amendment or waiver may, without the written
consent or the affirmative vote of the holder of each debenture so affected:
- change the maturity of the principal of or any installment of interest on
that debenture (including any payment of liquidated damages);
- reduce the principal amount of, or any premium or interest on (including
any payment of liquidated damages), that debenture;
- change the currency of payment of that debenture or interest thereon;
- impair the right to institute suit for the enforcement of any payment on
or with respect to that debenture;
- modify our obligations to maintain an office or agency in New York City;
- except as otherwise permitted or contemplated by provisions concerning
corporate reorganizations, adversely affect the repurchase option of
holders upon a Change of Control or the conversion rights of holders of
the debentures;
- modify the subordination provisions of the debentures in a manner adverse
to the holders of debentures;
- reduce the percentage in aggregate principal amount of debentures
outstanding necessary to modify or amend the indenture or to waive any
past default; or
44
<PAGE>
- reduce the percentage in aggregate principal amount of debentures
outstanding required for the adoption of a resolution or the quorum
required at any meeting of holders of debentures at which a resolution is
adopted.
The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the
debentures at the time outstanding and, at any reconvened meeting adjourned for
lack of a quorum, 25% of that aggregate principal amount.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the indenture while debentures remain
outstanding, subject to certain conditions, if
- all outstanding debentures will become due and payable at their scheduled
maturity, within one year; or
- all outstanding debentures are scheduled for redemption within one year,
and, in either case, we have deposited with the trustee an amount sufficient
to pay and discharge all outstanding debentures on the date of their scheduled
maturity or the scheduled date of redemption.
GOVERNING LAW
The indenture and the debentures are governed by, and construed in
accordance with, the law of the State of New York.
INFORMATION CONCERNING THE TRUSTEE
Chase Manhattan Bank and Trust Company, National Association, as trustee
under the indenture, has been appointed by us as paying agent, conversion agent,
registrar and custodian with regard to the debentures. ChaseMellon Shareholder
Services LLC is the transfer agent and registrar for our common stock. The
trustee or its affiliates may from time to time in the future provide banking
and other services to us in the ordinary course of their business.
REGISTRATION RIGHTS
We have, at our expense, filed with the SEC a shelf registration statement
on such form as we deem appropriate covering resales by holders of all
debentures and the common stock issuable upon conversion of the debentures.
Under the terms of the registration rights agreement, we agree to use all
reasonable efforts to:
- cause the registration statement to become effective as promptly as is
practicable, but in no event later than 180 days after the earliest date
of original issuance of any of the debentures; and
- keep the registration statement effective until such date that is two
years after the last date of original issuance of any of the debentures
(or such earlier date when the holders of the debentures and the common
stock issuable upon conversion of the debentures are able to sell all such
securities immediately without restriction pursuant to the volume
limitation provisions of Rule 144 under the Securities Act or any
successor rule thereto or otherwise).
We also agree to provide to each registered holder copies of the prospectus,
notify each registered holder when the shelf registration statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the debentures and the common stock issuable upon conversion of the
debentures. A holder who sells those securities pursuant to the shelf
registration statement generally will be required to be named as a selling
stockholder in the related prospectus and to deliver a prospectus to purchasers
and will be bound by the provisions of the registration rights
45
<PAGE>
agreement, which are applicable to that holder (including certain
indemnification provisions). If a shelf registration statement covering those
securities is not effective, they may not be sold or otherwise transferred
except pursuant to an exemption from registration under the Securities Act and
any other applicable securities laws or in a transaction not subject to those
laws.
Each holder must notify us not later than three business days prior to any
proposed sale by that holder pursuant to the shelf registration statement. This
notice will be effective for five business days. We may suspend the holder's use
of the prospectus for a reasonable period not to exceed 45 days (60 days under
certain circumstances relating to a proposed or pending material business
transaction, the disclosure of which would impede our ability to consummate such
transaction) in any 90-day period, and not to exceed an aggregate of 90 days in
any 12-month period, if we, in our reasonable judgment, believe we may possess
material non-public information the disclosure of which would have a material
adverse effect on us and our subsidiaries taken as a whole. Each holder, by its
acceptance of a debenture, agrees to hold any communication by us in response to
a notice of a proposed sale in confidence.
Under the terms of the registration rights agreement, if
- on the 90th day following the earliest date of original issuance of any of
the debentures, the shelf registration statement had not been filed with
the SEC;
- on the 180th day following the earliest date of original issuance of any
of the debentures, the shelf registration statement had not been declared
effective; or
- the registration statement shall cease to be effective or fail to be
usable without being succeeded within five business days by a
post-effective amendment or a report filed with the SEC pursuant to the
Exchange Act that cures the registration statement; or
- on the 45th or 60th day, as the case may be, of any period that the
prospectus has been suspended as described in the preceding paragraph,
such suspension has not been terminated (each, a "registration default"),
additional interest as liquidated damages will accrue on the debentures, from
and including the day following the registration default to but excluding the
day on which the registration default has been cured. Liquidated damages will be
paid semi-annually in arrears, with the first semi-annual payment due on the
first interest payment date, as applicable, following the date on which such
liquidated damages begin to accrue, and will accrue at a rate per year equal to:
- an additional 0.25% of the principal amount to and including the 90th day
following such registration default; and
- an additional 0.5% of the principal amount from and after the 91st day
following such registration default.
In no event will liquidated damages accrue at a rate per year exceeding
0.5%. If a holder has converted some or all of its debentures into common stock,
the holder will be entitled to receive equivalent amounts based on the principal
amount of the debentures converted.
We agreed to distribute a questionnaire to each holder to obtain certain
information regarding the holder for inclusion in the prospectus. Holders were
required to complete and deliver the questionnaire within 20 business days after
receipt of the questionnaire to be named as selling stockholders in the related
prospectus at the time of effectiveness. A holder will not be entitled to
liquidated damages unless it has provided all information requested by the
questionnaire prior to the deadline.
The specific provisions relating to the registration described above are
contained in the registration rights agreement which was entered into on the
closing of the initial offering of the debentures.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws.
Our authorized capital stock consists of 50,000,000 shares of common stock,
and 10,000,000 shares of preferred stock.
COMMON STOCK
As of January 4, 2000, there were 17,226,456 shares of our common stock
outstanding. The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. The
holders of common stock are not entitled to cumulative voting rights with
respect to the election of directors, and as a consequence, minority
stockholders are not able to elect directors on the basis of their votes alone.
Subject to preferences that may be applicable to any shares of preferred stock
issued in the future, holders of common stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
Inhale, holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock. Holders of common stock have no preemptive
rights and no right to convert their common stock into any other securities.
There are no redemption or sinking fund provisions applicable to the common
stock.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of common stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control. We
have no present plan to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to a restated investor rights agreement, as amended, the holders of
approximately 250,044 shares of common stock are entitled to require us in any
twelve-month period, to register their shares on Form S-3, subject to certain
conditions and limitations. Subject to certain limitations, we are required to
bear all registration and selling expenses in connection with such requested
registrations. These registration rights expire in 2004, or with respect to any
individual holder, at such time as that holder owns less than one percent of our
outstanding common stock and is able to dispose of all of that holder's
registrable securities in any 90 day period pursuant to Rule 144 under the
Securities Act.
Pfizer has the right to include shares of our common stock purchased
pursuant to the purchase agreement relating to its equity investment in the
first firmly underwritten public offering of our common stock effected after
January 18, 2000. We are required to pay all expenses in connection with such
registration, excluding the fees of counsel for Pfizer.
Baxter has the right to include shares of our common stock purchased
pursuant to the purchase agreement relating to its equity investment in the
first firmly underwritten public offering of our
47
<PAGE>
common stock effected after March 1, 1999. We are required to pay all expenses
in connection with such registration, excluding fees of counsel for Baxter.
Alliance has the right to include shares of our common stock issued pursuant
to the asset purchase agreement with Alliance in any registration statement for
the account of Inhale or an Inhale security holder (except the registration
statement of which this prospectus is a part) for the offering of common stock
to the public until the shares issued to Alliance are transferable pursuant to
Rule 144 in any 90 day period.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND BYLAWS
Our certificate of incorporation provides for the Board of Directors to be
divided into three classes, with staggered three-year terms. As a result, only
one class of directors will be elected at each annual meeting of stockholders,
with the other classes continuing for the remainder of their respective
three-year terms. Stockholders have no cumulative voting rights, and the
stockholders representing a majority of the shares of common stock outstanding
are able to elect all of the directors.
Our certificate of incorporation also requires that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing and that the stockholders may amend our bylaws or adopt new
bylaws, only by the affirmative vote of 66 2/3% of the outstanding voting
securities. A special meeting of the stockholders may be called by the Chairman,
either Chief Executive Officer or stockholders owning 10% or more of the
outstanding voting capital stock. These provisions may have the effect of
delaying, deferring or preventing a change in control.
The classification of the Board of Directors and lack of cumulative voting
will make it more difficult for our existing stockholders to replace the Board
of Directors as well as for another party to obtain control of Inhale by
replacing the Board of Directors. Since the Board of Directors has the power to
retain and discharge our officers, these provisions could also make it more
difficult for existing stockholders or another party to effect a change in
management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management. These provisions are
intended to enhance the likelihood of continued stability in the composition of
the Board of Directors and in the policies of the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change in control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy rights.
However, such provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of the our shares that could result from actual
or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in our management.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the time that such stockholder became an
interested stockholder, unless:
- prior to such time, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested holder;
- Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of
48
<PAGE>
determining the number of shares outstanding those shares owned (a) by
persons who are directors and also officers and (b) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or at or subsequent to such time, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
In general, Section 203 defines "business combination" to include the
following:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock or any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits by or through
the corporation.
In general, Section 203 defines "interested stockholder" as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services LLC is the transfer agent and registrar for
our common stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain anticipated U.S. federal
income tax consequences to a holder with respect to the purchase, ownership and
disposition of the debentures or our common stock acquired upon conversion of a
debenture as of the date hereof. This summary is generally limited to holders
who will hold the debentures and the shares of common stock into which the
debentures are convertible as "capital assets" within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code") and
who acquired the debentures in the initial offering at the initial offering
price, and does not deal with special situations including those that may apply
to particular holders such as exempt organizations, holders subject to the U.S.
federal alternative minimum tax, dealers in securities, commodities or foreign
currencies, financial institutions, insurance companies, regulated investment
companies, holders whose "functional currency" is not the U.S. dollar and
persons who hold the debentures or shares of common stock in connection with a
"straddle," "hedging," "conversion" or other risk reduction transaction. This
discussion does not address the tax consequences arising under any state, local
or foreign law.
The federal income tax considerations set forth below are based upon the
Internal Revenue Code of 1986, as amended, existing and proposed Treasury
Regulations, court decisions, and Internal Revenue Service ("IRS") rulings now
in effect, all of which are subject to change. We have not sought any ruling
from the IRS with respect to statements made and conclusions reached in this
discussion and there can be no assurance that the IRS will agree with such
statements and conclusions. Prospective investors should particularly note that
any such change could have retroactive application so as to result in federal
income tax consequences different from those discussed below.
49
<PAGE>
As used herein, the term "U.S. holder" means a beneficial owner of a
debenture (or our common stock acquired upon conversion of a debenture) that is
for U.S. federal income tax purposes:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision thereof (other than a
partnership that is not treated as a U.S. person under any applicable
Treasury Regulations);
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source;
- a trust, if a court within the U.S. is able to exercise primary
jurisdiction over its administration and one or more U.S. persons within
the meaning of Section 7701(a)(30) of the Code have authority to control
all of its substantial decisions, or if the trust has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a U.S.
person; or
- is otherwise subject to U.S. federal income taxation on a net income basis
in respect of the debentures or our common stock.
As used herein, a "non-U.S. holder" means a holder that is not a U.S.
holder. Prospective investors are urged to consult their tax advisors regarding
the tax consequences, in their particular circumstances, of purchasing, holding
and disposing of the debentures or our common stock, including the tax
consequences arising under any state, local or foreign laws. While the following
does not purport to discuss all tax matters relating to the debentures or the
common stock acquired upon conversion of a debenture, the following are the
material tax consequences of the debentures and common stock acquired upon
conversion of a debenture, subject to the qualifications set forth below.
Based on currently applicable authorities, we are treating the debentures as
indebtedness for U.S. federal income tax purposes. However, since the debentures
have certain equity characteristics, it is possible that the IRS will contend
that the debentures should be treated as an equity interest in, rather than
indebtedness of Inhale. Except as otherwise noted, the remainder of this
discussion assumes that the debentures constitute indebtedness for U.S. tax
purposes.
U.S. HOLDERS
STATED INTEREST
The debentures were not issued with more than a de minimis amount of
original issue discount within the meaning of Section 1273(a) of the Code. As a
result, interest paid on a debenture will be includible in the income of a U.S.
holder as ordinary income at the time it accrues or is actually or
constructively received in accordance with the holder's method of accounting for
U.S. federal income tax purposes. The interest rate on the debentures is subject
to increase by the payment of liquidated damages if the debentures are not
registered with the Commission within prescribed time periods. We are treating
the possibility that we will pay such additional interest as subject to a remote
and incidental contingency, within the meaning of applicable Treasury
Regulations and, therefore, we believe that any such additional interest will
not affect the yield to maturity on the debentures and therefore will be taxable
to U.S. holders at the time it accrues or is received in accordance with each
such holder's method of accounting. Our determination that there is a remote
likelihood of paying additional interest on the debentures is binding on each
U.S. holder unless the holder explicitly discloses in the manner required by
applicable Treasury Regulations that its determination is different from ours.
Our determination is not, however, binding on the IRS.
CONVERSION OR REPURCHASE FOR COMMON STOCK
A U.S. holder will not recognize income, gain or loss upon conversion of the
debentures solely into our common stock or a repurchase for common stock of a
debenture pursuant to exercise of the
50
<PAGE>
repurchase right (except with respect to any amounts attributable to accrued
interest on the debentures, which will be treated as interest for federal income
tax purposes), and except with respect to cash received in lieu of fractional
shares, and with respect to market discount, as described below under "--Market
Discount." The U.S. holder's basis in the common stock received on conversion or
repurchase of a debenture for common stock pursuant to the repurchase right will
be the same as the U.S. holder's adjusted tax basis in the debentures at the
time of conversion or repurchase (reduced by any basis allocable to a fractional
share), and the holding period for the common stock received on conversion or
repurchase will include the holding period of the debentures that were converted
or repurchased.
Cash received in lieu of a fractional share of common stock upon conversion
of the debentures into common stock or upon a repurchase for common stock of a
debenture pursuant to exercise of the repurchase right will be treated as a
payment in exchange for the fractional share of common stock. Accordingly, the
receipt of cash in lieu of a fractional share of common stock generally will
result in capital gain or loss measured by the difference between the cash
received for the fractional share and the U.S. holder's adjusted tax basis in
the fractional share.
DIVIDENDS ON COMMON STOCK
Generally, distributions will be treated as a dividend, subject to tax as
ordinary income, to the extent of our current or accumulated earnings or
profits, then as a tax-free return of capital to the extent of such U.S.
holder's adjusted tax basis in the common stock and thereafter as gain from the
sale or exchange of such common stock. Additionally, a dividend distribution to
a corporate U.S. holder may qualify for a dividends received deduction.
DISPOSITION, REDEMPTION OR REPURCHASE FOR CASH
Except as set forth above under "--Conversion or Repurchase for Common
Stock," and below under "--Market Discount," U.S. holders generally will
recognize capital gain or loss upon the sale, redemption, including a repurchase
for cash pursuant to the repurchase right, or other taxable disposition of the
debentures or common stock in an amount equal to the difference between:
- the U.S. holder's adjusted tax basis in the debentures or common stock (as
the case may be); and
- the amount of cash and fair market value of any property received from
such disposition (other than amounts attributable to accrued interest on
the debentures, which will be treated as interest for federal income tax
purposes).
A U.S. holder's adjusted tax basis in a debenture generally will equal the
cost of the debenture to such U.S. holder, increased by market discount
previously included in income by the U.S. holder and reduced by any amortized
premium.
Such gain or loss from the taxable disposition of the debentures or common
stock generally will be long-term capital gain or loss if the debentures were
held for more than one year at the time of the disposition and, in the case of
an individual holder, will be taxed at a maximum rate of 20%. Short term capital
gains realized by individual U.S. holders are taxed at a maximum rate of 39.6%.
Corporate U.S. holders are subject to a maximum regular income tax rate of 35%
on all capital gains and ordinary income. The deductibility of capital losses is
subject to limitations.
MARKET DISCOUNT
The resale of debentures may be affected by the impact on a purchaser of the
"market discount" provisions of the Code. For this purpose, the market discount
on a debenture generally will be equal to the amount, if any, by which the
stated redemption price at maturity of the debenture immediately
51
<PAGE>
after its acquisition exceeds the U.S. holder's adjusted tax basis in the
debenture. Subject to a de minimis exception, these provisions generally require
a U.S. holder who acquires a debenture at a market discount to treat as ordinary
income any gain recognized on the disposition of the debenture to the extent of
the "accrued market discount" on the debenture at the time of disposition,
unless the U.S. holder elects to include accrued market discount in income
currently. This election to include market discount in income currently, once
made, applies to all market discount obligations acquired on or after the first
taxable year to which the election applies and may not be revoked without the
consent of the IRS. In general, market discount will be treated as accruing on a
straight-line basis over the remaining term of the debenture at the time of
acquisition, or, at the election of the U.S. holder, under a constant yield
method. A U.S. holder who acquires a debenture at a market discount and who does
not elect to include accrued market discount in income currently may be required
to defer the deduction of a portion of the interest on any indebtedness incurred
or maintained to purchase or carry the debenture until the debenture is disposed
of in a taxable transaction. If a U.S. holder acquires a debenture with market
discount and receives common stock upon conversion of the debenture, the amount
of accrued market discount not previously included in income with respect to the
converted debenture through the date of conversion will be treated as ordinary
income and will increase the U.S. holder's basis in the debenture.
AMORTIZABLE PREMIUM
A U.S. holder who purchases a debenture at a premium over its stated
principal amount, plus accrued interest, generally may elect to amortize such
premium ("section 171 premium") from the purchase date to the debenture's
maturity date under a constant-yield method that reflects semiannual compounding
based on the debenture's payment period. Amortizable premium, however, will not
include any premium attributable to a debenture's conversion feature. The
premium attributable to the conversion feature is the excess, if any, of the
debenture's purchase price over what the debenture's fair market value would be
if there were no conversion feature. Amortized section 171 premium is treated as
an offset to interest income on a debenture and not as a separate deduction.
Bond premium on a debenture held by a U.S. holder that does not make the
election to amortize will decrease the gain or increase the loss otherwise
recognized upon disposition of the debenture. The election to amortize premium
on a constant yield method, once made, applies to all debt obligations held or
subsequently acquired by the electing U.S. holder on or after the first day of
the first taxable year to which the election applies and may not be revoked
without the consent of the IRS.
ADJUSTMENT OF CONVERSION PRICE
The conversion price of the debentures is subject to adjustment under
certain circumstances. Under Section 305 of the Code and the Treasury
Regulations issued thereunder, adjustments or the failure to make such
adjustments to the conversion price of the debentures may result in a taxable
constructive distribution to the U.S. holders of debentures if, and to the
extent that, certain adjustments or failure to make adjustments in the
conversion price that may occur in limited circumstances (for example, an
adjustment to reflect a taxable dividend to holders of our common stock)
increase the proportionate interest of a U.S. holder in our assets or earnings
and profits whether or not the U.S. holders ever convert the debentures. Such
constructive distribution will be treated as a dividend, resulting in ordinary
income (and a possible dividends received deduction in the case of corporate
holders) to the extent of our current and accumulated earnings and profits, with
any excess treated first as a tax-free return of capital which reduces the U.S.
holder's tax basis in the debentures to the extent thereof and thereafter as
gain from the sale or exchange of the debentures. Generally, a U.S. holder's tax
basis in a debenture will be increased to the extent any such constructive
distribution is treated as dividend. Moreover, if there is an adjustment (or a
failure to make an adjustment) to the conversion price of the debentures that
increases the proportionate interest of the holders of outstanding common stock
in our assets or earnings and profits, then such increase in the
52
<PAGE>
proportionate interest of the holders of the common stock generally will be
treated as a constructive distribution to such holders, taxable as described
above. As a result, U.S. holders of debentures could have taxable income as a
result of an event pursuant to which they receive no cash or property.
DEDUCTIBILITY OF INTEREST
Generally, under Section 279 of the Code, an interest deduction in excess of
$5.0 million is not permitted with respect to certain "corporate acquisition
indebtedness." Corporate acquisition indebtedness includes any indebtedness that
is:
- issued to provide consideration for the direct or indirect acquisition of
stock or assets of another corporation;
- subordinated;
- convertible directly or indirectly into the stock of the issuing
corporation; and
- issued by a corporation that has a debt to equity ratio that exceeds 2 to
1.
Our ability to deduct all of the interest payable on the debentures will depend
on the application of the foregoing tests to us. The availability of an interest
deduction with respect to the debentures was not determinative in our issuance
of the debentures pursuant to this offering.
Under Section 163(l) of the Code, no deduction is permitted for interest
paid or accrued on any indebtedness of a corporation that is "payable in equity"
of the issuer or a related party. Debt is treated as debt payable in equity of
the issuer if the debt is part of an arrangement designed to result in payment
of the instrument with or by reference to the equity. Such arrangements could
include debt instruments that are convertible at the holder's option if it is
substantially certain that the option will be exercised. The legislative history
indicates that it is not expected the provision will affect debt with a
conversion feature where the conversion price is significantly higher than the
market price of the stock on the date of the debt issuance. Accordingly, we do
not believe that our interest deduction with respect to interest payments on the
debentures will be adversely affected by these rules.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We or our designated paying agent will, where required, report to U.S.
holders of debentures or common stock and the IRS the amount of any interest
paid on the debentures (or dividends paid with respect to the common stock or
other reportable payments) in each calendar year and the amount of tax, if any,
withheld with respect to such payments.
Under the backup withholding provisions of the Code and the applicable
Treasury Regulations, a U.S. holder of debentures or our common stock acquired
upon the conversion of a debenture may be subject to backup withholding at the
rate of 31% with respect to dividends or interest paid on, or the proceeds of a
sale, exchange or redemption of, debentures or common stock, unless:
- such holder is a corporation or comes within certain other exempt
categories and when required demonstrates this fact; or
- provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.
The amount of any backup withholding from a payment to a U.S. holder will be
allowed as a credit against the U.S. holder's federal income tax liability and
may entitle such holder to a refund, provided that the required information is
furnished to the IRS.
53
<PAGE>
Treasury Regulations, generally effective January 1, 2001, subject to
certain transition rules, modify the currently effective information withholding
and backup withholding procedures and requirements. Prospective investors should
consult their own tax advisors concerning the application of the new withholding
regulations.
NON-U.S. HOLDERS
PAYMENTS OF INTEREST
Generally, payments of interest on the debentures to, or on behalf of, a
non-U.S. holder will not be subject to U.S. federal withholding tax where such
interest is not effectively connected with the conduct of a trade or business
within the U.S. by such non-U.S. holder if
- such non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of our stock within the
meaning of Code Section 871(h)(3);
- such non-U.S. holder is not (a) a controlled foreign corporation for U.S.
federal income tax purposes that is related to us through stock ownership
or (b) a bank that received the debenture on an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of its
trade or business as described in Code Section 881(c)(3)(A); and
- the non-U.S. holder provides a statement signed under penalties of perjury
that includes its name and address and certifies that it is not a U.S.
person in compliance with applicable requirements of the Treasury
Regulations or an exemption is otherwise established.
If certain requirements are satisfied, the certification described above may
be provided by a securities clearing organization, a bank, or other financial
institution that holds customer's securities in the ordinary course of its trade
or business. For purposes of this exception, the non-U.S. holder of debentures
would be deemed to own constructively the common stock into which it could be
converted.
If these requirements cannot be satisfied, a non-U.S. holder will be subject
to U.S. federal withholding tax at a rate of 30% (or lower treaty rate, if
applicable) on interest payments on the debentures unless:
- the interest is effectively connected with the conduct of a U.S. trade or
business, in which case the interest will be subject to U.S. federal
income tax on net income that applies to U.S. persons generally; or
- an applicable income tax treaty provides for a lower rate of, or exemption
from, withholding tax.
It is not clear whether the above discussion would be applicable to liquidated
damages, if any, received by non-U.S. holders.
CONVERSION OF DEBENTURES
A non-U.S. holder generally will not be subject to U.S. federal withholding
tax on the conversion of a debenture into common stock. To the extent a non-U.S.
holder receives cash in lieu of a fractional share of common stock upon
conversion, such cash may give rise to gain that would be subject to the rules
described below with respect to the sale or exchange of a debenture or common
stock. See "Sale or Exchange of Debentures or Common Stock" below.
ADJUSTMENT OF CONVERSION PRICE
The conversion price of the debentures is subject to adjustment in certain
circumstances. Any such adjustment could, in certain circumstances, give rise to
a deemed distribution to non-U.S. holders of the debentures. See "U.S.
Holders--Adjustment of Conversion Price" above. In such case, the deemed
54
<PAGE>
distribution would be subject to the rules below regarding withholding of U.S.
federal tax on dividends in respect of common stock.
DISTRIBUTIONS ON COMMON STOCK
Distributions on common stock will constitute a dividend for U.S. federal
income tax purposes to the extent of our current or accumulated earnings and
profits as determined under U.S. federal income tax principles. Dividends paid
on common stock held by a non-U.S. holder will be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate, if applicable), unless
the dividend is effectively connected with the conduct of a U.S. trade or
business by the non-U.S. holder and, if required by a tax treaty, is
attributable to a permanent establishment maintained in the United States, in
which case the dividend will be subject to U.S. federal income tax on net income
that applies to U.S. persons generally (and, with respect to corporate holders
under certain circumstances, the branch profits tax). A non-U.S. holder may be
required to satisfy certain certification requirements in order to claim a
reduction of or exemption from withholding under the foregoing rules. However,
prior to January 1, 2001, for purposes of an applicable tax treaty, if a
stockholder's address is outside the United States it will be assumed that such
stockholder is a citizen or resident of that country absent the payor's
knowledge to the contrary.
SALE OR EXCHANGE OF DEBENTURES OR COMMON STOCK
In general, a non-U.S. holder will not be subject to a U.S. federal
withholding tax on gain recognized upon the sale or other disposition (including
a redemption) of a debenture or common stock received upon conversion thereof
unless the gain is effectively connected with the conduct of a U.S. trade or
business by the non-U.S. holder and, if required by a tax treaty, is
attributable to a permanent establishment maintained in the United States, or
unless the non-U.S. holder:
- is a nonresident alien individual who is present in the United States for
183 or more days in the taxable year in which the gain is realized and
certain other conditions are satisfied; or
- is subject to tax pursuant to the provisions of U.S. tax law applicable to
certain U.S. expatriates.
However, if the Company were to become a United States real property holding
corporation (a "USRPHC"), a non-U.S. holder might be subject to federal income
tax withholding with respect to gain realized on the disposition of debentures
or shares of common stock. In that case, any withholding tax withheld pursuant
to the rules applicable to dispositions of a "United States real property
interest" would be creditable against such non-U.S. holder's U.S. federal income
tax liability and might entitle such non-U.S. holder to a refund upon furnishing
required information to the IRS. We do not believe that we are a USRPHC or will
become a USRPHC in the future.
U.S. ESTATE TAX
Debentures owned or treated as owned by an individual who is not a citizen
or resident (as specifically defined for U.S. federal estate tax purposes) of
the United States at the time of death (a "nonresident decedent") will not be
includible in the nonresident decedent's gross estate for U.S. federal estate
tax purposes as a result of such nonresident decedent's death, provided that, at
the time of death, the nonresident decedent does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
our stock and payments with respect to such debentures would not have been
effectively connected with the conduct of a U.S. trade or business by the
nonresident decedent. Common stock owned or treated as owned by a nonresident
decedent will be includible in the nonresident decedent's gross estate for U.S.
federal estate tax purposes as a result of the nonresident decedent's death.
Subject to applicable treaty limitations, if any, a nonresident decedent's
estate may be subject to U.S. federal estate tax on property includible in the
estate for U.S. federal estate tax purposes.
55
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
A non-U.S. holder will generally not be subject to IRS reporting or backup
withholding if the payor has received appropriate certification statements from
or on behalf of the non-U.S. holder and provided that the payor does not have
actual knowledge that the non-U.S. holder is a U.S. person. However, with
respect to distributions on common stock, prior to January 1, 2001, if a
stockholder's address is outside of the United States it will be assumed that
such stockholder is a citizen or resident of that country absent the payor's
knowledge to the contrary. The payment of the proceeds from the disposition of
the debentures or common stock to or through the U.S. office of any U.S. or
foreign broker will be subject to IRS reporting and possibly backup withholding
unless the owner certifies as to its non-U.S. status under penalties of perjury
or otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The payment of the proceeds from
the disposition of a debenture or common stock to or through a non-U.S. office
of a non-U.S. broker that is not a U.S. related person will not be subject to
IRS or backup withholding. For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a non-U.S. person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment (or for such part of the period that the broker has been in
existence) is derived from activities that are effectively connected with
the conduct of a U.S. trade or business.
In the case of the payment of proceeds from the disposition of debentures or
common stock to or through a non-U.S. office of a broker that is a U.S. related
person, the applicable Treasury Regulations require IRS reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
non-U.S. holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a broker
that is a U.S. person or a U.S. related person (absent actual knowledge that the
payee is a U.S. person).
Any amounts withheld under the backup withholding rates from a payment to a
non-U.S. holder will be allowed as a credit against such holder's U.S. federal
income tax liability, if any, or will otherwise be refundable, provided that the
requisite procedures are followed. Non-U.S. holders of the debentures or common
stock should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption, if applicable.
The IRS has issued new withholding regulations generally effective
January 1, 2001. The proposed regulations provide that information reporting,
but not backup withholding, may apply to a payment made outside the United
States of the proceeds of a sale of a debenture through an office outside the
United States of a broker that is a foreign partnership if one or more of its
partners are "U.S. persons," as defined in the Treasury Regulations, who in the
aggregate hold more than 50% of the income or capital interest in the
partnership or such foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its records that the holder is a
non-U.S. person and does not have actual knowledge that the holder is a U.S.
person, or the holder otherwise establishes an exemption. Non-U.S. holders
should consult their own tax advisors with respect to the future impact of these
new withholding regulations.
The preceding discussion of certain U.S. federal income tax consequences is
for general information only and is not tax advice. Accordingly, you should
consult your own tax adviser as to particular tax consequences to you of
purchasing, holding and disposing of the debentures and our common stock,
including the applicability and effect of any state, local or foreign tax laws,
and of any proposed changes in applicable laws.
56
<PAGE>
SELLING SECURITY HOLDERS
The debentures were originally issued by us and sold by the initial
purchasers in a transaction exempt from the registration requirements of the
Securities Act to persons reasonably believed by the initial purchasers to be
qualified institutional buyers. Selling holders, including their transferees,
pledgees or donees or their successors, may from time to time offer and sell
pursuant to this prospectus any or all of the debentures and common stock into
which the debentures are convertible.
The following table sets forth information, as of January 6, 2000, with
respect to the selling holders and the principal amounts of debentures
beneficially owned by each selling holder that may be offered under this
prospectus. The information is based on information provided by or on behalf of
the selling holders. The selling holders may offer all, some or none of the
debentures or common stock into which the debentures are convertible. Because
the selling holders may offer all or some portion of the debentures or the
common stock, no estimate can be given as to the amount of the debentures or the
common stock that will be held by the selling holders upon termination of any
sales. In addition, the selling holders identified below may have sold,
transferred or otherwise disposed of all or a portion of their debentures since
the date on which they provided the information regarding their debentures in
transactions exempt from the registration requirements of the Securities Act.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF DEBENTURES COMMON STOCK COMMON STOCK
BENEFICIALLY ISSUABLE UPON OWNED AFTER
OWNED AND CONVERSION OF COMMON STOCK COMPLETION OF
NAME OFFERED THE DEBENTURES OFFERED THE OFFERING
- ------------------------------------------------ ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Aftra Health Fund............................... $ 750,000.00 23,432 23,432 --
Allstate Insurance Company...................... 2,000,000.00 62,485 62,485 --
Alta Partners Holdings, LDC..................... 500,000.00 15,621 15,621 --
Ashford Capital Management, f/b/o Louviers Land
LLC........................................... 25,000.00 781 781 --
Ashford Capital Management, f/b/o Brandy Trust
Small Cap Partnership Limited Partner......... 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o Katherine
May........................................... 25,000.00 781 781 --
Ashford Capital Management, f/b/o Benjamin
Spencer Fund.................................. 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Nancy G. Frederick............................ 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o William H.
Frederick, Jr................................. 60,000.00 1,874 1,874 --
Ashford Capital Management, f/b/o
Mary B. Evans Trust........................... 70,000.00 2,186 2,186 --
Ashford Capital Management, f/b/o
Hanna Schweizer............................... 10,000.00 312 312 --
Ashford Capital Management, f/b/o
Hyde & Watson Foundation...................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o Patricia
Chalphin Trust................................ 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o Gilbert
Spiegel Trust................................. 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Jane D. Engel................................. 35,000.00 1,093 1,093 --
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF DEBENTURES COMMON STOCK COMMON STOCK
BENEFICIALLY ISSUABLE UPON OWNED AFTER
OWNED AND CONVERSION OF COMMON STOCK COMPLETION OF
NAME OFFERED THE DEBENTURES OFFERED THE OFFERING
- ------------------------------------------------ ---------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Ashford Capital Management, f/b/o
Frank & Yetta Chaiken Foundation.............. 30,000.00 937 937 --
Ashford Capital Management, f/b/o
Frank L. Chaiken Irrevocable Trust............ 125,000.00 3,905 3,905 --
Ashford Capital Management, f/b/o Ashford
Capital Partners, L.P......................... 200,000.00 6,248 6,248 --
Ashford Capital Management, f/b/o
Sophie Consagra............................... 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Susan A. Boyd Trust........................... 20,000.00 624 624 --
Ashford Capital Management, f/b/o
Robert Lovett Trust........................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o Virginia Q.
Lovett Trust.................................. 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Evelyn D. Lovett Trust........................ 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Mt. Cuba Astronomical Observatory............. 10,000.00 312 312 --
Ashford Capital Management, f/b/o
Robin Foundation.............................. 10,000.00 312 312 --
Ashford Capital Management, f/b/o Wisconsin
Alumni Research
Foundation.................................... 500,000.00 15,621 15,621 --
Ashford Capital Management, f/b/o Dorothy
Lovett........................................ 30,000.00 937 937 --
Ashford Capital Management, f/b/o
Harry Corless Trust........................... 40,000.00 1,249 1,249 --
Ashford Capital Management, f/b/o
Harry Corless IRA............................. 30,000.00 937 937 --
Ashford Capital Management, f/b/o
Jeanne O. Shields............................. 60,000.00 1,874 1,874 --
Ashford Capital Management, f/b/o Kessler
Institute Pension Plan........................ 150,000.00 4,686 4,686 --
Ashford Capital Management, f/b/o
Frank Chaiken Irrevocable Trust............... 20,000.00 624 624 --
Ashford Capital Management, f/b/o
John P. Larmann............................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o
Karin & Joseph Kirkland....................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o
Joseph J. Kirkland Charitable Remainder
Trust......................................... 20,000.00 624 624 --
Ashford Capital Management, f/b/o
Judith A. Destefano........................... 30,000.00 937 937 --
BNP Arbitrage SNC............................... 5,000,000.00 156,213 156,213 --
Brown & Williamson Tobacco Master Retirement
Trust......................................... 200,000.00 6,248 6,248 --
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF DEBENTURES COMMON STOCK COMMON STOCK
BENEFICIALLY ISSUABLE UPON OWNED AFTER
OWNED AND CONVERSION OF COMMON STOCK COMPLETION OF
NAME OFFERED THE DEBENTURES OFFERED THE OFFERING
- ------------------------------------------------ ---------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Cirdet (IMA) Limited............................ 1,800,000.00 56,236 56,236 --
Concorde Special Situations Investment Fund..... 100,000.00 3,124 3,124 --
Deutsche Bank Securities........................ 4,000,000.00 124,970 124,970 --
Family Service Life Insurance Company........... 300,000.00 9,372 9,372 --
Fist Franklin Convertible Securities Fund....... 4,000,000.00 124,970 124,970 --
FSS Franklin California Growth Fund............. 6,000,000.00 187,456 187,456 --
FSS Franklin Small Cap Growth Fund.............. 25,000,000.00 781,066 781,066 --
GEM Capital Management, Inc., as investment
advisor to GranGem 23 41 LLC.................. 550,000.00 17,183 17,183 --
GEM Capital Management, Inc., as investment
advisor to Frederic C. Hamilton............... 450,000.00 14,059 14,059 --
GEM Capital Management, Inc., as investment
advisor to Mary Ann Hamilton.................. 450,000.00 14,059 14,059 --
GEM Capital Management, Inc., as investment
advisor to Mount Sinai School of Medicine..... 500,000.00 15,621 15,621 --
GEM Capital Management, Inc., as investment
advisor to Olin Foundation.................... 1,000,000.00 31,242 31,242 --
GEM Capital Management, Inc., as investment
advisor to United States Olympic Foundation... 600,000.00 18,745 18,745 --
General Motors Welfare Benefit Trust............ 1,300,000.00 40,615 40,615 --
Guardian Life Insurance Company................. 6,500,000.00 203,077 203,077 --
Guardian Pension Trust.......................... 200,000.00 6,248 6,248
Mainstay Convertible Fund....................... 2,000,000.00 62,485 62,485 --
Mainstay Strategic Value Fund................... 250,000.00 7,810 7,810 --
Mainstay VP Convertible Portfolio............... 1,000,000.00 31,242 31,242 --
The New York Life Separate Account #7........... 1,175,000.00 36,710 36,710 --
The Retail Clerks Pension Trust................. 2,000,000.00 62,485 62,485 --
SoundShore Holdings, Ltd........................ 4,000,000.00 124,970 124,970 --
Soundshore Strategic Holding Fund, Ltd.......... 1,000,000.00 31,242 31,242
St. Albans Partners, Ltd........................ 1,900,000.00 59,361 59,361 --
The Travelers Indemnity Company................. 2,916,000.00 91,103 91,103 --
The Travelers Insurance Company................. 1,865,000.00 58,267 58,267 --
The Travelers Insurance Company Separate Account
TLAC.......................................... 219,000.00 6,842 6,842 --
Tribeca Investments, LLC........................ 7,250,000.00 226,509 226,509 --
Triton Capital Investments, Ltd................. 3,000,000.00 93,728 93,728 --
Value Line Convertible Fund, Inc................ 500,000.00 15,621 15,621 --
Warburg Dillon Read LLC......................... 1,000,000.00 31,242 31,242 --
</TABLE>
None of the selling holders nor any of their affiliates, officers, directors
or principal equity holders has held any position or office or has had any
material relationship with us within the past three years.
59
<PAGE>
The selling holders purchased the debentures from us in a private transaction on
October 13, 1999. All of the debentures were "restricted securities" under the
Securities Act prior to this registration.
Information concerning the selling holders may change from time to time and
any changed information will be set forth in supplements to this prospectus if
and when necessary. In addition, the conversion rate and therefore, the number
of shares of common stock issuable upon conversion of the debentures, is subject
to adjustment under certain circumstances. Accordingly, the aggregate principal
amount of debentures and the number of shares of common stock into which the
debentures are convertible may increase or decrease.
PLAN OF DISTRIBUTION
The selling holders and their successors, including their transferees,
pledgees or donees or their successors, may sell the debentures and the common
stock into which the debentures are convertible directly to purchasers or
through underwriters, broker-dealers or agents, who may receive compensation in
the form of discounts, concessions or commissions from the selling holders or
the purchasers. These discounts, concessions or commissions as to any particular
underwriter, broker-dealer or agent may be in excess of those customary in the
types of transactions involved.
The debentures and the common stock into which the debentures are
convertible may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market prices, at varying prices determined at the time of sale, or
at negotiated prices. These sales may be effected in transactions, which may
involve crosses or block transactions:
- on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the debentures or the
common stock may be listed or quoted at the time of sale;
- in the over-the-counter market;
- in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
- through the writing of options, whether the options are listed on an
options exchange or otherwise; or
- through the settlement of short sales.
In connection with the sale of the debentures and the common stock into
which the debentures are convertible or otherwise, the selling holders may enter
into hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the debentures or the common stock
into which the debentures are convertible in the course of hedging the positions
they assume. The selling holders may also sell the debentures or the common
stock into which the debentures are convertible short and deliver these
securities to close out their short positions, or loan or pledge the debentures
or the common stock into which the debentures are convertible to broker-dealers
that in turn may sell these securities.
The aggregate proceeds to the selling holders from the sale of the
debentures or common stock into which the debentures are convertible offered by
them will be the purchase price of the debentures or common stock less discounts
and commissions, if any. Each of the selling holders reserves the right to
accept and, together with their agents from time to time, to reject, in whole or
in part, any proposed purchase of debentures or common stock to be made directly
or through agents. We will not receive any of the proceeds from this offering.
60
<PAGE>
Our outstanding common stock is listed for trading on the Nasdaq National
Market. We do not intend to list the debentures for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the debentures.
In order to comply with the securities laws of some states, if applicable,
the debentures and common stock into which the debentures are convertible may be
sold in these jurisdictions only through registered or licensed brokers or
dealers. In addition, in some states the debentures and common stock into which
the debentures are convertible may not be sold unless they have been registered
or qualified for sale or an exemption from registration or qualification
requirements is available and is complied with.
The selling holders and any underwriters, broker-dealers or agents that
participate in the sale of the debentures and common stock into which the
debentures are convertible may be "underwriters" within the meaning of
Section 2(11) of the Securities Act. Any discounts, commissions, concessions or
profit they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling holders who are "underwriters"
within the meaning of Section 2(11) of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act. The selling holders have
acknowledged that they understand their obligations to comply with the
provisions of the Exchange Act and the rules thereunder relating to stock
manipulation, particularly Regulation M.
In addition, any securities covered by this prospectus that qualify for sale
pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling holder
may not sell any debentures or common stock described in this prospectus and may
not transfer, devise or gift these securities by other means not described in
this prospectus.
To the extent required, the specific debentures or common stock to be sold,
the names of the selling holders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement of which this prospectus
is a part.
We entered into a registration rights agreement for the benefit of holders
of the debentures to register their debentures and common stock under applicable
federal and state securities laws under specific circumstances and at specific
times. The registration rights agreement provides for cross-indemnification of
the selling holders and us and their and our respective directors, officers and
controlling persons against specific liabilities in connection with the offer
and sale of the debentures and the common stock, including liabilities under the
Securities Act. We will pay substantially all of the expenses incurred by the
selling holders incident to the offering and sale of the debentures and the
common stock.
LEGAL MATTERS
The validity of the debentures and common stock offered hereby is being
passed upon for us by Cooley Godward LLP, Menlo Park, California. As of the date
of this prospectus, certain members and associates of Cooley Godward LLP
beneficially own an aggregate of 300 shares of our common stock.
INDEPENDENT AUDITORS
The financial statements of Inhale Therapeutic Systems, Inc. at
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998, incorporated by reference in this registration statement have
been audited by Ernst & Young LLP, independent auditors, as stated in their
report and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
61
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE AUTHORIZED NO ONE TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
THAT ARE NOT CONTAINED IN THIS PROSPECTUS. YOU SHOULD RELY ONLY ON THE
INFORMATION PROVIDED IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE THEREIN.
YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION.
THIS PROSPECTUS DOES NOT OFFER TO SELL OR BUY ANY DEBENTURES OR SHARES OF COMMON
STOCK IN ANY JURISDICTION WHERE IT IS UNLAWFUL. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON
THE FRONT OF THE DOCUMENT.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Summary....................................... 1
Risk Factors.................................. 3
Where You Can Find More Information........... 11
Incorporation by Reference.................... 11
Use of Proceeds............................... 12
Ratio of Earnings to Fixed Charges............ 12
Business...................................... 13
Description of the Debentures................. 32
Description of Capital Stock.................. 47
Certain United States Federal Income Tax
Consequences................................ 49
Selling Security Holders...................... 57
Plan of Distribution.......................... 60
Legal Matters................................. 61
Independent Auditors.......................... 61
</TABLE>
INHALE THERAPEUTIC SYSTEMS, INC.
$93,625,000
6 3/4% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE OCTOBER 13, 2006
AND
2,925,095 SHARES
OF COMMON STOCK
ISSUABLE UPON CONVERSION
OF THE DEBENTURES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the debentures and common stock being registered. All the amounts shown are
estimates except for the registration fee and the filing fee.
<TABLE>
<S> <C>
Registration fee................................................... $ 24,717
Legal fees and expenses............................................ 25,000
Accounting fees and expenses....................................... 10,000
Printing and engraving............................................. 10,000
Nasdaq National Market filing fee.................................. 17,500
Miscellaneous...................................................... 7,783
TOTAL.............................................................. 95,000
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify our directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation, as amended provides for the
elimination of liability for monetary damages for breach of the directors'
fiduciary duty of care to the Registrant and its stockholders. These provisions
do not eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such an injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
II-2
<PAGE>
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<S> <C>
2.1(1) Agreement and Plan of Merger between Inhale Therapeutic Systems, a California
corporation, and Inhale Therapeutic Systems (Delaware), Inc., a Delaware
corporation.
3.1(1) Certificate of Incorporation of Registrant.
3.2(1) Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(2) Restated Investor Rights Agreement among the Registrant and certain other
persons named therein, dated April 29, 1993, as amended October 29, 1993.
4.3(2) Specimen stock certificate.
4.4(3) Stock Purchase Agreement between the Registrant and Pfizer Inc., dated January
18, 1995.
4.5(9) Form of Purchase Agreement between the Registrant and the individual Purchasers,
dated January 28, 1997.
4.6(10) Stock Purchase Agreement between the Registrant and Capital Research and
Management Company, dated December 8, 1998.
4.7(12) Purchase Agreement among the Registrant and Lehman Brothers Inc., Deutsche Bank
Securities Inc. and U.S. Bancorp Piper Jaffray Inc. dated October 6, 1999.
4.8(12) Registration Rights Agreement among the Registrant and Lehman Brothers Inc.,
Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray Inc., dated October
13, 1999.
4.9(12) Indenture between the Registrant as Issuer and Chase Manhattan Bank and Trust
Company, National Association, as Trustee, dated October 13, 1999.
5.1(12) Opinion of Cooley Godward llp.
10.1(4) Registrant's 1994 Equity Incentive Plan, as amended.
10.2(7) Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended.
10.3(2) Registrant's 1994 Employee Stock Purchase Plan, as amended.
10.4(2) Standard Industrial Lease between the Registrant and W.F. Batton & Co., Inc.,
dated September 17, 1992, as amended September 18, 1992.
10.5(2) Addendum IV dated April 1, 1994 to Lease dated September 17, 1992, between the
Registrant and W.F. Batton and Marie A. Batton, dated September 17, 1992.
10.6(6) Amendment Agreement Number One, dated October 20, 1995, to Lease dated September
17, 1992, between the Registrant and W.F. Batton & Co., Inc.
10.7(6) Amendment Agreement Number Two, dated November 15, 1995, to Lease, dated
September 17, 1992, between Registrant and W.F. Batton and Marie A. Batton,
Trustees of the W.F. Batton and Marie A. Batton Trust UTA dated January 12, 1998
("Batton Trust").
10.8(11) Amendment Agreement Number Three, dated February 14, 1996, to Lease, dated
September 17, 1992, between Registrant and Batton Trust.
10.9(11) Amendment Agreement Number Four, dated September 15, 1996, to Lease, dated
September 17, 1992, between Registrant and Batton Trust.
10.10(2) Senior Loan and Security Agreement between the Registrant and Phoenix Leasing
Incorporated, dated September 15, 1993.
10.11(2) Sublicense Agreement between the Registrant and John S. Patton, dated September
13, 1991.
10.11(5) Stock Purchase Agreement between the Registrant and Baxter World Trade
Corporation, dated March 1, 1996.
10.12(8) Sublease and Lease Agreement, dated October 2, 1996, between the Registrant and
T.M.T. Associates L.L.C. ("Landlord").
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.13(11) First Amendment, dated October 30, 1996, to Sublease and Lease Agreement, dated
October 2, 1996, between Registrant and Landlord.
10.14(11) Letter Agreement, dated April 9, 1997, amending Sublease and Lease Agreement,
dated October 2, 1996, between the Registrant and Landlord.
10.15(11) Third Amendment, dated April 16, 1997, to Sublease and Lease Agreement, dated
October 2, 1996, between Registrant and Landlord.
10.16(11) Fourth Amendment, dated November 5, 1997, to Sublease and Lease Agreement, dated
October 2, 1996, between Registrant and Landlord.
23.1(12) Consent of Ernst & Young LLP, independent auditors.
23.2(12) Consent of Cooley Godward LLP. (included in Exhibit 5.1)
24.1(12) Power of Attorney (included in signature page).
25.1(12) Form T-1 Statement of Eligibility and Qualification of Trustee.
</TABLE>
- ------------------------
(1) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(2) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-75942), as amended.
(3) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-89502), as amended.
(4) Incorporated by reference to Inhale's Registration Statement on Form S-8
(No. 333-59735).
(5) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in Inhale's Annual Report
on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to Inhale's Registration Statement on Form S-3
(No. 333-20787).
(10) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-3 (No. 333-68897), as amended.
(11) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(12) Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of The
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
II-4
<PAGE>
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at
that time shall be deemed to be the initial BONA FIDE offering thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to provisions described in Item 15, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Carlos, County of San Mateo, State of California
on January 5, 2000.
<TABLE>
<S> <C> <C>
By: /s/ ROBERT B. CHESS
------------------------------------------
Robert B. Chess
CO-CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Chess and Ajit S. Gill and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments, exhibits thereto and other documents in connection therewith) to
this registration statement and any subsequent registration statement filed by
the registrant pursuant to Securities and Exchange Commission Rule 462, which
relates to this registration statement and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Co-Chief Executive Officer
/s/ ROBERT B. CHESS and Chairman of the
- ------------------------------ Board (Principal January 5, 2000
Robert B. Chess Executive Officer)
Co-Chief Executive
/s/ AJIT S. GILL Officer, President and
- ------------------------------ Director (Principal January 5, 2000
Ajit S. Gill Executive Officer)
/s/ BRIGID A. MAKES Chief Financial Officer
- ------------------------------ (Principal Financial and January 5, 2000
Brigid A. Makes Accounting Officer)
/s/ MARK J. GABRIELSON
- ------------------------------ Director January 5, 2000
Mark J. Gabrielson
/s/ JAMES B. GLAVIN
- ------------------------------ Director January 5, 2000
James B. Glavin
/s/ JOHN S. PATTON
- ------------------------------ Vice President and January 5, 2000
John S. Patton Director
/s/ MELVIN PERELMAN
- ------------------------------ Director January 5, 2000
Melvin Perelman
/s/ IRWIN LERNER
- ------------------------------ Director January 5, 2000
Irwin Lerner
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT INDEX
- ----------------- -------------------------------------------------------------------------------------------------
<S> <C>
2.1 (1) Agreement and Plan of Merger between Inhale Therapeutic Systems, a California corporation, and
Inhale Therapeutic Systems (Delaware), Inc., a Delaware corporation.
3.1 (1) Certificate of Incorporation of Registrant.
3.2 (1) Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 (2) Restated Investor Rights Agreement among the Registrant and certain other persons named therein,
dated April 29, 1993, as amended October 29, 1993.
4.3 (2) Specimen stock certificate.
4.4 (3) Stock Purchase Agreement between the Registrant and Pfizer Inc., dated January 18, 1995.
4.5 (9) Form of Purchase Agreement between the Registrant and the individual Purchasers, dated January
28, 1997.
4.6 (10) Stock Purchase Agreement between the Registrant and Capital Research and Management Company,
dated December 8, 1998.
4.7 (12) Purchase Agreement among the Registrant and Lehman Brothers Inc., Deutsche Bank Securities Inc.
and U.S. Bancorp Piper Jaffray Inc. dated October 6, 1999.
4.8 (12) Registration Rights Agreement among the Registrant and Lehman Brothers Inc., Deutsche Bank
Securities Inc. and U.S. Bancorp Piper Jaffray Inc., dated October 13, 1999.
4.9 (12) Indenture between the Registrant as Issuer and Chase Manhattan Bank and Trust Company, National
Association, as Trustee, dated October 13, 1999.
5.1 (12) Opinion of Cooley Godward LLP.
10.1 (4) Registrant's 1994 Equity Incentive Plan, as amended.
10.2 (7) Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended.
10.3 (2) Registrant's 1994 Employee Stock Purchase Plan, as amended.
10.4 (2) Standard Industrial Lease between the Registrant and W.F. Batton & Co., Inc., dated
September 17, 1992, as amended September 18, 1992.
10.5 (2) Addendum IV dated April 1, 1994 to Lease dated September 17, 1992, between the Registrant and
W.F. Batton and Marie A. Batton, dated September 17, 1992.
10.6 (6) Amendment Agreement Number One, dated October 20, 1995, to Lease dated September 17, 1992,
between the Registrant and W.F. Batton & Co., Inc.
10.7 (6) Amendment Agreement Number Two, dated November 15, 1995, to Lease, dated September 17, 1992,
between Registrant and W.F. Batton and Marie A. Batton, Trustees of the W.F. Batton and Marie A.
Batton Trust UTA dated January 12, 1998 ("Batton Trust").
10.8 (11) Amendment Agreement Number Three, dated February 14, 1996, to Lease, dated September 17, 1992,
between Registrant and Batton Trust.
10.9 (11) Amendment Agreement Number Four, dated September 15, 1996, to Lease, dated September 17, 1992,
between Registrant and Batton Trust.
10.10(2) Senior Loan and Security Agreement between the Registrant and Phoenix Leasing Incorporated, dated
September 15, 1993.
10.11(2) Sublicense Agreement between the Registrant and John S. Patton, dated September 13, 1991.
10.11(5) Stock Purchase Agreement between the Registrant and Baxter World Trade Corporation, dated
March 1, 1996.
10.12(8) Sublease and Lease Agreement, dated October 2, 1996, between the Registrant and T.M.T. Associates
L.L.C. ("Landlord").
10.13(11) First Amendment, dated October 30, 1996, to Sublease and Lease Agreement, dated October 2, 1996,
between Registrant and Landlord.
10.14(11) Letter Agreement, dated April 9, 1997, amending Sublease and Lease Agreement, dated October 2,
1996, between the Registrant and Landlord.
10.15(11) Third Amendment, dated April 16, 1997, to Sublease and Lease Agreement, dated October 2, 1996,
between Registrant and Landlord.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT INDEX
--------- -------------------------------------------------------------------------------------------------
<S> <C>
10.16(11) Fourth Amendment, dated November 5, 1997, to Sublease and Lease Agreement, dated October 2, 1996,
between Registrant and Landlord.
23.1 (12) Consent of Ernst & Young LLP, independent auditors.
23.2 (12) Consent of Cooley Godward LLP. (included in Exhibit 5.1)
24.1 (12) Power of Attorney (included in signature page).
25.1 (12) Form T-1 Statement of Eligibility and Qualification of Trustee. Page 18 of 20
</TABLE>
- ------------------------
(1) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(2) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-75942), as amended.
(3) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-89502), as amended.
(4) Incorporated by reference to Inhale's Registration Statement on Form S-8
(No. 333-59735).
(5) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in Inhale's Annual Report
on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to Inhale's Registration Statement on Form S-3
(No. 333-20787).
(10) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-3 (No. 333-68897), as amended.
(11) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(12) Filed herewith.
<PAGE>
$100,000,000
INHALE THERAPEUTIC SYSTEMS, INC.
6 3/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
PURCHASE AGREEMENT
October 6, 1999
LEHMAN BROTHERS INC.
DEUTSCHE BANK SECURITIES INC.
U.S. BANCORP PIPER JAFFRAY INC.
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
Inhale Therapeutic Systems, Inc., a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell $100,000,000 in aggregate principal amount of its 6 3/4%
Convertible Subordinated Debentures due 2006 (the "Firm Debentures") to Lehman
Brothers Inc., Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray Inc.
(collectively, the "Initial Purchasers"). In addition, the Company proposes to
grant to the Initial Purchasers an option (the "Option") to purchase up to an
additional $9,000,000 in aggregate principal amount of 6 3/4% Convertible
Subordinated Debentures due 2006 to cover over-allotments, if any (the "Optional
Debentures" and, together with the Firm Debentures, the "Debentures").
The Debentures will be convertible into fully paid, nonassessable
shares of common stock of the Company, par value $0.0001 per share (the "Common
Stock"), on the terms, and subject to the conditions, set forth in the
Indenture. As used herein, "Conversion Shares" means the shares of Common Stock
into which the Debentures are convertible. The Debentures will be issued
pursuant to an indenture (the "Indenture") to be dated as of the First Delivery
Date (as defined in Section 2(a)), between the Company and Chase Manhattan Bank
and Trust Company, National Association, as Trustee (the "Trustee"). The
Debentures will be offered and sold to the Initial Purchasers without being
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in reliance upon an exemption therefrom.
Holders of the Debentures (including the Initial Purchasers and their
direct and indirect transferees) will be entitled to the benefits of a Resale
Registration Rights Agreement, dated the First Delivery Date, between the
Company and the Initial Purchasers (the "Registration Rights Agreement"),
pursuant to which the Company will agree to file with the Securities and
Exchange Commission (the "Commission") a shelf registration statement pursuant
to Rule 415 under the Securities Act (the "Registration Statement") covering the
resale of the Debentures and the Conversion Shares, and to use its best efforts
to cause the Registration Statement to be declared effective.
This Agreement, the Indenture, the Debentures and the Registration
Rights Agreement are referred to herein collectively as the "Operative
Documents".
This is to confirm the agreement between the Company and the Initial
Purchasers concerning the issue, offer and sale of the Debentures.
<PAGE>
1 . REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents, warrants to and agrees with, the Initial Purchasers
that:
(a) The Company has prepared a preliminary offering memorandum
dated September 27, 1999 (the "Preliminary Offering Memorandum") and will
prepare an offering memorandum dated the date hereof (the "Offering
Memorandum") setting forth information concerning the Company, the Debentures,
the Registration Rights Agreement and the Common Stock. Copies of the
Preliminary Offering Memorandum have been, and copies of the Offering Memorandum
will be, delivered by the Company to the Initial Purchasers pursuant to the
terms of this Agreement. As used in this Agreement, "Preliminary Offering
Memorandum" and "Offering Memorandum" means the Preliminary Offering Memorandum
or the Offering Memorandum, as the case may be, as amended or supplemented.
Each of the Preliminary Offering Memorandum and the Offering Memorandum, did not
as of its respective date, and the Offering Memorandum will not as of a Delivery
Date (as defined in Section 2(b)), contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED that the Company makes no representation or warranty as to
information contained in or omitted from the Preliminary Offering Memorandum or
the Offering Memorandum in reliance upon and in conformity with written
information furnished to the Company by or on the behalf of any Initial
Purchaser through Lehman Brothers Inc. specifically for inclusion therein.
(b) Assuming the accuracy of the representations and warranties
of the Initial Purchasers contained in Section 6 and their compliance with the
agreements set forth therein, it is not necessary, in connection with the
issuance and sale of the Debentures to the Initial Purchasers and the offer,
resale and delivery of the Debentures by the Initial Purchasers in the manner
contemplated by this Agreement, the Indenture, the Registration Rights Agreement
and the Offering Memorandum, to register the Debentures or the Conversion Shares
under the Securities Act or to qualify the Indenture under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act").
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which its ownership or lease of property or
the conduct of its businesses requires such qualification (except for where the
failure to be so qualified would not have a material adverse effect on the
affairs, management, business, properties, financial condition, results of
operations or prospects of the Company (a "Material Adverse Effect")), and has
all power and authority necessary to own or hold its properties and to conduct
the businesses in which it is engaged; and the Company has no subsidiaries.
(d) The Company has an authorized capitalization as set forth in
the Offering Memorandum, and all of the issued and outstanding shares of capital
stock of the Company have been duly and validly authorized and issued, are fully
paid and nonassessable and conform to the description thereof contained in the
Offering Memorandum; the Conversion Shares which are authorized on the date
hereof have been duly and validly authorized and reserved for issuance upon
conversion of the Debentures and are free of preemptive rights; and all
Conversion Shares, when so issued and delivered upon such conversion in
accordance with the terms of the Indenture, will be duly and validly authorized
and issued, fully paid and nonassessable and free and clear of all liens,
encumbrances, equities or claims.
(e) The execution, delivery and performance of the Operative
Documents by the Company and the issuance of the Debentures and the Conversion
Shares and the consummation of the transactions contemplated hereby and thereby
will not (x) conflict with or
<PAGE>
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or by
which the Company is bound or to which any of the properties or assets of the
Company is subject, (y) result in any violation of the provisions of the
certificate of incorporation or bylaws of the Company or (z) result in any
violation of any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
properties or assets; and except (i) with respect to the transactions
contemplated by the Registration Rights Agreement, as may be required under the
Securities Act, the Trust Indenture Act and the rules and regulations
promulgated thereunder and (ii) as required by the state securities or "blue
sky" laws, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required for
the execution, delivery and performance of the Operative Documents by the
Company, and the consummation of the transactions contemplated hereby and
thereby.
(f) The Company has all necessary corporate right, power and
authority to execute and deliver this Agreement and perform its obligations
hereunder; and this Agreement and the transactions contemplated hereby have been
duly authorized, executed and delivered by the Company.
(g) The Company has all necessary corporate right, power and
authority to execute and deliver the Indenture and perform its obligations
thereunder; the Indenture has been duly authorized by the Company, and upon the
effectiveness of the Registration Statement, will be qualified under the Trust
Indenture Act; on the First Delivery Date, the Indenture will have been duly
executed and delivered by the Company and, assuming due authorization, execution
and delivery of the Indenture by the Trustee, will constitute a legally valid
and binding agreement of the Company enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and other similar laws relating
to or affecting creditors' rights generally, subject to general principles of
equity and to limitations on availability of equitable relief, including
specific performance (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing; and the Indenture
conforms in all material respects to the description thereof contained in the
Offering Memorandum.
(h) The Company has all necessary corporate right, power and
authority to execute and deliver the Registration Rights Agreement and perform
its obligations thereunder; the Registration Rights Agreement and the
transactions contemplated thereby have been duly authorized by the Company; when
the Registration Rights Agreement is duly executed and delivered by the Company
(assuming due authorization, execution and delivery by the Initial Purchasers),
it will be a legally valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, subject to general principles of equity and to
<PAGE>
limitations on availability of equitable relief, including specific performance
(whether considered in a proceeding in equity or at law) and an implied covenant
of good faith and fair dealing, and except with respect to the rights of
indemnification and contribution thereunder, where enforcement thereof may be
limited by federal or state securities laws or the policies underlying such
laws; and the Registration Rights Agreement conforms in all material respects to
the description thereof contained in the Offering Memorandum.
(i) The Company has all necessary corporate right, power and
authority to execute, issue and deliver the Debentures and perform its
obligations thereunder; the Debentures have been duly authorized by the Company;
when the Debentures are executed, authenticated and issued in accordance with
the terms of the Indenture and delivered to and paid for by the Initial
Purchasers pursuant to this Agreement on the respective Delivery Date (assuming
due authentication of the Debentures by the Trustee), such Debentures will
constitute legally valid and binding obligations of the Company, entitled to the
benefits of the Indenture and enforceable in accordance with their terms, except
as the enforceability thereof may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and other similar laws relating
to or affecting creditors' rights generally, subject to general principles of
equity and to limitations on availability of equitable relief, including
specific performance (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing; and the Debentures
conform in all material respects to the description thereof contained in the
Offering Memorandum.
(j) Except for the Registration Rights Agreement and the Stock
Purchase Agreement, dated January 18, 1995, between the Company and Pfizer, Inc.
("Pfizer"), the Stock Purchase Agreement, dated March 1, 1996, as amended,
between the Company and Baxter Healthcare Corporation and the Restated Investor
Rights Agreement, dated April 29, 1993, as amended October 29, 1993, among the
Company and certain stockholders of the Company, and except as contemplated
pursuant the Asset Purchase Agreement between the Company and Alliance
Pharmaceutical Corp., dated October 4, 1999 (the "Alliance Agreement"), there
are no contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in any
securities being registered pursuant to any registration statement filed by the
Company under the Securities Act.
(k) The Company has not sustained, since the date of the latest
audited financial statements included in the Offering Memorandum, any material
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree; and, since such date, there has
not been any change in the capital stock or long-term debt of the Company or any
material adverse change in or affecting the affairs, management, business,
properties,
<PAGE>
financial condition, stockholders' equity, results of operations or prospects of
the Company except: (i) as set forth or contemplated in the Offering Memorandum,
(ii) any grants under the Company's employee stock plans in accordance with the
terms of such plans as described in the Offering Memorandum, or other shares of
Common Stock (or rights to receive Common Stock) issued to service providers to
the Company in the ordinary course of business (the "Authorized Grants") or
(iii) operating losses incurred in the ordinary course of business.
(l) The financial statements of the Company (including the
related notes and supporting schedules) included in the Offering Memorandum
present fairly the financial condition and results of operations of the Company,
at the dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved.
(m) Ernst &Young LLP, who have certified the financial
statements of the Company included in the Offering Memorandum, whose report
appears in the Offering Memorandum, are independent accountants as required by
the Securities Act and the rules and regulations promulgated thereunder.
(n) The Company has good and marketable title in fee simple to
all real property and good and marketable title to all personal property owned
by it, in each case free and clear of all liens, encumbrances, security
interests, claims and defects, except such as are described in the Offering
Memorandum or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property by the
Company; and all real property and personal property held under lease by the
Company is held by it under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property by the Company.
(o) The Company carries, or is covered by, insurance as is
customary for companies similarly situated and engaged in similar businesses in
similar industries.
(p) The Company owns, or possesses adequate rights to use, all
material trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights and licenses necessary for the conduct of
its business, and has no reason to believe that the conduct of its business will
conflict with, and has not received any notice of any claim of conflict with,
any such rights of others.
(q) The Company owns, or possesses adequate rights to use, all
material patents necessary for the conduct of its business. Except as set forth
or contemplated in the Offering Memorandum, no valid U.S. patent is, or to the
knowledge of the Company would be, infringed by the activities of the Company in
the manufacture, use or sale of any product or component thereof as described in
the Offering Memorandum. The patent applications (the "Patent Applications")
filed by or on behalf of the Company described in the Offering
<PAGE>
Memorandum have been properly prepared and filed on behalf of the Company; each
of the Patent Applications and patents (the "Patents") described in the Offering
Memorandum is assigned or licensed to the Company, and, except as set forth or
contemplated in the Offering Memorandum, no other entity or individual has any
right or claim in any Patent, Patent Application or any patent to be issued
therefrom; and, to the knowledge of the Company, each of the Patent Applications
discloses potentially patentable subject matter. There are no actions, suits or
judicial proceedings pending relating to patents or proprietary information to
which the Company is a party or of which any property of the Company is subject,
and, to the knowledge of the Company, no actions, suits or judicial proceedings
are threatened by governmental authorities or, except as set forth or
contemplated in the Offering Memorandum, others. The Company is not aware of,
except as set forth or contemplated in the Offering Memorandum, any claim by
others that the Company is infringing or otherwise violating any patents or
other intellectual property rights of others and is not aware of any rights of
third parties to any of the Company's Patent Applications, licensed Patents or
licenses which could affect materially the use thereof by the Company. Except
as set forth in the Offering Memorandum, the Company owns or possesses
sufficient licenses or other rights to use all patents, trade secrets,
technology and know-how necessary to conduct the Company's business as described
in the Offering Memorandum.
(r) Except as disclosed in the Offering Memorandum, the Company
has filed with the Food and Drug Administration (the "FDA") and the California
Food and Drug Branch ("CFDB") for and received approval of all registrations,
applications, licenses, requests for exemptions, permits and other regulatory
authorizations necessary to conduct the Company's business as it is described in
the Offering Memorandum; the Company is in material compliance with all such
registrations, applications, licenses, requests for exemptions, permits and
other regulatory authorizations, and all applicable FDA and CFDB rules and
regulations, guidelines and policies, including but not limited to, applicable
FDA and CFDB rules, regulations and policies relating to current good
manufacturing practice ("CGMP") and current good laboratory practice ("CGLP");
the Company has no reason to believe that any party granting any such
registration, application, license, request for exemption, permit or other
authorization is considering limiting, suspending or revoking the same and knows
of no basis for any such limitation, suspension or revocation.
(s) The human clinical trials, animal studies and other
preclinical tests conducted by the Company or in which the Company has
participated that are described in the Offering Memorandum or the results of
which are referred to in the Offering Memorandum, and, to the knowledge of the
Company, such studies and tests conducted on behalf of the Company, were and, if
still pending, are being conducted in accordance with commonly used or
appropriate experimental protocols, procedures and controls applied by research
scientists generally in the preclinical or clinical study of new drugs; the
descriptions or the results of such studies and tests contained in the Offering
Memorandum are accurate and complete in all material respects, and the Company
has no knowledge of any other studies or tests, the results of which reasonably
call
<PAGE>
into question the results described or referred to in the Offering Memorandum;
and the Company has not received any notices or other correspondence from the
FDA or any other governmental agency requiring the termination, suspension or
modification of any animal studies or other preclinical tests, or clinical
studies conducted by or on behalf of the Company or in which the Company has
participated that are described in the Offering Memorandum or the results of
which are referred to in the Offering Memorandum.
(t) Except as disclosed in the Offering Memorandum, there are no
legal or governmental proceedings pending to which the Company is a party or of
which any property or asset of the Company is the subject which, if determined
adversely to the Company might have a Material Adverse Effect; and to the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or, except as set forth or contemplated in the Offering
Memorandum, threatened by others.
(u) No event has occurred nor has any circumstance arisen which,
had the Debentures been issued on such Delivery Date, would constitute a default
or an Event of Default (as such term is defined in the Indenture).
(v) The Company is not (i) in violation of its certificate of
incorporation or bylaws, (ii) in default in any material respect, and no event
has occurred which, with notice or lapse of time or both, would constitute such
a default, in the due performance or observance of any term, covenant or
condition contained in any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which it is a party or by which it is bound or
to which any of its properties or assets is subject or (iii) in violation of any
law, ordinance, governmental rule, regulation or court decree to which it or its
properties or assets may be subject or has failed to obtain any license, permit,
certificate, franchise or other governmental authorization or permit necessary
to the ownership of its properties or to the conduct of its business, except to
the extent that any such default, event or violation described in the foregoing
clauses (i), (ii) and (iii) would not have a Material Adverse Effect.
(w) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
<PAGE>
(x) The Company has timely and properly filed with the
Commission all reports and other documents required to have been filed by it
with the Commission pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations promulgated under the
Exchange Act.
(y) The Company has filed all federal, state and local income
and franchise tax returns required to be filed through the date hereof or has
requested extensions thereof and has paid all taxes due thereon, and no tax
deficiency has been determined adversely to the Company which has had (nor does
the Company have any knowledge of any tax deficiency which, if determined
adversely to the Company, might have) a Material Adverse Effect.
(z) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the Company (or, to
the knowledge of the Company, any of its predecessors in interest) at, upon or
from any of the property now or previously owned or leased by the Company in
violation of any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit or which would require remedial action under any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit, except for
any violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions a Material Adverse Effect; there has been no
material spill, discharge, leak, emission, injection, escape, dumping or release
of any kind onto such property or into the environment surrounding such property
of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company
or with respect to which the Company has knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release which would not
have or would not be reasonably likely to have, singularly or in the aggregate
with all such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, a Material Adverse Effect; and the terms "hazardous
wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have
the meanings specified in any applicable local, state, federal and foreign laws
or regulations with respect to environmental protection.
(aa) There are no contracts or other documents which would be
required to be described in the Offering Memorandum if the Offering Memorandum
were a prospectus included in a registration statement on Form S-1 that have not
been so described in the Offering Memorandum.
(bb) Except as set forth in the Company's Proxy Statement filed
with the Commission on April 29, 1999, there is no relationship, direct or
indirect, between or among the Company, on the one hand, and the directors,
officers, shareholders, customers or suppliers of the Company, on the other
hand, which would be required to be described in the Offering Memorandum if the
Offering Memorandum were a prospectus included in a registration statement on
Form S-1 that has not been so described.
<PAGE>
(cc) Since the date as of which information is given in the
Offering Memorandum through the date hereof, the Company has not (i) issued or
granted any securities (other than Authorized Grants), (ii) incurred any
material liability or obligation, direct or contingent, other than liabilities
and obligations which were incurred in the ordinary course of business, (iii)
entered into any material transaction not in the ordinary course of business or
(iv) declared or paid any dividend on its capital stock.
(dd) Except as disclosed in the Offering Memorandum, (i) there
are no outstanding securities convertible into or exchangeable for, or warrants,
rights or options issued by the Company to purchase, any shares of the capital
stock of the Company (except, in the case of options, any Authorized Grants),
(ii) there are no statutory, contractual, preemptive or other rights to
subscribe for or to purchase any Common Stock that do not by their terms
terminate upon the First Delivery Date and (iii) there are no restrictions upon
transfer of the Common Stock pursuant to the Company's certificate of
incorporation or bylaws.
(ee) The Company has undertaken a review to evaluate the effect
of the Year 2000 Problem (that is, any significant risk that its computer
hardware and software ("Computer Equipment") will not, in the case of dates or
time periods occurring after December 31, 1999, function at least as effectively
as in the case of dates or time periods occurring prior to January 1, 2000), and
determined that as a result thereof, the Company reasonably believes that (i)
there are no issues related to the Company's readiness to address the Year 2000
Problem that are of a character required to be described or referred to in the
Offering Memorandum and which have not been so described or referred to in the
Offering Memorandum and (ii) the Year 2000 Problem will not have a Material
Adverse Effect.
(ff) The Company (i) makes and keeps materially accurate books
and records and (ii) maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to permit
preparation of its financial statements and to maintain accountability for its
assets, (C) access to its assets is permitted only in accordance with
management's authorization and (D) the reported accountability for its assets is
compared with existing assets at reasonable intervals.
(gg) Neither the Company nor any director, officer, agent or
employee acting on behalf of the Company has (i) used any corporate funds for
any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity, (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds, (iii) violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977 or (iv) made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(hh) No labor disturbance by the employees of the Company exists
or, to the
<PAGE>
knowledge of the Company, is imminent which might be expected to have a Material
Adverse Effect.
(ii) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
(jj) No securities of the same class (within the meaning of Rule
144A(d)(3) under the Securities Act) as the Debentures are listed on any
national securities exchange registered under Section 6 of the Exchange Act or
quoted on an automated inter-dealer quotation system.
(kk) None of the Company or any of its affiliates (as defined in
Rule 501(b) of Regulation D under the Securities Act ("Regulation D")) (other
than the Initial Purchasers, about which no representation is made by the
Company), has, directly or through an agent, engaged in any form of general
solicitation or general advertising in connection with the offering of the
Debentures (as those terms are used in Regulation D) under the Securities Act or
in any manner involving a public offering within the meaning of Section 4(2) of
the Securities Act; the Company has not entered into any contractual arrangement
with respect to the distribution of the Debentures except for this Agreement and
the Company will not enter into any such arrangement.
(ll) None of the Company or any of its affiliates (other than the
Initial Purchasers, about which no representation is made by the Company), has,
directly or through any agent, sold, offered for sale, solicited offers to buy
or otherwise negotiated in respect of, any "security" (as defined in the
Securities Act) which is or will be integrated with the sale of the Debentures
in a manner that would require the registration under the Securities Act of the
Debentures.
(mm) The Company has not taken, directly or indirectly, any
action designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company in connection with the offering of the
Debentures.
2 . PURCHASE, SALE AND DELIVERY OF DEBENTURES.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to sell to
each Initial Purchaser, and each Initial Purchaser agrees, severally and not
jointly, to purchase from the Company, at a purchase price of 97.00% of the
principal amount thereof (the "purchase price") the principal amount of Firm
Debentures set forth opposite such Initial Purchaser's name in Schedule I
hereto.
<PAGE>
Delivery of and payment for the Firm Debentures shall be made at the
office of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York
10017, at 10:00 a.m. (New York time) on October 13, 1999, or such later date as
the Initial Purchasers shall designate, which date and time may be postponed by
agreement between the Initial Purchasers and the Company or as provided in
Section 8 (such date and time of delivery and payment for the Firm Debentures
being herein called the "First Delivery Date"). Delivery of the Firm Debentures
shall be made to the Initial Purchasers against payment of the purchase price by
the Initial Purchasers. Payment for the Firm Debentures shall be effected
either by wire transfer of immediately available funds to an account with a bank
in The City of New York, the account number and the ABA number for such bank to
be provided by the Company to the Initial Purchasers at least two business days
in advance of the First Delivery Date, or by such other manner of payment as may
be agreed by the Company and the Initial Purchasers.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants the
Option to the Initial Purchasers to purchase, severally and not jointly, the
Optional Debentures at the same price as the Initial Purchasers shall pay for
the Firm Debentures and the principal amount of the Optional Debentures to be
sold to be each Initial Purchaser shall be that principal amount which bears the
same ratio to the aggregate principal amount of Optional Debentures being
purchased as the principal amount of Firm Debentures set forth opposite the name
of such Initial Purchaser in Schedule I hereto (or such number increased as set
forth in Section 8). The Option may be exercised only to cover over-allotments
in the sale of the Firm Debentures by the Initial Purchasers. The Option may be
exercised once in whole or in part at any time not more than 30 days subsequent
to the date of this Agreement upon notice in writing or by facsimile by the
Initial Purchasers to the Company setting forth the amount (which shall be an
integral multiple of $1,000) of Optional Debentures as to which the Initial
Purchasers are exercising the Option.
The date for the delivery of and payment for the Optional Debentures,
being herein referred to as an "Optional Delivery Date", which may be the First
Delivery Date (the First Delivery Date and the Optional Delivery Date, if any,
being sometimes referred to as a "Delivery Date"), shall be determined by the
Initial Purchasers but shall not be later than five full business days after
written notice of election to purchase Optional Debentures is given. Delivery
of the Optional Debentures shall be made to the Initial Purchasers against
payment of the purchase price by the Initial Purchasers. Payment for the
Optional Debentures shall be effected either by wire transfer of immediately
available funds to an account with a bank in The City of New York, the account
number and the ABA number for such bank to be provided by the Company to the
Initial Purchasers at least two business days in advance of the Optional
Delivery Date, or by such other manner of payment as may be agreed by the
Company and the Initial Purchasers.
(c) The Company will deliver against payment of the purchase
price (a) the
<PAGE>
Debentures initially sold to qualified institutional buyers ("QIBs"), as defined
in Rule 144A under the Securities Act ("Rule 144A") in the form of one or more
permanent global certificates (the "Global Debentures"), registered in the name
of Cede & Co., as nominee for The Depository Trust Company ("DTC") and (b) the
Debentures initially sold to "accredited investors" (as defined in Rule 501(a)
under the Securities Act) who are not QIBs in certificated, fully registered
form (the "Certificated Debentures"). Beneficial interests in the Debentures
initially sold to QIBs will be shown on, and transfers thereof will be effected
only through, records maintained in book-entry form by DTC and its participants.
The Global Debentures will be made available, at the request of the
Initial Purchasers, for checking at least 24 hours prior to such Delivery Date.
The Certificated Debentures will be made available, at the request of the
Initial Purchasers, for checking at least 48 hours prior to such Delivery Date.
(d) Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligations of the Initial Purchasers hereunder.
3 . FURTHER AGREEMENTS OF THE COMPANY. The Company further
agrees:
(a) To advise the Initial Purchasers promptly of any proposal to
amend or supplement the Offering Memorandum and not to effect any such amendment
or supplement without the consent of the Initial Purchasers. If, at any time
prior to completion of the resale of the Debentures by the Initial Purchasers,
any event shall occur or condition exist as a result of which it is necessary to
amend or supplement the Offering Memorandum in order that the Offering
Memorandum will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time it is delivered to a purchaser,
not misleading, to promptly notify the Initial Purchaser and prepare, subject to
the first sentence of this Section 3(a), such amendment or supplement as may be
necessary to correct such untrue statement or omission.
(b) To furnish to the Initial Purchasers and to Simpson Thacher
& Bartlett, counsel to the Initial Purchasers, copies of the Preliminary
Offering Memorandum and the Offering Memorandum (and all amendments and
supplements thereto) in each case as soon as available and in such quantities as
the Initial Purchasers reasonably requests for internal use and for distribution
to prospective purchasers; and to furnish to the Initial Purchasers on the date
hereof four copies of the Offering Memorandum signed by duly authorized officers
of the Company, one of which will include the independent auditors' reports
therein manually signed by such independent auditors. The Company will pay the
expenses of printing and distributing to the Initial Purchasers all such
documents.
(c) To use its reasonable efforts to take such action as the
Initial Purchasers
<PAGE>
may reasonably request from time to time, to qualify the Debentures for offering
and sale under the securities laws of such jurisdictions as the Initial
Purchasers may request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions in the United
States for as long as may be necessary to complete the resale of the Debentures;
PROVIDED that in connection therewith, the Company shall not be required to
qualify as a foreign corporation or otherwise subject itself to taxation in any
jurisdiction in which it is not otherwise so qualified or subject.
(d) To apply the proceeds from the sale of the Debentures as set
forth under "Use of Proceeds" in the Offering Memorandum.
(e) For a period of 90 days from the date of the Offering
Memorandum, not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition or purchase by any person at any
time in the future of), or announce an offering of any debt securities of the
Company (other than the Debentures) or any shares of Common Stock (other than
the Conversion Shares), or sell or grant options, rights or warrants with
respect to any shares of Common Stock (other than Authorized Grants or issuances
of shares of Common Stock or rights to receive shares of Common Stock in
connection with collaborative agreements entered into in the ordinary course of
business (the "Collaborative Shares") or issuances of shares of Common Stock or
rights to receive shares of Common Stock in connection with any merger,
consolidation, acquisition or similar business combination with a company not
subject to the reporting requirements of the Exchange Act ("Acquisition Shares")
or as contemplated pursuant to the Alliance Agreement (the "Alliance Shares"))
without the prior written consent of Lehman Brothers Inc.; and to cause each
officer and director of the Company to furnish to the Initial Purchasers, prior
to the First Delivery Date, and to cause each person or entity receiving any
such Collaborative Shares, Acquisition Shares or Alliance Shares to furnish to
the Initial Purchasers, prior to issuance of any such Collaborative Shares,
Acquisition Shares or Alliance Shares, a letter or letters, in form and
substance satisfactory to counsel to the Initial Purchasers, pursuant to which
each such person shall agree not to, directly or indirectly, offer for sale,
sell or otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition or purchase by
any person at any time in the future of), any shares of Common Stock
beneficially owned, deemed to be beneficially owned, or in the future acquired
by each such person for a period of 90 days from the date of the Offering
Memorandum, without the prior written consent of Lehman Brothers Inc., PROVIDED,
HOWEVER, that no such letter or letters shall be required with respect to any
such Collaborative Shares, Acquisition Shares or Alliance Shares so long as (i)
such shares shall be restricted securities, as defined in Rule 144 under the
Securities Act, on the day 90 days from the date of the Offering Memorandum and
(ii) the Company shall be under no obligation to register such shares under the
Securities Act prior to such date, PROVIDED, FURTHER, that with respect to the
shares of Common Stock owned by the officers of the Company, such restrictions
shall not apply to (i) sales of shares of Common Stock made to satisfy loans
incurred to finance the purchase of such shares of Common Stock, if that
<PAGE>
satisfaction is required by the lender pursuant to margin regulations and (ii)
charitable donations of shares of Common Stock that are consistent with the
prior years' practice.
(f) For so long as any of the Debentures are "restricted
securities" within the meaning of Rule 144(a)(3) under the Securities Act, to
provide to any holder of the Debentures or to any prospective purchaser of the
Debentures designated by any holder, upon request of such holder or prospective
purchaser, information required to be provided by Rule 144A(d)(4) of the
Securities Act if, at the time of such request, the Company is not subject to
the reporting requirements under Section 13 or 15(d) of the Exchange Act.
(g) Each of the Debentures will bear, to the extent applicable,
the legend contained in "Notice to Investors" in the Offering Memorandum for the
time period and upon the other terms stated therein, except after the Debentures
are resold pursuant to a registration statement effective under the Securities
Act.
(h) To take such steps as shall be necessary to ensure that it
shall not become an "investment company" within the meaning of such term under
the Investment Company Act, and the rules and regulations of the Commission
thereunder.
(i) None of the Company or any of its affiliates will take,
directly or indirectly, any action which is designed to stabilize or manipulate,
or which constitutes or which might reasonably be expected to cause or result in
stabilization or manipulation, of the price of any security of the Company in
connection with the offering of the Debentures.
(j) To execute and deliver the Registration Rights Agreement (in
form and substance satisfactory to the Initial Purchasers.
(k) To use its best efforts to assist the Initial Purchasers in
arranging to cause the Debentures to be accepted to trade in the PORTAL market
("PORTAL") of the National Association of Securities Dealers, Inc. ("NASD").
(l) To use its best efforts to cause the Debentures to be
accepted for clearance and settlement through the facilities of DTC.
(m) To use its best efforts to have the Conversion Shares
approved by the NASDAQ Stock Market's National Stock Exchange ("NASDAQ") for
inclusion prior to the effectiveness of the Registration Statement.
(n) The Company has not taken and until a period of 90 days has
elapsed from the date of the Offering Memorandum shall not take, directly or
indirectly, any action which releases Pfizer from or waives any restriction
imposed on Pfizer with respect to the transfer ofshares of Common Stock
contained in the Stock Purchase Agreement between Pfizer and the
<PAGE>
Company, dated January 18, 1995.
(0) The Company has not taken and until a period of 90 days has
elapsed from the date of the Offering Memorandum shall not take, directly or
indirectly, any action which releases Baxter from or waives any restriction
imposed on Baxter with respect to the transfer of shares of Common Stock
contained in the Stock Purchase Agreement between Baxter and the Company, dated
March 1, 1996, as amended.
4 . EXPENSES. The Company agrees to pay:
(a) the costs incident to the authorization, issuance, sale and
delivery of the Debentures, and any taxes payable in that connection;
(b) the costs incident to the preparation, printing and
distribution of the Preliminary Offering Memorandum, the Offering
Memorandum and any amendment or supplement to the Offering Memorandum, all
as provided in this Agreement;
(c) the costs of producing and distributing the Operative
Documents;
(d) the fees and expenses of Cooley Godward LLP and Ernst &
Young LLP;
(e) the costs of distributing the terms of agreement relating to
the organization of the underwriting syndicate and selling group to the
members thereof by mail, telex or other means of communication;
(f) the fees and expenses of qualifying the Debentures under the
securities laws of the several jurisdictions as provided in Section 3(c)
and of preparing, printing and distributing a Blue Sky Memorandum
(including reasonable related fees and expenses of counsel to the Initial
Purchasers);
(g) all costs and expenses incident to (i) the preparation of
the "road show" presentation materials and (ii) the road show travelling
expenses of the Company;
(h) all fees and expenses incurred in connection with any rating
of the Debentures;
(i) the costs of preparing the Debentures;
(j) all expenses and fees in connection with the application for
inclusion of the Debentures in the PORTAL market and the inclusion of the
Conversion Shares on the NASDAQ;
<PAGE>
(k) the fees and expenses (including fees and disbursements of
counsel) of the Trustee, and the costs and charges of any registrar,
transfer agent, paying agent or conversion agent; and
(l) all other costs and expenses incident to the performance of
the obligations of the Company under this Agreement;
PROVIDED that, except as provided in this Section 4 and in Section 7, the
Initial Purchasers shall pay their own costs and expenses, including the costs
and expenses of their counsel and any transfer taxes on the Debentures which
they may sell.
5 . CONDITIONS OF THE INITIAL PURCHASERS' OBLIGATIONS. The
several obligations of the Initial Purchasers hereunder are subject to the
accuracy, when made and on each Delivery Date, of the representations and
warranties of the Company contained herein, to the performance by the Company of
its obligations hereunder, and to each of the following additional terms and
conditions:
(a) No Initial Purchaser shall have discovered and disclosed to
the Company prior to or on such Delivery Date that the Offering Memorandum or
any amendment or supplement thereto contains any untrue statement of a fact
which, in the opinion of counsel to the Initial Purchasers, is material or omits
to state any fact which is material and necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) All corporate proceedings and other legal matters incident
to the authorization, form and validity of the Operative Documents and the
Offering Memorandum or any amendment or supplement thereto, and all other legal
matters relating to the Operative Documents and the transactions contemplated
thereby shall be satisfactory in all material respects to counsel to the Initial
Purchasers, and the Company shall have furnished to such counsel all documents
and information that they may reasonably request to enable them to pass upon
such matters.
(c) Cooley Godward LLP shall have furnished to the Initial
Purchasers their written opinion, as counsel to the Company, addressed to the
Initial Purchasers and dated such Delivery Date, in form and substance
satisfactory to the Initial Purchasers, to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, and, based solely on certificates of public officials, is duly
qualified to do business and is in good standing as a foreign corporation
in each jurisdiction in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
Company, and has all corporate
<PAGE>
power and authority necessary to own or hold its properties and conduct the
business in which it is engaged; and, to the knowledge of such counsel, the
Company has no subsidiaries;
(ii) The Company has an authorized capitalization as set
forth in the Offering Memorandum, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and conform to
the description thereof contained in the Offering Memorandum in the section
entitled "Description of Capital Stock";
(iii) The Conversion Shares that are authorized on the date
hereof have been duly authorized and validly reserved for issuance upon
conversion of the Debentures and are free of preemptive rights; and the
Conversion Shares, when so issued and delivered upon such conversion in
accordance with the terms of the Indenture, will be duly and validly
authorized and issued, fully paid and nonassessable;
(iv) The statements in the Offering Memorandum under the
captions "Description of the Debentures" and "Description of Capital
Stock", insofar as they purport to summarize the provisions of the
Indenture, the Registration Rights Agreement, the Debentures and the Common
Stock (including the Conversion Shares) are accurate and complete in all
material respects to the extent required if such statements were contained
in a registration statement on Form S-3 under the Securities Act;
(v) There are no preemptive or other rights to subscribe
for or to purchase from the Company, or any restriction upon the voting or
transfer of, any shares of Common Stock pursuant to the Company's
certificate of incorporation or bylaws;
(vi) To the knowledge of such counsel and other than as set
forth in the Offering Memorandum, there are no legal or governmental
proceedings pending to which the Company is a party or of which any
property or assets of the Company is the subject which, if determined
adversely to the Company, might have a material adverse effect on the
financial position, stockholders' equity, results of operations or business
of the Company; and, to the actual knowledge of such counsel, no such
proceedings are overtly threatened or contemplated by governmental
authorities or threatened by others;
(vii) The execution, delivery and performance of this
Agreement, the Indenture and the Registration Rights Agreement and the
issuance of the Debentures and the Conversion Shares and the consummation
of the transactions contemplated hereby and thereby do not result in any
violation of the provisions of the certificate of incorporation or bylaws
of the Company or any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or assets; and,
except as may be required by the
<PAGE>
securities or "blue sky" laws of any state of the United States in
connection with the sale of the Debentures, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement and the Indenture by the Company and the
issuance of the Debentures and the Conversion Shares and the consummation
of the transactions contemplated hereby and thereby;
(viii) No registration of the Debentures or the Conversion
Shares under the Securities Act, and no qualification of the Indenture or
an indenture under the Trust Indenture Act, is required in connection with
the offer, sale and delivery of the Debentures or in connection with the
conversion of the Debentures into Conversion Shares, in each case, in the
manner contemplated by the Offering Memorandum, this Agreement and the
Indenture;
(ix) The statements in the Offering Memorandum under the
caption "Certain United States Federal Income Tax Considerations", insofar
as they purport to constitute summaries of matters of United States federal
income tax law and regulations or legal conclusions with respect thereto,
constitute accurate summaries of the matters described therein in all
material respects to the extent required if such statements were contained
in a registration statement on Form S-3 under the Securities Act;
(x) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended;
(xi) The Company has all necessary corporate right, power
and authority to execute and deliver each of the Operative Documents to
which it is a party and to perform its obligations thereunder and to issue,
sell and deliver the Debentures and the Conversion Shares to the Initial
Purchasers;
(xii) This Agreement has been duly authorized, executed and
delivered by the Company;
(xiii) The Indenture has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution and
delivery thereof by the Trustee, constitutes a legally valid and binding
agreement of the Company enforceable against the Company in accordance with
its terms except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, subject to general
principles of equity and to limitations on availability of equitable
relief, including specific performance (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing;
<PAGE>
(xiv) The Registration Rights Agreement has been duly
authorized, executed and delivered by the Company and, assuming due
authorization, execution and delivery thereof by the Initial Purchasers,
constitutes a valid and legally binding agreement of the Company
enforceable against the Company in accordance with its terms except as
rights to indemnity contained therein may be limited by applicable law and
except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally, subject to general principles of
equity and to limitations on availability of equitable relief, including
specific performance (regardless of whether such enforceability is
considered in a proceeding in equity or at law), by an implied covenant of
good faith and fair dealing; and
(xv) The Debentures have been duly authorized by the Company
and when executed, issued and authenticated in accordance with terms of the
Indenture and delivered to and paid for by the Initial Purchasers, will
constitute legally valid and binding obligations of the Company, entitled
to the benefits of the Indenture and enforceable against the Company in
accordance with their terms except as the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally, subject
to general principles of equity and to limitations on availability of
equitable relief, including specific performance (regardless of whether
such enforceability is considered in a proceeding in equity or at law) or
by an implied covenant of good faith and fair dealing.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the federal laws of the United States of America,
the laws of the State of New York and the Delaware General Corporation Law and
may state that it is relying, in respect of matters of New York law, upon
Simpson Thacher & Bartlett, and in respect of matters of fact, upon certificates
of officers of the Company, PROVIDED that such counsel shall state that it
believes that the Initial Purchasers and it are justified in relying upon such
certificates. Such counsel shall also have furnished to the Initial Purchasers
a written statement, addressed to the Initial Purchasers and dated such Delivery
Date, in form and substance satisfactory to the Initial Purchasers, to the
effect that during the course of preparing the Offering Memorandum, such counsel
participated in conferences with officers and other representatives of the
Company, the Company's independent public accountants, the Initial Purchasers
and their counsel, at which the contents of the Offering Memorandum were
discussed, and while such counsel has not independently verified and is not
passing upon the accuracy, completeness or fairness of the statements made in
the Offering Memorandum except as explicitly set forth above, no facts have come
to the attention of such counsel which lead it to believe that the Offering
Memorandum (other than the financial statements,
<PAGE>
financial and statistical data and supporting schedules as to which such counsel
shall make no statement), as of its date or as of such Delivery Date, contained
or contains any untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) Stephen L. Hurst, Esq., General Counsel and Secretary of the
Company, shall have furnished to the Initial Purchasers his written opinion,
addressed to the Initial Purchasers and dated such Delivery Date, in form and
substance satisfactory to the Initial Purchasers, to the effect that:
(i) All of the issued shares of capital stock of the Company
have been duly and validly authorized and issued and are fully paid and
nonassessable;
(ii) Except as disclosed in the Offering Memorandum, there are no
preemptive or other rights to subscribe for or to purchase from the
Company, or any restriction upon the voting or transfer of, any shares of
Common Stock pursuant to any agreement or other instrument to which the
Company is a party known to such counsel; and
(iii) The execution, delivery and performance of this Agreement,
the Indenture and the Registration Rights Agreement and the issuance of the
Debentures and the Conversion Shares and the consummation of the
transactions contemplated hereby and thereby do not result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company is a
party or by which the Company is bound or to which any of the property or
assets of the Company is subject.
Such counsel shall also have furnished to the Initial Purchasers a
written statement, addressed to the Initial Purchasers and dated such Delivery
Date, in form and substance satisfactory to the Initial Purchasers, to the
effect that he has no reason to believe that the statements under the captions
"Risk Factors--Our patents may not protect our products and our products may
infringe on third-party patent rights" and "Patents and Proprietary Rights" in
the Offering Memorandum, as of its date or as of such Delivery Date, contained
or contains any untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(e) Simpson Thacher & Bartlett, shall have furnished to the
Initial Purchasers their written opinion, as counsel to the Initial Purchasers,
addressed to the Initial Purchasers and dated such Delivery Date, in form and
substance satisfactory to the Initial Purchasers.
<PAGE>
(f) With respect to the letter of Ernst & Young LLP delivered to
the Initial Purchasers concurrently with the execution of this Agreement (the
"initial letter"), the Company shall have furnished to the Initial Purchasers a
letter (the "bring-down letter") of such accountants, addressed to the Initial
Purchasers and dated such Delivery Date (i) confirming that they are independent
accountants within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of
the bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Offering Memorandum, as of a date not more than five
days prior to the date of the bring-down letter), the conclusions and findings
of such firm with respect to the financial information and other matters covered
by the initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(g) The Company shall have furnished to the Initial Purchasers
on such Delivery Date a certificate, dated such Delivery Date and delivered on
behalf of the Company by one of its co-chief executive officers and its chief
financial officer, in form and substance satisfactory to the Initial Purchasers,
to the effect that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of the date given and as of
such Delivery Date; and the Company has complied in all material respects
with all its agreements contained herein to be performed prior to or on
such Delivery Date;
(ii) (A) The Company has not sustained since the date of
the latest audited financial statements included in the Offering Memorandum
any loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, except (x) as set
forth or contemplated in the Offering Memorandum and (y) for operating
losses incurred in the ordinary course of business, or (B) since such date
there has not been any change in the capital stock or long-term debt of the
Company (except for issuances of shares of Common Stock upon exercise of
outstanding options described in the Offering Memorandum or pursuant to
Authorized Grants), or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company, except as set forth or contemplated in the Offering Memorandum;
and
(iii) Such officer has carefully examined the Offering
Memorandum and, in such officer's opinion (A) the Offering Memorandum, as
of its date, did not include any untrue statement of a material fact and
did not omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and (B) since the date of the Offering Memorandum, no event has
occurred which should have been set forth in a supplement or
<PAGE>
amendment to the Offering Memorandum.
(h) The Indenture shall have been duly executed and delivered by
the Company and the Trustee and the Debentures shall have been duly executed and
delivered by the Company and duly authenticated by the Trustee.
(i) The Company and the Initial Purchasers shall have executed
and delivered the Registration Rights Agreement (in form and substance
satisfactory to the Initial Purchasers) and the Registration Rights Agreement
shall be in full force and effect.
(j) The NASD shall have accepted the Debentures for trading on
PORTAL.
(i) The Company shall not have sustained since the date of
the latest audited financial statements included in the Offering Memorandum
any loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, except (A) as set
forth or contemplated in the Offering Memorandum and (B) for operating losses
incurred in the ordinary course of business, or (ii) since such date there
shall not have been any change in the capital stock or long-term debt of the
Company (except for issuances of shares of Common Stock upon exercise of
outstanding options described in the Offering Memorandum or pursuant to
Authorized Grants), or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company, except as set
forth or contemplated in the Offering Memorandum, the effect of which, in any
such case described in clause (i) or (ii), is, in the reasonable judgment of
the Initial Purchasers, so material and adverse as to make it impracticable
or inadvisable to proceed with the sale or the delivery of the Debentures
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Offering Memorandum.
(1) Subsequent to the execution and delivery of this
Agreement there shall not have occurred any of the following:
(i) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange, the NASDAQ or the
over-the-counter market, or trading in any securities of the
Company on any exchange shall have been suspended or minimum
prices shall have been established on any such exchange or
market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction;
(ii) a banking moratorium shall have been declared by
United States federal or New York State authorities;
(iii) the United States shall have become engaged in
hostilities, there
<PAGE>
shall have been an escalation in hostilities involving the United
States, or there shall have been a declaration of a national
emergency or war by the United States; or
(iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions (or
the effect of international conditions on the financial markets
in the United States shall be such) as to make it, in the sole
judgment of the Initial Purchasers, impracticable or inadvisable
to proceed with the offering or delivery of the Debentures being
delivered on such Delivery Date on the terms and in the manner
contemplated in the Offering Memorandum.
(m) The Company shall have furnished to the Initial Purchasers
such further information, certificates and documents as the Initial Purchasers
may reasonably request to evidence compliance with the conditions set forth in
this Section 5.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance satisfactory to counsel
to the Initial Purchasers.
6 . REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF INITIAL
PURCHASERS. Each Initial Purchaser, severally and not jointly, represents and
warrants that such Initial Purchaser is a QIB. Each Initial Purchaser,
severally and not jointly, agrees with the Company that:
(a) The Debentures and the Conversion Shares have not been and will
not be registered under the Securities Act in connection with the initial
offering of the Debentures.
(b) Such Initial Purchaser is purchasing the Debentures pursuant to a
private sale exemption from registration under the Securities Act;
(c) The Debentures have not been and will not be offered or sold by
such Initial Purchaser or its affiliates acting on its behalf within the
United States or to, or for the account or benefit of, United States
persons except in accordance with Rule 144A or to limited number of
"accredited investors" (as defined in Rule 501(a) under the Securities
Act);
(d) Such Initial Purchaser will not offer or sell the Debentures in
the United States by means of any form of general solicitation or general
advertising within the meaning of Rule 502(c) of Regulation D, including
(i) any advertisement, article, notice or other communication published in
any newspaper, magazine or similar medium or broadcast over television or
radio, or (ii) any seminar or meeting
<PAGE>
whose attendees have been invited by any general solicitation or general
advertising in the United States; and
(e) Such Initial Purchaser has not offered or sold, and will not
offer or sell, any Debentures in the United States except to (A) persons
whom it reasonably believes to be QIBs and (B) a limited number of
"accredited investors" (as defined in Rule 501(a) under the Securities
Act).
7 . INDEMNIFICATION AND CONTRIBUTION.
(a) The Company shall indemnify and hold harmless each Initial
Purchaser, its officers and employees and each person, if any, who controls any
Initial Purchaser within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of the Debentures), to which that Initial
Purchaser, officer, employee or controlling person may become subject, insofar
as such loss, claim, damage, liability or action arises out of, or is based
upon:
(i) any untrue statement or alleged untrue statement of a
material fact contained in (A) any Preliminary Offering Memorandum or the
Offering Memorandum, or in any amendment or supplement thereto, or (B) any
blue sky application or other document prepared or executed by the Company
(or based upon any written information furnished by the Company) filed in
any jurisdiction specifically for the purpose of qualifying any or all of
the Debentures under the securities laws of any state or other jurisdiction
(such application, document or information being hereinafter called a "Blue
Sky Application") or
(ii) the omission or alleged omission to state therein any
material fact necessary to make the statements therein not misleading,
and shall reimburse each Initial Purchaser and each such officer, employee and
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by that Initial Purchaser, officer, employee or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Offering Memorandum or the
Offering Memorandum, or in any such amendment or supplement, or in any Blue Sky
Application in reliance upon and in conformity with the written information
furnished to the Company by or on behalf of any Initial Purchaser specifically
for inclusion therein and described in Section 7(e); PROVIDED, FURTHER, that as
to any Preliminary Offering Memorandum, this indemnity agreement shall not inure
to the benefit of any Initial
<PAGE>
Purchaser, its officers or employees or any person controlling that Initial
Purchaser on account of any loss, claim, damage, liability or action arising
from the sale of Debentures to any person by that Initial Purchaser if that
Initial Purchaser failed to send or give a copy of the Offering Memorandum,
as the same may be amended or supplemented, to that person, and the untrue
statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact in such Preliminary Offering
Memorandum was corrected in the Offering Memorandum, unless such failure
resulted from non-compliance by the Company with Section 3(b). The foregoing
indemnity agreement is in addition to any liability which the Company may
otherwise have to any Initial Purchaser or to any officer, employee or
controlling person of that Initial Purchaser.
(b) Each Initial Purchaser, severally and not jointly, shall
indemnify and hold harmless, the Company, its officers and directors, and each
person, if any, who controls the Company within the meaning of the Securities
Act from and against any loss, claim, damage or liability, joint or several, or
any action in respect thereof, to which the Company or any such director,
officer or controlling person may become subject, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon:
(i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Offering Memorandum or the
Offering Memorandum or in any amendment or supplement thereto, or in any
Blue Sky Application, or
(ii) the omission or alleged omission to state therein any
material fact necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with the written information furnished to the Company by or on behalf
of that Initial Purchaser specifically for inclusion therein and described in
Section 7(e), and shall reimburse the Company and any such director, officer or
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by the Company or any such director, officer or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred. The foregoing indemnity agreement is in addition to any liability
which any Initial Purchaser may otherwise have to the Company or any such
director, officer or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 7, notify the indemnifying party in
writing of the claim or the commencement of that action; PROVIDED, HOWEVER, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent it has
been materially prejudiced by
<PAGE>
such failure and, PROVIDED, FURTHER, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have to an
indemnified party otherwise than under this Section 7. If any such claim or
action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; PROVIDED, HOWEVER, that
the Initial Purchasers shall have the right to employ counsel to represent
jointly the Initial Purchasers and their respective officers, employees and
controlling persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the Initial Purchasers against the
Company under this Section 8, if the Initial Purchasers shall have reasonably
concluded that there may be one or more legal defenses available to the Initial
Purchasers and their respective officers, employees and controlling persons that
are different from or additional to those available to the Company and its
officers, employees and controlling persons, the fees and expenses of a single
separate counsel shall be paid by the Company. No indemnifying party shall:
(i) without the prior written consent of the indemnified parties
(which consent shall not be unreasonably withheld) settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding, or
(ii) be liable for any settlement of any such action effected
without its written consent (which consent shall not be unreasonably
withheld), but if settled with its written consent or if there be a final
judgment of the plaintiff in any such action, the indemnifying party agrees
to indemnify and hold harmless any indemnified party from and against any
loss of liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 7 shall
for any reason be unavailable or insufficient to hold harmless an indemnified
party under Section 7(a) or 7(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof:
<PAGE>
(i) in such proportion as shall be appropriate to reflect the
relative benefits received by the Company on the one hand and the Initial
Purchasers on the other from the offering of the Debentures, or
(ii) if the allocation provided by clause 7(d)(i) is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 7(d)(i) but
also the relative fault of the Company on the one hand and the Initial
Purchasers on the other with respect to the statements or omissions or
alleged statements or alleged omissions that resulted in such loss, claim,
damage or liability (or action in respect thereof), as well as any other
relevant equitable considerations.
The relative benefits received by the Company on the one hand and the Initial
Purchasers on the other with respect to such offering shall be deemed to be in
the same proportion as the total net proceeds from the offering of the
Debentures purchased under this Agreement (before deducting expenses) received
by the Company on the one hand, and the total discounts and commissions received
by the Initial Purchasers with respect to the Debentures purchased under this
Agreement, on the other hand, bear to the total gross proceeds from the offering
of the Debentures under this Agreement, in each case as set forth in the table
on the cover page of the Offering Memorandum. The relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Initial Purchasers, the intent of
the parties and their relative knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the Initial
Purchasers agree that it would not be just and equitable if the amount of
contributions pursuant to this Section 7(d) were to be determined by PRO RATA
allocation (even if the Initial Purchasers were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 7(d) shall be
deemed to include, for purposes of this Section 7(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7(d), no Initial Purchaser shall be required to
contribute any amount in excess of the amount by which the total price at which
the Debentures resold by it in the initial placement of such Debentures were
offered to investors exceeds the amount of any damages which such Initial
Purchaser has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Initial Purchasers'
obligations to contribute as provided in this Section 7(d) are several in
proportion to their respective purchase obligations and not joint.
(e) The Initial Purchasers severally confirm that the statements
with respect to
<PAGE>
the offering of the Debentures set forth on the cover page of the Offering
Memorandum and in the fifth, seventh, ninth, tenth, eleventh, twelfth and
fourteenth paragraphs under the caption "Plan of Distribution" in the Offering
Memorandum are correct and constitute the only information furnished in writing
to the Company by or on behalf of the Initial Purchasers specifically for
inclusion in the Offering Memorandum.
8 . DEFAULTING INITIAL PURCHASERS.
If, on any Delivery Date, any Initial Purchaser defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Initial Purchasers shall be obligated to purchase the aggregate
principal amount of Debentures which the defaulting Initial Purchaser agreed but
failed to purchase on such Delivery Date in the respective proportions which the
total aggregate principal amount of Debentures set opposite the name of each
remaining non-defaulting Initial Purchaser in Schedule 1 hereto bears to the
total aggregate principal amount of Debentures set opposite the names of all the
remaining non-defaulting Initial Purchasers in Schedule 1 hereto; PROVIDED,
HOWEVER, that the remaining non-defaulting Initial Purchasers shall not be
obligated to purchase any Debentures on such Delivery Date if the total
aggregate principal amount of Debentures which the defaulting Initial Purchasers
agreed but failed to purchase on such date exceeds 9.09% of the total aggregate
principal amount at maturity of Debentures to be purchased on such Delivery
Date, and any remaining non-defaulting Initial Purchaser shall not be obligated
to purchase more than 110% of the aggregate principal amount at maturity of
Debentures which it agreed to purchase on such Delivery Date pursuant to the
terms of Section 2. If the foregoing maximums are exceeded, the remaining
non-defaulting Initial Purchasers, or those other purchasers satisfactory to the
Initial Purchasers who so agree, shall have the right, but shall not be
obligated, to purchase on such Delivery Date, in such proportion as may be
agreed upon among them, the total aggregate principal amount of Debentures to be
purchased on such Delivery Date. If the remaining Initial Purchasers or other
purchasers satisfactory to the Initial Purchasers do not elect to purchase on
such Delivery Date the aggregate principal amount of Debentures which the
defaulting Initial Purchasers agreed but failed to purchase, this Agreement (or
with respect to the Optional Delivery Date, the obligation of the Initial
Purchasers to purchase the Optional Debentures) shall terminate without
liability on the part of any non-defaulting Initial Purchasers and the Company,
except that the Company will continue to be liable for the payment of expenses
to the extent set forth in Sections 4 and 10. As used in this Agreement, the
term "Initial Purchaser" includes, for all purposes of this Agreement unless the
context requires otherwise, any party not listed in Schedule 1 hereto who,
pursuant to this Section 8, purchases Debentures which a defaulting Initial
Purchaser agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Initial Purchaser
of any liability it may have to the Company for damages caused by its default.
If other purchasers are obligated or agree to purchase the Debentures of a
defaulting or withdrawing Initial Purchaser, either the remaining non-defaulting
Initial Purchasers or the Company may postpone the
<PAGE>
Delivery Date for up to seven full business days in order to effect any changes
in the Offering Memorandum or in any other document or arrangement that, in the
opinion of counsel to the Company or counsel to the Initial Purchasers, may be
necessary.
9 . TERMINATION. The obligations of the Initial Purchasers
hereunder may be terminated by the Initial Purchasers by notice given to and
received by the Company prior to delivery of and payment for the Debentures if,
prior to that time, any of the events described in Sections 5(k) and (l) shall
have occurred or if the Initial Purchasers shall decline to purchase the
Debentures for any reason permitted under this Agreement.
10 . REIMBURSEMENT OF INITIAL PURCHASERS' EXPENSES. If (a) the
Company shall fail to tender the Debentures for delivery to the Initial
Purchasers for any reason permitted under this Agreement or (b) the Initial
Purchasers shall decline to purchase the Debentures for any reason permitted
under this Agreement (including the termination of this Agreement pursuant to
Section 9), the Company shall reimburse the Initial Purchasers for the fees and
expenses of their counsel and for such other out-of-pocket expenses as shall
have been incurred by them in connection with this Agreement and the proposed
purchase of the Debentures, and upon demand the Company shall pay the full
amount thereof to the Initial Purchasers. If this Agreement is terminated
pursuant to Section 8 by reason of the default of one or more Initial
Purchasers, the Company shall not be obligated to reimburse any defaulting
Initial Purchaser on account of those expenses.
11 . NOTICES, ETC. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Initial Purchasers, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 1-212-528-8822); and
(b) if to the Company, shall be delivered or sent by mail, telex
or facsimile transmission to Inhale Therapeutic Systems, Inc., 150
Industrial Road, San Carlos, California 94070, Attention: Stephen L.
Hurst, Esq. (Fax: (650) 631-3150).
PROVIDED, HOWEVER, that any notice to an Initial Purchaser pursuant to Section
7(c) shall be delivered or sent by mail, telex or facsimile transmission to each
such Initial Purchaser, which address will be supplied to any other party hereto
by Lehman Brothers Inc. upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Initial Purchasers by Lehman Brothers Inc.
(B) . PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of and be binding upon the Initial Purchasers, the
Company and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
the representations, warranties, indemnities and agreements of the
<PAGE>
Company contained in this Agreement shall also be deemed to be for the benefit
of the officers and employees of each Initial Purchaser and the person or
persons, if any, who control each Initial Purchaser within the meaning of
Section 15 of the Securities Act and any indemnity agreement of the Initial
Purchasers contained in Section 7(b) of this Agreement shall be deemed to be for
the benefit of directors, officers and employees of the Company, and any person
controlling the Company within the meaning of Section 15 of the Securities Act.
Nothing contained in this Agreement is intended or shall be construed to give
any person, other than the persons referred to in this Section 12, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision contained herein.
13 . SURVIVAL. The respective indemnities, representations,
warranties and agreements of the Company and the Initial Purchasers contained in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Debentures and
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of any
of them or any person controlling any of them.
14 . DEFINITION OF THE TERMS "BUSINESS DAY" AND "SUBSIDIARY". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the rules and regulations promulgated under the
Securities Act.
15 . GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
16 . COUNTERPARTS. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
17 . HEADINGS. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
If the foregoing correctly sets forth the agreement between the
Company and the Initial Purchasers, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
Inhale Therapeutic Systems, Inc.
By /s/ Robert Chess
-------------------------------
NAME:
TITLE:
Accepted and agreed by:
Lehman Brothers Inc.
Deutsche Bank Securities Inc.
U.S. Bancorp Piper Jaffray
By: Lehman Brothers Inc.
By /s/ Edward Breck
------------------------------
AUTHORIZED REPRESENTATIVE
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Principal Amount
Initial Purchasers of Firm Debentures
- -------------------
<S> <C>
Lehman Brothers Inc. $ 65,000,000
Deutsche Bank Securities Inc. 17,500,000
U.S. Bancorp Piper Jaffray Inc. 17,500,000
--------------------
Total $ 100,000,000
--------------------
--------------------
</TABLE>
<PAGE>
RESALE REGISTRATION RIGHTS AGREEMENT
between
INHALE THERAPEUTIC SYSTEMS, INC.
and
LEHMAN BROTHERS INC.
DEUTSCHE BANK SECURITIES INC.
and
U.S. BANCORP PIPER JAFFRAY INC.
DATED AS OF OCTOBER 13, 1999
<PAGE>
2
RESALE REGISTRATION RIGHTS AGREEMENT, dated as of October 13,
1999, between Inhale Therapeutic Systems, Inc., a Delaware corporation (together
with any successor entity, herein referred to as the "Issuer"), and Lehman
Brothers Inc., Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray Inc.
(collectively, the "Initial Purchasers").
Pursuant to the Purchase Agreement, dated October 6, 1999,
between the Issuer and the Initial Purchasers (the "Purchase Agreement"), the
Initial Purchasers have agreed to purchase from the Issuer up to $100,000,000
($109,000,000 if the Initial Purchasers exercise the over-allotment option in
full) in aggregate principal amount of 6 3/4% Convertible Subordinated
Debentures due 2006 (the "Debentures"). The Debentures will be convertible into
fully paid, nonassessable common stock, par value $.0001 per share, of the
Issuer (the "Common Stock") on the terms, and subject to the conditions, set
forth in the Indenture (as defined herein). To induce the Initial Purchasers to
purchase the Debentures, the Issuer has agreed to provide the registration
rights set forth in this Agreement pursuant to Section 3(j) of the Purchase
Agreement.
The parties hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following
capitalized terms shall have the following meanings:
ADVICE: As defined in Section 4(c)(ii) hereof.
AGREEMENT: This Resale Registration Rights Agreement.
BLUE SKY APPLICATION: As defined in Section 6(a) hereof.
BROKER-DEALER: Any broker or dealer registered under the
Exchange Act.
BUSINESS DAY: A day other than a Saturday or Sunday or any
federal holiday in the United States.
CLOSING DATE: The date of this Agreement.
COMMISSION: Securities and Exchange Commission.
COMMON STOCK: As defined in the preamble hereto.
DAMAGES PAYMENT DATE: Each Interest Payment Date. For
purposes of this Agreement, if no Debentures are outstanding, "Damages
Payment Date" shall mean each
<PAGE>
3
April 13 and October 13.
DEBENTURES: As defined in the preamble hereto.
EFFECTIVENESS PERIOD: As defined in Section 2(a)(iii) hereof.
EFFECTIVENESS TARGET DATE: As defined in Section 2(a)(ii) hereof.
EXCHANGE ACT: Securities Exchange Act of 1934, as amended.
HOLDER: A Person who owns, beneficially or otherwise,
Transfer Restricted Securities.
INDEMNIFIED HOLDER: As defined in Section 6(a) hereof.
INDENTURE: The Indenture, dated as of October 13, 1999, between
the Issuer and Chase Manhattan Bank and Trust Company, National
Association, as trustee (the "Trustee"), pursuant to which the
Debentures are to be issued, as such Indenture is amended, modified or
supplemented from time to time in accordance with the terms thereof.
INITIAL PURCHASERS: As defined in the preamble hereto.
INTEREST PAYMENT DATE: As defined in the Indenture.
ISSUER: As defined in the preamble hereto.
LIQUIDATED DAMAGES: As defined in Section 3(a) hereof.
MAJORITY OF HOLDERS: Holders holding over 50% of the aggregate
principal amount of Debentures outstanding; PROVIDED that, for purpose
of this definition, a holder of shares of Common Stock which constitute
Transfer Restricted Securities and issued upon conversion of the
Debentures shall be deemed to hold an aggregate principal amount of
Debentures (in addition to the principal amount of Debentures held by
such holder) equal to the product of (x) the number of such shares of
Common Stock held by such holder and (y) the prevailing conversion
price, such prevailing conversion price as determined in accordance with
Section 12 of the Indenture.
NASD: National Association of Securities Dealers, Inc.
PERSON: An individual, partnership, corporation,
unincorporated organization,
<PAGE>
4
trust, joint venture or a government or agency or political subdivision
thereof.
PROSPECTUS: The prospectus included in a Shelf Registration
Statement, as amended or supplemented by any prospectus supplement and
by all other amendments thereto, including post-effective amendments,
and all material incorporated by reference into such Prospectus.
QUESTIONNAIRE DEADLINE: As defined in Section 2(b) hereof.
RECORD HOLDER: With respect to any Damages Payment Date, each Person who
is a Holder on the record date with respect to the Interest Payment Date on
which such Damages Payment Date shall occur. In the case of a Holder of shares
of Common Stock issued upon conversion of the Debentures, "Record Holder" shall
mean each Person who is a Holder of shares of Common Stock which constitute
Transfer Restricted Securities on the March 31 or September 30 immediately
preceding the Damages Payment Date.
REGISTRATION DEFAULT: As defined in Section 3(a) hereof.
SALE NOTICE: As defined in Section 4(e) hereof.
SECURITIES ACT: Securities Act of 1933, as amended.
SHELF FILING DEADLINE: As defined in Section 2(a)(i) hereof.
SHELF REGISTRATION STATEMENT: As defined in Section 2(a)(i)
hereof.
SUSPENSION PERIOD. As defined in Section 4(b)(i) hereof.
TIA: Trust Indenture Act of 1939, as in effect on the date the
Indenture is qualified under the TIA.
TRANSFER RESTRICTED SECURITIES: Each Debenture and each share
of Common Stock issued upon conversion of Debentures until the earlier
of:
(i) the date on which such Debenture or such share of
Common Stock issued upon conversion has been effectively
registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement;
(ii) the date on which such Debenture or such share
of Common Stock issued upon conversion is transferred in
compliance with Rule 144 under the Securities Act or may be
sold or transferred pursuant to Rule 144 under the Securities
Act (or any other similar provision then in force); or
<PAGE>
5
(iii) the date on which such Debenture or such share
of Common Stock issued upon conversion ceases to be outstanding
(whether as a result of redemption, repurchase and
cancellation, conversion or otherwise).
UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A
registration in which securities of the Issuer are sold to an
underwriter for reoffering to the public.
2. SHELF REGISTRATION.
(a) The Issuer shall:
(i) not later than 90 days after the date hereof (the
"Shelf Filing Deadline"), cause to be filed a registration
statement pursuant to Rule 415 under the Securities Act (the
"Shelf Registration Statement"), which Shelf Registration
Statement shall provide for resales of all Transfer Restricted
Securities held by Holders that have provided the information
required pursuant to the terms of Section 2(b) hereof;
(ii) use its best efforts to cause the Shelf
Registration Statement to be declared effective by the
Commission not later than 180 days after the date hereof (the
"Effectiveness Target Date"); and
(iii) use its best efforts to keep the Shelf
Registration Statement continuously effective, supplemented and
amended as required by the provisions of Section 4(b) hereof to
the extent necessary to ensure that (A) it is available for
resales by the Holders of Transfer Restricted Securities
entitled to the benefit of this Agreement and (B) conforms with
the requirements of this Agreement and the Securities Act and
the rules and regulations of the Commission promulgated
thereunder as announced from time to time for a period (the
"Effectiveness Period") of:
(1) two years following the last date of
original issuance of Debentures; or
(2) such shorter period that will terminate
when (x) all of the Holders of Transfer Restricted
Securities are able to sell all Transfer Restricted
Securities immediately without restriction pursuant
to Rule 144(k) under the Securities Act or any
successor rule thereto, (y) when all Transfer
Restricted Securities have ceased to be outstanding
(whether as
<PAGE>
6
a result of redemption, repurchase and cancellation,
conversion or otherwise) or (z) all Transfer
Restricted Securities registered under the Shelf
Registration Statement have been sold.
(b) No Holder of Transfer Restricted Securities may include any
of its Transfer Restricted Securities in the Shelf Registration Statement
pursuant to this Agreement unless such Holder furnishes to the Issuer in
writing, prior to or on the 20th Business Days after receipt of a request
therefor (the "Questionnaire Deadline"), such information as the Issuer may
reasonably request for use in connection with the Shelf Registration Statement
or Prospectus or preliminary Prospectus included therein and in any application
to be filed with or under state securities laws. In connection with all such
requests for information from Holders of Transfer Restricted Securities, the
Issuer shall notify such Holders of the requirements set forth in the preceding
sentence. No Holder of Transfer Restricted Securities shall be entitled to
Liquidated Damages pursuant to Section 3 hereof unless such Holder shall have
provided all such reasonably requested information prior to or on the
Questionnaire Deadline. Each Holder as to which the Shelf Registration Statement
is being effected agrees to furnish promptly to the Issuer all information
required to be disclosed in order to make information previously furnished to
the Issuer by such Holder not materially misleading.
3. LIQUIDATED DAMAGES.
(a) If:
(i) the Shelf Registration Statement is not
filed with the Commission prior to or on the Shelf Filing
Deadline;
(ii) the Shelf Registration Statement has not been
declared effective by the Commission prior to or on the
Effective Target Date;
(iii) subject to the provisions of Section 4(b)(i)
hereof, the Shelf Registration Statement is filed and declared
effective but, during the Effectiveness Period, shall
thereafter cease to be effective or fail to be usable for its
intended purpose without being succeeded within five Business
Days by a post-effective amendment to the Shelf Registration
Statement or a report filed with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act that
cures such failure and, in the case of a post-effective
amendment, is itself immediately declared effective; or
(iv) prior to or on the 45th or 60th day, as the case
may be, of any Suspension Period, such suspension has not been
terminated,
<PAGE>
7
(each such event referred to in foregoing clauses (i) through (iv), a
"Registration Default"), the Issuer hereby agrees to pay liquidated damages
("Liquidated Damages") with respect to the Transfer Restricted Securities from
and including the day following the Registration Default to but excluding the
day on which the Registration Default has been cured:
(A) in respect of the Debentures, to each holder of
Debentures, (x) with respect to the first 90-day period during
which a Registration Default shall have occurred and be
continuing, in an amount per year equal to an additional 0.25%
of the principal amount of the Debentures, and (y) with respect
to the period commencing on the 91st day following the day the
Registration Default shall have occurred and be continuing, in
an amount per year equal to an additional 0.50% of the
principal amount of the Debentures; PROVIDED that in no event
shall Liquidated Damages accrue at a rate per year exceeding
0.50% of the principal amount of the Debentures; and
(B) in respect of any shares of Common Stock, to each
holder of shares of Common Stock issued upon conversion of
Debentures, (x) with respect to the first 90-day period in
which a Registration Default shall have occurred and be
continuing, in an amount per year equal to 0.25% of the
principal amount of the converted Debentures, and (y) with
respect to the period commencing the 91st day following the day
the Registration Default shall have occurred and be continuing,
in an amount per year equal to 0.50% of the principal amount of
the converted Debentures; PROVIDED that in no event shall
Liquidated Damages accrue at a rate per year exceeding 0.50% of
the principal amount of the converted Debentures.
(b) All accrued Liquidated Damages shall be paid in arrears to
Record Holders by the Issuer on each Damages Payment Date by wire transfer of
immediately available funds or by federal funds check. Following the cure of all
Registration Defaults relating to any particular Debenture or share of Common
Stock, the accrual of Liquidated Damages with respect to such Debenture or share
of Common Stock will cease.
All obligations of the Issuer set forth in this Section 3 that
are outstanding with respect to any Transfer Restricted Security at the time
such security ceases to be a Transfer Restricted Security shall survive until
such time as all such obligations with respect to such Transfer Restricted
Security shall have been satisfied in full.
The Liquidated Damages set forth above shall be the exclusive
monetary remedy available to the Holders of Transfer Restricted Securities for
such Registration Default.
4. REGISTRATION PROCEDURES.
<PAGE>
8
(a) In connection with the Shelf Registration Statement, the
Issuer shall comply with all the provisions of Section 4(b) hereof and shall use
its best efforts to effect such registration to permit the sale of the Transfer
Restricted Securities being sold in accordance with the intended method or
methods of distribution thereof, and pursuant thereto, shall as expeditiously as
possible prepare and file with the Commission a Shelf Registration Statement
relating to the registration on any appropriate form under the Securities Act.
(b) In connection with the Shelf Registration Statement and any
Prospectus required by this Agreement to permit the sale or resale of Transfer
Restricted Securities, the Issuer shall:
(i) Subject to any notice by the Issuer in accordance
with this Section 4(b) of the existence of any fact or event of
the kind described in Section 4(b)(iii)(D), use its best
efforts to keep the Shelf Registration Statement continuously
effective during the Effectiveness Period; upon the occurrence
of any event that would cause any the Shelf Registration
Statement or the Prospectus contained therein (A) to contain a
material misstatement or omission or (B) not be effective and
usable for resale of Transfer Restricted Securities during the
Effectiveness Period, the Issuer shall file promptly an
appropriate amendment to the Shelf Registration Statement or a
report filed with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, in the case of clause
(A), correcting any such misstatement or omission, and, in the
case of either clause (A) or (B), use its best efforts to cause
such amendment to be declared effective and the Shelf
Registration Statement and the related Prospectus to become
usable for their intended purposes as soon as practicable
thereafter. Notwithstanding the foregoing, the Issuer may
suspend the effectiveness of the Shelf Registration Statement
by written notice to the Holders for a period not to exceed an
aggregate of 45 days in any 90-day period (each such period, a
"Suspension Period") if:
(x) an event occurs and is continuing as a
result of which the Shelf Registration Statement
would, in the Issuer's reasonable judgment, contain
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; and
(y) the Issuer reasonably determines that
the disclosure of such event at such time would have
a material adverse effect on the business of the
Issuer (and its subsidiaries, if any, taken as a
whole);
PROVIDED that in the event the disclosure relates to a
previously undisclosed
<PAGE>
9
proposed or pending material business transaction, the
disclosure of which would impede the Issuer's ability to
consummate such transaction, the Issuer may extend a
Suspension Period from 45 days to 60 days; PROVIDED, HOWEVER,
that Suspension Periods shall not exceed an aggregate of 90
days in any 360-day period.
(ii) Prepare and file with the Commission such
amendments and post-effective amendments to the Shelf
Registration Statement as may be necessary to keep the Shelf
Registration Statement effective during the Effectiveness
Period; cause the Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 under the Securities Act, and to comply
fully with the applicable provisions of Rules 424 and 430A
under the Securities Act in a timely manner; and comply with
the provisions of the Securities Act with respect to the
disposition of all securities covered by the Shelf Registration
Statement during the applicable period in accordance with the
intended method or methods of distribution by the sellers
thereof set forth in the Shelf Registration Statement or
supplement to the Prospectus.
(iii) Advise the underwriter(s), if any, and selling
Holders promptly (but in any event within five Business Days)
and, if requested by such Persons, to confirm such advice in
writing:
(A) when the Prospectus or any Prospectus
supplement or post-effective amendment has been
filed, and, with respect to the Shelf Registration
Statement or any post-effective amendment thereto,
when the same has become effective,
(B) of any request by the Commission for
amendments to the Shelf Registration Statement or
amendments or supplements to the Prospectus or for
additional information relating thereto,
(C) of the issuance by the Commission of any
stop order suspending the effectiveness of the Shelf
Registration Statement under the Securities Act or of
the suspension by any state securities commission of
the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction,
or the initiation of any proceeding for any of the
preceding purposes, or
(D) of the existence of any fact or the
happening of any event, during the Effectiveness
Period, that makes any statement of a material fact
made in the Shelf Registration Statement, the
Prospectus, any amendment or supplement thereto, or
any document incorporated by
<PAGE>
10
reference therein untrue, or that requires the
making of any additions to or changes in the Shelf
Registration Statement or the Prospectus in order to
make the statements therein not misleading.
If at any time the Commission shall issue any stop order
suspending the effectiveness of the Shelf Registration
Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the
qualification or exemption from qualification of the Transfer
Restricted Securities under state securities or Blue Sky laws,
the Issuer shall use its reasonable best efforts to obtain the
withdrawal or lifting of such order at the earliest possible
time.
(iv) Furnish to each of the selling Holders and each
of the underwriter(s), if any, before filing with the
Commission, a copy of the Shelf Registration Statement and
copies of any Prospectus included therein or any amendments or
supplements to any the Shelf Registration Statement or
Prospectus (other than documents incorporated by reference
after the initial filing of the Shelf Registration Statement),
which documents will be subject to the review of such holders
and underwriter(s), if any, for a period of at least ten
Business Days, and the Issuer will not file any the Shelf
Registration Statement or Prospectus or any amendment or
supplement to any the Shelf Registration Statement or
Prospectus (other than documents incorporated by reference) to
which a selling Holder of Transfer Restricted Securities
covered by the Shelf Registration Statement or the
underwriter(s), if any, shall reasonably object within five
Business Days after the receipt thereof. A selling Holder or
underwriter, if any, shall be deemed to have reasonably
objected to such filing if the Shelf Registration Statement,
amendment, Prospectus or supplement, as applicable, as proposed
to be filed, contains a material misstatement or omission.
(v) Make available at reasonable times for inspection
by one or more representatives of the selling Holders,
designated in writing by a Majority of Holders whose Transfer
Restricted Securities are included in the Shelf Registration
Statement, any underwriter participating in any distribution
pursuant to the Shelf Registration Statement, and any attorney
or accountant retained by such selling Holders or any of the
underwriter(s), all financial and other records, pertinent
corporate documents and properties of the Issuer as shall be
reasonably necessary to enable them to exercise any applicable
due diligence responsibilities, and cause the Issuer's
officers, directors, managers and employees to supply all
information reasonably requested by any such representative or
representatives of the selling Holders, underwriter, attorney
or accountant in connection with the Shelf Registration
Statement after the filing thereof and before its
effectiveness; PROVIDED, HOWEVER, that any information
designated by the Company as
<PAGE>
11
confidential at the time of delivery of such information shall
be kept confidential by the recipient thereof.
(vi) If requested by any selling Holders or the
underwriter(s), if any, promptly incorporate in the Shelf
Registration Statement or Prospectus, pursuant to a supplement
or post-effective amendment if necessary, such information as
such selling Holders and underwriter(s), if any, may reasonably
request to have included therein, including, without
limitation: (1) information relating to the "Plan of
Distribution" of the Transfer Restricted Securities, (2)
information with respect to the principal amount of Debentures
or number of shares of Common Stock being sold to such
underwriter(s), (3) the purchase price being paid therefor and
(4) any other terms of the offering of the Transfer Restricted
Securities to be sold in such offering; and make all required
filings of such Prospectus supplement or post-effective
amendment as soon as reasonably practicable after the Issuer is
notified of the matters to be incorporated in such Prospectus
supplement or post-effective amendment.
(vii) Furnish to each selling Holder and each of the
underwriter(s), if any, without charge, at least one copy of
the Shelf Registration Statement, as first filed with the
Commission, and of each amendment thereto (and any documents
incorporated by reference therein or exhibits thereto (or
exhibits incorporated in such exhibits by reference) as such
Person may request).
(viii) Deliver to each selling Holder and each of the
underwriter(s), if any, without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto as such Persons reasonably may
request; subject to any notice by the Issuer in accordance with
this Section 4(b) of the existence of any fact or event of the
kind described in Section 4(b)(iii) (D), the Issuer hereby
consents to the use of the Prospectus and any amendment or
supplement thereto by each of the selling Holders and each of
the underwriter(s), if any, in connection with the offering and
the sale of the Transfer Restricted Securities covered by the
Prospectus or any amendment or supplement thereto.
(ix) If an underwriting agreement is entered into and
the registration is an Underwritten Registration, the Issuer
shall:
(A) upon request, furnish to each selling
Holder and each underwriter, if any, in such
substance and scope as they may reasonably request
and as are customarily made by issuers to
underwriters in primary underwritten offerings, upon
the date of closing of any sale of Transfer
Restricted Securities in an Underwritten
Registration:
<PAGE>
12
(1) a certificate, dated the date of
such closing, signed by the Chief Financial
Officer of the Issuer confirming, as of the
date thereof, the matters set forth in
Section 5(g) of the Purchase Agreement and
such other matters as such parties may
reasonably request;
(2) opinions, each dated the date of
such closing, of counsel to the Issuer
covering such of the matters set forth in
Sections 5(c) and 5(d) of the Purchase
Agreement as are customarily covered in
legal opinions to underwriters in connection
with primary underwritten offerings of
securities; and
(3) customary comfort letters, dated
the date of such closing, from the Issuer's
independent accountants (and from any other
accountants whose report is contained or
incorporated by reference in the Shelf
Registration Statement), in the customary
form and covering matters of the type
customarily covered in comfort letters to
underwriters in connection with primary
underwritten offerings of securities;
(B) set forth in full in the underwriting
agreement, if any, indemnification provisions and
procedures which provide rights no less protective
than those set forth in Section 6 hereof with respect
to all parties to be indemnified; and
(C) deliver such other documents and
certificates as may be reasonably requested by such
parties to evidence compliance with clause (A) above
and with any customary conditions contained in the
underwriting agreement or other agreement entered
into by the selling Holders pursuant to this clause
(ix).
(x) Before any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the
underwriter(s), if any, and their respective counsel in
connection with the registration and qualification of the
Transfer Restricted Securities under the securities or Blue Sky
laws of such jurisdictions as the selling Holders or
underwriter(s), if any, may reasonably request and do any and
all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Transfer Restricted
Securities covered by the Shelf Registration Statement;
PROVIDED, HOWEVER, that the Issuer shall not be required (A) to
register or qualify as a foreign corporation or a dealer of
securities where it is not now so
<PAGE>
13
qualified or to take any action that would subject it to the
service of process in any jurisdiction where it is not now so
subject or (B) to subject themselves to taxation in any such
jurisdiction if they are not now so subject.
(xi) Cooperate with the selling Holders and the
underwriter(s), if any, to facilitate the timely preparation
and delivery of certificates representing Transfer Restricted
Securities to be sold and not bearing any restrictive legends
(unless required by applicable securities laws); and enable
such Transfer Restricted Securities to be in such denominations
and registered in such names as the Holders or the
underwriter(s), if any, may request at least two Business Days
before any sale of Transfer Restricted Securities made by such
underwriter(s).
(xii) Use its best efforts to cause the Transfer
Restricted Securities covered by the Shelf Registration
Statement to be registered with or approved by such other U.S.
governmental agencies or authorities as may be necessary to
enable the seller or sellers thereof or the underwriter(s), if
any, to consummate the disposition of such Transfer Restricted
Securities.
(xiii) Subject to Section 4(b)(i) hereof, if any fact
or event contemplated by Section 4(b)(iii)(D) hereof shall
exist or have occurred, use its reasonable best efforts prepare
a supplement or post-effective amendment to the Shelf
Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of
Transfer Restricted Securities, the Prospectus will not contain
an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading.
(xiv) Provide CUSIP numbers for all Transfer
Restricted Securities not later than the effective date of the
Shelf Registration Statement and provide the Trustee under the
Indenture with certificates for the Debentures that are in a
form eligible for deposit with The Depository Trust Company.
(xv) Cooperate and assist in any filings required to
be made with the NASD and in the performance of any due
diligence investigation by any underwriter that is required to
be retained in accordance with the rules and regulations of the
NASD.
(xvi) Otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission and all
reporting requirements under the rules and regulations of the
Exchange Act.
<PAGE>
14
(xvii) Cause the Indenture to be qualified under the
TIA not later than the effective date of the Shelf Registration
Statement required by this Agreement, and, in connection
therewith, cooperate with the trustee and the holders of
Debentures to effect such changes to the Indenture as may be
required for such Indenture to be so qualified in accordance
with the terms of the TIA; and execute and use its best efforts
to cause the trustee thereunder to execute all documents that
may be required to effect such changes and all other forms and
documents required to be filed with the Commission to enable
such Indenture to be so qualified in a timely manner.
(xviii) Cause all Transfer Restricted Securities
covered by the Shelf Registration Statement to be listed or
quoted, as the case may be, on each securities exchange or
automated quotation system on which similar securities issued
by the Issuer are then listed or quoted.
(xix) Provide promptly to each Holder upon written
request each document filed with the Commission pursuant to the
requirements of Section 13 and Section 15 of the Exchange Act
after the effective date of the Shelf Registration Statement.
(xx) If requested by the underwriters, make
appropriate officers of the Issuer available to the
underwriters for meetings with prospective purchasers of the
Transfer Restricted Securities and prepare and present to
potential investors customary "road show" material in a manner
consistent with other new issuances of other securities similar
to the Transfer Restricted Securities.
(c) Each Holder agrees by acquisition of a Transfer Restricted
Security that, upon receipt of any notice from the Issuer of the existence of
any fact of the kind described in Section 4(b)(iii)(D) hereof, such Holder will,
and will use its reasonable best efforts to cause any underwriter(s) in an
Underwritten Offering to, forthwith discontinue disposition of Transfer
Restricted Securities pursuant to the Shelf Registration Statement until:
(i) such Holder has received copies of the
supplemented or amended Prospectus contemplated by Section
4(b)(xiv) hereof; or
(ii) such Holder is advised in writing (the "Advice")
by the Issuer that the use of the Prospectus may be resumed,
and has received copies of any additional or supplemental
filings that are incorporated by reference in the Prospectus.
If so directed by the Issuer, each Holder will deliver to the Issuer (at the
Issuer's expense) all
<PAGE>
15
copies, other than permanent file copies then in such Holder's possession, of
the Prospectus covering such Transfer Restricted Securities that was current at
the time of receipt of such notice of suspension.
(d) Each Holder who intends to be named as a selling Holder in
the Shelf Registration Statement shall furnish to the Issuer in writing, within
20 Business Days after receipt of a request therefor as set forth in a
questionnaire, such information regarding such Holder and the proposed
distribution by such Holder of its Transfer Restricted Securities as the Issuer
may reasonably request for use in connection with the Shelf Registration
Statement or Prospectus or preliminary Prospectus included therein. (The form of
the questionnaire is attached hereto as Exhibit A.) Holders that do not complete
the questionnaire and deliver it to the Issuer shall not be named as selling
securityholders in the Prospectus or preliminary Prospectus included in the
Shelf Registration Statement and therefore shall not be permitted to sell any
Transfer Restricted Securities pursuant to the Shelf Registration Statement.
Each Holder who intends to be named as a selling Holder in the Shelf
Registration Statement shall promptly furnish to the Issuer in writing such
other information as the Issuer may from time to time reasonably request in
writing.
(e) Upon the effectiveness of the Shelf Registration Statement,
each Holder shall notify the Issuer at least three Business Days prior to any
intended distribution of Transfer Restricted Securities pursuant to the Shelf
Registration Statement (a "Sale Notice"), which notice shall be effective for
five Business Days. Each Holder of this Security, by accepting the same, agrees
to hold any communication by the Company in response to a Sale Notice in
confidence.
5. REGISTRATION EXPENSES.
(a) All expenses incident to the Issuer's performance of or
compliance with this Agreement shall be borne by the Issuer regardless of
whether a Shelf Registration Statement becomes effective, including, without
limitation:
(i) all registration and filing fees and expenses
(including filings made by any Initial Purchasers or Holders
with the NASD);
(ii) all fees and expenses of compliance with federal
securities and state Blue Sky or securities laws;
(iii) all expenses of printing (including printing of
Prospectuses and certificates for the Common Stock to be issued
upon conversion of the Debentures), messenger and delivery
services and telephone;
(iv) all fees and disbursements of counsel to the
Issuer and, subject to
<PAGE>
16
Section 5(b) below, the Holders of Transfer Restricted
Securities;
(v) all application and filing fees in connection
with listing (or authorizing for quotation) the Common Stock on
a national securities exchange or automated quotation system
pursuant to the requirements hereof; and
(vi) all fees and disbursements of independent
certified public accountants of the Issuer (including the
expenses of any special audit and comfort letters required by
or incident to such performance).
The Issuer shall bear its internal expenses (including, without
limitation, all salaries and expenses of their officers and employees performing
legal, accounting or other duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Issuer.
(b) In connection with the Shelf Registration Statement
required by this Agreement, the Issuer shall reimburse the Initial Purchasers
and the Holders of Transfer Restricted Securities being registered pursuant to
the Shelf Registration Statement, as applicable, for the reasonable fees and
disbursements of not more than one counsel, which shall be Simpson Thacher &
Bartlett, or such other counsel as may be chosen by a Majority of Holders for
whose benefit the Shelf Registration Statement is being prepared.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Issuer shall indemnify and hold harmless each Holder,
such Holder's officers and employees and each person, if any, who controls such
Holder within the meaning of the Securities Act (each, an "Indemnified Holder"),
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to resales of the Transfer Restricted
Securities), to which such Indemnified Holder may become subject, insofar as any
such loss, claim, damage, liability or action arises out of, or is based upon:
(i) any untrue statement or alleged untrue statement of a
material fact contained in (A) the Shelf Registration Statement or
Prospectus or any amendment or supplement thereto or (B) any blue sky
application or other document or any amendment or supplement thereto
prepared or executed by the Issuer (or based upon written information
furnished by or on behalf of the Issuer expressly for use in such blue
sky application or other document or amendment on supplement) filed in
any jurisdiction specifically for the purpose of qualifying any or all
of the Transfer Restricted Securities under the securities law of any
state or other jurisdiction (such application or document being
hereinafter called a "Blue Sky Application"); or
<PAGE>
17
(ii) the omission or alleged omission to state therein any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading,
and shall reimburse each Indemnified Holder promptly upon demand for any legal
or other expenses reasonably incurred by such Indemnified Holder in connection
with investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action as such expenses are incurred; PROVIDED,
HOWEVER, that the Issuer shall not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of, or is based
upon, any untrue statement or alleged untrue statement or omission or alleged
omission made in the Shelf Registration Statement or Prospectus or amendment or
supplement thereto or Blue Sky Application in reliance upon and in conformity
with written information furnished to the Issuer by or on behalf of any Holder
(or its related Indemnified Holder) specifically for use therein. The foregoing
indemnity agreement is in addition to any liability which the Issuer may
otherwise have to any Indemnified Holder.
(b) Each Holder, severally and not jointly, shall indemnify and
hold harmless the Issuer, its officers and employees and each person, if any,
who controls the Issuer within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof, to which the Issuer or any such officer, employee or
controlling person may become subject, insofar as any such loss, claim, damage
or liability or action arises out of, or is based upon:
(i) any untrue statement or alleged untrue statement of any
material fact contained in the Shelf Registration Statement or
Prospectus or any amendment or supplement thereto or any Blue Sky
Application; or
(ii) the omission or the alleged omission to state therein any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Issuer by or on behalf of
such Holder (or its related Indemnified Holder) specifically for use therein,
and shall reimburse the Issuer and any such officer, employee or controlling
person promptly upon demand for any legal or other expenses reasonably incurred
by the Issuer or any such officer, employee or controlling person in connection
with investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any Holder may
otherwise have to the Issuer and any such
<PAGE>
18
officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify the indemnifying party in
writing of the claim or the commencement of that action; PROVIDED, HOWEVER, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 6 except to the extent it has
been materially prejudiced by such failure and, PROVIDED, FURTHER, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 6.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; PROVIDED, HOWEVER, that a
Majority of Holders shall have the right to employ a single counsel to represent
jointly a Majority of Holders and their respective officers, employees and
controlling persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by a Majority of Holders against the
Issuer under this Section 7, if a Majority of Holders shall have reasonably
concluded that there may be one or more legal defenses available to them and
their respective officers, employees and controlling persons that are different
from or additional to those available to the Issuer and its officers, employees
and controlling persons, the fees and expenses of a single separate counsel
shall be paid by the Issuer. No indemnifying party shall:
(i) without the prior written consent of the indemnified
parties (which consent shall not be unreasonably withheld) settle or
compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes
an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or
(ii) be liable for any settlement of any such action effected
without its written consent (which consent shall not be unreasonably
withheld), but if settled with its written consent or if there be a
final judgment for the plaintiff in any such action, the indemnifying
party agrees to indemnify and hold harmless any indemnified party from
and against any loss of liability by reason of such settlement or
judgment.
<PAGE>
19
(d) If the indemnification provided for in this Section 6 shall
for any reason be unavailable or insufficient to hold harmless an indemnified
party under Section 6(a) or 6(b) in respect of any loss, claim, damage or
liability (or action in respect thereof) referred to therein, each indemnifying
party shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability (or action in respect thereof):
(i) in such proportion as is appropriate to reflect the
relative benefits received by the Issuer from the offering and sale of
the Transfer Restricted Securities on the one hand and a Holder with
respect to the sale by such Holder of the Transfer Restricted Securities
on the other, or
(ii) if the allocation provided by clause (6)(d)(i) is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 6(d)(i) but
also the relative fault of the Issuer on the one hand and the Holders on
the other in connection with the statements or omissions or alleged
statements or alleged omissions that resulted in such loss, claim,
damage or liability (or action in respect thereof), as well as any other
relevant equitable considerations.
The relative benefits received by the Issuer on the one hand and a Holder on the
other with respect to such offering and such sale shall be deemed to be in the
same proportion as the total net proceeds from the offering of the Debentures
purchased under the Purchase Agreement (before deducting expenses) received by
the Issuer as set forth in the table on the cover of the Offering Memorandum,
dated October 6, 1999, on the one hand, bear to the total proceeds received by
such Holder with respect to its sale if Transfer Restricted Securities on the
other. The relative fault of the parties shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Issuer on the one hand or the Holders on the other, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Issuer and
each Holder agree that it would not be just and equitable if the amount of
contribution pursuant to this Section 6(d) were determined by PRO RATA
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid or payable by an indemnified party as a result of the loss,
claim, damage or liability, or action in respect thereof, referred to above in
this Section 6 shall be deemed to include, for purposes of this Section 7, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending or preparing to defend any such
action or claim. Notwithstanding the provisions of this Section 6, no Holder
shall be required to contribute any amount in excess of the amount by which the
total price at which the Transfer Restricted Securities purchased by it were
resold exceeds the amount of any damages which such
<PAGE>
20
Holder has otherwise been required to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Holders' obligations to contribute as provided
in this Section 6(d) are several and not joint.
7. RULE 144A. In the event the Issuer is not subject to Section
13 or 15(d) of the Exchange Act, the Issuer hereby agrees with each Holder, for
so long as any Transfer Restricted Securities remain outstanding, to make
available to any Holder or beneficial owner of Transfer Restricted Securities in
connection with any sale thereof and any prospective purchaser of such Transfer
Restricted Securities from such Holder or beneficial owner, the information
required by Rule 144A(d)(4) under the Securities Act in order to permit resales
of such Transfer Restricted Securities pursuant to Rule 144A.
8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder may
participate in any Underwritten Registration hereunder unless such Holder:
(i) agrees to sell such Holder's Transfer Restricted Securities
on the basis provided in any underwriting arrangements approved by the
Persons entitled hereunder to approve such arrangements and
(ii) completes and executes all reasonable questionnaires,
powers of attorney, indemnities, underwriting agreements, lock-up
letters and other documents required under the terms of such
underwriting arrangements.
9. SELECTION OF UNDERWRITERS. The Holders of Transfer
Restricted Securities covered by the Shelf Registration Statement who desire to
do so may sell such Transfer Restricted Securities in an Underwritten Offering.
In any such Underwritten Offering, the investment banker or investment bankers
and manager or managers that will administer the offering will be selected by a
Majority of Holders whose Transfer Restricted Securities are included in such
offering; PROVIDED, that such investment bankers and managers must be reasonably
satisfactory to the Issuer.
10. MISCELLANEOUS.
(a) REMEDIES. The Issuer acknowledges and agrees that any
failure by the Issuer to comply with its obligations under Section 2 hereof may
result in material irreparable injury to the Initial Purchasers or the Holders
for which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of any such
failure, the Initial Purchasers or any Holder may obtain such relief as may be
required to specifically enforce the Issuer's obligations under Section 2
hereof. The Issuer further agrees to
<PAGE>
21
waive the defense in any action for specific performance that a remedy at law
would be adequate.
(b) ADJUSTMENTS AFFECTING TRANSFER RESTRICTED SECURITIES. The
Issuer shall not, directly or indirectly, take any action with respect to the
Transfer Restricted Securities as a class that would adversely affect the
ability of the Holders of Transfer Restricted Securities to include such
Transfer Restricted Securities in a registration undertaken pursuant to this
Agreement.
(c) NO INCONSISTENT AGREEMENTS. The Issuer will not, on or
after the date of this Agreement, enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in this
Agreement or otherwise conflicts with the provisions hereof. In addition, the
Issuer shall not grant to any of its security holders (other than the holders of
Transfer Restricted Securities in such capacity) the right to include any of its
securities in the Shelf Registration Statement provided for in this Agreement
other than the Transfer Restricted Securities. Other than the Stock Purchase
Agreement, dated January 18, 1995, between the Issuer and Pfizer, Inc. and the
Stock Purchase Agreement, dated March 1, 1996, as amended, between the Issuer
and Baxter Healthcare Corporation, the Issuer has not previously entered into
any agreement (which has not expired or been terminated) granting any
registration rights with respect to its securities to any Person which rights
conflict with the provisions hereof.
(d) AMENDMENTS AND WAIVERS. This Agreement may not be amended,
modified or supplemented, and waivers or consents to or departures from the
provisions hereof may not be given, unless the Issuer has obtained the written
consent of a Majority of Holders.
(e) NOTICES. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, first-class
mail (registered or certified, return receipt requested), telex, telecopier, or
air courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the
records of the registrar under the Indenture or the transfer
agent of the Common Stock, as the case may be; and
(ii) if to the Issuer:
Inhale Therapeutic Systems, Inc.
150 Industrial Road
San Carlos, California 94070
Attention: Stephen L. Hurst, Esq.
With a copy to:
Cooley Godward LLP
<PAGE>
22
3000 Sand Hill Road
Building #3, suite 230
Menlo Park, California 94025
Attention: Marc P. Tanoury, Esq.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if telecopied; and on
the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; PROVIDED,
HOWEVER, that (i) this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of a Holder unless and to the extent such successor
or assign acquired Transfer Restricted Securities from such Holder and (ii)
nothing contained herein shall be deemed to permit any assignment, transfer or
other disposition of Transfer Restricted Securities in violation of the terms of
the Purchase Agreement or the Indenture. If any transferee of any Holder shall
acquire Transfer Restricted Securities, in any manner, whether by operation of
law or otherwise, such Transfer Restricted Securities shall be held subject to
all of the terms of this Agreement, and by taking and holding such Transfer
Restricted Securities such person shall be conclusively deemed to have agreed to
be bound by and to perform all of the terms and provisions of this Agreement. .
(g) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) SECURITIES HELD BY THE ISSUER OR THEIR AFFILIATES. Whenever
the consent or approval of Holders of a specified percentage of Transfer
Restricted Securities is required hereunder, Transfer Restricted Securities held
by the Issuer or its "affiliates" (as such term is defined in Rule 405 under the
Securities Act) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
(i) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(j) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
<PAGE>
23
(k) SEVERABILITY. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(l) ENTIRE AGREEMENT. This Agreement is intended by the parties
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Issuer with
respect to the Transfer Restricted Securities. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
<PAGE>
24
In Witness Whereof, the parties have executed this Agreement as
of the date first written above.
<PAGE>
25
Inhale Therapeutic Systems, Inc.
By /s/ Robert Chess
----------------------------------
NAME:
TITLE:
Lehman Brothers Inc.
Deutsche Bank Securities Inc.
U.S. Bancorp Piper Jaffray Inc.
By: Lehman Brothers Inc.
By /s/ Edward Breck
----------------------------------
AUTHORIZED REPRESENTATIVE
<PAGE>
26
EXHIBIT A
INHALE THERAPEUTIC SYSTEMS, INC.
FORM OF SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE
The undersigned beneficial holder of 6 3/4% Convertible Subordinated
Debentures due 2006 (the "Debentures") of Inhale Therapeutic Systems, Inc. (the
"Issuer"), or common stock, par value $.001 per share (the "Shares" and together
with the Debentures, the "Transfer Restricted Securities") of the Issuer
understands that the Issuer has filed, or intends to file, with the Securities
and Exchange Commission (the "Commission") a registration statement (the "Shelf
Registration Statement"), for the registration and resale under Rule 415 of the
Securities Act of 1933, as amended (the "Securities Act"), of the Transfer
Restricted Securities in accordance with the terms of the Registration Rights
Agreement, dated as of October 13, 1999 (the "Registration Rights Agreement")
between the Issuer and Lehman Brothers Inc., Deutsche Bank Securities Inc. and
U.S. Bancorp Piper Jaffray Inc. A copy of the Registration Rights Agreement is
available from the Issuer upon request at the address set forth below. All
capitalized terms not otherwise defined herein have the meaning ascribed thereto
in the Registration Rights Agreement.
Each beneficial owner of Transfer Restricted Securities is entitled to
the benefits of the Registration Rights Agreement. In order to sell or otherwise
dispose of any Transfer Restricted Securities pursuant to the Shelf Registration
Statement, a beneficial owner of Transfer Restricted Securities generally will
be required to be named as a selling securityholder in the related Prospectus,
deliver a Prospectus to purchasers of Transfer Restricted Securities and be
bound by those provisions of the Registration Rights Agreement applicable to
such beneficial owner (including certain indemnification provisions, as
described below). BENEFICIAL OWNERS THAT DO NOT COMPLETE THIS NOTICE AND
QUESTIONNAIRE WITHIN 20 BUSINESS DAYS OF RECEIPT HEREOF AND DELIVER IT TO THE
ISSUER AS PROVIDED BELOW WILL NOT BE NAMED AS SELLING SECURITYHOLDERS IN THE
PROSPECTUS AND THEREFORE WILL NOT BE PERMITTED TO SELL ANY TRANSFER RESTRICTED
SECURITIES PURSUANT TO THE SHELF REGISTRATION STATEMENT.
Certain legal consequences arise from being named as a selling
securityholder in the Shelf Registration Statement and the related Prospectus.
Accordingly, holders and beneficial owners of Transfer Restricted Securities are
advised to consult their own securities law counsel regarding the consequences
of being named or not being named as a selling securityholder in the Shelf
Registration Statement and the related Prospectus.
<PAGE>
NOTICE
The undersigned beneficial owner (the "Selling Securityholder") of
Transfer Restricted Securities hereby gives notice to the Issuer of its
intention to sell or otherwise dispose of Transfer Restricted Securities
beneficially owned by it and listed below in Item 3 (unless otherwise specified
under Item 3) pursuant to the Shelf Registration Statement. The undersigned, by
signing and returning this Notice and Questionnaire, understands that it will be
bound by the terms and conditions of this Notice and Questionnaire and the
Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, the undersigned has
agreed to indemnify and hold harmless the Issuer, the Issuer's directors, the
Issuer's officers who sign the Shelf Registration Statement and each person, if
any, who controls the Issuer within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against certain
losses arising in connection with statements concerning the undersigned made in
the Shelf Registration Statement or the related Prospectus in reliance upon the
information provided in this Notice and Questionnaire.
The undersigned hereby provides the following information to the Issuer
and represents and warrants that such information is accurate and complete:
QUESTIONNAIRE
1. (a) Full legal name of Selling Securityholder:
(b) Full legal name of registered holder (if not the same as (a)
above) through which Transfer Restricted Securities listed in
(3) below are held:
(c) Full legal name of DTC participant (if applicable and if not
the same as (b) above) through which Transfer Restricted
Securities listed in (3) are held:
2. Address for notices to Selling Securityholders:
Telephone:
Fax:
Contact Person:
<PAGE>
3. Beneficial ownership of Transfer Restricted Securities:
(a) Type of Transfer Restricted Securities beneficially owned, and
principal amount of Debentures or number of shares of Common
Stock, as the case may be, beneficially owned:
(b) CUSIP No(s). of such Transfer Restricted Securities beneficially
owned:
4. Beneficial ownership of the Issuer's securities owned by the Selling
Securityholder:
EXCEPT AS SET FORTH BELOW IN THIS ITEM (4), THE UNDERSIGNED IS NOT THE
BENEFICIAL OR REGISTERED OWNER OF ANY SECURITIES OF THE ISSUER OTHER
THAN THE TRANSFER RESTRICTED SECURITIES LISTED ABOVE IN ITEM (3)
("OTHER SECURITIES").
(a) Type and amount of Other Securities beneficially owned by the
Selling Securityholder:
(b) CUSIP No(s). of such Other Securities beneficially owned:
5. Relationship with the Issuer
Except as set forth below, neither the undersigned nor any of its
affiliates, officers, directors or principal equity holders (5% or
more) has held any position or office or has had any other material
relationship with the Issuer (or their predecessors or affiliates)
during the past three years.
State any exceptions here:
6. Plan of Distribution
Except as set forth below, the undersigned (including its donees or
pledgees) intends to distribute the Transfer Restricted Securities
listed above in Item (3) pursuant to the Shelf Registration Statement
only as follows (if at all). Such Transfer Restricted Securities may be
sold from time to time directly by the undersigned or, alternatively,
through underwriters, broker-dealers or agents. If the Transfer
Restricted Securities are sold through underwriters or broker-dealers,
the Selling Securityholder will be responsible for underwriting
discounts or commissions or agent's commissions. Such Transfer
Restricted Securities
<PAGE>
may be sold in one or more transactions at fixed prices, at prevailing
market prices at the time of sale, at varying prices determined at the
time of sale, or at negotiated prices. Such sales may be effected in
transactions (which may involve crosses or block transactions):
(i) on any national securities exchange or quotation
service on which the Transfer Restricted Securities may be
listed or quoted at the time of sale;
(ii) in the over-the-counter market;
(iii) in transactions otherwise than on such exchanges
or services or in the over-the-counter market; or
(iv) through the writing of options.
In connection with sales of the Transfer Restricted Securities or
otherwise, the undersigned may enter into hedging transactions with
broker-dealers, which may in turn engage in short sales of the Transfer
Restricted Securities and deliver Transfer Restricted Securities to
close out such short positions, or loan or pledge Transfer Restricted
Securities to broker-dealers that in turn may sell such securities.
State any exceptions here:
Note: In no event will such method(s) of distribution take the form of
an underwritten offering of the Transfer Restricted Securities without the prior
agreement of the Issuer.
The undersigned acknowledges that it understands its obligation to
comply with the provisions of the Exchange Act and the rules and regulations
promulgated thereunder relating to stock manipulation, particularly Regulation M
thereunder (or any successor rules or regulations), in connection with any
offering of Transfer Restricted Securities pursuant to the Shelf Registration
Statement. The undersigned agrees that neither it nor any person acting on its
behalf will engage in any transaction in violation of such provisions.
The Selling Securityholder hereby acknowledges its obligations under
the Registration Rights Agreement to indemnify and hold harmless certain persons
as set forth therein.
Pursuant to the Registration Rights Agreement, the Issuer has agreed
under certain circumstances to indemnify the Selling Securityholders against
certain liabilities.
In accordance with the undersigned's obligation under the Registration
Rights Agreement
<PAGE>
to provide such information as may be required by law for inclusion in the Shelf
Registration Statement, the undersigned agrees to promptly notify the Issuer of
any inaccuracies or changes in the information provided herein that may occur
subsequent to the date hereof at any time while the Shelf Registration Statement
remains effective. All notices hereunder and pursuant to the Registration Rights
Agreement shall be made in writing at the address set forth below.
By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to items (1) through (6) above and
the inclusion of such information in the Shelf Registration Statement and the
related Prospectus. The undersigned understands that such information will be
relied upon by the Issuer in connection with the preparation or amendment of the
Shelf Registration Statement and the related Prospectus.
IN WITNESS WHEREOF, the undersigned, by authority duly given, has
caused this Notice and Questionnaire to be executed and delivered either in
person or by its duly authorized agent.
Dated:
Beneficial Owner
By:
--------------------------------------------
Name:
Title:
Please return the completed and executed Notice and Questionnaire to Inhale
Therapeutic Systems, Inc. at:
Inhale Therapeutic Systems, Inc.
150 Industrial Road
San Carlos, California 94070
Attention: Stephen L. Hurst, Esq.
<PAGE>
INDENTURE
BETWEEN
INHALE THERAPEUTIC SYSTEMS, INC.,
AS ISSUER
AND
CHASE MANHATTAN BANK AND TRUST COMPANY,
NATIONAL ASSOCIATION
AS TRUSTEE
6 3/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
DATED AS OF OCTOBER 13, 1999
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ------------- ---------
<S> <C>
310(a)(1) 5.11
(a)(2) 5.11
(a)(3) n/a
(a)(4) n/a
(a)(5) 5.11
(b) 5.3; 5.11
(c) n/a
311(a) 5.12
(b) 5.12
(c) n/a
312(a) 2.10
(b) 14.3
(c) 14.3
313(a) 5.7
(b)(1) n/a
(b)(2) 5.7
(c) 5.7; 14.2
(d) 5.7
314(a)(1), (2), (3) 9.6; 14.6
(a)(4) 9.6; 9.7; 14.6
(b) n/a
(c)(1) 14.5
(c)(2) 14.5
(c)(3) n/a
(d) n/a
(e) 14.6
(f) n/a
315(a) 5.1(a)
(b) 5.6; 14.2
(c) 5.1(b)
(d) 5.1(c)
(e) 4.14
<PAGE>
316(a)(last sentence) 2.13
(a)(1)(A) 4.5
(a)(1)(B) 4.4
(a)(2) n/a
(b) 4.7
(c) 7.4
317(a)(1) 4.8
(a)(2) 4.9
(b) 2.5
318(a) 14.1
(b) n/a
(c) 14.1
- --------------------------------
</TABLE>
"n/a" means not applicable.
*This Cross-Reference Table shall not, for any purpose, be deemed to be a part
of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE 1
Section 1.1 Definitions 1
Section 1.2 Incorporation by Reference of Trust Indenture Act 13
Section 1.3 Rules of Construction 14
ARTICLE 2 THE SECURITIES 14
Section 2.1 Title and Terms 14
Section 2.2 Form of Securities 16
Section 2.3 Legends 17
Section 2.4 Execution, Authentication, Delivery and Dating 21
Section 2.5 Registrar and Paying Agent 22
Section 2.6 Paying Agent to Hold Assets in Trust 23
Section 2.7 General Provisions Relating to Transfer and Exchange 23
Section 2.8 Book-Entry Provisions for the Global Securities 24
Section 2.9 Special Transfer Provisions 25
Section 2.10 Holder Lists 27
Section 2.11 Persons Deemed Owners 28
Section 2.12 Mutilated, Destroyed, Lost or Stolen Securities 28
Section 2.13 Treasury Securities . 29
Section 2.14 Temporary Securities 29
Section 2.15 Cancellation 29
Section 2.16 CUSIP Numbers 30
Section 2.17 Defaulted Interest 30
ARTICLE 3 SATISFACTION AND DISCHARGE 30
Section 3.1 Satisfaction and Discharge of Indenture 30
Section 3.2 Deposited Monies to be Held in Trust 32
Section 3.3 Return of Unclaimed Monies 32
ARTICLE 4 DEFAULTS AND REMEDIES 32
Section 4.1 Events of Default 32
Section 4.2 Acceleration of Maturity; Rescission and Annulment 34
<PAGE>
Section 4.3 Other Remedies . 34
Section 4.4 Waiver of Past Defaults 35
Section 4.5 Control by Majority 35
Section 4.6 Limitation on Suit 36
Section 4.7 Unconditional Rights of Holders to Receive Payment and
to Convert 36
Section 4.8 Collection of Indebtedness and Suits for Enforcement by the
Trustee 36
Section 4.9 Trustee May File Proofs of Claim 37
Section 4.10 Restoration ofRights and Remedies 38
Section 4.11 Rights and Remedies Cumulative 38
Section 4.12 Delay or Omission Not Waiver 38
Section 4.13 Application of Money Collected 38
Section 4.14 Undertaking for Costs 39
Section 4.15 Waiver of Stay or Extension Laws 39
ARTICLE 5 THE TRUSTEE 40
Section 5.1 Certain Duties and Responsibilities 40
Section 5.2 Certain Rights of Trustee 41
Section 5.3 Individual Rights of Trustee 42
Section 5.4 Money Held in Trust 42
Section 5.5 Trustee's Disclaimer 42
Section 5.6 Notice of Defaults 43
Section 5.7 Reports by Trustee to Holders 43
Section 5.8 Compensation and Indemnification 43
Section 5.9 Replacement of Trustee 44
Section 5.10 Successor Trustee by Merger, Etc. 45
Section 5.11 Corporate Trustee Required; Eligibility 45
Section 5.12 Collection of Claims Against the Company 45
ARTICLE 6 CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER
OR LEASE 45
Section 6.1 Company May Consolidate, Etc., Only on Certain Terms 45
Section 6.2 Successor Corporation Substituted 46
ARTICLE 7 AMENDMENTS, SUPPLEMENTS AND WAIVERS 46
Section 7.1 Without Consent of Holders of Securities 46
Section 7.2 With Consent of Holders of Securities 47
Section 7.3 Compliance with Trust Indenture Act 48
<PAGE>
Section 7.4 Revocation of Consents and Effect of Consents or Votes 48
Section 7.5 Notation on or Exchange of Securities 49
Section 7.6 Trustee to Sign Amendment, Etc. 49
ARTICLE 8 MEETING OF HOLDERS OF SECURITIES 50
Section 8.1 Purposes for Which Meetings May Be Called 50
Section 8.2 Call Notice and Place of Meetings 50
Section 8.3 Persons Entitled to Vote at Meetings 50
Section 8.4 Quorum; Action 50
Section 8.5 Determination of Voting Rights; Conduct and Adjournment
of Meetings 51
Section 8.6 Counting Votes and Recording Action of Meetings 52
ARTICLE 9 COVENANTS 52
Section 9.1 Payment of Principal, Premium and Interest 52
Section 9.2 Maintenance of Offices or Agencies 53
Section 9.3 Corporate Existence 53
Section 9.4 Maintenance of Properties 53
Section 9.5 Payment of Taxes and Other Claims 54
Section 9.6 Reports 54
Section 9.7 Compliance Certificate 55
Section 9.8 Resale of Certain Securities 55
ARTICLE 10 REDEMPTION OF SECURITIES 55
Section 10.1 Optional Redemption 55
Section 10.2 Notice to Trustee 56
Section 10.3 Selection of Securities to Be Redeemed 56
Section 10.4 Notice of Redemption 56
Section 10.5 Effect of Notice of Redemption 57
Section 10.6 Deposit of Redemption Price 57
Section 10.7 Securities Redeemed in Part 58
ARTICLE 11 REPURCHASE AT THE OPTION OF A HOLDERUPON A CHANGE OF CONTROL 58
Section 11.1 Repurchase Right 58
Section 11.2 Conditions to the Company's Election to Pay the Repurchase
Price in Common Stock 59
Section 11.3 Notices; Method of Exercising Repurchase Right, Etc. 60
<PAGE>
ARTICLE 12 CONVERSION OF SECURITIES 62
Section 12.1 Conversion Right and Conversion Price 62
Section 12.2 Exercise of Conversion Right 63
Section 12.3 Fractions of Shares 64
Section 12.4 Adjustment of Conversion Price 64
Section 12.5 Notice of Adjustments of Conversion Price 73
Section 12.6 Notice Prior to Certain Actions 74
Section 12.7 Company to Reserve Common Stock 75
Section 12.8 Taxes on Conversions 75
Section 12.9 Covenant as to Common Stock 75
Section 12.10 Cancellation of Converted Securities 75
Section 12.11 Effect of Reclassification, Consolidation, Merger or Sale 75
Section 12.12 Responsibility of Trustee for Conversion Provisions 77
ARTICLE 13 SUBORDINATION 77
Section 13.1 Securities Subordinated to Senior Debt 77
Section 13.2 Subrogation 79
Section 13.3 Obligation of the Company is Absolute and Unconditional 79
Section 13.4 Maturity of or Default on Senior Debt 80
Section 13.5 Payments on Securities Permitted 80
Section 13.6 Effectuation of Subordination by Trustee 80
Section 13.7 Knowledge of Trustee 81
Section 13.8 Trustee's Relation to Senior Debt 81
Section 13.9 Rights of Holders of Senior Debt Not Impaired 81
Section 13.10 Modification of Terms of Senior Debt 82
Section 13.11 Certain Conversions Not Deemed Payment 82
ARTICLE 14 OTHER PROVISIONS OF GENERAL APPLICATION 83
Section 14.1 Trust Indenture Act Controls 83
Section 14.2 Notices 83
Section 14.3 Communication by Holders with Other Holders 84
Section 14.4 Acts of Holders of Securities 84
Section 14.5 Certificate and Opinion as to Conditions Precedent 85
Section 14.6 Statements Required in Certificate or Opinion 85
Section 14.7 Effect of Headings and Table of Contents 86
Section 14.8 Successors and Assigns 86
Section 14.9 Separability Clause 86
<PAGE>
Section 14.10 Benefits of Indenture 86
Section 14.11 Governing Law 86
Section 14.12 Counterparts 86
Section 14.13 Legal Holidays 87
Section 14.14 Recourse Against Others 87
EXHIBITS
EXHIBIT A: Form of Security A-1
EXHIBIT B: Form of Certificate to be Delivered by Transferee in
Connection with Transfers to Accredited Investors B-1
</TABLE>
<PAGE>
INDENTURE, dated as of October 13, 1999, between INHALE
THERAPEUTIC SYSTEMS, INC., a corporation duly organized and existing under
the laws of the State of Delaware, having its principal office at 150
Industrial Road, San Carlos, California 94070 (the "Company"), and CHASE
MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION, a national banking
association, as Trustee (the "Trustee"), having its principal corporate trust
office at 101 California Street, Suite 2725, San Francisco, California 94111.
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of
its 6 3/4% Convertible Subordinated Debentures due 2006 (herein called the
"Securities") of substantially the tenor and amount hereinafter set forth,
and to provide therefor the Company has duly authorized the execution and
delivery of this Indenture.
All things necessary to make the Securities, when the
Securities are executed by the Company and authenticated and delivered
hereunder and duly issued by the Company, the valid obligations of the
Company, and to make this Indenture a valid agreement of the Company, in
accordance with their and its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase
of the Securities by the Holders thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the
Securities, as follows:
1 ARTICLE DEFINITIONS AND INCORPORATION BY REFERENCE
1.1 SECTION DEFINITIONS.
For all purposes of this Indenture and the Securities, the
following terms are defined as follows:
"Act", when used with respect to any Holder of a Security,
has the meaning specified in Section 14.4(a) hereof.
"Adjusted Interest Rate" means, with respect to any Reset
Transaction, the rate per annum that is the arithmetic average of the
rates quoted by two Reference Dealers selected by the Company or its
successor as the rate at which interest on the Securities should accrue
so that the fair market value, expressed in dollars, of a Security
immediately after the later of:
(1) the public announcement of such Reset
Transaction; or
(2) the public announcement of a change in dividend
policy in connection with such Reset Transaction,
will equal the average Trading Price of a Security for the 20 Trading
Days preceding the date of public announcement of such Reset
Transaction; provided that the Adjusted
<PAGE>
2
Interest Rate shall not be lessthan 6 3/4% per annum.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of
this definition, "control", when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Bankruptcy Law" means Title 11 of the U.S. Code or any
similar federal or state law for the relief of debtors.
"Board of Directors" means either the board of directors of
the Company or any committee of that board empowered to act for it with
respect to this Indenture.
"Board Resolution" means a resolution duly adopted by the
Board of Directors, a copy of which, certified by the Secretary or an
Assistant Secretary of the Company to be in full force and effect on
the date of such certification, shall have been delivered to the
Trustee.
"Business Day", when used with respect to any Place of Payment
or Place of Conversion, means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in that
Place of Payment or Place of Conversion, as the case may be, are
authorized or obligated by law to close.
"Change of Control" means the occurrence of any of the
following after the original issuance of the Securities:
(1) the acquisition by any person, including any
syndicate or group deemed to be a "person" under Section
13(d)(3) of the Exchange Act, of beneficial ownership,
directly or indirectly, through a purchase, merger or other
acquisition transaction or series of transactions, of shares
of capital stock of the Company entitling such person to
exercise 50% or more of the total voting power of all shares
of capital stock of the Company entitled to vote generally in
elections of directors, other than any such acquisition by the
Company, any subsidiary of the Company or any employee benefit
plan of the Company; or
(2) any consolidation or merger of the Company with
or into any other person, any merger of another person into
the Company, or any conveyance, transfer, sale, lease or other
disposition of all or substantially all of the properties
<PAGE>
3
and assets of the Company to another person, other than (a)
any such transaction (x) that does not result in any
reclassification, conversion, exchange or cancellation of
outstanding shares of capital stock of the Company and (y)
pursuant to which holders of capital stock of the Company
immediately prior to such transaction have the entitlement to
exercise, directly or indirectly, 50% or more of the total
voting power of all shares of capital stock of the Company
entitled to vote generally in the election of directors of the
continuing or surviving person immediately after such
transaction and (b) any merger which is effected solely to
change the jurisdiction of incorporation of the Company and
results in a reclassification, conversion or exchange of
outstanding shares of Common Stock solely into shares of
common stock of the surviving entity;
provided, however, that a Change of Control shall not be deemed to have
occurred if the closing sales price per share of the Common Stock for
any five Trading Days within the period of 10 consecutive Trading Days
ending immediately after the later of the Change of Control or the
public announcement of the Change of Control, in the case of a Change
of Control under clause (1) above, or the period of 10 consecutive
Trading Days ending immediately before the Change of Control, in the
case of a Change of Control under clause (2) above, shall equal or
exceed 110% of the Conversion Price of the Securities in effect on each
such Trading Day. Beneficial ownership shall be determined in
accordance with Rule 13d-3 promulgated by the SEC under the Exchange
Act. The term "person" shall include any syndicate or group which would
be deemed to be a "person" under Section 13(d)(3) of the Exchange Act.
"Chief Executive Officer" means any co-chief executive
officer of the Company.
"Closing Date" means October 13, 1999 or such later date on
which the Securities may be delivered pursuant to the Purchase
Agreement.
"Closing Price" of any security on any date of determination
means:
(1) the closing sale price (or, if no closing sale
price is reported, the last reported sale price) of such
security on the New York Stock Exchange on such date;
(2) if such security is not listed for trading on the
New York Stock Exchange on any such date, the closing sale
price as reported in the composite transactions for the
principal U.S. securities exchange on which such security is
so listed;
(3) if such security is not so listed on a U.S.
national or regional
<PAGE>
4
securities exchange, the closing sale price as reported by the
NASDAQ National Market;
(4) if such security is not so reported, the last
quoted bid price for such security in the over-the-counter
market as reported by the National Quotation Bureau or similar
organization; or
(5) if such bid price is not available, the average
of the mid-point of the last bid and ask prices of such
security on such date from at least three nationally
recognized independent investment banking firms retained for
this purpose by the Company.
"Common Stock" means any stock of any class of the Company
which has no preference in respect of dividends or of amounts payable
in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company and which is not subject to redemption by
the Company. However, subject to the provisions of Section 12.11
hereof, shares issuable on conversion of Securities shall include only
shares of the class designated as Common Stock, par value $0.0001 per
share, of the Company at the date of this Indenture or shares of any
class or classes resulting from any reclassification or
reclassifications thereof and which have no preference in respect of
dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company and
which are not subject to redemption by the Company, provided that if at
any time there shall be more than one such resulting class, the shares
of each such class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting
from all such reclassifications bears to the total number of shares of
all such classes resulting from all such reclassifications.
"Company" means the corporation named as the "Company" in the
first paragraph of this instrument until a successor corporation shall
have become such pursuant to the applicable provisions of this
Indenture, and thereafter "Company" shall mean such successor
corporation.
"Company Notice" has the meaning specified in Section 11.3
hereof.
"Company Order" means a written order signed in the name of
the Company by both (1) the Chairman of the Board, the Chief Executive
Officer, the President or a Vice President and (2) so long as not the
same as the officer signing pursuant to clause (1), the Chief Financial
Officer, the Treasurer or the Secretary of the Company, and delivered
to the Trustee.
"Conversion Agent" means any Person authorized by the Company
to convert
<PAGE>
5
Securities in accordance with Article 12 hereof.
"Conversion Price" has the meaning specified in Section 12.1
hereof.
"Corporate Trust Office" means for purposes of presentation or
surrender of Securities for payment, registration, transfer, exchange
or conversion or for service of notices or demands upon the Company,
the office of the Trustee located in The City of New York at which at
any particular time its corporate trust business shall be administered
(which at the date of this Indenture is located at 55 Water Street,
Room 234, North Building, New York, New York 10041), and for all other
purposes, the office of the Trustee located in the City of San
Francisco (which at the date of this Indenture is located at 101
California Street, Suite 2725, San Francisco, CA 94111).
"corporation" means corporations, associations, limited
liability companies, companies and business trusts.
"Current Market Price" has the meaning set forth in Section
12.4(g).
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means an event which is, or after notice or lapse of
time or both would be, an Event of Default.
"Default Exception" has the meaning specified in Section
4.1(d) hereof.
"Defaulted Interest" has the meaning specified in Section 2.17
hereof.
"Depositary" means The Depository Trust Company, its nominees
and their respective successors.
"Designated Senior Debt" means Senior Debt of the Company
which, at the date of determination, has an aggregate amount
outstanding of, or under which, at the date of determination, the
holders thereof are committed to lend up to, at least $25 million and
is specifically designated in the instrument, agreement or other
document evidencing or governing that Senior Debt as "Designated Senior
Debt" for purposes of this Indenture (provided that such instrument,
agreement or other document may place limitations and conditions on the
right of such Senior Debt to exercise the rights of Designated Senior
Debt).
"Dividend Yield" on any security for any period means the
dividends paid or
<PAGE>
6
proposed to be paid pursuant to an announced dividend policy on such
security for such period divided by, if with respect to dividends paid
on such security, the average Closing Price of such security during
such period and, if with respect to dividends proposed to be paid on
such security, the Closing Price of such security on the effective date
of the related Reset Transaction.
"Dollar," "U.S. Dollar" or "U.S. $" means a dollar or other
equivalent unit in such coin or currency of the United States as at the
time shall be legal tender for the payment of public and private debts.
"DTC Participants" has the meaning specified in Section 2.8
hereof.
"Event of Default" has the meaning specified in Section 4.1
hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Expiration Time" has the meaning specified in Section 12.4(f)
hereof.
"fair market value" has the meaning set forth in Section
12.4(g) hereof.
"Global Security" has the meaning specified in Section 2.2
hereof.
"guarantee" means any obligation, contingent or otherwise, of
any Person, directly or indirectly guaranteeing any Indebtedness of any
other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness of such
other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or
maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect
thereof (in whole or in part);
provided, however, that the term "guarantee" will not include
endorsements for collection or deposit in the ordinary course of
business. The term "guarantee" used as a verb has a corresponding
meaning.
"Holder", when used with respect to any Security, means the
Person in whose name the Security is registered in the Register.
<PAGE>
7
"Indebtedness", when used with respect to any Person, and
without duplication means:
(1) all indebtedness, obligations and other
liabilities (contingent or otherwise) of such Person for
borrowed money (including obligations of the Company in
respect of overdrafts, foreign exchange contracts, currency
exchange agreements, Interest Rate Protection Agreements, and
any loans or advances from banks, whether or not evidenced by
notes or similar instruments) or evidenced by bonds,
debentures, notes or other instruments for the payment of
money, or incurred in connection with the acquisition of any
property, services or assets (whether or not the recourse of
the lender is to the whole of the assets of such Person or to
only a portion thereof), other than any account payable or
other accrued current liability or obligation to trade
creditors incurred in the ordinary course of business in
connection with the obtaining of materials or services;
(2) all reimbursement obligations and other
liabilities (contingent or otherwise) of such Person with
respect to letters of credit, bank guarantees, bankers'
acceptances, surety bonds, performance bonds or other guaranty
of contractual performance;
(3) all obligations and liabilities (contingent or
otherwise) in respect of (a) leases of such Person required,
in conformity with generally accepted accounting principles,
to be accounted for as capitalized lease obligations on the
balance sheet of such Person and (b) any lease or related
documents (including a purchase agreement) in connection with
the lease of real property which provides that such Person is
contractually obligated to purchase or cause a third party to
purchase the leased property and thereby guarantee a minimum
residual value of the leased property to the landlord and the
obligations of such Person under such lease or related
document to purchase or to cause a third party to purchase the
leased property;
(4) all obligations of such Person (contingent or
otherwise) with respect to an interest rate or other swap, cap
or collar agreement or other similar instrument or agreement
or foreign currency hedge, exchange, purchase or similar
instrument or agreement;
(5) all direct or indirect guaranties or similar
agreements by such Person in respect of, and obligations or
liabilities (contingent or otherwise) of such Person to
purchase or otherwise acquire or otherwise assure a creditor
against loss in respect of, indebtedness, obligations or
liabilities of another Person
<PAGE>
8
of the kind described in clauses (1) through (4);
(6) any indebtedness or other obligations described
in clauses (1) through (4) secured by any mortgage, pledge,
lien or other encumbrance existing on property which is owned
or held by such Person, regardless of whether the indebtedness
or other obligation secured thereby shall have been assumed by
such Person; and
(7) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or supplements to,
any indebtedness, obligation or liability of the kind
described in clauses (1) through (6).
"Indenture" means this instrument as originally executed or as
it may from time to time be supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof.
"Initial Purchasers" mean Lehman Brothers Inc., Deutsche Bank
Securities Inc. and U.S. Bancorp Piper Jaffray Inc.
"Institutional Accredited Investor" means an institution that
is an "accredited investor" as that term is defined in Rule 501(a) (1),
(2), (3) or (7) under the Securities Act.
"Interest Payment Date" means each of April 13 and October 13.
"Interest Rate" means, (a) if a Reset Transaction has not
occurred, 6 3/4% per annum, or (b) following the occurrence of a Reset
Transaction, the Adjusted Interest Rate related to such Reset
Transaction to, but not including the effective date of any succeeding
Reset Transaction.
"Interest Rate Protection Agreement" means, with respect to
any Person, any interest rate swap agreement, interest rate cap or
collar agreement or other financial agreement or arrangement designed
to protect such person against fluctuations in interest rates, as in
effect from time to time.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended.
"Liquidated Damages" means all liquidated damages, if any,
payable pursuant to Section 3 of the Registration Rights Agreement.
"Maturity" means the date on which the principal of such
Security becomes due
<PAGE>
9
and payable as therein or herein provided, whether at the Stated
Maturity or by acceleration, conversion, call for redemption, exercise
of a Repurchase Right or otherwise.
"Nasdaq National Market" means the National Association of
Securities Dealers Automated Quotation National Market or any successor
national securities exchange or automated over-the-counter trading
market in the United States.
"Non-Electing Share" has the meaning specified in Section
12.11 hereof.
"Non-institutional Accredited Investor" means a Person that is
an "accredited investor" as that term is defined in Rule 501(a) (4),
(5) or (6) under the Securities Act.
"Officer" of the Company means the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Financial Officer,
the Treasurer, any Vice President or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by both (1)
the Chairman of the Board, the Chief Executive Officer, the President
or a Vice President and (2) so long as not the same as the officer
signing pursuant to clause (1), the Chief Financial Officer, the
Treasurer or the Secretary of the Company, and delivered to the
Trustee.
"Opinion of Counsel" means a written opinion of counsel, who
may be counsel to the Company (and may include directors or employees
of the Company) and which opinion is acceptable to the Trustee which
acceptance shall not be unreasonably withheld.
"Outstanding", when used with respect to Securities, means, as
of the date of determination, all Securities theretofore authenticated
and delivered under this Indenture, except Securities:
(1) previously canceled by the Trustee or delivered
to the Trustee for cancellation;
(2) for the payment or redemption of which money in
the necessary amount has been previously deposited with the
Trustee or any Paying Agent (other than the Company) in trust
or set aside and segregated in trust by the Company (if the
Company shall act as its own Paying Agent) for the Holders of
such Securities, provided that if such Securities are to be
redeemed, notice of such redemption has been duly given
pursuant to this Indenture; and
(3) which have been paid, in exchange for or in lieu
of which other
<PAGE>
10
Securities have been authenticated and delivered pursuant to
this Indenture, other than any such Securities in respect of
which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a BONA
FIDE purchaser in whose hands such Securities are valid
obligations of the Company.
"Paying Agent" has the meaning specified in Section 2.5
hereof.
"Payment Blockage Notice" has the meaning specified in Section
13.1(d) hereof.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company,
trust, estate, unincorporated organization or government or any agency
or political subdivision thereof.
"Physical Securities" has the meaning specified in Section 2.2
hereof.
"Place of Conversion" means any city in which any Conversion
Agent is located.
"Place of Payment" means any city in which any Paying Agent is
located.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that
evidenced by such particular Security; and, for the purposes of this
definition, any Security authenticated and delivered under Section 2.12
hereof in exchange for or in lieu of a mutilated, destroyed, lost or
stolen Security shall be deemed to evidence the same debt as the
mutilated, destroyed, lost or stolen Security.
"Purchase Agreement" means the Purchase Agreement, dated
October 6, 1999, between the Company and the Initial Purchasers.
"QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
"Quoted Price" of the Common Stock means the last reported
sale price of the Common Stock on the Nasdaq National Market, or, if
the Common Stock is listed on a national securities exchange, then on
such exchange, or if the Common Stock is not quoted on Nasdaq National
Market or listed on an exchange, the average of the last bid and asked
price on the National Association of Securities Dealers Automated
Quotation System.
"Record Date" means either a Regular Record Date or a Special
Record Date, as the case may be, provided that, for purposes of Section
12.4 hereof, Record Date has the meaning specified in 12.4(g) hereof.
<PAGE>
11
"Redemption Date", when used with respect to any Security to
be redeemed, means the date fixed for such redemption by or pursuant to
this Indenture.
"Redemption Price", when used with respect to any Security to
be redeemed, means the price at which such Security is to be redeemed
pursuant to this Indenture.
"Reference Dealer" means a dealer engaged in the trading of
convertible securities.
"Reference Period" has the meaning set forth in Section
12.4(d) hereof.
"Register" has the meaning specified in Section 2.5 hereof.
"Registrar" has the meaning specified in Section 2.5 hereof.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of October 13, 1999, between the Company and the
Initial Purchasers.
"Regular Record Date" for the interest on the Securities
(including Liquidated Damages, if any) payable means the March 31
(whether or not a Business Day) next preceding an April 13 Interest
Payment Date and the September 30 (whether or not a Business Day) next
preceding an October 13 Interest Payment Date.
"Repurchase Date" has the meaning specified in Section 11.1
hereof.
"Repurchase Price" has the meaning specified in Section 11.1
hereof.
"Repurchase Right" has the meaning specified in Section 11.1
hereof.
"Reset Transaction" means a merger, consolidation or statutory
share exchange to which the entity that is the issuer of the shares of
common stock into which the Securities are then convertible into is a
party, a sale of all or substantially all the assets of that entity, a
recapitalization of those shares of common stock or a distribution
described in Section 12.4(d) hereof, after the effective date of which
transaction or distribution the Securities would be convertible into:
(1) shares of an entity the common stock of which had
a Dividend Yield for the four fiscal quarters of such entity
immediately preceding the public announcement of such
transaction or distribution that was more than 2.5% higher
then the Dividend Yield on the Common Stock (or other common
stock then
<PAGE>
12
issuable upon conversion of the Securities) for the four
fiscal quarters preceding the public announcement of such
transaction or distribution, or
(2) shares of an entity that announces a dividend
policy prior to the effective date of such transaction or
distribution which policy, if implemented, would result in a
Dividend Yield on such entity's common stock for the next four
fiscal quarters that would result in such a 2.5% basis point
increase.
"Responsible Officer", when used with respect to the Trustee,
means any officer of the Trustee, including any vice president,
assistant vice president, secretary, assistant secretary, the
treasurer, any assistant treasurer, the managing director or any other
officer of the Trustee customarily performing functions similar to
those performed by any of the above designated officers and also means,
with respect to a particular corporate trust matter, any other officer
to whom such matter is referred because of such officer's knowledge of
and familiarity with the particular subject.
"Restricted Securities" means the Securities defined as such
in Section 2.3 hereof.
"Restricted Securities Legend" has the meaning set forth in
Section 2.3(a) hereof.
"Rule 144" means Rule 144 under the Securities Act (including
any successor rule thereof), as the same may be amended from time to
time.
"Rule 144A" means Rule 144A as promulgated under the
Securities Act (including any successor rule thereof), as the same may
be amended from time to time.
"SEC" means the Securities and Exchange Commission.
"Securities" has the meaning ascribed to it in the first
paragraph under the caption "Recitals of the Company".
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Debt" means the principal of, premium, if any,
interest (including all interest accruing subsequent to the
commencement of any bankruptcy or similar proceeding, whether or not a
claim for post-petition interest is allowable as a claim in any such
proceeding) and rent payable on or termination payment with respect to
or in connection with, and all fees, costs, expenses and other amounts
accrued or due on or in connection with, Indebtedness of the Company,
whether outstanding on the date of this Indenture or thereafter
created, incurred, assumed, guaranteed or in effect guaranteed by the
Company (including all deferrals, renewals, extensions or refundings
of, or amendments, modifications or supplements to, the foregoing),
unless in the case of any
<PAGE>
13
particular Indebtedness the instrument creating or evidencing the same
or the assumption or guarantee thereof expressly provides that such
Indebtedness shall not be senior in right of payment to the Securities
or expressly provides that such Indebtedness is PARI PASSU or junior to
the Securities. Notwithstanding the foregoing, the term "Senior Debt"
shall include, without limitation, all Designated Senior Debt, and
shall not include Indebtedness of the Company to any Subsidiary.
"Significant Subsidiary" means any Subsidiary which is a
"significant subsidiary" within the meaning of Rule 405 under the
Securities Act.
"Special Record Date" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 2.17
hereof.
"Stated Maturity" means the date specified in any Security as
the fixed date for the payment of principal on such Security or on
which an installment of interest (including Liquidated Damages, if any)
on such Security is due and payable.
"Subsidiary" means a corporation more than 50% of the
outstanding voting stock of which is owned, directly or indirectly, by
the Company or by one or more other Subsidiaries, or by the Company and
one or more other Subsidiaries. For the purposes of this definition
only, "voting stock" means stock which ordinarily has voting power for
the election of directors, whether at all times or only so long as no
senior class of stock has such voting power by reason of any
contingency.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
Section 77aaa-77bbbb), as in effect on the date of this Indenture;
provided, however, that in the event the TIA is amended after such
date, "TIA" means, to the extent required by such amendment, the Trust
Indenture Act of 1939, as so amended, or any successor statute.
"Trading Day" means:
(1) if the applicable security is listed or admitted
for trading on the New York Stock Exchange or another national
security exchange, a day on which the New York Stock Exchange
or such other national security exchange is open for business;
(2) if the applicable security is quoted on the
Nasdaq National Market, a day on which trades may be made
thereon; or
(3) if the applicable security is not so listed,
admitted for trading or quoted, any day other than a Saturday
or Sunday or a day on which banking
<PAGE>
14
institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Trading Price" of a security on any date of determination
means:
(1) the closing sale price (or, if no closing sale
price is reported, the last reported sale price) of such
security on the New York Stock Exchange on such date;
(2) if such security is not listed for trading on the
New York Stock Exchange on any such date, the closing sale
price as reported in the composite transactions for the
principal U.S. securities exchange on which such security is
so listed;
(3) if such security is not so listed on a U.S.
national or regional securities exchange, the closing sale
price as reported by the NASDAQ National Market;
(4) if such security is not so reported, the last
price quoted by Interactive Data Corporation for such security
or, if Interactive Data Corporation is not quoting such price,
a similar quotation service selected by the Company;
(5) if such security is not so quoted, the average of
the mid-point of the last bid and ask prices for such security
from at least two dealers recognized as market-makers for such
security; or
(6) if such security is not so quoted, the average of
the last bid and ask prices for such security from a Reference
Dealer.
"Transfer Agent" means any Person, which may be the Company,
authorized by the Company to exchange or register the transfer of
Securities.
"Trigger Event" has the meaning specified in Section 12.4(d)
hereof.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have
become such pursuant to the applicable provisions of this Indenture,
and thereafter "Trustee" shall mean such successor Trustee.
"U.S. Government Obligations" means: (1) direct obligations of
the United States of America for the payment of which the full faith
and credit of the United States of America is pledged or (2)
obligations of a person controlled or supervised by and acting
<PAGE>
15
as an agency or instrumentality of the United States of America, the
payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America and which in either
case, are non-callable at the option of the issuer thereof.
"Vice President", when used with respect to the Company, means
any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
1.2 SECTION INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Holder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the Securities means the Company and any other
obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule have
the meanings assigned to them by such definitions.
1.3 SECTION RULES OF CONSTRUCTION.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(2) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with accounting principles
generally accepted in the United States prevailing at the time of any
relevant computation hereunder; and
<PAGE>
16
(3) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.
2 ARTICLE
THE SECURITIES
2.1 SECTION TITLE AND TERMS.
The Securities shall be known and designated as the "6 3/4%
Convertible Subordinated Debentures due 2006"of the Company. The aggregate
principal amount of Securities which may be authenticated and delivered under
this Indenture is limited to $100,000,000 (or $109,000,000 if the over-allotment
option set forth in Section 2 of the Purchase Agreement is exercised in full),
except for securities authenticated and delivered upon registration of, transfer
of, or in exchange for, or in lieu of other Securities pursuant to Section 2.7,
2.8, 2.9, 2.12, 7.5, 10.7, 11.1 or 12.2 hereof. The Securities shall be issuable
in denominations of $1,000 or integral multiples thereof.
The Securities shall mature on October 13, 2006.
Interest shall accrue from October 13, 1999 at the Interest
Rate until the principal thereof is paid or made available for payment. Interest
shall be payable semiannually in arrears on April 13 and October 13 in each
year, commencing April 13, 2000.
Interest on the Securities shall be computed (i) for any full
semiannual period for which a particular Interest Rate is applicable on the
basis of a 360-day year of twelve 30-day months and (ii) for any period for
which a particular Interest Rate is applicable shorter than a full semiannual
period for which interest is calculated, on the basis of a 30-day month and, for
such periods of less than a month, the actual number of days elapsed over a
30-day month. For purposes of determining the Interest Rate, the Trustee may
assume that a Reset Transaction has not occurred unless the Trustee has received
an Officers' Certificate stating that a Reset Transaction has occurred and
specifying the Adjusted Interest Rate then in effect.
A Holder of any Security at the close of business on a Regular
Record Date shall be entitled to receive interest (including Liquidated Damages,
if any) on such Security on the corresponding Interest Payment Date. A Holder of
any Security which is converted after the close of business on a Regular Record
Date and prior to the corresponding Interest Payment Date (other than any
Security whose Maturity is prior to such Interest Payment Date) shall be
entitled to receive interest (including Liquidated Damages, if any) on the
principal amount of such
<PAGE>
17
Security, notwithstanding the conversion of such Security prior to such Interest
Payment Date. However, any such Holder which surrenders any such Security for
conversion during the period between the close of business on such Regular
Record Date and ending with the opening of business on the corresponding
Interest Payment Date shall be required to pay the Company an amount equal to
the interest (including Liquidated Damages, if any) on the principal amount of
such Security so converted, which is payable by the Company to such Holder on
such Interest Payment Date, at the time such Holder surrenders such Security for
conversion. Notwithstanding the foregoing, any such Holder which surrenders for
conversion any Security which has been called for redemption by the Company in a
notice of redemption given by the Company pursuant to Section 10.4 hereof shall
be entitled to receive (and retain) such interest (including Liquidated Damages,
if any) and need not pay the Company an amount equal to the interest (including
Liquidated Damages, if any) on the principal amount of such Security so
converted at the time such Holder surrenders such Security for conversion.
Principal of, and premium, if any, and interest on, Global
Securities shall be payable to the Depositary in immediately available funds.
Principal and premium, if any, on Physical Securities shall be
payable at the office or agency of the Company maintained for such purpose,
initially the Corporate Trust Office of the Trustee. Interest on Physical
Securities will be payable by (i) U.S. Dollar check drawn on a bank in The City
of New York mailed to the address of the Person entitled thereto as such address
shall appear in the Register, or (ii) upon application to the Registrar not
later than the relevant Record Date by a Holder of an aggregate principal amount
in excess of $5,000,000, wire transfer in immediately available funds.
The Securities shall be redeemable at the option of the
Company as provided in Article 10 hereof.
The Securities shall have a Repurchase Right exercisable at
the option of Holders as provided in Article 11 hereof.
The Securities shall be convertible as provided in Article 12
hereof.
The Securities shall be subordinated in right of payment to
Senior Debt of the Company as provided in Article 13 hereof.
2.2 SECTION FORM OF SECURITIES.
The Securities and the Trustee's certificate of authentication
to be borne by such Securities shall be substantially in the form annexed hereto
as Exhibit A, which is incorporated in and made a part of this Indenture. The
terms and provisions contained in the form of Security shall constitute, and are
hereby expressly made, a part of this Indenture and to the extent
<PAGE>
18
applicable, the Company and the Trustee, by their execution and delivery of this
Indenture, expressly agree to such terms and provisions and to be bound thereby.
Any of the Securities may have such letters, numbers or other
marks of identification and such notations, legends and endorsements as the
officers executing the same may approve (execution thereof to be conclusive
evidence of such approval) and as are not inconsistent with the provisions of
this Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
securities exchange or automated quotation system on which the Securities may be
listed or designated for issuance, or to conform to usage.
Securities offered and sold to QIBs in reliance on Rule 144A
shall be issued initially only in the form of one or more permanent Global
Securities (each, a "Global Security") in registered form without interest
coupons. The Global Securities shall be:
(1) duly executed by the Company and authenticated by the
Trustee as hereinafter provided;
(2) registered in the name of the Depositary (or its nominee)
for credit to the respective accounts of the Holders at the Depositary;
and
(3) deposited with the Trustee, as custodian for the
Depositary.
The Global Securities shall be substantially in the form of Security set forth
in Exhibit A annexed hereto (including the text and schedule called for by
footnotes 1 and 2 thereto). The aggregate principal amount of the Global
Securities may from time to time be increased or decreased by adjustments made
on the records of the Trustee, as custodian for the Depositary (or its nominee),
in accordance with the instructions given by the Holder thereof, as hereinafter
provided.
Securities offer and sold to Institutional Accredited
Investors and Non-institutional Accredited Investors, and Securities issued in
exchange for interests in the Global Securities pursuant to Section 2.8(d)
hereof shall be issued in the form of permanent definitive Securities (the
"Physical Securities") in registered form without interest coupons. The Physical
Securities shall be substantially in the form set forth in Exhibit A annexed
hereto.
The Securities shall be typed, printed, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Securities may be listed, all as determined by the Officers executing such
Securities, as evidenced by their execution of such Securities.
<PAGE>
19
2.3 SECTION LEGENDS.
(a) RESTRICTED SECURITIES LEGENDS.
Each Security issued hereunder shall, upon issuance, bear
the legend set forth in Section 2.3(a)(i) or Section 2.3(a)(ii) (each, a
"Restricted Securities Legend"), as the case may be, and such legend shall
not be removed except as provided in Section 2.3(a)(iii). Each Security that
bears or is required to bear the Restricted Securities Legend set forth in
Section 2.3(a)(i) (together with any Common Stock issued upon conversion of
the Securities and required to bear the Restricted Securities Legend set
forth in Section 2.3(a)(ii), collectively, the "Restricted Securities") shall
be subject to the restrictions on transfer set forth in this Section 2.3(a)
(including the Restricted Securities Legend set forth below), and the Holder
of each such Restricted Security, by such Holder's acceptance thereof, shall
be deemed to have agreed to be bound by all such restrictions on transfer.
As used in Section 2.3(a), the term "transfer" encompasses any
sale, pledge, transfer or other disposition whatsoever of any Restricted
Security.
(i) RESTRICTED SECURITIES LEGEND FOR SECURITIES.
Except as provided in Section 2.3(a)(iii), until two years
after the original issuance date of any Security, any certificate evidencing
such Security (and all securities issued in exchange therefor or substitution
thereof, other than Common Stock, if any, issued upon conversion thereof which
shall bear the legend set forth in Section 2.3(a)(ii), if applicable) shall bear
a Restricted Securities Legend in substantially the following form:
THE SECURITY EVIDENCED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF,
THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT OR (B) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED
INVESTOR") THAT IS PURCHASING AT LEAST $100,000 IN AGGREGATE PRINCIPAL
AMOUNT OF DEBENTURES OR AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(4), (5) or (6) UNDER THE SECURITIES ACT (A "NON-INSTITUTIONAL
ACCREDITED INVESTOR") THAT IS
<PAGE>
20
PURCHASING AT LEAST $250,000 IN AGGREGATE PRINCIPAL AMOUNT OF
DEBENTURES; (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE
ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER THE
SECURITY EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION
OF SUCH SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF,
(B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT TO AN INSTITUTIONAL ACCREDITED
INVESTOR THAT IS PURCHASING DEBENTURES IN AGGREGATE PRINCIPAL AMOUNT OF
AT LEAST $100,000 OR TO A NON-INSTITUTIONAL ACCREDITED INVESTOR THAT IS
PURCHASING DEBENTURES IN AGGREGATE PRINCIPAL AMOUNT OF AT LEAST
$250,000, AND THAT, IN EITHER CASE, PRIOR TO SUCH TRANSFER, FURNISHES
TO CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION, AS
TRUSTEE (OR ANY SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND WARRANTIES RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE FORM OF
LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES
ACT (IF AVAILABLE) OR (E) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT AND WHICH
CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER; AND (3) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED
HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(E)
ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY WITHIN
TWO YEARS AFTER THE ORIGINAL ISSUANCE OF SUCH SECURITY (OTHER THAN A
TRANSFER PURSUANT TO CLAUSE (2)(E) ABOVE), THE HOLDER MUST CHECK THE
APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER
OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE (OR ANY
SUCCESSOR TRUSTEE, AS APPLICABLE). IF THE PROPOSED TRANSFER IS PURSUANT
TO CLAUSE (2)(C) OR 2(D) ABOVE, THE HOLDER MUST, PRIOR TO SUCH
TRANSFER, FURNISH TO THE TRUSTEE (OR ANY SUCCESSOR TRUSTEE, AS
APPLICABLE), SUCH CERTIFICATIONS, LEGAL
<PAGE>
21
OPINIONS OR OTHER INFORMATION AS THE COMPANY MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE
TRANSFER OF THE SECURITY EVIDENCED HEREBY PURSUANT TO CLAUSE (2)(E)
ABOVE OR THE EXPIRATION OF TWO YEARS FROM THE ORIGINAL ISSUANCE OF THE
SECURITY EVIDENCED HEREBY. AS USED HEREIN, THE TERMS "UNITED STATES"
AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER
THE SECURITIES ACT.
(ii) RESTRICTED SECURITIES LEGEND FOR COMMON STOCK ISSUED UPON
CONVERSION OF THE SECURITIES.
Until two years after the original issuance date of any
Security, any stock certificate representing Common Stock issued upon conversion
of such Security shall bear a Restricted Securities Legend in substantially the
following form:
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. THE HOLDER HEREOF AGREES THAT
UNTIL THE EXPIRATION OF TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THE
SECURITY UPON THE CONVERSION OF WHICH THE COMMON STOCK EVIDENCED HEREBY
WAS ISSUED, (1) IT WILL NOT RESELL OR OTHERWISE TRANSFER THE SECURITY
EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT TO AN
INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED IN RULE 501(a)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT) THAT IS PURCHASING A NUMBER OF
SHARES OF COMMON STOCK AT LEAST EQUAL TO $100,000 DIVIDED BY $32.0075
(THE INITIAL CONVERSION PRICE) OR TO A NON-INSTITUTIONAL ACCREDITED
INVESTOR (AS DEFINED AS DEFINED IN RULE 501(a)(4), (5) or (6) UNDER THE
SECURITIES ACT) THAT IS PURCHASING A NUMBER OF SHARES OF COMMON STOCK
AT LEAST EQUAL TO $250,000 DIVIDED BY $32.0075 (THE INITIAL CONVERSION
PRICE) AND THAT, IN EITHER CASE, PRIOR TO SUCH TRANSFER, FURNISHES TO
<PAGE>
22
CHASEMELLON SHAREHOLDER SERVICES LLC, AS TRANSFER AGENT (OR ANY
SUCCESSOR TRANSFER AGENT, AS APPLICABLE), A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND WARRANTIES RELATING TO THE RESTRICTIONS ON
TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE FORM OF LETTER CAN BE
OBTAINED FROM SUCH TRUSTEE), (C) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT AND WHICH CONTINUES TO BE
EFFECTIVE AT THE TIME OF SUCH TRANSFER; (2) PRIOR TO ANY SUCH TRANSFER
OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(D) ABOVE, IT WILL FURNISH TO
SUCH TRANSFER AGENT (OR ANY SUCCESSOR TRANSFER AGENT, AS APPLICABLE),
SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE COMPANY
MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT; AND (3) IT WILL
DELIVER TO EACH PERSON TO WHOM THE COMMON STOCK EVIDENCED HEREBY IS
TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO A CLAUSE (1)(D) ABOVE) A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE
REMOVED UPON THE EARLIER OF THE TRANSFER OF THE COMMON STOCK EVIDENCED
HEREBY PURSUANT TO CLAUSE (1)(D) ABOVE OR THE EXPIRATION OF TWO YEARS
FROM THE ORIGINAL ISSUANCE OF THE SECURITY UPON THE CONVERSION OF WHICH
THE COMMON STOCK EVIDENCED HEREBY WAS ISSUED. AS USED HEREIN, THE TERMS
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT.
(iii) REMOVAL OF THE RESTRICTED SECURITIES LEGENDS.
Each Security or share of Common Stock issued upon conversion
of such Security shall bear the Restricted Securities Legend set forth in
Section 2.3(a)(i) or 2.3(a)(ii), as the case may be, until the earlier of:
(A) two years after the original issuance date of such
Security;
(B) such Security or Common Stock has been sold pursuant to a
registration statement that has been declared effective under the
Securities Act (and which continues
<PAGE>
23
to be effective at the time of such sale); or
(C) such Common Stock has been issued upon conversion of
Securities that have been sold pursuant to a registration statement
that has been declared effective under the Securities Act (and which
continues to be effective at the time of such sale).
The Holder must give notice thereof to the Trustee and any transfer agent for
the Common Stock, as applicable.
Notwithstanding the foregoing, the Restricted Securities
Legend may be removed if there is delivered to the Company such satisfactory
evidence, which may include an opinion of independent counsel, as may be
reasonably required by the Company that neither such legend nor the restrictions
on transfer set forth therein are required to ensure that transfers of such
Security will not violate the registration requirements of the Securities Act.
Upon provision of such satisfactory evidence, the Trustee, at the written
direction of the Company, shall authenticate and deliver in exchange for such
Securities another Security or Securities having an equal aggregate principal
amount that does not bear such legend. If the Restricted Securities Legend has
been removed from a Security as provided above, no other Security issued in
exchange for all or any part of such Security shall bear such legend, unless the
Company has reasonable cause to believe that such other Security is a
"restricted security" within the meaning of Rule 144 and instructs the Trustee
in writing to cause a Restricted Securities Legend to appear thereon.
Any Security (or security issued in exchange or substitution
thereof) as to which such restrictions on transfer shall have expired in
accordance with their terms or as to which the conditions for removal of the
Restricted Securities Legend set forth in Section 2.3(a)(i) as set forth therein
have been satisfied may, upon surrender of such Security for exchange to the
Registrar in accordance with the provisions of Section 2.7 hereof, be exchanged
for a new Security or Securities, of like tenor and aggregate principal amount,
which shall not bear the Restricted Securities Legend required by Section
2.3(a)(i).
Any such Common Stock as to which such restrictions on
transfer shall have expired in accordance with their terms or as to which the
conditions for removal of the Restricted Securities Legend set forth in Section
2.3(a)(ii) as set forth therein have been satisfied may, upon surrender of the
certificates representing such shares of Common Stock for exchange in accordance
with the procedures of the transfer agent for the Common Stock, be exchanged for
a new certificate or certificates for a like aggregate number of shares of
Common Stock, which shall not bear the Restricted Securities Legend required by
Section 2.3(a)(ii).
(b) GLOBAL SECURITY LEGEND.
<PAGE>
24
Each Global Security shall also bear the following legend on
the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY ("DTC") TO INHALE THERAPEUTIC SYSTEMS,
INC. (OR ITS SUCCESSOR) OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, CONVERSION OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
2.4 SECTION EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
Two Officers shall execute the Securities on behalf of the
Company by manual or facsimile signature. If an Officer whose signature is on a
Security no longer holds that office at the time the Security is authenticated,
the Security shall be valid nevertheless.
At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Securities executed by the
Company to the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities, and the Trustee in accordance
with such Company Order shall authenticate and deliver such Securities as in
this Indenture provided and not otherwise.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this
Indenture, or be valid or obligatory for any purpose, unless there appears on
such Security a certificate of authentication substantially in the form provided
for herein executed by or on behalf of the Trustee by manual signature, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder.
The Trustee may appoint an authenticating agent or agents
reasonably acceptable to the Company with respect to the Securities. Unless
limited by the terms of such appointment, an authenticating agent may
authenticate Securities whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent.
2.5 SECTION REGISTRAR AND PAYING AGENT.
<PAGE>
25
The Company shall maintain an office or agency where
Securities may be presented for registration of transfer or for exchange (the
"Registrar") and an office or agency where Securities may be presented for
payment (the "Paying Agent"). The Registrar shall keep a register of the
Securities (the "Register") and of their transfer and exchange. The Company may
appoint one or more co-Registrars and one or more additional Paying Agents for
the Securities. The term "Paying Agent" includes any additional paying agent and
the term "Registrar" includes any additional registrar. The Company may change
any Paying Agent or Registrar without prior notice to any Holder.
The Company will cause each Paying Agent (other than the
Trustee) to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee, subject to the provisions of this
Section, that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of and
premium, if any, or interest (including Liquidated Damages, if any) on
Securities in trust for the benefit of the Persons entitled thereto
until such sums shall be paid to such Persons or otherwise disposed of
as provided in this Indenture;
(2) give the Trustee notice of any Default by the Company in the making
of any payment of principal and premium, if any, or interest (including
Liquidated Damages, if any); and
(3) at any time during the continuance of any such Default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent.
The Company shall give prompt written notice to the Trustee of
the name and address of any Agent who is not a party to this Indenture. If the
Company fails to appoint or maintain another entity as Registrar or Paying
Agent, the Trustee shall act as such. The Company or any Affiliate of the
Company may act as Paying Agent or Registrar; provided, however, that none of
the Company, its subsidiaries or the Affiliates of the foregoing shall act:
(i) as Paying Agent in connection with redemptions, offers to
purchase and discharges, as otherwise specified in this Indenture, and
(ii) as Paying Agent or Registrar if a Default or Event of
Default has occurred and is continuing.
The Company hereby initially appoints the Trustee as Registrar
and Paying Agent for the Securities.
<PAGE>
26
2.6 SECTION PAYING AGENT TO HOLD ASSETS IN TRUST.
Not later than 11:00 a.m. (New York City time) on each due
date of the principal, premium, if any, and interest (including Liquidated
Damages, if any) on any Securities, the Company shall deposit with one or more
Paying Agents money in immediately available funds sufficient to pay such
principal, premium, if any, and interest (including Liquidated Damages, if any)
so becoming due. The Company at any time may require a Paying Agent to pay all
money held by it to the Trustee. Upon payment over to the Trustee, the Paying
Agent (if other than the Company) shall have no further liability for the money
so paid over to the Trustee.
If the Company shall act as a Paying Agent, it shall, prior to
or on each due date of the principal of and premium, if any, or interest
(including Liquidated Damages, if any) on any of the Securities, segregate and
hold in trust for the benefit of the Holders a sum sufficient with monies held
by all other Paying Agents, to pay the principal and premium, if any, or
interest (including Liquidated Damages, if any) so becoming due until such sums
shall be paid to such Persons or otherwise disposed of as provided in this
Indenture, and shall promptly notify the Trustee of its action or failure to
act.
2.7 SECTION GENERAL PROVISIONS RELATING TO TRANSFER AND EXCHANGE.
The Securities are issuable only in registered form. A Holder
may transfer a Security only by written application to the Registrar stating the
name of the proposed transferee and otherwise complying with the terms of this
Indenture. No such transfer shall be effected until, and such transferee shall
succeed to the rights of a Holder only upon, final acceptance and registration
of the transfer by the Registrar in the Register. Furthermore, any Holder of a
Global Security shall, by acceptance of such Global Security, agree that
transfers of beneficial interests in such Global Security may be effected only
through a book-entry system maintained by the Holder of such Global Security (or
its agent) and that ownership of a beneficial interest in the Security shall be
required to be reflected in a book-entry. Notwithstanding the foregoing, in the
case of a Restricted Security, a beneficial interest in a Global Security being
transferred in reliance on an exemption from the registration requirements of
the Securities Act other than in accordance with Rule 144 and Rule 144A may only
be transferred for a Physical Security.
When Securities are presented to the Registrar with a request
to register the transfer or to exchange them for an equal aggregate principal
amount of Securities of other authorized denominations, the Registrar shall
register the transfer or make the exchange as requested if its requirements for
such transactions are met (including that such Securities are duly endorsed or
accompanied by a written instrument of transfer duly executed by the Holder
thereof or by an attorney who is authorized in writing to act on behalf of the
Holder). Subject to Section 2.4 hereof, to permit registrations of transfers and
exchanges, the Company shall execute and the
<PAGE>
27
Trustee shall authenticate Securities at the Registrar's request. No service
charge shall be made for any registration of transfer or exchange or redemption
of the Securities, but the Company may require payment of a sum sufficient to
cover any transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer taxes or other similar governmental
charge payable upon exchanges pursuant to Section 2.14, 7.5 or 10.7 hereof).
Neither the Company nor the Registrar shall be required to
exchange or register a transfer of any Securities:
(1) for a period of 15 Business Days prior to the day of any
selection of Securities for redemption under Article 10 hereof;
(2) so selected for redemption or, if a portion of any
Security is selected for redemption, such portion thereof selected for
redemption; or
(3) surrendered for conversion or, if a portion of any
Security is surrendered for conversion, such portion thereof
surrendered for conversion.
2.8 SECTION BOOK-ENTRY PROVISIONS FOR THE GLOBAL SECURITIES.
(a) The Global Securities initially shall:
(i) be registered in the name of the Depositary
(or a nominee thereof);
(ii) be delivered to the Trustee as custodian for
such Depositary; and
(iii) bear the Restricted Securities Legend as set
forth in Section 2.3(a)(i) hereof.
Members of, or participants in, the Depositary ("DTC
Participants") shall have no rights under this Indenture with respect to any
Global Security held on their behalf by the Depositary, or the Trustee as its
custodian, or under such Global Security, and the Depositary may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing contained herein shall prevent the
Company, the Trustee or any agent of the Company or Trustee from giving effect
to any written certification, proxy or other authorization furnished by the
Depositary or impair, as between the Depositary and the DTC Participants, the
operation of customary practices governing the exercise of the rights of a
Holder of any Security.
(b) The registered Holder of a Global Security may grant
proxies and otherwise authorize any Person, including DTC Participants and
Persons that may hold interests
<PAGE>
28
through DTC Participants, to take any action which a Holder is entitled to take
under this Indenture or the Securities.
(c) A Global Security may not be transferred, in whole or in
part, to any Person other than the Depositary (or a nominee thereof), and no
such transfer to any such other Person may be registered. Beneficial interests
in a Global Security may be transferred in accordance with the rules and
procedures of the Depositary and the provisions of Section 2.9 hereof.
(d) If at any time:
(i) the Depositary notifies the Company in writing
that it is no longer willing or able to continue to act as Depositary
for the Global Securities, or the Depositary ceases to be a "clearing
agency" registered under the Exchange Act and a successor depositary
for the Global Securities is not appointed by the Company within 90
days of such notice or cessation;
(ii) the Company, at its option, notifies the Trustee
in writing that it elects to cause the issuance of the Securities in
definitive form under this Indenture in exchange for all or any part of
the Securities represented by a Global Security or Global Securities;
or
(iii) an Event of Default has occurred and is
continuing and the Registrar has received a request from the Depositary
for the issuance of Physical Securities in exchange for such Global
Security or Global Securities,
the Depositary shall surrender such Global Security or Global Securities to the
Trustee for cancellation and the Company shall execute, and the Trustee, upon
receipt of an Officers' Certificate and Company Order for the authentication and
delivery of Securities, shall authenticate and deliver in exchange for such
Global Security or Global Securities, Physical Securities in an aggregate
principal amount equal to the aggregate principal amount of such Global Security
or Global Securities. Such Physical Securities shall be registered in such names
as the Depositary shall identify in writing as the beneficial owners of the
Securities represented by such Global Security or Global Securities (or any
nominee thereof).
(e) Notwithstanding the foregoing, in connection with any
transfer of beneficial interests in a Global Security to beneficial owners
pursuant to Section 2.8(d) hereof, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of such Global Security
in an amount equal to the principal amount of the beneficial interest in such
Global Security to be transferred.
<PAGE>
29
2.9 SECTION SPECIAL TRANSFER PROVISIONS.
Unless a Security is transferred after the time period
referred to in Rule 144(k) under the Securities Act or otherwise sold pursuant
to a registration statement that has been declared effective under the
Securities Act (and which continues to be effective at the time of such sale),
the following provisions shall apply:
(a) TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS WHICH
ARE NOT QIBS, OR NON-INSTITUTIONAL ACCREDITED INVESTORS.
The following provisions shall apply with respect to the
registration of any proposed transfer of Securities to any Institutional
Accredited Investor which is not a QIB, or any Non-institutional Accredited
Investor:
(i) The Registrar shall register the transfer if the proposed
transferee has delivered to the Trustee (A) a certificate substantially
in the form of Exhibit B annexed hereto and (B) such opinion of counsel
and other evidence satisfactory to the Company that such transfer is in
compliance with the Securities Act, as requested by the Company.
(ii) If the proposed transferor is a DTC Participant holding a
beneficial interest in Global Securities, upon receipt by the Registrar
of the documents required by clause (i) of this Section 2.9(a) and
instructions given in accordance with the procedures of the Depositary
and of the Registrar, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of the Global
Securities in an amount equal to the principal amount of the beneficial
interest in the Global Securities to be transferred, and the Company
shall execute, and the Trustee shall authenticate and deliver, one or
more Physical Securities of like tenor and amount.
(iii) If the Securities to be transferred consist of Physical
Securities, upon receipt by the Registrar of the documents referred to
in clause (i) of this Section 2.9(a), the Company shall execute and the
Trustee shall authenticate and deliver, new Physical Securities
registered in the name of the transferee and the Trustee shall cancel
the Physical Securities presented for transfer.
(b) TRANSFERS TO QIBS.
The following provisions shall apply with respect to the
registration of any proposed transfer of Securities to a QIB:
(i) If the Securities to be transferred consist of an interest
in the Global Securities, the transfer of such interest may be effected
only through the book-entry
<PAGE>
30
system maintained by the Depositary.
(ii) If the Securities to be transferred consist of Physical
Securities, the Registrar shall register the transfer if such transfer
is being made by a proposed transferor who has checked the box provided
for on the form of Security stating, or has otherwise advised the
Company and the Registrar in writing, that the sale has been made in
compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Security stating
or has otherwise advised the Company and the Registrar in writing that:
(A) it is purchasing the Securities for its own
account or an account with respect to which it exercises sole
investment discretion, in each case for investment and not
with a view to distribution;
(B) it and any such account is a QIB within the
meaning of Rule 144A;
(C) it is aware that the sale to it is being made in
reliance on Rule 144A;
(D) it acknowledges that it has received such
information regarding the Company as it has requested pursuant
to Rule 144A or has determined not to request such
information; and
(E) it is aware that the transferor is relying upon
its foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
In addition, the Registrar shall reflect on its books and records the
date and an increase in the principal amount of the Global Securities
in an amount equal to the principal amount of the Physical Securities
to be transferred, and the Trustee shall cancel the Physical Securities
so transferred.
(c) GENERAL.
By its acceptance of any Security bearing the Restricted
Securities Legend, each Holder of such a Security acknowledges the restrictions
on transfer of such Security set forth in this Indenture and agrees that it will
transfer such Security only as provided in this Indenture. The Registrar shall
not register a transfer of any Security unless such transfer complies with the
restrictions on transfer of such Security set forth in this Indenture. The
Registrar shall be entitled to receive and rely on written instructions from the
Company verifying that such transfer complies with such restrictions on
transfer. In connection with any transfer of Securities, each Holder agrees by
its acceptance of the Securities to furnish the Registrar or the Company such
<PAGE>
31
certifications, legal opinions or other information as either of them may
reasonably require to confirm that such transfer is being made pursuant to an
exemption from, or a transaction not subject to, the registration requirements
of the Securities Act; provided that the Registrar shall not be required to
determine (but may rely on a determination made by the Company with respect to)
the sufficiency of any such certifications, legal opinions or other information.
The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 2.8 hereof or this
Section 2.9. The Company shall have the right to inspect and make copies of all
such letters, notices or other written communications at any reasonable time
upon the giving of reasonable written notice to the Registrar.
2.10 SECTION Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders and shall otherwise comply with Section 312(a) of the TIA. If the
Trustee is not the Registrar, the Company shall furnish to the Trustee prior to
or on each Interest Payment Date and at such other times as the Trustee may
request in writing a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of Holders relating to such
Interest Payment Date or request, as the case may be.
2.11 SECTION PERSONS DEEMED OWNERS.
The Company, the Trustee and any agent of the Company or the
Trustee may treat the registered Holder of a Global Security as the absolute
owner of such Global Security for the purpose of receiving payment thereof or on
account thereof and for all other purposes whatsoever, whether or not such
Security be overdue, and notwithstanding any notice of ownership or writing
thereon, or any notice of previous loss or theft or other interest therein. The
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name any Security is registered as the owner of such Security
for the purpose of receiving payment of principal of and premium, if any, and
interest (including Liquidated Damages, if any) on such Security and for all
other purposes whatsoever, whether or not such Security be overdue, and
notwithstanding any notice of ownership or writing thereon, or any notice of
previous loss or theft or other interest therein.
2.12 SECTION MUTILATED, DESTROYED, LOST OR STOLEN SECURITIES.
If any mutilated Security is surrendered to the Trustee, the
Company shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
<PAGE>
32
If there is delivered to the Company and the Trustee
(1) evidence to their satisfaction of the destruction, loss or theft
of any Security, and
(2) such security or indemnity as may be required by them to save each
of them and any agent of either of them harmless, then, in the absence
of notice to the Company or the Trustee that such Security has been
acquired by a BONA FIDE purchaser, the Company shall execute and, upon
request, the Trustee shall authenticate and deliver, in lieu of any
such destroyed, lost or stolen Security, a new Security of like tenor
and principal amount and bearing a number not contemporaneously
outstanding.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its discretion,
but subject to any conversion rights, may, instead of issuing a new Security,
pay such Security, upon satisfaction of the condition set forth in the preceding
paragraph.
Upon the issuance of any new Security under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and such new
Security shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.
2.13 SECTION TREASURY SECURITIES.
In determining whether the Holders of the requisite principal
amount of Outstanding Securities are present at a meeting of Holders for quorum
purposes or have given any request, demand, authorization, direction, notice,
consent or waiver hereunder, Securities owned by the Company or any Affiliate of
the Company shall be disregarded and deemed not to be Outstanding, except that,
in determining whether the Trustee shall be protected in relying upon any such
determination as to the presence of a quorum or upon any such request, demand,
<PAGE>
33
authorization, direction, notice, consent or waiver, only such Securities of
which the Trustee has received written notice and are so owned shall be so
disregarded.
2.14 SECTION TEMPORARY SECURITIES .
Pending the preparation of Securities in definitive form, the
Company may execute and the Trustee shall, upon written request of the Company,
authenticate and deliver temporary Securities (printed or lithographed).
Temporary Securities shall be issuable in any authorized denomination, and
substantially in the form of the Securities in definitive form but with such
omissions, insertions and variations as may be appropriate for temporary
Securities, all as may be determined by the Company. Every such temporary
Security shall be executed by the Company and authenticated by the Trustee upon
the same conditions and in substantially the same manner, and with the same
effect, as the Securities in definitive form. Without unreasonable delay, the
Company will execute and deliver to the Trustee Securities in definitive form
(other than in the case of Securities in global form) and thereupon any or all
temporary Securities (other than any such Securities in global form) may be
surrendered in exchange therefor, at each office or agency maintained by the
Company pursuant to Section 9.2 and the Trustee shall authenticate and deliver
in exchange for such temporary Securities an equal aggregate principal amount of
Securities in definitive form. Such exchange shall be made by the Company at its
own expense and without any charge therefor. Until so exchanged, the temporary
Securities shall in all respects be entitled to the same benefits and subject to
the same limitations under this Indenture as Securities in definitive form
authenticated and delivered hereunder.
2.15 SECTION CANCELLATION.
All securities surrendered for payment, redemption,
repurchase, conversion, registration of transfer or exchange shall, if
surrendered to any Person other than the Trustee, be delivered to the
Trustee. All Securities so delivered shall be canceled promptly by the
Trustee, and no Securities shall be issued in lieu thereof except as
expressly permitted by any of the provisions of this Indenture. Upon written
instructions of the Company, the Trustee shall destroy canceled Securities
and, after such destruction, shall deliver a certificate of such destruction
to the Company. If the Company shall acquire any of the Securities, such
acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Securities unless the same are delivered to
the Trustee for cancellation.
2.16 SECTION CUSIP NUMBERS
The Company in issuing the Securities may use "CUSIP"
numbers (if then generally in use), and the Trustee shall use CUSIP numbers
in notices of redemption or exchange as a convenience to Holders; provided
that any such notice shall state that no representation is made
<PAGE>
34
as to the correctness of such numbers either as printed on the Securities or as
contained in any such notice and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers. The Company shall
promptly notify the Trustee of any change in the CUSIP numbers.
2.17 SECTION DEFAULTED INTEREST.
If the Company fails to make a payment of interest (including
Liquidated Damages, if any) on any Security when due and payable ("Defaulted
Interest"), it shall pay such Defaulted Interest plus (to the extent lawful) any
interest payable on the Defaulted Interest, in any lawful manner. It may elect
to pay such Defaulted Interest, plus any such interest payable on it, to the
Persons who are Holders of such Securities on which the interest is due on a
subsequent Special Record Date. The Company shall notify the Trustee in writing
of the amount of Defaulted Interest proposed to be paid on each such Security.
The Company shall fix any such Special Record Date and payment date for such
payment. At least 15 days before any such Special Record Date, the Company shall
mail to Holders affected thereby a notice that states the Special Record Date,
the Interest Payment Date, and amount of such interest (and such Liquidated
Damages, if any) to be paid.
3 ARTICLE
SATISFACTION AND DISCHARGE
3.1 SECTION SATISFACTION AND DISCHARGE OF INDENTURE.
When:
(1) the Company shall deliver to the Trustee for cancellation
all Securities previously authenticated (other than any Securities
which have been destroyed, lost or stolen and in lieu of, or in
substitution for which, other Securities shall have been authenticated
and delivered) and not previously canceled, or
(2) (A) all the Securities not previously canceled or
delivered to the Trustee for cancellation shall have become due and
payable, or are by their terms to become due and payable within one
year or are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption,
(B) the Company shall deposit with the Trustee, in
trust, cash in U.S. dollars and/or U.S. Government Obligations which
through the payment of interest and principal in respect thereof, in
accordance with their terms, will provide (and without
<PAGE>
35
reinvestment and assuming no tax liability will be imposed on such
Trustee), not later than one day before the due date of any payment of
money, an amount in cash, sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay
principal of, premium, if any, or interest (including Liquidated
Damages, if any) on all of the Securities (other than any Securities
which shall have been mutilated, destroyed, lost or stolen and in lieu
of or in substitution for which other Securities shall have been
authenticated and delivered) not previously canceled or delivered to
the Trustee for cancellation, on the dates such payments of principal,
premium, if any, or interest (including Liquidated Damages, if any) are
due to such date of maturity or redemption, as the case may be, and
(C) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel to the effect that (x)
the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (y) since the date of execution of
this Indenture, there has been a change in the applicable federal
income tax law, in the case of either clause (x) or (y) to the effect
that, and based thereon such Opinion of Counsel shall confirm that, the
Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and discharge and will be subject
to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and
discharge had not occurred, and
if, in the case of either clause (1) or (2), the Company shall also pay or cause
to be paid all other sums payable hereunder by the Company, then this Indenture
shall cease to be of further effect (except as to:
(i) remaining rights of registration of transfer,
substitution and exchange and conversion of Securities,
(ii) rights hereunder of Holders to receive payments of
principal of and premium, if any, and interest (including
Liquidated Damages, if any) on, the Securities and the other
rights, duties and obligations of Holders, as beneficiaries
hereof with respect to the amounts, if any, so deposited with
the Trustee, and
(iii) the rights, obligations and immunities of the
Trustee hereunder),
and the Trustee, on demand of the Company accompanied by an Officers'
Certificate and an Opinion of Counsel and at the cost and expense of the
Company, shall execute proper instruments acknowledging satisfaction of and
discharging this Indenture; provided, however, the Company shall reimburse the
Trustee for all amounts due the Trustee under Section 5.8 hereof
<PAGE>
36
and for any costs or expenses thereafter reasonably and properly incurred by the
Trustee and to compensate the Trustee for any services thereafter reasonably and
properly rendered by the Trustee in connection with this Indenture or the
Securities.
3.2 SECTION DEPOSITED MONIES TO BE HELD IN TRUST .
Subject to Section 3.3 hereof, all monies deposited with the
Trustee pursuant to Section 3.1 hereof shall be held in trust and applied by it
to the payment, notwithstanding the provisions of Article 13 hereof, either
directly or through any Paying Agent (including the Company if acting as its own
Paying Agent), to the Holders of the particular Securities for the payment or
redemption of which such monies have been deposited with the Trustee, of all
sums due and to become due thereon for principal, premium, if any, and interest
(including Liquidated Damages, if any). All monies deposited with the Trustee
pursuant to Section 3.1 hereof (and held by it or any Paying Agent) for the
payment of Securities subsequently converted shall be returned to the Company
upon request of the Company.
3.3 SECTION RETURN OF UNCLAIMED MONIES.
The Trustee and the Paying Agent shall pay to the Company any
money held by them for the payment of principal or premium, if any, or interest
(including Liquidated Damages, if any) that remains unclaimed for two years
after the date upon which such payment shall have become due. After payment to
the Company, Holders entitled to the money must look to the Company for payment
as general creditors unless an applicable abandoned property law designates
another Person, and all liability of the Trustee and such Paying Agent with
respect to such money shall cease.
4 ARTICLE
DEFAULTS AND REMEDIES
4.1 SECTION EVENTS OF DEFAULT.
An "Event of Default" with respect to the Securities occurs
when any of the following occurs (whatever the reason for such Event of Default
and whether it shall be occasioned by the provisions of Article 13 hereof or be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) the Company defaults in the payment of the principal of or
premium, if any, on any of the Securities when it becomes due and
payable at Maturity, upon redemption or exercise of a Repurchase Right
or otherwise, whether or not such payment is
<PAGE>
37
prohibited by Article 13 hereof; or
(b) the Company defaults in the payment of interest (including
Liquidated Damages, if any) on any of the Securities when it becomes
due and payable and such default continues for a period of 30 days,
whether or not such payment is prohibited by Article 13 hereof; or
(c) the Company fails to perform or observe any other term,
covenant or agreement contained in the Securities or this Indenture and
the default continues for a period of 60 days after written notice of
such failure, requiring the Company to remedy the same, shall have been
given to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of the
Outstanding Securities; or
(d) (i) the Company fails to make any payment by the end of
the applicable grace period, if any, after the maturity of any
Indebtedness for borrowed money in an amount in excess of $5,000,000
(provided that such failure shall not constitute an Event of Default if
(1) the Company determines, in good faith, that a lessor under a lease
described in clause (3)(a) of the definition of Indebtedness breached a
covenant under the lease and the Company has given notice of the breach
to the lessor and the Trustee and (2) as a result of the breach, the
Company withholds payment under the lease) (a "Default Exception"), or
(ii) there is an acceleration of any Indebtedness for borrowed money in
an amount in excess of $5,000,000 because of a default with respect to
such Indebtedness (other than a Default Exception) without such
Indebtedness having been discharged or such acceleration having been
cured, waived, rescinded or annulled, in the case of either (i) or (ii)
above, for a period of 30 days after written notice to the Company by
the Trustee or to the Company and the Trustee by Holders of at least
25% in aggregate principal amount of the Outstanding Securities; or
(e) the entry by a court having jurisdiction in the premises
of (i) a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable U.S. federal or
state bankruptcy, insolvency, reorganization or other similar law or
(ii) a decree or order adjudging the Company a bankrupt or insolvent,
or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company
under any applicable U.S. federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and
the continuance of any such decree or order for relief or any such
other decree or order unstayed and in effect for a period of 60
consecutive days; or
<PAGE>
38
(f) the commencement by the Company of a voluntary case or
proceeding under any applicable U.S. federal or state bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by
the Company to the entry of a decree or order for relief in respect of
the Company in an involuntary case or proceeding under any applicable
U.S. federal or state bankruptcy, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency case
or proceeding against the Company, or the filing by the Company of a
petition or answer or consent seeking reorganization or relief under
any applicable U.S. federal or state law, or the consent by the Company
to the filing of such petition or to the appointment of or the taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or of any
substantial part of its property, or the making by the Company of an
assignment for the benefit of creditors, or the admission by the
Company in writing of its inability to pay its debts generally as they
become due, or the taking of corporate action by the Company expressly
in furtherance of any such action.
4.2 SECTION ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default with respect to Outstanding Securities
(other than an Event of Default specified in Section 4.1(e) or 4.1(f) hereof)
occurs and is continuing, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Outstanding Securities, by written notice to
the Company, may declare due and payable 100% of the principal amount of all
Outstanding Securities plus any accrued and unpaid interest to the date of
payment. Upon a declaration of acceleration, such principal and accrued and
unpaid interest to the date of payment shall be immediately due and payable.
If an Event of Default specified in Section 4.1(e) or 4.1(f)
hereof occurs, all unpaid principal and accrued and unpaid interest (including
Liquidated Damages, if any) on the Outstanding Securities shall become and be
immediately due and payable, without any declaration or other act on the part of
the Trustee or any Holder.
The Holders of a majority in aggregate principal amount of the
Outstanding Securities by written notice to the Trustee may rescind and annul an
acceleration and its consequences if:
(1) all existing Events of Default, other than the nonpayment
of principal of or interest on the Securities which have become due
solely because of the acceleration, have been remedied, cured or
waived, and
(2) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction;
<PAGE>
39
provided, however, that in the event such declaration of acceleration has been
made based on the existence of an Event of Default under Section 4.1(d) hereof
and such Event of Default has been remedied, cured or waived in accordance with
Section 4.1(d) hereof, then, without any further action by the Holders, such
declaration of acceleration shall be rescinded automatically and the
consequences of such declaration shall be annulled. No such rescission or
annulment shall affect any subsequent Default or impair any right consequent
thereon.
4.3 SECTION OTHER REMEDIES.
If an Event of Default with respect to Outstanding Securities
occurs and is continuing, the Trustee may pursue any available remedy by
proceeding at law or in equity to collect the payment of principal of or
interest on the Securities or to enforce the performance of any provision of the
Securities.
The Trustee may maintain a proceeding in which it may
prosecute and enforce all rights of action and claims under this Indenture or
the Securities, even if it does not possess any of the Securities or does not
produce any of them in the proceeding.
4.4 SECTION WAIVER OF PAST DEFAULTS .
The Holders, either (a) through the written consent of not
less than a majority in aggregate principal amount of the Outstanding
Securities, or (b) by the adoption of a resolution, at a meeting of Holders of
the Outstanding Securities at which a quorum is present, by the Holders of at
least a majority in aggregate principal amount of the Outstanding Securities
represented at such meeting, may, on behalf of the Holders of all of the
Securities, waive an existing Default or Event of Default, except a Default or
Event of Default:
(1) in the payment of the principal of or premium, if any, or
interest (including Liquidated Damages, if any) on any Security
(provided, however, that subject to Section 4.7 hereof, the Holders of
a majority in aggregate principal amount of the Outstanding Securities
may rescind an acceleration and its consequences, including any related
payment default that resulted from such acceleration); or
(2) in respect of a covenant or provision hereof which, under
Section 7.2 hereof, cannot be modified or amended without the consent
of the Holders of each Outstanding Security affected.
Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; provided, however, that no such waiver shall
extend to any subsequent or other Default or impair any right consequent
thereon.
<PAGE>
40
4.5 SECTION CONTROL BY MAJORITY.
The Holders of a majority in aggregate principal amount of the
Outstanding Securities (or such lesser amount as shall have acted as a meeting
pursuant to the provisions of this Indenture) shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that:
(1) conflicts with any law or with this Indenture;
(2) the Trustee determines may be unduly prejudicial to the
rights of the Holders not joining therein, or
(3) may expose the Trustee to personal liability.
The Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction.
4.6 SECTION LIMITATION ON SUIT.
No Holder of any Security shall have any right to pursue any
remedy with respect to this indenture or the Securities (including, instituting
any proceeding, judicial or otherwise, with respect to this Indenture or for the
appointment of a receiver or trustee) unless:
(1) such Holder has previously given written notice to the Trustee of
an Event of Default that is continuing;
(2) the Holders of at least 25% in aggregate principal amount of the
Outstanding Securities shall have made written request to the Trustee
to pursue the remedy;
(3) such Holder or Holders have offered to the Trustee indemnity
satisfactory to it against any costs, expenses and liabilities incurred
in complying with such request;
(4) the Trustee has failed to comply with the request for 60 days after
its receipt of such notice, request and offer of indemnity; and
(5) during such 60-day period, no direction inconsistent with such
written request has been given to the Trustee by the Holders of a
majority in aggregate principal amount of the Outstanding Securities
(or such amount as shall have acted at a meeting pursuant to the
provisions of this Indenture);
<PAGE>
41
provided, however, that no one or more of such Holders may use this Indenture to
prejudice the rights of another Holder or to obtain preference or priority over
another Holder.
4.7 SECTION UNCONDITIONAL RIGHTS OF HOLDERS TO RECEIVE PAYMENT
AND TO CONVERT .
Notwithstanding any other provision in this Indenture, the
Holder of any Security shall have the right, which is absolute and
unconditional, to receive payment of the principal of and premium, if any, and
interest (including Liquidated Damages, if any) on such Security on the Stated
Maturity expressed in such Security (or, in the case of redemption, on the
Redemption Date, or in the case of the exercise of a Repurchase Right, on the
Repurchase Date) and to convert such Security in accordance with Article 12, and
to bring for the enforcement of any such payment on or after such respective
dates and right to convert, and such rights shall not be impaired or affected
without the consent of such Holder.
4.8 SECTION COLLECTION OF INDEBTEDNESS AND SUITS FOR
ENFORCEMENT BY THE TRUSTEE .
The Company covenants that if:
(1) a Default or Event of Default is made in the payment of any
interest (including Liquidated Damages, if any) on any Security when
such interest (including Liquidated Damages, if any) becomes due and
payable and such Default or Event of Default continues for a period of
30 days, or
(2) a Default or Event of Default is made in the payment of the
principal of or premium, if any, on any Security at the Maturity
thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable (as expressed
therein or as a result of any acceleration effected pursuant to Section 4.2
hereof) on such Securities for principal and premium, if any, and interest
(including Liquidated Damages, if any) and, to the extent that payment of such
interest shall be legally enforceable, interest on any overdue principal and
premium, if any, and on any overdue interest (including Liquidated Damages, if
any), calculated using the Interest Rate, and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and
unpaid, may prosecute such proceeding to judgment or
<PAGE>
42
final decree and may enforce the same against the Company and collect the moneys
adjudged or decreed to be payable in the manner provided by law out of the
property of the Company, wherever situated.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion proceed to protect and enforce its rights and the rights
of the Holders of Securities by such appropriate judicial proceedings as the
Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
4.9 SECTION TRUSTEE MAY FILE PROOFS OF CLAIM .
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company or the property of the Company
or its creditors, the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of overdue principal or interest (including
Liquidated Damages, if any)) shall be entitled and empowered, by intervention in
such proceeding or otherwise,
(1) to file and prove a claim for the whole amount of principal and
premium, if any, and interest (including Liquidated Damages, if any)
owing and unpaid in respect of the Securities and to file such other
papers or documents as may be necessary or advisable in order to have
the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Holders of Securities allowed in such
judicial proceeding, and
(2) to collect and receive any moneys or other property payable or
deliverable on any such claim and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceedings is hereby authorized by
each Holder of Securities to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders of Securities, to pay to the Trustee any amount due to it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and any other amounts due the Trustee under Section 5.8.
Nothing contained herein shall be deemed to authorize the
Trustee to authorize or consent to or accept, or adopt on behalf of any Holder
of a Security, any plan of reorganization,
<PAGE>
43
arrangement, adjustment or composition affecting the Securities or the rights of
any Holder thereof or to authorize the Trustee to vote in respect of the claim
of any Holder of a Security in any such proceeding.
4.10 SECTION RESTORATION OF RIGHTS AND REMEDIES .
If the Trustee or any Holder of a Security has instituted any
proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case, subject to any determination in such proceeding, the Company, the Trustee
and the Holders of Securities shall be restored severally and respectively to
their former positions hereunder and thereafter all rights and remedies of the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
4.11 SECTION RIGHTS AND REMEDIES CUMULATIVE .
Except as otherwise provided with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities in the last
paragraph of Section 2.12, no right or remedy conferred in this Indenture upon
or reserved to the Trustee or to the Holders of Securities is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
4.12 SECTION DELAY OR OMISSION NOT WAIVER .
No delay or omission of the Trustee or of any Holder of any
Security to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or any acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders of Securities may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders of Securities, as the case may be.
4.13 SECTION APPLICATION OF MONEY COLLECTED.
Subject to Article 13, any money collected by the Trustee
pursuant to this Article shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such money on
account of principal or premium, if any, or interest (including Liquidated
Damages, if any), upon presentation of the Securities and the notation thereon
of the payment if only partially paid and upon surrender thereof if fully paid:
<PAGE>
44
FIRST: To the payment of all amounts due the Trustee;
SECOND: To the payment of the amounts then due and unpaid for
principal of and premium, if any, and interest (including Liquidated
Damages, if any) on the Securities and coupons in respect of which or
for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts
due and payable on such Securities for principal and premium, if any,
and interest (including Liquidated Damages, if any), respectively; and
THIRD: Any remaining amounts shall be repaid to the Company.
4.14 SECTION UNDERTAKING FOR COSTS .
All parties to this Indenture agree, and each Holder of any
Security by such Holder's acceptance thereof shall be deemed to have agreed,
that any court may in its discretion require, in any suit for the enforcement of
any right or remedy under this Indenture, or in any suit against the Trustee for
any action taken, suffered or omitted by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and that
such court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in aggregate
principal amount of the Outstanding Securities, or to any suit instituted by any
Holder of any Security for the enforcement of the payment of the principal of or
premium, if any, or interest (including Liquidated Damages, if any) on any
Security on or after the Stated Maturity expressed in such Security (or, in the
case of redemption or exercise of a Repurchase Right, on or after the Redemption
Date) or for the enforcement of the right to convert any Security in accordance
with Article 12.
4.15 SECTION WAIVER OF STAY OR EXTENSION LAWS .
The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim to take the benefit or advantage of, any stay or extension law
wherever enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
<PAGE>
45
5 ARTICLE
THE TRUSTEE
5.1 SECTION CERTAIN DUTIES AND RESPONSIBILITIES .
(a) Except during the continuance of an Event of Default,
(1) The Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture or the TIA,
and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; provided, however, that in the case of any such
certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall examine the
certificates or opinions to determine whether or not, on their face,
they conform to the requirements to this Indenture (but need not
investigate or confirm the accuracy of any facts stated therein).
(b) In case an Event of Default actually known to a
Responsible Officer of the Trustee has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of such person's
own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, except that: (d)
(1) This paragraph (c) shall not be construed to limit the
effect of paragraph (a) of this Section 5.1;
(2) The Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be
proved that the Trustee was negligent in ascertaining the pertinent
facts; and
(3) The Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with a
direction received by it of the Holders of
<PAGE>
46
a majority in principal amount of the Outstanding Securities (or such
lesser amount as shall have acted at a meeting pursuant to the
provisions of this Indenture) relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture.
(d) Whether or not herein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Section 5.1.
(e) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers. The Trustee may refuse to perform any duty or exercise any
right or power unless it receives indemnity satisfactory to it against any loss,
liability, cost or expense (including, without limitation, reasonable fees of
counsel).
(f) The Trustee shall not be obligated to pay interest on any
money or other assets received by it unless otherwise agreed in writing with the
Company. Assets held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(g) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, coupon, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company, personally
or by agent or attorney at the sole cost of the Company and shall incur no
liability or additional liability of any kind by reason of such inquiry or
investigation.
(h) The Trustee shall not be deemed to have notice or actual
knowledge of any Event of Default unless a Responsible Officer of the
Trustee has actual knowledge thereof or unless written notice of any event which
is in fact a Default is received by the Trustee pursuant to Section 14.2 hereof,
and such notice references the Securities and this Indenture.
(i) The rights, privileges, protections, immunities and
benefits given to the Trustee hereunder, including, without limitation, its
right to be indemnified, are extended to, and shall be enforceable by, the
Trustee in each of its capacities hereunder, and each Paying Agent,
authenticating agent, Conversion Agent or Registrar acting hereunder.
5.2 SECTION CERTAIN RIGHTS OF TRUSTEE .
<PAGE>
47
Subject to the provisions of Section 5.1 hereof and subject to
Section 315(a) through (d) of the TIA:
(1) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper person. The
Trustee need not investigate any fact or matter stated in the document.
(2) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, or both. The
Trustee shall not be liable for any action it takes or omits to take in
good faith in reliance on the Officers' Certificate or Opinion of
Counsel
(3) The Trustee may act through attorneys and agents and shall
not be responsible for the misconduct or negligence of any attorney or
agent appointed with due care.
(4) The Trustee shall not be liable for any action taken or
omitted to be taken by it in good faith which it believed to be
authorized or within the discretion or rights or powers conferred upon
it by this Indenture, unless the Trustee's conduct constitutes
negligence.
(5) The Trustee may consult with counsel of its selection and
the advice of such counsel as to matters of law shall be full and
complete authorization and protection in respect of any action taken,
omitted or suffered by it hereunder in good faith and in accordance
with the advice or opinion of such counsel.
(6) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be
sufficient if signed by an Officer of the Company.
(7) The permissive rights of the Trustee to do things
enumerated in this Indenture shall not be construed as a duty unless so
specified herein.
5.3 SECTION INDIVIDUAL RIGHTS OF TRUSTEE .
The Trustee in its individual or any other capacity may
become the owner or pledgee of Securities and may otherwise deal with the
Company or any Affiliate of the Company with the same rights it would have if it
were not Trustee. However, in the event that the Trustee acquires any
conflicting interest (as such term is defined in Section 310(b) of the TIA), it
must eliminate such conflict within 90 days, apply to the SEC for permission to
continue as trustee (to the extent permitted under Section 310(b) of the TIA) or
resign. Any agent may do the same
<PAGE>
48
with like rights and duties. The Trustee is also subject to Sections 5.11 and
5.12 hereof.
5.4 SECTION MONEY HELD IN TRUST .
Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise expressly agreed with the Company.
5.5 SECTION TRUSTEE'S DISCLAIMER .
The recitals contained herein and in the Securities
(except for those in the certificate of authentication) shall be taken as the
statements of the Company, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity,
sufficiency or priority of this Indenture or of the Securities. The Trustee
shall not be accountable for the use or application by the Company of Securities
or the proceeds thereof.
5.6 SECTION NOTICE OF DEFAULTS .
Within 90 days after the occurrence of any Default or
Event of Default hereunder of which the Trustee has received written notice, the
Trustee shall give notice to Holders pursuant to Section 14.2 hereof, unless
such Default or Event of Default shall have been cured or waived; provided,
however, that, except in the case of a Default or Event of Default in the
payment of the principal of or premium, if any, or interest (including
Liquidated Damages, if any), or in the payment of any redemption or repurchase
obligation on any Security, the Trustee shall be protected in withholding such
notice if and so long as Responsible Officers of the Trustee in good faith
determine that the withholding of such notice is in the interest of the Holders.
5.7 SECTION REPORTS BY TRUSTEE TO HOLDERS.
The Trustee shall transmit to Holders such reports
concerning the Trustee and its actions under this Indenture as may be required
by Section 313 of the TIA at the times and in the manner provided by the TIA.
A copy of each report at the time of its mailing to
Holders shall be filed with the SEC, if required, and each stock exchange, if
any, on which the Securities are listed. The Company shall promptly notify
the Trustee when the Securities become listed on any stock exchange.
5.8 SECTION COMPENSATION AND INDEMNIFICATION.
<PAGE>
49
The Company covenants and agrees to pay to the Trustee
from time to time, and the Trustee shall be entitled to, reasonable compensation
(which shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust) and the Company covenants and
agrees to pay or reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by or on behalf of it in
accordance with any of the provisions of this Indenture (including the
reasonable compensation and the expenses and disbursements of its counsel and of
all agents and other persons not regularly in its employ), except to the extent
that any such expense, disbursement or advance is due to its negligence or bad
faith. When the Trustee incurs expenses or renders services in connection with
an Event of Default specified in Section 4.1 hereof, the expenses (including the
reasonable charges and expenses of its counsel) and the compensation for the
services are intended to constitute expenses of administration under any
bankruptcy law. The Company also covenants to indemnify the Trustee and its
officers, directors, employees and agents for, and to hold such Persons harmless
against, any loss, liability or expense incurred by them, arising out of or in
connection with the acceptance or administration of this Indenture or the trusts
hereunder or the performance of their duties hereunder, including the costs and
expenses of defending themselves against or investigating any claim of liability
in the premises, except to the extent that any such loss, liability or expense
was due to the negligence or willful misconduct of such Persons. The obligations
of the Company under this Section 5.8 to compensate and indemnify the Trustee
and its officers, directors, employees and agents and to pay or reimburse such
Persons for expenses, disbursements and advances shall constitute additional
indebtedness hereunder and shall survive the satisfaction and discharge of this
Indenture or the earlier resignation or removal of the Trustee. Such additional
indebtedness shall be a senior claim to that of the Securities upon all property
and funds held or collected by the Trustee as such, except funds held in trust
for the benefit of the Holders of particular Securities, and the Securities are
hereby subordinated to such senior claim. "Trustee" for purposes of this Section
5.8 shall include any predecessor Trustee, but the negligence or willful
misconduct of any Trustee shall not affect the indemnification of any other
Trustee.
5.9 SECTION REPLACEMENT OF TRUSTEE .
A resignation or removal of the Trustee and appointment of
a successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 5.9.
The Trustee may resign and be discharged from the trust
hereby created by so notifying the Company in writing. The Holders of at least a
majority in aggregate principal amount of Outstanding Securities may remove the
Trustee by so notifying the Trustee and the Company in writing. The Company must
remove the Trustee if:
(i) the Trustee fails to comply with Section 5.10 hereof
or Section 310 of the
<PAGE>
50
TIA;
(ii) the Trustee becomes incapable of acting.
(iii) the Trustee is adjudged a bankrupt or an insolvent
or an order for relief is entered with respect to the Trustee under
any Bankruptcy Law; or
(iv) a Custodian or public officer takes charge of the
Trustee or its property.
If the Trustee resigns or is removed or if a vacancy
exists in the office of the Trustee for any reason, the Company shall promptly
appoint a successor Trustee. The Trustee shall be entitled to payment of its
fees and reimbursement of its expenses while acting as Trustee. Within one year
after the successor Trustee takes office, the Holders of at least a majority in
aggregate principal amount of Outstanding Securities may appoint a successor
Trustee to replace the successor Trustee appointed by the Company.
Any Holder may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee if the Trustee fails to comply with Section 5.10 hereof.
If an instrument of acceptance by a successor Trustee
shall not have been delivered to the Trustee within 30 days after the giving of
such notice of resignation or removal, the resigning or removed Trustee, as the
case may be, may petition, at the expense of the Company, any court of competent
jurisdiction for the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of
its appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The Company shall mail a notice of the successor Trustee's
succession to the Holders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee. Notwithstanding
replacement of the Trustee pursuant to this Section 5.9, the Company's
obligations under Section 5.8 hereof shall continue for the benefit of the
retiring Trustee with respect to expenses, losses and liabilities incurred by it
prior to such replacement.
5.10 SECTION SUCCESSOR TRUSTEE BY MERGER, ETC.
Subject to Section 5.10 hereof, if the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business to, another corporation or national banking
association, the successor entity without any further act shall be the successor
Trustee as to the Securities.
<PAGE>
51
5.11 SECTION CORPORATE TRUSTEE REQUIRED; ELIGIBILITY .
The Trustee shall at all times satisfy the requirements of
Section 310(a)(1), (2) and (5) of the TIA. The Trustee shall at all times have
(or, in the case of a corporation included in a bank holding company system, the
related bank holding company shall at all times have), a combined capital and
surplus of at least $100 million as set forth in its (or its related bank
holding company's) most recent published annual report of condition. The Trustee
is subject to Section 310(b) of the TIA.
5.12 SECTION COLLECTION OF CLAIMS AGAINST THE COMPANY.
The Trustee is subject to Section 311(a) of the TIA,
excluding any creditor relationship listed in Section 311(b) of the TIA. A
Trustee who has resigned or been removed shall be subject to Section 311(a) of
the TIA to the extent indicated therein.
6 ARTICLE
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
6.1 SECTION COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN
TERMS .
The Company shall not consolidate with or merge into any
other Person or convey, 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, transfer or
lease its properties and assets substantially as an entirety to the Company,
unless:
(1) in the event that the Company shall consolidate with
or merge into another Person or convey, 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 or transfer, or which
leases, the properties and assets of the Company substantially as an
entirety shall be a corporation, limited liability company, partnership
or trust organized and validly existing under the laws of the United
States of America, any State thereof or the District of Columbia and,
if the entity surviving such transaction or transferee entity is not
the Company, then such surviving or transferee entity shall expressly
assume, by an indenture supplemental hereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, the due and punctual
payment of the principal of and premium, if any and interest (including
Liquidated Damages, if any), on all the Securities and the performance
of every covenant of this Indenture on the party of the Company to be
performed or observed and shall have
<PAGE>
52
provided for conversion rights in accordance with Section 12.11 hereof;
(2) at the time of consummation 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; and
(3) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article and that all
conditions precedent herein provided for relating to such transaction
have been complied with.
6.2 SECTION SUCCESSOR CORPORATION SUBSTITUTED .
Upon any consolidation or merger by the Company with or
into any other corporation or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety to any Person,
in accordance with Section 6.1 hereof, the successor corporation formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor corporation had been named as the Company
herein, and thereafter, except in the case of a lease to another Person, the
predecessor corporation shall be relieved of all obligations and covenants under
this Indenture and the Securities.
7 ARTICLE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
7.1 SECTION WITHOUT CONSENT OF HOLDERS OF SECURITIES .
Without the consent of any Holders of Securities, the
Company, when authorized by a Board Resolution, and the Trustee, at any time and
from time to time, may amend this Indenture and the Securities to:
(a) add to the covenants of the Company for the benefit of
the Holders of Securities;
(b) surrender any right or power herein conferred upon the
Company;
(c) make provision with respect to the conversion rights
of Holders of Securities pursuant to Section 12.11 hereof;
<PAGE>
53
(d) provide for the assumption of the Company's
obligations to the Holders of Securities in the case of a merger,
consolidation, conveyance, transfer or lease pursuant to
Article 6 hereof;
(e) reduce the Conversion Price; provided, that such
reduction in the Conversion Price shall not adversely affect the
interest of the Holders of Securities (after taking into account
tax and other consequences of such reduction) in any material
respect;
(f) comply with the requirements of the SEC in order to
effect or maintain the qualification of this Indenture under the
TIA;
(g) make any changes or modifications to this Indenture
necessary in connection with the registration of any Securities
under the Securities Act as contemplated in the Registration
Rights Agreement, provided, that such action pursuant to this
clause (g) does not adversely affect the interests of the Holders
of Securities in any material respect;
(h) cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other
provision herein or which is otherwise defective, or to make any
other provisions with respect to matters or questions arising
under this Indenture which the Company and the Trustee may deem
necessary or desirable and which shall not be inconsistent with
the provisions of this Indenture, provided, that such action
pursuant to this clause (h) does not adversely affect the
interests of the Holders of Securities in any material respect;
(i) add or modify any other provisions with respect to
matters or questions arising under this Indenture which the
Company and the Trustee may deem necessary or desirable and which
shall not be inconsistent with the provisions of this Indenture,
provided, that such action pursuant to this clause (i) does not
adversely affect the interests of the Holders of Securities in
any material respect; or
(j) make provision for the establishment of a book-entry
system, in which Holders would have the option to participate,
for the clearance and settlement of transactions in Securities
originally issued in definitive form.
7.2 SECTION WITH CONSENT OF HOLDERS OF SECURITIES .
Except as provided below in this Section 7.2, this
Indenture or the Securities may be amended or supplemented, and noncompliance in
any particular instance with any provision of this Indenture or the Securities
may be waived, in each case (i) with the written consent of the Holders of at
least a majority in aggregate principal amount of the Outstanding Securities or
(ii)
<PAGE>
54
by the adoption of a resolution, at a meeting of Holders of the Outstanding
Securities at which a quorum is present, by the Holders of a majority in
aggregate principal amount of the Outstanding Securities represented at such
meeting.
Without the written consent or the affirmative vote of
each Holder of Securities, an amendment or waiver under this Section 7.2 may
not:
(a) change the Stated Maturity of the principal of, or any
installment of interest (including Liquidated Damages, if any) on, any
Security;
(b) reduce the principal amount of, or premium, if any, on
any Security;
(c) reduce the Interest Rate or interest (including
Liquidated Damages, if any) on any Security;
(d) change the currency of payment of principal of,
premium, if any, or interest (including Liquidated Damages, if any) on
any Security;
(e) impair the right of any Holder to institute suit for
the enforcement of any payment in or with respect to any Security;
(f) modify the obligation of the Company to maintain an
office or agency in The City of New York pursuant to Section 9.2
hereof;
(g) except as permitted by Section 12.11 hereof, adversely
affect the Repurchase Right or the right to convert any Security as
provided in Article 12 hereof;
(h) modify the subordination provisions of the Securities
in a manner adverse to the Holders of Securities,
(i) modify any of the provisions of this Section, Section
4.4 or Section 14.11, except to increase any percentage contained
herein or therein or to provide that certain other provisions of this
Indenture cannot be modified or waived without the consent of the
Holder of each Outstanding Security affected thereby; or
(j) reduce the requirements of Section 8.4 hereof for
quorum or voting, or reduce the percentage in aggregate principal
amount of the Outstanding Securities the consent of whose Holders is
required for any such supplemental indenture or the consent of whose
Holders is required for any waiver provided for in this Indenture.
It shall not be necessary for any Act of Holders of
Securities under this Section to
<PAGE>
55
approve the particular form of any proposal supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
7.3 SECTION Compliance with Trust Indenture Act.
Every amendment to this Indenture or the Securities shall
be set forth in a supplemental indenture that complies with the TIA as then in
effect.
7.4 SECTION REVOCATION OF CONSENTS AND EFFECT OF
CONSENTS OR VOTES.
Until an amendment, supplement or waiver becomes effective, a
written consent to it by a Holder is a continuing consent by the Holder and
every subsequent Holder of a Security or portion of a Security that evidences
the same debt as the consenting Holder's Security, even if notation of the
consent is not made on any Security; provided, however, that unless a record
date shall have been established, any such Holder or subsequent Holder may
revoke the consent as to its Security or portion of a Security if the Trustee
receives written notice of revocation before the date the amendment, supplement
or waiver becomes effective.
An amendment, supplement or waiver becomes effective on
receipt by the Trustee of written consents from or affirmative votes by, as the
case may be, the Holders of the requisite percentage of aggregate principal
amount of the Outstanding Securities, and thereafter shall bind every Holder of
Securities; provided, however, if the amendment, supplement or waiver makes a
change described in any of the clauses (a) through (j) of Section 7.2 hereof,
the amendment, supplement or waiver shall bind only each Holder of a Security
which has consented to it or voted for it, as the case may be, and every
subsequent Holder of a Security or portion of a Security that evidences the same
indebtedness as the Security of the consenting or affirmatively voting, as the
case may be, Holder.
7.5 SECTION NOTATION ON OR EXCHANGE OF SECURITIES.
If an amendment, supplement or waiver changes the terms of a
Security:
(a) the Trustee may require the Holder of a Security to
deliver such Securities to the Trustee, the Trustee may place an
appropriate notation on the Security about the changed terms and return
it to the Holder and the Trustee may place an appropriate notation on
any Security thereafter authenticated; or
(b) if the Company or the Trustee so determines, the Company
in exchange for the Security shall issue and the Trustee shall
authenticate a new Security that reflects the changed terms.
<PAGE>
56
Failure to make the appropriate notation or issue a new
Security shall not affect the validity and effect of such amendment, supplement
or waiver.
7.6 SECTION Trustee to Sign Amendment, Etc.
The Trustee shall sign any amendment authorized pursuant
to this Article 7 if the amendment does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If the amendment does adversely affect
the rights, duties, liabilities or immunities of the Trustee, the Trustee may
but need not sign it. In signing or refusing to sign such amendment, the Trustee
shall be entitled to receive and shall be fully protected in relying upon an
Officers' Certificate and an Opinion of Counsel as conclusive evidence that such
amendment is authorized or permitted by this Indenture.
8 ARTICLE
MEETING OF HOLDERS OF SECURITIES
8.1 SECTION PURPOSES FOR WHICH MEETINGS MAY BE CALLED .
A meeting of Holders of Securities may be called at any
time and from time to time pursuant to this Article to make, give or take any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be made, given or taken by Holders of
Securities.
8.2 SECTION CALL NOTICE AND PLACE OF MEETINGS .
(a) The Trustee may at any time call a meeting of Holders of
Securities for any purpose specified in Section 8.1 hereof, to be held at such
time and at such place in The City of New York. Notice of every meeting of
Holders of Securities, setting forth the time and the place of such meeting and
in general terms the action proposed to be taken at such meeting, shall be
given, in the manner provided in Section 14.2 hereof, not less than 21 nor more
than 180 days prior to the date fixed for the meeting.
(b) In case at any time the Company, pursuant to a Board
Resolution, or the Holders of at least 10% in principal amount of the
Outstanding Securities shall have requested the Trustee to call a meeting of the
Holders of Securities for any purpose specified in Section 8.1 hereof, by
written request setting forth in reasonable detail the action proposed to be
taken at the meeting, and the Trustee shall not have made the first publication
of the notice of such meeting within 21 days after receipt of such request or
shall not thereafter proceed to cause the meeting to be held as provided herein,
then the Company or the Holders of Securities in the amount specified, as the
case may be, may determine the time and the place in The City of New York for
<PAGE>
57
such meeting and may call such meeting for such purposes by giving notice
thereof as provided in paragraph (a) of this Section.
8.3 SECTION PERSONS ENTITLED TO VOTE AT MEETINGS .
To be entitled to vote at any meeting of Holders of
Securities, a Person shall be (a) a Holder of one or more Outstanding
Securities, or (b) a Person appointed by an instrument in writing as proxy for a
Holder or Holders of one or more Outstanding Securities by such Holder or
Holders. The only Persons who shall be entitled to be present or to speak at any
meeting of Holders shall be the Persons entitled to vote at such meeting and
their counsel, any representatives of the Trustee and its counsel and any
representatives of the Company and its counsel.
8.4 SECTION QUORUM; ACTION .
The Persons entitled to vote a majority in principal
amount of the Outstanding Securities shall constitute a quorum. In the absence
of a quorum within 30 minutes of the time appointed for any such meeting, the
meeting shall, if convened at the request of Holders of Securities, be
dissolved. In any other case, the meeting may be adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of such meeting. In the absence of a quorum at any such adjourned
meeting, such adjourned meeting may be further adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of such adjourned meeting. Notice of the reconvening of any
adjourned meeting shall be given as provided in Section 8.2(a) hereof, except
that such notice need be given only once and not less than five days prior to
the date on which the meeting is scheduled to be reconvened. Notice of the
reconvening of an adjourned meeting shall state expressly the percentage of the
principal amount of the Outstanding Securities which shall constitute a quorum.
Subject to the foregoing, at the reconvening of any
meeting adjourned for a lack of a quorum, the Persons entitled to vote 25% in
principal amount of the Outstanding Securities at the time shall constitute a
quorum for the taking of any action set forth in the notice of the original
meeting.
At a meeting or an adjourned meeting duly reconvened and
at which a quorum is present as aforesaid, any resolution and all matters
(except as limited by the proviso to Section 7.2 hereof) shall be effectively
passed and decided if passed or decided by the Persons entitled to vote not less
than a majority in principal amount of Outstanding Securities represented and
voting at such meeting.
Any resolution passed or decisions taken at any meeting of
Holders of Securities
<PAGE>
58
duly held in accordance with this Section shall be binding on all the Holders of
Securities, whether or not present or represented at the meeting.
8.5 SECTION DETERMINATION OF VOTING RIGHTS; CONDUCT AND
ADJOURNMENT OF MEETINGS.
(a) Notwithstanding any other provisions of this Indenture,
the Trustee may make such reasonable regulations as it may deem advisable for
any meeting of Holders of Securities in regard to proof of the holding of
Securities and of the appointment of proxies and in regard to the appointment
and duties of inspectors of votes, the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other matters
concerning the conduct of the meeting as it shall deem appropriate. Except as
otherwise permitted or required by any such regulations, the holding of
Securities shall be proved in the manner specified in Section 1.3 hereof and the
appointment of any proxy shall be proved in the manner specified in Section 1.3
hereof. Such regulations may provide that written instruments appointing
proxies, regular on their face, may be presumed valid and genuine without the
proof specified in Section 1.3 hereof or other proof.
(b) The Trustee shall, by an instrument in writing, appoint a
temporary chairman (which may be the Trustee) of the meeting, unless the meeting
shall have been called by the Company or by Holders of Securities as provided in
Section 8.2(b) hereof, in which case the Company or the Holders of Securities
calling the meeting, as the case may be, shall in like manner appoint a
temporary chairman. A permanent chairman and a permanent secretary of the
meeting shall be elected by vote of the Persons entitled to vote a majority in
principal amount of the Outstanding Securities represented at the meeting.
(c) At any meeting each Holder of a Security or proxy shall be
entitled to one vote for each $1,000 principal amount of Securities held or
represented by him; provided, however, that no vote shall be cast or counted at
any meeting in respect of any Security challenged as not Outstanding and ruled
by the chairman of the meeting to be not Outstanding. The chairman of the
meeting shall have no right to vote, except as a Holder of a Security or proxy.
(d) Any meeting of Holders of Securities duly called
pursuant to Section 8.2 hereof at which a quorum is present may be adjourned
from time to time by Persons entitled to vote a majority in principal amount
of the Outstanding Securities represented at the meeting, and the meeting may
be held as so adjourned without further notice.
8.6 SECTION COUNTING VOTES AND RECORDING ACTION OF
MEETINGS.
The vote upon any resolution submitted to any meeting of
Holders of Securities shall be by written ballots on which shall be subscribed
the signatures of the Holders of
<PAGE>
59
Securities or of their representatives by proxy and the principal amounts and
serial numbers of the Outstanding Securities held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record, at least in
duplicate, of the proceedings of each meeting of Holders of Securities shall be
prepared by the secretary of the meeting and there shall be attached to said
record the original reports of the inspectors of votes on any vote by ballot
taken thereat and affidavits by one or more Persons having knowledge of the
facts setting forth a copy of the notice of the meeting and showing that said
notice was given as provided in Section 8.2 hereof and, if applicable, Section
8.4 hereof. Each copy shall be signed and verified by the affidavits of the
permanent chairman and secretary of the meeting and one such copy shall be
delivered to the Company and another to the Trustee to be preserved by the
Trustee, the latter to have attached thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the matters
therein stated.
9 ARTICLE
COVENANTS
9.1 SECTION PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST .
The Company will duly and punctually pay the principal of
and premium, if any, and interest (including Liquidated Damages, if any) in
respect of the Securities in accordance with the terms of the Securities and
this Indenture. The Company will deposit or cause to be deposited with the
Trustee as directed by the Trustee, no later than the day of the Stated Maturity
of any Security or installment of interest (including Liquidated Damages, if
any), all payments so due.
9.2 SECTION MAINTENANCE OF OFFICES OR AGENCIES .
The Company hereby appoints the Trustee's Corporate Trust
Office as its office in The City of New York, where Securities may be:
(i) presented or surrendered for payment;
(ii) surrendered for registration of transfer or exchange;
(iii) surrendered for conversion;
and where notices and demands to or upon the Company in respect of the
Securities and this Indenture maybe served.
<PAGE>
60
The Company may at any time and from time to time vary or
terminate the appointment of any such office or appoint any additional offices
for any or all of such purposes; provided, however, that until all of the
Securities have been delivered to the Trustee for cancellation, or moneys
sufficient to pay the principal of and premium, if any, and interest (including
Liquidated Damages, if any) on the Securities have been made available for
payment and either paid or returned to the Company pursuant to the provisions of
Section 9.3 hereof, the Company will maintain in The City of New York, an office
or agency where Securities may be presented or surrendered for payment, where
Securities may be surrendered for registration of transfer or exchange, where
Securities may be surrendered for conversion and where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Company will give prompt written notice to the Trustee, and notice to the
Holders in accordance with Section 14.2 hereof, of the appointment or
termination of any such agents and of the location and any change in the
location of any such office or agency.
If at any time the Company shall fail to maintain any such
required office or agency in The City of New York, or shall fail to furnish the
Trustee with the address thereof, presentations and surrenders may be made at,
and notices and demands may be served on, the Corporate Trust Office of the
Trustee.
9.3 SECTION CORPORATE EXISTENCE .
Subject to Article 6 hereof, the Company will do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence, rights (charter and statutory) and franchises;
provided, however, that the Company shall not be required to preserve any such
right or franchise if the Company determines that the preservation thereof is no
longer desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders.
9.4 SECTION MAINTENANCE OF PROPERTIES .
The Company will maintain and keep its properties and
every part thereof in such repair, working order and condition, and make or
cause to be made all such needful and proper repairs, renewals and replacements
thereto, as in the judgment of the Company are necessary in the interests of the
Company; provided, however, that nothing contained in this Section shall prevent
the Company from selling, abandoning or otherwise disposing of any of its
properties or discontinuing a part of its business from time to time if, in the
judgment of the Company, such sale, abandonment, disposition or discontinuance
is advisable and does not materially adversely affect the interests or business
of the Company.
9.5 SECTION PAYMENT OF TAXES AND OTHER CLAIMS .
<PAGE>
61
The Company will, and will cause any Significant
Subsidiary to, promptly pay and discharge or cause to be paid and discharged all
material taxes, assessments and governmental charges or levies lawfully imposed
upon it or upon its income or profits or upon any of its property, real or
personal, or upon any part thereof, as well as all material claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon its property; provided, however, that neither the Company nor any
Significant Subsidiary shall be required to pay or discharge or cause to be paid
or discharged any such tax, assessment, charge, levy, or claim if the amount,
applicability or validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company or such Significant Subsidiary, as
the case may be, shall have set aside on its books reserves deemed by it
adequate with respect thereto.
9.6 SECTION REPORTS.
(a) The Company shall deliver to the Trustee within 15
days after it files them with the SEC copies of the annual reports and of the
information, documents, and other reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) which the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act; provided, however, the Company shall not be required to deliver to
the Trustee any materials for which the Company has sought and received
confidential treatment by the SEC. The Company also shall comply with the other
provisions of Section 314(a) of the TIA.
(b) If at any time the Company is not subject to Section
13 or 15(d) of the Exchange Act, upon the request of a Holder of a Security, the
Company will promptly furnish or cause to be furnished to such Holder or to a
prospective purchaser of such Security designated by such Holder, as the case
may be, the information, if any, required to be delivered by it pursuant to Rule
144A(d)(4) under the Securities Act to permit compliance with Rule 144A in
connection with the resale of such Security; provided, however, that the Company
shall not be required to furnish such information in connection with any request
made on or after the date which is two years from the later of the date such
security was last acquired from the Company or an "affiliate" of the Company.
9.7 SECTION COMPLIANCE CERTIFICATE .
The Company shall deliver to the Trustee, within 120 days
after the end of each fiscal year of the Company, an Officers' Certificate
stating that in the course of the performance by the signers of their duties as
Officers of the Company, they would normally have knowledge of any failure by
the Company to comply with all conditions, or Default by the Company with
respect to any covenants, under this Indenture, and further stating whether or
not they have knowledge of any such failure or default and, if so, specifying
each such failure or Default and
<PAGE>
62
the nature thereof. In the event an Officer of the Company comes to have actual
knowledge of a Default, regardless of the date, the Company shall deliver an
Officers' Certificate to the Trustee specifying such Default and the nature and
status thereof.
9.8 SECTION RESALE OF CERTAIN SECURITIES .
During the period of two years after the last date of
original issuance of any Securities, the Company shall not, and shall not permit
any of its "affiliates" (as defined under Rule 144 under the Securities Act) to,
resell any Securities, or shares of Common Stock issuable upon conversion of the
Securities, which constitute "restricted securities" under Rule 144, that are
acquired by any of them within the United States or to "U.S. persons" (as
defined in Regulation S) except pursuant to an effective registration statement
under the Securities Act or an applicable exemption therefrom. The Trustee shall
have no responsibility or liability in respect of the Company's performance of
its agreement in the preceding sentence.
10 ARTICLE
REDEMPTION OF SECURITIES
10.1 SECTION OPTIONAL REDEMPTION .
The Securities are not redeemable prior to October 13,
2002. On or after October 13, 2002, the Company may, at its option, redeem the
Securities in whole at any time or in part from time to time, on any date prior
to maturity, upon notice as set forth in Section 10.4, at the redemption price
(expressed as percentages of the principal amount) set forth below if redeemed
during the 12-month period beginning October 13 of the years indicated and
ending October 12 of the following year:
<TABLE>
<CAPTION>
Redemption Price
----------------
<S> <C>
2002 103.375%
2003 102.250%
2004 101.125%
2005 100.000%
</TABLE>
("the Redemption Price"), plus any interest accrued but not paid to the
Redemption Date.
10.2 SECTION NOTICE TO TRUSTEE .
If the Company elects to redeem Securities pursuant to the
redemption
<PAGE>
63
provisions of Section 10.1 hereof, it shall notify the Trustee at least 30 days
prior to the Redemption Date of such intended Redemption Date, the principal
amount of Securities to be redeemed and the CUSIP numbers of the Securities to
be redeemed.
10.3 SECTION SELECTION OF SECURITIES TO BE REDEEMED .
If fewer than all the Securities are to be redeemed, the
Trustee shall select the particular Securities to be redeemed from the
Outstanding Securities by a method that complies with the requirements of any
exchange on which the Securities are listed, or, if the Securities are not
listed on an exchange, on a PRO RATA basis or by lot or in accordance with any
other method the Trustee considers fair and appropriate. Securities and portions
thereof that the Trustee selects shall be in amounts equal to the minimum
authorized denominations for Securities to be redeemed or any integral multiple
thereof.
If any Security selected for partial redemption is
converted in part before termination of the conversion right with respect to the
portion of the Security so selected, the converted portion of such Security
shall be deemed to be the portion selected for redemption (provided, however,
that the Holder of such Security so converted and deemed redeemed shall not be
entitled to any additional interest payment as a result of such deemed
redemption than such Holder would have otherwise been entitled to receive upon
conversion of such Security). Securities which have been converted during a
selection of Securities to be redeemed may be treated by the Trustee as
Outstanding for the purpose of such selection.
The Trustee shall promptly notify the Company and the
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to the redemption of Securities
shall relate, in the case of any Securities redeemed or to be redeemed only in
part, to the portion of the principal amount of such Securities which has been
or is to be redeemed.
10.4 SECTION NOTICE OF REDEMPTION .
Notice of redemption shall be given in the manner provided
in Section 14.2 hereof to the Holders of Securities to be redeemed. Such notice
shall be given not less than 20 nor more than 60 days prior to the Redemption
Date.
All notices of redemption shall state:
(1) the Redemption Date;
<PAGE>
64
(2) the Redemption Price and interest accrued and unpaid to
the Redemption Date, if any;
(3) if fewer than all the Outstanding Securities are to be
redeemed, the aggregate principal amount of Securities to be redeemed
and the aggregate principal amount of Securities which will be
outstanding after such partial redemption;
(4) that on the Redemption Date the Redemption Price and
interest accrued and unpaid to the Redemption Date, if any, will become
due and payable upon each such Security to be redeemed, and that
interest thereon shall cease to accrue on and after such date;
(5) the Conversion Price, the date on which the right to
convert the principal of the Securities to be redeemed will terminate
and the places where such Securities may be surrendered for conversion;
(6) the place or places where such Securities are to be
surrendered for payment of the Redemption Price and accrued and unpaid
interest, if any; and
(7) the CUSIP number of the Securities.
The notice given shall specify the last date on which
exchanges or transfers of Securities may be made pursuant to Section 2.7 hereof,
and shall specify the serial numbers of Securities and the portions thereof
called for redemption.
Notice of redemption of Securities to be redeemed at the
election of the Company shall be given by the Company or, at the Company's
request, by the Trustee in the name of and at the expense of the Company.
10.5 SECTION EFFECT OF NOTICE OF REDEMPTION .
Notice of redemption having been given as provided in
Section 10.4 hereof, the Securities 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 and unpaid interest) such Securities shall cease to
bear interest. Upon surrender of any such Security for redemption in accordance
with such notice, such Security shall be paid by the Company at the Redemption
Price; provided, however, the installments of interest on Securities whose
Stated Maturity is prior to or on the Redemption Date shall be payable to the
Holders of such Securities, or one or more Predecessor Securities, registered as
such on the relevant Record Date according to their terms and the provisions of
Section 2.7 hereof.
<PAGE>
65
If any Security 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 Interest Rate.
10.6 SECTION DEPOSIT OF REDEMPTION PRICE .
Prior to or on any Redemption Date, the Company shall
deposit with the Trustee or with a Paying Agent an amount of money sufficient to
pay the Redemption Price of all the Securities to be redeemed on that Redemption
Date, other than any Securities called for redemption on that date which have
been converted prior to the date of such deposit, and accrued and unpaid
interest, if any, on such Securities.
If any Security called for redemption is converted, any money
deposited with the Trustee or with a Paying Agent or so segregated and held in
trust for the redemption of such Security shall (subject to any right of the
Holder of such Security or any Predecessor Security to receive interest as
provided in the fourth to last paragraph of Section 2.1 hereof) be paid to the
Company on Company Request or, if then held by the Company, shall be discharged
from such trust.
10.7 SECTION SECURITIES REDEEMED IN PART .
Any Security which is to be redeemed only in part shall be
surrendered at an office or agency of the Company designated for that purpose
pursuant to Section 9.2 hereof (with, if the Company or the Trustee so requires,
due endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by, the Holder thereof or the Holder's
attorney duly authorized in writing), and the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities 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 Security so surrendered.
11 ARTICLE
REPURCHASE AT THE OPTION OF A HOLDER
UPON A CHANGE OF CONTROL
11.1 SECTION REPURCHASE RIGHT .
In the event that a Change in Control shall occur, each
Holder shall have the right
<PAGE>
66
(the "Repurchase Right"), at the Holder's option, but subject to the provisions
of Section 11.2 hereof, to require the Company to repurchase, and upon the
exercise of such right the Company shall repurchase, all of such Holder's
Securities not theretofore called for redemption, or any portion of the
principal amount thereof that is equal to $1,000 or any integral multiple
thereof (provided that no single Security may be repurchased in part unless the
portion of the principal amount of such Security to be Outstanding after such
repurchase is equal to $1,000 or integral multiples thereof), on the date (the
"Repurchase Date") that is 45 days after the date of the Company Notice at a
purchase price equal to 100% of the principal amount of the Securities to be
repurchased (the "Repurchase Price"), plus interest accrued and unpaid to, but
excluding, the Repurchase Date; provided, however, that installments of interest
on Securities whose Stated Maturity is prior to or on the Repurchase Date shall
be payable to the Holders of such Securities, or one or more Predecessor
Securities, registered as such on the relevant Record Date according to their
terms and the provisions of Section 2.1 hereof.
Subject to the fulfilment by the Company of the conditions
set forth in Section 11.2 hereof, the Company may elect to pay the Repurchase
Price by delivering the number of shares of Common Stock equal to (i) the
Repurchase Price divided by (ii) 95% of the average of the Closing Prices per
share of Common Stock for the five consecutive Trading Days immediately
preceding and including the third Trading Day prior to the Repurchase Date.
Whenever in this Indenture (including Sections 2.2, 4.1(a)
and 4.7 hereof) or Exhibit A annexed hereto there is a reference, in any
context, to the principal of any Security as of any time, such reference shall
be deemed to include reference to the Repurchase Price payable in respect to
such Security to the extent that such Repurchase Price is, was or would be so
payable at such time, and express mention of the Repurchase Price in any
provision of this Indenture shall not be construed as excluding the Repurchase
Price in those provisions of this Indenture when such express mention is not
made; provided, however, that, for the purposes of Article 13 hereof, such
reference shall be deemed to include reference to the Repurchase Price only to
the extent the Repurchase Price is payable in cash.
11.2 SECTION CONDITIONS TO THE COMPANY'S ELECTION TO PAY THE
REPURCHASE PRICE IN COMMON STOCK .
(a) The shares of Common Stock to be issued upon
repurchase of Securities hereunder:
(i) shall not require registration under any federal
securities law before such shares may be freely transferable
without being subject to any transfer restrictions under the
Securities Act upon repurchase or, if such registration is
required, such registration shall be completed and shall
become effective prior to the Repurchase Date; and
<PAGE>
67
(ii) shall not require registration with, or approval
of, any governmental authority under any state law or any
other federal law before shares may be validly issued or
delivered upon repurchase or if such registration is required
or such approval must be obtained, such registration shall be
completed or such approval shall be obtained prior to the
Repurchase Date.
(b) The shares of Common Stock to be listed upon
repurchase of Securities hereunder are, or shall have been, approved for listing
on the Nasdaq National Market or the New York Stock Exchange or listed on
another national securities exchange, in any case, prior to the Repurchase Date.
(c) All shares of Common Stock which may be issued upon
repurchase of Securities will be issued out of the Company's authorized but
unissued Common Stock and will, upon issue, be duly and validly issued and
fully paid and nonassessable and free of any preemptive or similar rights.
(d) If any of the conditions set forth in clauses (a)
through (d) of this Section 11.2 are not satisfied in accordance with the
terms thereof, the Repurchase Price shall be paid by the Company only in
cash.
11.3 SECTION NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT,
ETC.
(a) Unless the Company shall have theretofore called for
redemption all of the Outstanding Securities, prior to or on the 30th day after
the occurrence of a Change in Control, the Company, or, at the written request
and expense of the Company prior to or on the 30th day after such occurrence,
the Trustee, shall give to all Holders of Securities notice, in the manner
provided in Section 14.2 hereof, of the occurrence of the Change of Control and
of the Repurchase Right set forth herein arising as a result thereof (the
"Company Notice"). The Company shall also deliver a copy of such notice of a
Repurchase Right to the Trustee. Each notice of a Repurchase Right shall state:
(1) the Repurchase Date;
(2) the date by which the Repurchase Right must exercised;
(3) the Repurchase Price and accrued and unpaid interest, if
any, and whether the Repurchase Price shall be paid by the Company in
cash or by delivery of shares of Common Stock;
(4) a description of the procedure which a Holder must follow
to exercise a Repurchase Right, and the place or places where such
Securities, are to be surrendered for \
<PAGE>
68
payment of the Repurchase Price and accrued and unpaid interest, if
any;
(5) that on the Repurchase Date the Repurchase Price and
accrued and unpaid interest, if any, will become due and payable upon
each such Security designated by the Holder to be repurchased, and that
interest thereon shall cease to accrue on and after said date;
(6) the Conversion Rate then in effect, the date on which the
right to convert the principal amount of the Securities to be
repurchased will terminate and the place where such Securities may be
surrendered for conversion, and
(7) the place or places where such Securities, together with
the Option to Elect Repayment Upon a Change of Control certificate
included in Exhibit A annexed hereto are to be delivered for payment of
the Repurchase Price and accrued and unpaid interest, if any.
No failure of the Company to give the foregoing notices or
defect therein shall limit any Holder's right to exercise a Repurchase Right or
affect the validity of the proceedings for the repurchase of Securities.
If any of the foregoing provisions or other provisions of
this Article 11 are inconsistent with applicable law, such law shall govern.
(b) To exercise a Repurchase Right, a Holder shall
deliver to the Trustee prior to or on the 30th day after the date of the
Company Notice:
(1) written notice of the Holder's exercise of such right,
which notice shall set forth the name of the Holder, the principal
amount of the Securities to be repurchased (and, if any Security is to
be repurchased in part, the serial number thereof, the portion of the
principal amount thereof to be repurchased) and a statement that an
election to exercise the Repurchase Right is being made thereby, and,
in the event that the Repurchase Price shall be paid in shares of
Common Stock, the name or names (with addresses) in which the
certificate or certificates for shares of Common Stock shall be issued,
and
(2) the Securities with respect to which the Repurchase
Right is being exercised.
Such written notice shall be irrevocable, except that the right of the Holder to
convert the Securities with respect to which the Repurchase Right is being
exercised shall continue until the close of business on the Business Day
immediately preceding the Repurchase Date.
<PAGE>
69
(c) In the event a Repurchase Right shall be exercised in
accordance with the terms hereof, the Company shall pay or cause to be paid to
the Trustee the Repurchase Price in cash or shares of Common Stock, as provided
above, for payment to the Holder on the Repurchase Date or, if shares of Common
Stock are to be paid, as promptly after the Repurchase Date as practicable,
together with accrued and unpaid interest to the Repurchase Date payable in cash
with respect to the Securities as to which the Repurchase Right has been
exercised; provided, however, that installments of interest that mature prior to
or on the Repurchase Date shall be payable in cash to the Holders of such
Securities, or one or more Predecessor Securities, registered as such at the
close of business on the relevant Regular Record Date.
(d) If any Security (or portion thereof) surrendered for
repurchase shall not be so paid on the Repurchase Date, the principal amount of
such Security (or portion thereof, as the case may be) shall, until paid, bear
interest to the extent permitted by applicable law from the Repurchase Date at
the Interest Rate, and each Security shall remain convertible into Common Stock
until the principal of such Security (or portion thereof, as the case may be)
shall have been paid or duly provided for.
(e) Any Security which is to be repurchased only in part
shall be surrendered to the Trustee (with, if the Company or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by the Holder thereof
or his attorney duly authorized in writing), and the Company shall execute, and
the Trustee shall authenticate and make available for delivery to the Holder of
such Security without service charge, a new Security or Securities, containing
identical terms and conditions, each in an authorized denomination in aggregate
principal amount equal to and in exchange for the unrepurchased portion of the
principal of the Security so surrendered.
(f) Any issuance of shares of Common Stock in respect of
the Repurchase Price shall be deemed to have been effected immediately prior to
the close of business on the Repurchase Date and the Person or Persons in whose
name or names any certificate or certificates for shares of Common Stock shall
be issuable upon such repurchase shall be deemed to have become on the
Repurchase Date the holder or holders of record of the shares represented
thereby; provided, however, that any surrender for repurchase on a date when the
stock transfer books of the Company shall be closed shall constitute the Person
or Persons in whose name or names the certificate or certificates for such
shares are to be issued as the record holder or holders thereof for all purposes
at the opening of business on the next succeeding day on which such stock
transfer books are open. No payment or adjustment shall be made for dividends or
distributions on any Common Stock issued upon repurchase of any Security
declared prior to the Repurchase Date.
(g) No fractions of shares of Common Stock shall be issued
upon repurchase of any Security or Securities. If more than one Security shall
be repurchased from the same Holder
<PAGE>
70
and the Repurchase Price shall be payable in shares of Common Stock, the number
of full shares which shall be issued upon such repurchase shall be computed on
the basis of the aggregate principal amount of the Securities (or specified
portions thereof) to be so repurchased. Instead of any fractional share of
Common Stock which would otherwise be issued on the repurchase of any Security
or Securities (or specified portions thereof), the Company shall pay a cash
adjustment in respect of such fraction (calculated to the nearest one-100th of a
share) in an amount equal to the same fraction of the Quoted Price of the Common
Stock as of the Trading Day preceding the Repurchase Date.
(h) Any issuance and delivery of certificates for shares
of Common Stock on repurchase of Securities shall be made without charge to the
Holder of Securities being repurchased for such certificates or for any tax or
duty in respect of the issuance or delivery of such certificates or the
Securities represented thereby; provided, however, that the Company shall not be
required to pay any tax or duty which may be payable in respect of (i) income of
the Holder or (ii) any transfer involved in the issuance or delivery of
certificates for shares of Common Stock in a name other than that of the Holder
of the Securities being repurchased, and no such issuance or delivery shall be
made unless the Persons requesting such issuance or delivery has paid to the
Company the amount of any such tax or duty or has established, to the
satisfaction of the Company, that such tax or duty has been paid.
(i) All Securities delivered for repurchase shall be
delivered to the Trustee to be canceled at the direction of the Trustee, which
shall dispose of the same as provided in Section 2.15 hereof.
12 ARTICLE
CONVERSION OF SECURITIES
12.1 SECTION CONVERSION RIGHT AND CONVERSION PRICE .
Subject to and upon compliance with the provisions of this
Article, at the option of the Holder thereof, any Security or any portion of the
principal amount thereof which is $1,000 or an integral multiple of $1,000 may
be converted at the principal amount thereof, or of such portion thereof, into
duly authorized, fully paid and nonassessable shares of Common Stock, at the
Conversion Price, determined as hereinafter provided, in effect at the time of
conversion. Such conversion right shall expire at the close of business on
October 13, 2006.
In case a Security or portion thereof is called for
redemption, such conversion right in respect of the Security or the portion so
called, shall expire at the close of business on the second Business Day
preceding the Redemption Date, unless the Company defaults in making the payment
due upon redemption. In the case of a Change of Control for which the Holder
<PAGE>
71
exercises its Repurchase Right with respect to a Security or portion thereof,
such conversion right in respect of the Security or portion thereof shall expire
at the close of business on the Business Day immediately preceding the
Repurchase Date.
The price at which shares of Common Stock shall be
delivered upon conversion (the "Conversion Price") shall be initially equal to
$32.0075 per share of Common Stock. The Conversion Price shall be adjusted in
certain instances as provided in paragraphs (a), (b), (c), (d), (e), (f), (h)
and (1) of Section 12.4 hereof.
12.2 SECTION EXERCISE OF CONVERSION RIGHT .
To exercise the conversion right, the Holder of any
Security to be converted shall surrender such Security duly endorsed or assigned
to the Company or in blank, at the office of any Conversion Agent, accompanied
by a duly signed conversion notice substantially in the form attached to the
Security to the Company stating that the Holder elects to convert such Security
or, if less than the entire principal amount thereof is to be converted, the
portion thereof to be converted.
Securities surrendered for conversion during the period
from the close of business on any Regular Record Date to the opening of business
on the next succeeding Interest Payment Date (except in the case of any Security
whose Maturity is prior to such Interest Payment Date) shall be accompanied by
payment in New York Clearing House funds or other funds acceptable to the
Company of an amount equal to the interest to be received on such Interest
Payment Date on the principal amount of Securities being surrendered for
conversion.
Securities shall be deemed to have been converted
immediately prior to the close of business on the day of surrender of such
Securities for conversion in accordance with the foregoing provisions, and at
such time the rights of the Holders of such Securities as Holders shall cease,
and the Person or Persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock at such time. As promptly as practicable on or after the
conversion date, the Company shall cause to be issued and delivered to such
Conversion Agent a certificate or certificates for the number of full shares of
Common Stock issuable upon conversion, together with payment in lieu of any
fraction of a share as provided in Section 12.3 hereof.
In the case of any Security which is converted in part
only, upon such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the Company, a
new Security or Securities of authorized denominations in aggregate principal
amount equal to the unconverted portion of the principal amount of such
Securities.
<PAGE>
72
If shares of Common Stock to be issued upon conversion of
a Restricted Security, or Securities to be issued upon conversion of a
Restricted Security in part only, are to be registered in a name other than that
of the Holder of such Restricted Security, such Holder must deliver to the
Conversion Agent a certificate in substantially the form set forth in the form
of Security set forth in Exhibit A annexed hereto, dated the date of surrender
of such Restricted Security and signed by such Holder, as to compliance with the
restrictions on transfer applicable to such Restricted Security. Neither the
Trustee nor any Conversion Agent, Registrar or Transfer Agent shall be required
to register in a name other than that of the Holder shares of Common Stock or
Securities issued upon conversion of any such Restricted Security not so
accompanied by a properly completed certificate.
The Company hereby initially appoints the Trustee as the
Conversion Agent.
12.3 SECTION FRACTIONS OF SHARES .
No fractional shares of Common Stock shall be issued upon
conversion of any Security or Securities. If more than one Security shall be
surrendered for conversion at one time by the same Holder, the number of full
shares which shall be issued upon conversion thereof shall be computed on the
basis of the aggregate principal amount of the Securities (or specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issued upon conversion of any Security or Securities (or
specified portions thereof), the Company shall pay a cash adjustment in respect
of such fraction (calculated to the nearest one-100th of a share) in an amount
equal to the same fraction of the Quoted Price of the Common Stock as of the
Trading Day preceding the date of conversion.
12.4 SECTION ADJUSTMENT OF CONVERSION PRICE .
The Conversion Price shall be subject to adjustments,
calculated by the Company, from time to time as follows:
(a) In case the Company shall hereafter pay a dividend or
make a distribution to all holders of the outstanding Common Stock in
shares of Common Stock, the Conversion Price in effect at the opening
of business on the date following the date fixed for the determination
of stockholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such Conversion Price by
a fraction:
(i) the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on
the Record Date (as defined in Section 12.4(g)) fixed for such
determination, and
(ii) the denominator of which shall be the sum of such
number of shares
<PAGE>
73
and the total number of shares constituting such dividend or other
distribution.
Such reduction shall become effective immediately after the opening of
business on the day following the Record Date. If any dividend or
distribution of the type described in this Section 12.4(a) is declared
but not so paid or made, the Conversion Price shall again be adjusted
to the Conversion Price which would then be in effect if such dividend
or distribution had not been declared.
(b) In case the outstanding shares of Common Stock
shall be subdivided into a greater number of shares of Common Stock,
the Conversion Price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective
shall be proportionately reduced, and conversely, in case
outstanding shares of Common Stock shall be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at
the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased,
such reduction or increase, as the case may be, to become effective
immediately after the opening of business on the day following the
day upon which such subdivision or combination becomes effective.
(c) In case the Company shall issue rights or warrants
(other than any rights or warrants referred to in Section 12.4(d))
to all holders of its outstanding shares of Common Stock entitling
them to subscribe for or purchase shares of Common Stock (or
securities convertible into Common Stock) at a price per share (or
having a conversion price per share) less than the Current Market
Price (as defined in Section 12.4(g)) on the Record Date fixed for
the determination of stockholders entitled to receive such rights or
warrants, the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price
in effect at the opening of business on the date after such Record
Date by a fraction:
(i) the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on the
Record Date plus the number of shares which the aggregate offering
price of the total number of shares so offered for subscription or
purchase (or the aggregate conversion price of the convertible
securities so offered) would purchase at such Current Market Price,
and
(ii) the denominator of which shall be the number
of shares of Common Stock outstanding on the close of business on
the Record Date plus the total number of additional shares of Common
Stock so offered for subscription or purchase (or into which the
convertible securities so offered are convertible).
Such adjustment shall become effective immediately after the opening of
business on the
<PAGE>
74
day following the Record Date fixed for determination of
stockholders entitled to receive such rights or warrants. To the
extent that shares of Common Stock (or securities convertible into
Common Stock) are not delivered pursuant to such rights or warrants,
upon the expiration or termination of such rights or warrants the
Conversion Price shall be readjusted to the Conversion Price which
would then be in effect had the adjustments made upon the issuance
of such rights or warrants been made on the basis of the delivery of
only the number of shares of Common Stock (or securities convertible
into Common Stock) actually delivered. In the event that such rights
or warrants are not so issued, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if
such date fixed for the determination of stockholders entitled to
receive such rights or warrants had not been fixed. In determining
whether any rights or warrants entitle the holders to subscribe for
or purchase shares of Common Stock at less than such Current Market
Price, and in determining the aggregate offering price of such
shares of Common Stock, there shall be taken into account any
consideration received for such rights or warrants, the value of
such consideration if other than cash, to be determined by the Board
of Directors.
(d) In case the Company shall, by dividend or
otherwise, distribute to all holders of its Common Stock shares of
any class of capital stock of the Company (other than any dividends
or distributions to which Section 12.4(a) applies) or evidences of
its indebtedness, cash or other assets, including securities, but
excluding (1) any rights or warrants referred to in Section 12.4(c),
(2) any stock, securities or other property or assets (including
cash) distributed in connection with a reclassification, change,
merger, consolidation, statutory share exchange, combination, sale
or conveyance to which Section 12.11 hereof applies and (3)
dividends and distributions paid exclusively in cash (the securities
described in foregoing clauses (1), (2) and (3) hereinafter in this
Section 12.4(d) called the "securities"), then, in each such case,
subject to the second succeeding paragraph of this Section 12.4(d),
the Conversion Price shall be reduced so that the same shall be
equal to the price determined by multiplying the Conversion Price in
effect immediately prior to the close of business on the Record Date
(as defined in Section 12.4(g)) with respect to such distribution by
a fraction:
(i) the numerator of which shall be the Current
Market Price (determinedas provided in Section 12.4(g)) on
such date less the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive
and set forth in a Board Resolution) on such date of the
portion of the securities so distributed applicable to one
share of Common Stock (determined on the basis of the
number of shares of the Common Stock outstanding on the
Record Date), and
(ii) the denominator of which shall be such Current
Market Price.
<PAGE>
75
Such reduction shall become effective immediately prior to the
opening of business on the day following the Record Date. However,
in the event that the then fair market value (as so determined) of
the portion of the securities so distributed applicable to one share
of Common Stock is equal to or greater than the Current Market Price
on the Record Date, in lieu of the foregoing adjustment, adequate
provision shall be made so that each Holder shall have the right to
receive upon conversion of a Security (or any portion thereof) the
amount of securities such Holder would have received had such Holder
converted such Security (or portion thereof) immediately prior to
such Record Date. In the event that such dividend or distribution is
not so paid or made, the Conversion Price shall again be adjusted to
be the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.
If the Board of Directors determines the fair
market value of any distribution for purposes of this Section
12.4(d) by reference to the actual or when issued trading market for
any securities comprising all or part of such distribution, it must
in doing so consider the prices in such market over the same period
(the "Reference Period") used in computing the Current Market Price
pursuant to Section 12.4(g) to the extent possible, unless the Board
of Directors in a Board Resolution determines in good faith that
determining the fair market value during the Reference Period would
not be in the best interest of the Holder.
Rights or warrants distributed by the Company to
all holders of Common Stock entitling the holders thereof to
subscribe for or purchase shares of the Company's capital stock
(either initially or under certain circumstances), which rights or
warrants, until the occurrence of a specified event or events
("Trigger Event"):
(i) are deemed to be transferred with such shares
of Common Stock;
(ii) are not exercisable; and
(iii) are also issued in respect of future
issuances of Common Stock,
shall be deemed not to have been distributed for purposes of this
Section 12.4(d) (and no adjustment to the Conversion Price under
this Section 12.4(d) will be required) until the occurrence of the
earliest Trigger Event. If such right or warrant is subject to
subsequent events, upon the occurrence of which such right or
warrant shall become exercisable to purchase different securities,
evidences of indebtedness or other assets or entitle the holder to
purchase a different number or amount of the foregoing or to
purchase any of the foregoing at a different purchase price, then
the occurrence of each such event shall be deemed to be the date of
issuance and record date with respect to a new right or warrant (and
a termination or expiration of the existing right or warrant without
exercise by the
<PAGE>
76
holder thereof). In addition, in the event of any distribution (or
deemed distribution) of rights or warrants, or any Trigger Event or
other event (of the type described in the preceding sentence) with
respect thereto, that resulted in an adjustment to the Conversion
Price under this Section 12.4(d):
(1) in the case of any such rights or warrants
which shall all have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Price shall
be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the
case may be, as though it were a cash distribution, equal
to the per share redemption or repurchase price received by
a holder of Common Stock with respect to such rights or
warrant (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the
date of such redemption or repurchase, and
(2) in the case of such rights or warrants all of
which shall have expired or been terminated without
exercise, the Conversion Price shall be readjusted as if
such rights and warrants had never been issued.
For purposes of this Section 12.4(d) and Sections 12.4(a),
12.4(b) and 12.4(c), any dividend or distribution to which this
Section 12.4(d) is applicable that also includes shares of Common
Stock, a subdivision or combination of Common Stock to which Section
12.4(c) applies, or rights or warrants to subscribe for or purchase
shares of Common Stock to which Section 12.4(c) applies (or any
combination thereof), shall be deemed instead to be:
(1) a dividend or distribution of the evidences of
indebtedness, assets, shares of capital stock, rights or
warrants other than such shares of Common Stock, such
subdivision or combination or such rights or warrants to
which Sections 12.4(a), 12.4(b) and 12.4(c) apply,
respectively (and any Conversion Price reduction required
by this Section 12.4(d) with respect to such dividend or
distribution shall then be made), immediately followed by
(2) a dividend or distribution of such shares of
Common Stock, such subdivision or combination or such
rights or warrants (and any further Conversion Price
reduction required by Sections 12.4(a), 12.4(b) and 12.4(c)
with respect to such dividend or distribution shall then be
made), except:
(A) the Record Date of such dividend or
distribution shall be substituted as (x) "the date
fixed for the determination of stockholders
entitled to receive such dividend or other
distribution", "Record Date fixed for such
determinations" and "Record Date" within the
meaning of Section
<PAGE>
77
12.4(a), (y) "the day upon which such subdivision
becomes effective" and "the day upon which such
combination becomes effective" within the meaning
of Section 12.4(b), and (z) as "the date fixed for
the determination of stockholders entitled to
receive such rights or warrants", "the Record Date
fixed for the determination of the stockholders
entitled to receive such rights or warrants" and
such "Record Date" within the meaning of Section
12.4(c), and
(B) any shares of Common Stock included in
such dividend or distribution shall not be deemed
"outstanding at the close of business on the date
fixed for such determination" within the meaning of
Section 12.4(a) and any reduction or increase in
the number of shares of Common Stock resulting from
such subdivision or combination shall be
disregarded in connection with such dividend or
distribution.
(e) In case the Company shall, by dividend or
otherwise, distribute to all holders of its Common Stock cash
(excluding any cash that is distributed upon a reclassification,
change, merger, consolidation, statutory share exchange,
combination, sale or conveyance to which Section 12.11 hereof
applies or as part of a distribution referred to in Section 12.4(d)
hereof), in an aggregate amount that, combined together with:
(1) the aggregate amount of any other such
distributions to all holders of Common Stock made
exclusively in cash within the 12 months preceding the date
of payment of such distribution, and in respect of which no
adjustment pursuant to this Section 12.4(e) has been made,
and
(2) the aggregate of any cash plus the fair
market value (as determined by the Board of Directors,
whose determination shall be conclusive and set forth in a
Board Resolution) of consideration payable in respect of
any tender offer by the Company or any of its subsidiaries
for all or any portion of the Common Stock concluded within
the 12 months preceding the date of such distribution, and
in respect of which no adjustment pursuant to Section
12.4(f) hereof has been made,
exceeds 10% of the product of the Current Market Price (determined
as provided in Section 12.4(g)) on the Record Date with respect to
such distribution times the number of shares of Common Stock
outstanding on such date, then and in each such case, immediately
after the close of business on such date, the Conversion Price shall
be reduced so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the
close of business on such Record Date by a fraction:
<PAGE>
78
(i) the numerator of which shall be equal to
the Current Market Price on the Record Date less an amount
equal to the quotient of (x) the excess of such combined
amount over such 10% and (y) the number of shares of Common
Stock outstanding on the Record Date, and
(ii) the denominator of which shall be equal to
the Current Market Price on such date.
However, in the event that the then fair market value (as so
determined) of the portion of the securities so distributed
applicable to one share of Common Stock is equal to or greater than
the Current Market Price on the Record Date, in lieu of the
foregoing adjustment, adequate provision shall be made so that each
Holder shall have the right to receive upon conversion of a Security
(or any portion thereof) the amount of cash such Holder would have
received had such Holder converted such Security (or portion
thereof) immediately prior to such Record Date. In the event that
such dividend or distribution is not so paid or made, the Conversion
Price shall again be adjusted to be the Conversion Price which would
then be in effect if such dividend or distribution had not been
declared.
(f) In case a tender offer made by the Company or any
of its subsidiaries for all or any portion of the Common Stock shall
expire and such tender offer (as amended upon the expiration
thereof) shall require the payment to stockholders (based on the
acceptance (up to any maximum specified in the terms of the tender
offer) of Purchased Shares (as defined below)) of an aggregate
consideration having a fair market value (as determined by the Board
of Directors, whose determination shall be conclusive and set forth
in a Board Resolution) that combined together with:
(1) the aggregate of the cash plus the fair
market value (as determined by the Board of Directors,
whose determination shall be conclusive and set forth in a
Board Resolution), as of the expiration of such tender
offer, of consideration payable in respect of any other
tender offers, by the Company or any of its subsidiaries
for all or any portion of the Common Stock expiring within
the 12 months preceding the expiration of such tender offer
and in respect of which no adjustment pursuant to this
Section 12.4(f) has been made, and
(2) the aggregate amount of any distributions
to all holders of the Company's Common Stock made
exclusively in cash within 12 months preceding the
expiration of such tender offer and in respect of which no
adjustment pursuant to Section 12.4(e) has been made,
exceeds 10% of the product of the Current Market Price (determined
as provided in Section 12.4(g)) as of the last time (the "Expiration
Time") tenders could have been made
<PAGE>
79
pursuant to such tender offer (as it may be amended) times the
number of shares of Common Stock outstanding (including any tendered
shares) on the Expiration Time, then, and in each such case,
immediately prior to the opening of business on the day after the
date of the Expiration Time, the Conversion Price shall be adjusted
so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to close of business on
the date of the Expiration Time by a fraction:
(i) the numerator of which shall be the number
of shares of Common Stock outstanding (including any
tendered shares) at the Expiration Time multiplied by the
Current Market Price of the Common Stock on the Trading Day
next succeeding the Expiration Time, and
(ii) the denominator shall be the sum of (x) the
fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on
the acceptance (up to any maximum specified in the terms of
the tender offer) of all shares validly tendered and not
withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the
"Purchased Shares") and (y) the product of the number of
shares of Common Stock outstanding (less any Purchased
Shares) on the Expiration Time and the Current Market Price
of the Common Stock on the Trading Day next succeeding the
Expiration Time.
Such reduction (if any) shall become effective immediately prior to
the opening of business on the day following the Expiration Time. In
the event that the Company is obligated to purchase shares pursuant
to any such tender offer, but the Company is permanently prevented
by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if
such tender offer had not been made. If the application of this
Section 12.4(f) to any tender offer would result in an increase in
the Conversion Price, no adjustment shall be made for such tender
offer under this Section 12.4(f).
(g) For purposes of this Section 12.4, the following
terms shall have the meanings indicated:
(1) "Current Market Price" shall mean the average
of the daily Closing Prices per share of Common Stock for
the ten consecutive Trading Days immediately prior to the
date in question; provided, however, that if:
(i) the "ex" date (as hereinafter defined)
for any event (other than the issuance or
distribution requiring such computation) that
requires an
<PAGE>
80
adjustment to the Conversion Price pursuant to
Section 12.4(a), (b), (c), (d), (e) or (f) occurs
during such ten consecutive Trading Days, the
Closing Price for each Trading Day prior to the
"ex" date for such other event shall be adjusted by
multiplying such Closing Price by the same fraction
by which the Conversion Price is so required to be
adjusted as a result of such other event;
(ii) the "ex" date for any event (other
than the issuance or distribution requiring such
computation) that requires an adjustment to the
Conversion Price pursuant to Section 12.4(a), (b),
(c), (d), (e) or (f) occurs on or after the "ex"
date for the issuance or distribution requiring
such computation and prior to the day in question,
the Closing Price for each Trading Day on and after
the "ex" date for such other event shall be
adjusted by multiplying such Closing Price by the
reciprocal of the fraction by which the Conversion
Price is so required to be adjusted as a result of
such other event; and
(iii) the "ex" date for the issuance or
distribution requiring such computation is prior to
the day in question, after taking into account any
adjustment required pursuant to clause (i) or (ii)
of this proviso, the Closing Price for each Trading
Day on or after such "ex" date shall be adjusted by
adding thereto the amount of any cash and the fair
market value (as determined by the Board of
Directors in a manner consistent with any
determination of such value for purposes of Section
12.4(d) or (f), whose determination shall be
conclusive and set forth in a Board Resolution) of
the evidences of indebtedness, shares of capital
stock or assets being distributed applicable to one
share of Common Stock as of the close of business
on the day before such "ex" date.
For purposes of any computation under Section 12.4(f), the
Current Market Price of the Common Stock on any date shall
be deemed to be the average of the daily Closing Prices per
share of Common Stock for such day and the next two
succeeding Trading Days; provided, however, that if the
"ex" date for any event (other than the tender offer
requiring such computation) that requires an adjustment to
the Conversion Price pursuant to Section 12.4(a), (b), (c),
(d), (e) or (f) occurs on or after the Expiration Time for
the tender or exchange offer requiring such computation and
prior to the day in question, the Closing Price for each
Trading Day on and after the "ex" date for such other event
shall be adjusted by multiplying such Closing Price by the
reciprocal of the fraction by which the Conversion Price is
so required to be adjusted as a result of such other event.
For purposes of this paragraph, the term "ex" date, when
used:
<PAGE>
81
(A) with respect to any issuance or
distribution, means the first date on which the
Common Stock trades regular way on the relevant
exchange or in the relevant market from which the
Closing Price was obtained without the right to
receive such issuance or distribution;
(B) with respect to any subdivision or
combination of shares of Common Stock, means the
first date on which the Common Stock trades regular
way on such exchange or in such market after the
time at which such subdivision or combination
becomes effective, and
(C) with respect to any tender or exchange
offer, means the first date on which the Common
Stock trades regular way on such exchange or in
such market after the Expiration Time of such offer.
Notwithstanding the foregoing, whenever successive
adjustments to the Conversion Price are called for pursuant
to this Section 12.4, such adjustments shall be made to the
Current Market Price as may be necessary or appropriate to
effectuate the intent of this Section 12.4 and to avoid
unjust or inequitable results as determined in good faith
by the Board of Directors.
(2) "fair market value" shall mean the amount
which a willing buyer would pay a willing seller in an
arm's length transaction.
(1) "Record Date" shall mean, with respect to any
dividend, distribution or other transaction or event in
which the holders of Common Stock have the right to receive
any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged
for or converted into any combination of cash, securities
or other property, the date fixed for determination of
stockholders entitled to receive such cash, securities or
other property (whether such date is fixed by the Board of
Directors or by statute, contract or otherwise).
(h) The Company may make such reductions in the
Conversion Price, in addition to those required by Sections 12.4(a),
(b), (c), (d), (e) or (f), as the Board of Directors considers to be
advisable to avoid or diminish any income tax to holders of Common
Stock or rights to purchase Common Stock resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any
event treated as such for income tax purposes.
To the extent permitted by applicable law, the Company from
time to time may reduce the Conversion Price by any amount for any
period of time if the period is at least 20 days and the reduction
is irrevocable during the period and the Board of Directors
<PAGE>
82
determines in good faith that such reduction would be in the best
interests of the Company, which determination shall be conclusive
and set forth in a Board Resolution. Whenever the Conversion Price
is reduced pursuant to the preceding sentence, the Company shall
mail to the Trustee and each Holder at the address of such Holder as
it appears in the Register a notice of the reduction at least 15
days prior to the date the reduced Conversion Price takes effect,
and such notice shall state the reduced Conversion Price and the
period during which it will be in effect.
(i) No adjustment in the Conversion Price shall be
required unless such adjustment would require an increase or
decrease of at least 1% in such price; provided, however, that any
adjustments which by reason of this Section 12.4(i) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Article 12 shall
be made by the Company and shall be made to the nearest cent or to
the nearest one hundredth of a share, as the case may be. No
adjustment need be made for a change in the par value or no par
value of the Common Stock.
(j) In any case in which this Section 12.4 provides
that an adjustment shall become effective immediately after a Record
Date for an event, the Company may defer until the occurrence of
such event (i) issuing to the Holder of any Security converted after
such Record Date and before the occurrence of such event the
additional shares of Common Stock issuable upon such conversion by
reason of the adjustment required by such event over and above the
Common Stock issuable upon such conversion before giving effect to
such adjustment and (ii) paying to such holder any amount in cash in
lieu of any fraction pursuant to Section 12.3 hereof.
(k) For purposes of this Section 12.4, the number of
shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company but shall include shares
issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock. The Company will not pay any
dividend or make any distribution on shares of Common Stock held in
the treasury of the Company.
(l) If the distribution date for the rights provided in
the Company's rights agreement, if any, occurs prior to the date a
Security is converted, the Holder of the Security who converts such
Security after the distribution date is not entitled to receive the
rights that would otherwise be attached (but for the date of
conversion) to the shares of Common Stock received upon such
conversion; provided, however, that an adjustment shall be made to
the Conversion Price pursuant to clause 12.4(b) as if the rights
were being distributed to the common stockholders of the Company
immediately prior to such conversion. If such an adjustment is made
and the rights are later redeemed, invalidated or terminated, then a
corresponding reversing adjustment shall be made to the Conversion
Price, on an equitable basis, to take account of such event.
<PAGE>
83
12.5 SECTION NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.
Whenever the Conversion Price is adjusted as herein
provided (other than in the case of an adjustment pursuant to the second
paragraph of Section 12.4(h) for which the notice required by such paragraph
has been provided), the Company shall promptly file with the Trustee and any
Conversion Agent other than the Trustee an Officers' Certificate setting
forth the adjusted Conversion Price and showing in reasonable detail the
facts upon which such adjustment is based. Promptly after delivery of such
Officers' Certificate, the Company shall prepare a notice stating that the
Conversion Price has been adjusted and setting forth the adjusted Conversion
Price and the date on which each adjustment becomes effective, and shall mail
such notice to each Holder at the address of such Holder as it appears in the
Register within 20 days of the effective date of such adjustment. Failure to
deliver such notice shall not effect the legality or validity of any such
adjustment.
12.6 SECTION NOTICE PRIOR TO CERTAIN ACTIONS.
In case at any time after the date hereof:
(1) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash out
of its capital surplus or its consolidated retained earnings;
(2) the Company shall authorize the granting to the
holders of its Common Stock of rights or warrants to subscribe for
or purchase any shares of capital stock of any class (or of
securities convertible into shares of capital stock of any class) or
of any other rights;
(3) there shall occur any reclassification of the
Common Stock of the Company (other than a subdivision or combination
of its outstanding Common Stock, a change in par value, a change
from par value to no par value or a change from no par value to par
value), or any merger, consolidation, statutory share exchange or
combination to which the Company is a party and for which approval
of any shareholders of the Company is required, or the sale,
transfer or conveyance of all or substantially all of the assets of
the Company; or
(4) there shall occur the voluntary or involuntary
dissolution, liquidation or winding up of the Company;
the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of securities pursuant to Section 9.2 hereof, and
shall cause to be provided to the
<PAGE>
84
Trustee and all Holders in accordance with Section 14.2 hereof, at least 20
days (or 10 days in any case specified in clause (1) or (2) above) prior to
the applicable record or effective date hereinafter specified, a notice
stating:
(A) the date on which a record is to be taken for the
purpose of such dividend, distribution, rights or warrants, or, if a
record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend,
distribution, rights or warrants are to be determined, or
(B) the date on which such reclassification, merger,
consolidation, statutory share exchange, combination, sale,
transfer, conveyance, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, merger,
consolidation, statutory share exchange, sale, transfer,
dissolution, liquidation or winding up.
Neither the failure to give such notice nor any defect
therein shall affect the legality or validity of the proceedings or actions
described in clauses (1) through (4) of this Section 12.6.
12.7 SECTION COMPANY TO RESERVE COMMON STOCK.
The Company shall at all times use its best efforts to
reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock, for the purpose of effecting the
conversion of Securities, the full number of shares of fully paid and
nonassessable Common Stock then issuable upon the conversion of all
Outstanding Securities.
12.8 SECTION TAXES ON CONVERSIONS.
Except as provided in the next sentence, the Company will
pay any and all taxes (other than taxes on income) and duties that may be
payable in respect of the issue or delivery of shares of Common Stock on
conversion of Securities pursuant hereto. A Holder delivering a Security for
conversion shall be liable for and will be required to pay any tax or duty
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the Security or Securities to be converted, and no such issue or delivery
shall be made unless the Person requesting such issue has paid to the Company
the amount of any such tax or duty, or has established to the satisfaction of
the Company that such tax or duty has been paid.
12.9 SECTION COVENANT AS TO COMMON STOCK.
<PAGE>
85
The Company covenants that all shares of Common Stock which
may be issued upon conversion of Securities will upon issue be fully paid and
nonassessable and, except as provided in Section 12.8, the Company will pay
all taxes, liens and charges with respect to the issue thereof.
12.10 SECTION CANCELLATION OF CONVERTED SECURITIES.
All Securities delivered for conversion shall be delivered
to the Trustee to be canceled by or at the direction of the Trustee, which
shall dispose of the same as provided in Section 2.9.
12.11 SECTION EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER
OR SALE.
If any of following events occur, namely:
(i) any reclassification or change of the outstanding
shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination),
(ii) any merger, consolidation, statutory share exchange
or combination of the Company with another corporation as a result
of which holders of Common Stock shall be entitled to receive stock,
securities or other property or assets (including cash) with respect
to or in exchange for such Common Stock or
(iii) any sale or conveyance of the properties and assets
of the Company as, or substantially as, an entirety to any other
corporation as a result of which holders of Common Stock shall be
entitled to receive stock, securities or other property or assets
(including cash) with respect to or in exchange for such Common
Stock,
the Company or the successor or purchasing corporation, as the case may be,
shall execute with the Trustee a supplemental indenture (which shall comply
with the TIA as in force at the date of execution of such supplemental
indenture if such supplemental indenture is then required to so comply)
providing that such Security shall be convertible into the kind and amount of
shares of stock and other securities or property or assets (including cash)
which such Holder would have been entitled to receive upon such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance had such Securities been converted into
Common Stock immediately prior to such reclassification, change, merger,
consolidation, statutory share exchange, combination, sale or conveyance
assuming such holder of Common Stock did not exercise its rights of election,
if any, as to the kind or amount of securities, cash or other property
receivable upon such merger, consolidation, statutory share exchange, sale or
conveyance (provided that, if the kind or amount of securities, cash or other
property receivable upon such
<PAGE>
86
merger, consolidation, statutory share exchange, sale or conveyance is not
the same for each share of Common Stock in respect of which such rights of
election shall not have been exercised ("Non-Electing Share"), then for the
purposes of this Section 12.11 the kind and amount of securities, cash or
other property receivable upon such merger, consolidation, statutory share
exchange, sale or conveyance for each Non-Electing Share shall be deemed to
be the kind and amount so receivable per share by a plurality of the
Non-Electing Shares). Such supplemental indenture shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 12. If, in the case of any such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance, the stock or other securities and assets
receivable thereupon by a holder of shares of Common Stock includes shares of
stock or other securities and assets of a corporation other than the
successor or purchasing corporation, as the case may be, in such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance, then such supplemental indenture shall also
be executed by such other corporation and shall contain such additional
provisions to protect the interests of the Holders of the Securities as the
Board of Directors shall reasonably consider necessary by reason of the
foregoing, including to the extent practicable the provisions providing for
the Repurchase Rights set forth in Article 13 hereof.
The Company shall cause notice of the execution of such
supplemental indenture to be mailed to each Holder, at the address of such
Holder as it appears on the Register, within 20 days after execution thereof.
Failure to deliver such notice shall not affect the legality or validity of
such supplemental indenture.
The above provisions of this Section shall similarly apply
to successive reclassifications, mergers, consolidations, statutory share
exchanges, combinations, sales and conveyances.
If this Section 12.11 applies to any event or occurrence,
Section 12.4 hereof shall not apply.
12.12 SECTION RESPONSIBILITY OF TRUSTEE FOR CONVERSION PROVISIONS.
The Trustee, subject to the provisions of Section 5.1
hereof, and any Conversion Agent shall not at any time be under any duty or
responsibility to any Holder of Securities to determine whether any facts
exist which may require any adjustment of the Conversion Price, or with
respect to the nature or intent of any such adjustments when made, or with
respect to the method employed, or herein or in any supplemental indenture
provided to be employed, in making the same. Neither the Trustee, subject to
the provisions of Section 5.1 hereof, nor any Conversion Agent shall be
accountable with respect to the validity or value (of the kind or amount) of
any Common Stock, or of any other securities or property, which may at any
time be issued or delivered upon the conversion of any Security; and it or
they do not make any
<PAGE>
87
representation with respect thereto. Neither the Trustee, subject to the
provisions of Section 5.1 hereof, nor any Conversion Agent shall be
responsible for any failure of the Company to make any cash payment or to
issue, transfer or deliver any shares of stock or share certificates or other
securities or property upon the surrender of any Security for the purpose of
conversion; and the Trustee, subject to the provisions of Section 5.1 hereof,
and any Conversion Agent shall not be responsible or liable for any failure
of the Company to comply with any of the covenants of the Company contained
in this Article.
13ARTICLE
SUBORDINATION
13.1 SECTION SECURITIES SUBORDINATED TO SENIOR DEBT.
The Company covenants and agrees, and each Holder of
Securities, by such Holder's acceptance thereof, likewise covenants and
agrees, that the Indebtedness represented by the Securities and the payment
of the principal of and premium, if any, and interest (including Liquidated
Damages, if any) on each and all of the Securities is hereby expressly
subordinated and junior, to the extent and in the manner set forth and as set
forth in this Section 13.1, in right of payment to the prior payment in full
of all Senior Debt.
(a) In the event of any distribution of assets of the Company
upon any dissolution, winding up, liquidation or reorganization of the
Company, whether in bankruptcy, insolvency, reorganization or receivership
proceedings or upon an assignment for the benefit of creditors or any other
marshalling of the assets and liabilities of the Company or otherwise, the
holders of all Senior Debt shall first be entitled to receive payment of the
full amount due thereon in respect of all such Senior Debt and all other
amounts due or provision shall be made for such amount in cash, or other
payments satisfactory to the holders of Senior Debt, before the Holders of
any of the Securities are entitled to receive any payment or distribution of
any character, whether in cash, securities or other property, on account of
the principal of or premium, if any, or interest (including Liquidated
Damages, if any) on the Indebtedness evidenced by the Securities.
(b) In the event of any acceleration of Maturity of the
Securities because of an Event of Default, unless the full amount due in
respect of all Senior Debt is paid in cash or other form of payment
satisfactory to the holders of Senior Debt, no payment shall be made by the
Company with respect to the principal of, premium, if any, or interest
(including Liquidated Damages, if any) on the Securities or to acquire any of
the Securities (including any redemption, conversion or cash repurchase
pursuant to the exercise of the Repurchase Right), and the Company shall give
prompt written notice of such acceleration to such holders of Senior Debt.
(c) In the event of and during the continuance of any default
in payment of the
<PAGE>
88
principal of or premium, if any, or interest on, rent or other payment
obligation in respect of, any Senior Debt, unless all such payments due in
respect of such Senior Debt have been paid in full in cash or other payments
satisfactory to the holders of Senior Debt, no payment shall be made by the
Company with respect to the principal of, premium, if any, or interest
(including Liquidated Damages, if any) on the Securities or to acquire any of
the Securities (including any redemption, conversion or cash repurchase
pursuant to the exercise of the Repurchase Right). The Company shall give
prompt written notice to the Trustee of any default under any Senior Debt or
under any agreement pursuant to which Senior Debt may have been issued.
(d) During the continuance of any event of default with respect
to any Designated Senior Debt, as such event of default is defined under any
such Designated Senior Debt or in any agreement pursuant to which any
Designated Senior Debt has been issued (other than a default in payment of
the principal of or premium, if any, or interest on, rent or other payment
obligation in respect of any Designated Senior Debt), permitting the holder
or holders of such Designated Senior Debt to accelerate the maturity thereof
(or in the case of any lease, permitting the landlord either to terminate the
lease or to require the Company to make an irrevocable offer to terminate the
lease following an event of default thereunder), no payment shall be made by
the Company, directly or indirectly, with respect to principal of, premium,
if any, or interest (including Liquidated Damages, if any) on the Securities
for 179 days following notice in writing (a "Payment Blockage Notice") to the
Company, from any holder or holders of such Designated Senior Debt or their
representative or representatives or the trustee or trustees under any
indenture or under which any instrument evidencing any such Designated Senior
Debt may have been issued, that such an event of default has occurred and is
continuing, unless such event of default has been cured or waived or such
Designated Senior Debt has been paid in full; provided, however, if the
maturity of such Designated Senior Debt is accelerated (or in the case of any
lease, as a result of such event of default, the landlord under the lease has
given the Company notice of its intention to terminate the lease or to
require the Company to make an irrevocable offer to terminate the lease), no
payment may be made on the Securities until such Designated Senior Debt has
been paid in full in cash or other payment satisfactory to the holders of
such Designated Senior Debt or such acceleration (or termination, in the case
of a lease) has been cured or waived.
For purposes of this Section 13.1(d), such Payment Blockage
Notice shall be deemed to include notice of all other events of default under
such indenture or instrument which are continuing at the time of the event of
default specified in such Payment Blockage Notice. The provisions of this
Section 13.1(d) shall apply only to one such Payment Blockage Notice given in
any period of 365 days with respect to any issue of Designated Senior Debt,
and no such continuing event of default that existed or was continuing on the
date of delivery of any Payment Blockage Notice shall be, or shall be made,
the basis for a subsequent Payment Blockage Notice.
(e) In the event that, notwithstanding the foregoing provisions
of Sections
<PAGE>
89
13.1(a), 13.1(b), 13.1(c) and 13.1(d), any payment on account of principal,
premium, if any, or interest (including Liquidated Damages, if any) on the
Securities shall be made by or on behalf of the Company and received by the
Trustee, by any Holder or by any Paying Agent (or, if the Company is acting
as its own Paying Agent, money for any such payment shall be segregated and
held in trust):
(i) after the occurrence of an event specified in
Section 13.1(a) or 13.1(b), then, unless all Senior Debt is paid in
full in cash, or provision shall be made therefor,
(ii) after the happening of an event of default of the
type specified in Section 13.1(c) above, then, unless the amount of
such Senior Debt then due shall have been paid in full, or provision
made therefor or such event of default shall have been cured or
waived, or
(iii) after the happening of an event of default of the
type specified in Section 13.1(d) above and delivery of a Payment
Blockage Notice, then, unless such event of default shall have been
cured or waived or the 179-day period specified in Section 13.1(d)
shall have expired,
such payment (subject, in each case, to the provisions of Section 13.7
hereof) shall be held in trust for the benefit of, and shall be immediately
paid over to, the holders of Designated Senior Debt (unless an event
described in Section 13.1(a), (b) or (c) has occurred, in which case the
payment shall be held in trust for the benefit of, and shall be immediately
paid over to all holders of Senior Debt) or their representative or
representatives or the trustee or trustees under any indenture under which
any instruments evidencing any of the Designated Senior Debt or Senior Debt,
as the case may be, may have been issued, as their interests may appear.
13.2 SECTION SUBROGATION.
Subject to the payment in full of all Senior Debt to which
the Indebtedness evidenced by the Securities is in the circumstances
subordinated as provided in Section 13.1 hereof, the Holders of the
Securities shall be subrogated to the rights of the holders of such Senior
Debt to receive payments or distributions of cash, property or securities of
the Company applicable to such Senior Debt until all amounts owing on the
Securities shall be paid in full, and, as between the Company, its creditors
other than holders of such Senior Debt, and the Holders of the Securities, no
such payment or distribution made to the holders of Senior Debt by virtue of
this Article which otherwise would have been made to the holders of the
Securities shall be deemed to be a payment by the Company on account of such
Senior Debt, provided that the provisions of this Article are and are
intended solely for the purpose of defining the relative rights of the
Holders of the Securities, on the one hand, and the holders of Senior Debt,
on the other hand.
<PAGE>
90
13.3 SECTION OBLIGATION OF THE COMPANY IS ABSOLUTE AND
UNCONDITIONAL.
Nothing contained in this Article or elsewhere in this
Indenture or in the Securities is intended to or shall impair, as between the
Company, its creditors other than the holders of Senior Debt, and the Holders
of the Securities, the obligation of the Company, which is absolute and
unconditional, to pay to the Holders of the Securities the principal of and
premium, if any, and interest (including Liquidated Damages, if any) on the
Securities as and when the same shall become due and payable in accordance
with their terms, or is intended to or shall affect the relative rights of
the Holders of the Securities and creditors of the Company other than the
holders of Senior Debt, nor shall anything contained herein or therein
prevent the Trustee or the Holder of any Security from exercising all
remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article of the holders
of Senior Debt in respect of cash, property or securities of the Company
received upon the exercise of any such remedy.
13.4 SECTION MATURITY OF OR DEFAULT ON SENIOR DEBT.
Upon the maturity of any Senior Debt by lapse of time, acceleration
or otherwise, all principal of or premium, if any, or interest on, rent or
other payment obligations in respect of all such matured Senior Debt shall
first be paid in full, or such payment shall have been duly provided for,
before any payment on account of principal, or premium, if any, or interest
(including Liquidated Damages, if any) is made upon the Securities.
13.5 SECTION PAYMENTS ON SECURITIES PERMITTED.
Except as expressly provided in this Article, nothing
contained in this Article shall affect the obligation of the Company to make,
or prevent the Company from making, payments of the principal of, or premium,
if any, or interest (including Liquidated Damages, if any) on the Securities
in accordance with the provisions hereof and thereof, or shall prevent the
Trustee or any Paying Agent from applying any moneys deposited with it
hereunder to the payment of the principal of, or premium, if any, or interest
(including Liquidated Damages, if any) on the Securities.
13.6 SECTION EFFECTUATION OF SUBORDINATION BY TRUSTEE.
Each Holder of Securities, by such Holder's acceptance
thereof, authorizes and directs the Trustee on such Holder's behalf to take
such action as may be necessary or appropriate to effectuate the
subordination provided in this Article and appoints the Trustee such Holder's
attorney-in-fact for any and all such purposes.
<PAGE>
91
Upon any payment or distribution of assets of the Company
referred to in this Article, the Trustee and the Holders of the Securities
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which any such dissolution, winding up, liquidation
or reorganization proceeding affecting the affairs of the Company is pending
or upon a certificate of the trustee in bankruptcy, receiver, assignee for
the benefit of creditors, liquidating trustee or agent or other Person making
any payment or distribution, delivered to the Trustee or to the Holders of
the Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, and as to other facts pertinent
to the right of such Persons under this Article, and if such evidence is not
furnished, the Trustee may defer any payment to such Persons pending judicial
determination as to the right of such Persons to receive such payment.
13.7 SECTION KNOWLEDGE OF TRUSTEE.
Notwithstanding the provision of this Article or any other
provisions of this Indenture, the Trustee shall not be charged with knowledge
of the existence of any Senior Debt, of any default in payment of principal
of, premium, if any, or interest on, rent or other payment obligation in
respect of any Senior Debt, or of any facts which would prohibit the making
of any payment of moneys to or by the Trustee, or the taking of any other
action by the Trustee, unless a Responsible Officer of the Trustee having
responsibility for the administration of the trust established by this
Indenture shall have received written notice thereof from the Company, any
Holder of Securities, any Paying or Conversion Agent of the Company or the
holder or representative of any class of Senior Debt, and, prior to the
receipt of any such written notice, the Trustee shall be entitled in all
respects to assume that no such default or facts exist; provided, however,
that unless on the third Business Day prior to the date upon which by the
terms hereof any such moneys may become payable for any purpose the Trustee
shall have received the notice provided for in this Section 13.7, then,
anything herein contained to the contrary notwithstanding, the Trustee shall
have full power and authority to receive such moneys and apply the same to
the purpose for which they were received, and shall not be affected by any
notice to the contrary which may be received by it on or after such date.
13.8 SECTION TRUSTEE'S RELATION TO SENIOR DEBT.
The Trustee shall be entitled to all the rights set forth
in this Article with respect to any Senior Debt at the time held by it, to
the same extent as any other holder of Senior Debt and nothing in this
Indenture shall deprive the Trustee of any of its rights as such holder.
Nothing contained in this Article shall apply to claims of
or payments to the Trustee under or pursuant to Section 5.8 hereof.
With respect to the holders of Senior Debt, the Trustee
undertakes to perform or
<PAGE>
92
to observe only such of its covenants and obligations as are specifically set
forth in this Article, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt and the Trustee shall not be liable to any holder of
Senior Debt if it shall pay over or deliver to Holders, the Company or any
other Person moneys or assets to which any holder of Senior Debt shall be
entitled by virtue of this Article or otherwise.
13.9 SECTION RIGHTS OF HOLDERS OF SENIOR DEBT NOT IMPAIRED.
No right of any present or future holder of any Senior Debt
to enforce the subordination herein shall at any time or in any way be
prejudiced or impaired by any act or failure to act on the part of the
Company or by any noncompliance by the Company with the terms, provisions and
covenants of this Indenture, regardless of any knowledge thereof any such
holder may have or be otherwise charged with.
13.10 SECTION MODIFICATION OF TERMS OF SENIOR DEBT.
Any renewal or extension of the time of payment of any
Senior Debt or the exercise by the holders of Senior Debt of any of their
rights under any instrument creating or evidencing Senior Debt, including
without limitation the waiver of default thereunder, may be made or done all
without notice to or assent from the Holders of the Securities or the Trustee.
No compromise, alteration, amendment, modification,
extension, renewal or other change of, or waiver, consent or other action in
respect of, any liability or obligation under or in respect of, or of any of
the terms, covenants or conditions of any indenture or other instrument under
which any Senior Debt is outstanding or of such Senior Debt, whether or not
such release is in accordance with the provisions or any applicable document,
shall in any way alter or affect any of the provisions of this Article or of
the Securities relating to the subordination thereof.
13.11 SECTION CERTAIN CONVERSIONS NOT DEEMED PAYMENT.
For the purposes of this Article 13 only:
(1) the issuance and delivery of junior securities upon
conversion of Securities in accordance with Article 12 hereof shall
not be deemed to constitute a payment or distribution on account of
the principal of, premium, if any, or interest (including Liquidated
Damages, if any) on Securities or on account of the purchase or
other acquisition of Securities, and
(2) the payment, issuance or delivery of cash (except
in satisfaction of fractional shares pursuant to Section 12.3
hereof), property or securities (other than junior
<PAGE>
93
securities) upon conversion of a Security shall be deemed to
constitute payment on account of the principal of, premium, if any,
or interest (including Liquidated Damages, if any) on such Security.
For the purposes of this Section 13.11, the term "junior securities" means:
(a) shares of any common stock of the Company or
(b) other securities of the Company that are
subordinated in right of payment to all Senior Debt that may be
outstanding at the time of issuance or delivery of such securities
to substantially the same extent as, or to a greater extent that,
the Securities are so subordinated as provided in this Article.
Nothing contained in this Article 13 or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company, its
creditors (other than holders of Senior Debt) and the Holders of Securities,
the right, which is absolute and unconditional, of the Holder of any Security
to convert such Security in accordance with Article 12 hereof.
14 ARTICLE
OTHER PROVISIONS OF GENERAL APPLICATION
14.1 SECTION Trust Indenture Act Controls.
This Indenture is subject to the provisions of the TIA
which are required to be part of this Indenture, and shall, to the extent
applicable, be governed by such provisions.
14.2 SECTION NOTICES.
Any notice or communication to the Company or the Trustee
is duly given if in writing and delivered in person or mailed by first-class
mail to the address set forth below:
(a) if to the Company:
Inhale Therapeutic Systems, Inc.
150 Industrial Road
San Carlos, California
Attention: Stephen L. Hurst, Esq.
with a copy to:
Cooley Godward LLP
3000 Sand Hill Road
<PAGE>
94
Building #3, Suite 230
Menlo Park, California 94025
Attention: Mark P. Tanoury, Esq.
(b) if to the Trustee:
Chase Manhattan Bank and Trust Company, National
Association
101 California Street
Suite 2725
San Francisco, California 94111
Attention: Corporate Trust Administration
The Company or the Trustee by notice to the other may designate additional or
different addresses for subsequent notices or communications.
Any notice or communication to a Holder shall be mailed by
first-class mail to his address shown on the Register kept by the Registrar.
Failure to mail a notice or communication to a Holder or any defect in such
notice or communication shall not affect its sufficiency with respect to
other Holders.
If a notice or communication is mailed or sent in the
manner provided above within the time prescribed, it is duly given as of the
date it is mailed, whether or not the addressee receives it, except that
notice to the Trustee shall only be effective upon receipt thereof by the
Trustee.
If the Company mails a notice or communication to Holders,
it shall mail a copy to the Trustee at the same time.
14.3 SECTION Communication by Holders with Other Holders.
Holders may communicate pursuant to Section 312(b) of the
TIA with other Holders with respect to their rights under the Securities or
this Indenture. The Company, the Trustee, the Registrar and anyone else shall
have the protection of Section 312(c) of the TIA.
14.4 SECTION ACTS OF HOLDERS OF SECURITIES.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or
taken by Holders of Securities may be embodied in and evidenced by:
(1) one or more instruments of substantially similar tenor
signed by such
<PAGE>
95
Holders in person or by agent or proxy duly appointed in writing;
(2) the record of Holders of Securities voting in favor
thereof, either in person or by proxies duly appointed in writing,
at any meeting of Holders of Securities duly called and held in
accordance with the provisions of Article 8; or
(3) a combination of such instruments and any such record.
Except as herein otherwise expressly provided, such action shall become
effective when such instrument or instruments or record or both are delivered
to the Trustee and, where it is hereby expressly required, to the Company.
Such instrument or instruments and record (and the action embodied therein
and evidenced thereby) are herein sometimes referred to as the "Act" of the
Holders of Securities signing such instrument or instruments and so voting at
such meeting. Proof of execution of any such instrument or of a writing
appointing any such agent or proxy, or of the holding by any Person of a
Security, shall be sufficient for any purpose of this Indenture and (subject
to Section 5.1 hereof) conclusive in favor of the Trustee and the Company if
made in the manner provided in this Section. The record of any meeting of
Holders of Securities shall be proved in the manner provided in Section 8.6
hereof.
(b) The fact and date of the execution by any Person of any
such instrument or writing may be provided in any manner which the Trustee
reasonably deems sufficient.
(c) The principal amount and serial numbers of Securities held
by any Person, and the date of such Person holding the same, shall be proved
by the Register.
(d) Any request, demand, authorization, direction, notice,
consent, election, waiver or other Act of the Holders of any Security shall
bind every future Holder of the same Security and the Holder of every
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered
to be done by the Trustee or the Company in reliance thereon, whether or not
notation of such action is made upon such Security.
14.5 SECTION CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
In any case where several matters are required to be
certified by, or covered by an opinion of, any specified Person, it is not
necessary that all such matters be certified by, or covered by the opinion
of, only one such Person, or that they be so certified or covered by only one
document, but one such Person may certify or give an opinion with respect to
some matters and one or more other such Persons as to other matters, and any
such Person may certify or give an opinion as to such matters in one or
several documents.
<PAGE>
96
Any certificate or opinion of an officer of the Company may
be based, insofar as it relates to legal matters, upon an Opinion of Counsel,
unless such officer knows, or in the exercise of reasonable care should know,
that the Opinion of Counsel with respect to the matters upon which such
certificate or opinion is based is erroneous. Any such Opinion of Counsel may
be based, insofar as it relates to factual matters, upon a certificate or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care
should know, that the certificate or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two
or more applications, requests, consents, certificates, statements, opinions
or other instruments under this Indenture, they may, but need not, be
consolidated and form one instrument.
Upon any application or request by the Company to the
Trustee to take any action under any provision of this Indenture, the Company
shall furnish to the Trustee an Officers' Certificate stating that all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with and an Opinion of Counsel stating
that in the opinion of such Counsel all such conditions precedent, if any,
have been complied with, except that in the case of any such application or
request as to which the furnishing of such documents is specifically required
by any provision of this Indenture relating to such particular application or
request, no additional certificate or opinion need be furnished.
14.6 SECTION STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance
with a condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate
or opinion on behalf of the Company has read such covenant or
condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
<PAGE>
97
14.7 SECTION EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction
hereof.
14.8 SECTION SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the
Company shall bind its successors and assigns, whether so expressed or not.
14.9 SECTION SEPARABILITY CLAUSE.
In case any provision in this Indenture or the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
14.10 SECTION BENEFITS OF INDENTURE.
Nothing contained in this Indenture or in the Securities,
express or implied, shall give to any Person, other than the parties hereto
and their successors hereunder, the holders of Senior Debt and the Holders of
Securities, any benefit or legal or equitable right, remedy or claim under
this Indenture.
14.11 SECTION GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
14.12 SECTION COUNTERPARTS.
This instrument may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an
original but all such counterparts shall together constitute but one and the
same instrument.
14.13 SECTION LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption
Date or Stated Maturity of any Security or the last day on which a Holder of
a Security has a right to convert such Security shall not be a Business Day
at any Place of Payment or Place of Conversion, then
<PAGE>
98
(notwithstanding any other provision of this Indenture or of the Securities)
payment of interest (including Liquidated Damages, if any) or principal or
premium, if any, or conversion of the Securities, need not be made at such
Place of Payment or Place of Conversion on such day, but may be made on the
next succeeding Business Day at such Place of Payment or Place of Conversion
with the same force and effect as if made on the Interest Payment Date or
Redemption Date or at the Stated Maturity or on such last day for conversion,
provided, that in the case that payment is made on such succeeding Business
Day, no interest shall accrue on the amount so payable for the period from
and after such Interest Payment Date, Redemption Date or Stated Maturity, as
the case may be.
14.14 SECTION RECOURSE AGAINST OTHERS.
No recourse for the payment of the principal of or premium,
if any, or interest (including Liquidated Damages, if any) on any Security,
or for any claim based thereon or otherwise in respect thereof, shall be had
against any incorporator, shareholder, officer or director, as such, past,
present or future, of the Company or of any successor corporation, whether by
virtue of any constitution, statute or rule of law or by the enforcement of
any assessment or penalty or otherwise, all such liability being, by the
acceptance thereof and as part of the consideration for the issue thereof,
expressly waived and released.
<PAGE>
99
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed all as of the day and year first above written.
<PAGE>
100
INHALE THERAPEUTIC SYSTEMS, INC.
By: /s/ Robert Chess
_______________________________
Name:
Title:
CHASE MANHATTAN BANK AND TRUST
COMPANY, NATIONAL ASSOCIATION
By: /s/ Hank S. Helley
_______________________________
Name:
Title:
<PAGE>
101
EXHIBIT A
FORM OF SECURITY
[FACE OF SECURITY]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY ("DTC") TO INHALE THERAPEUTIC SYSTEMS, INC. (OR ITS
SUCCESSOR) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, CONVERSION OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO.
OR IN SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.1
THE SECURITY EVIDENCED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A)
IT IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" AS DEFINED
IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AN
"INSTITUTIONAL ACCREDITED INVESTOR") THAT IS PURCHASING AT LEAST $100,000 IN
AGGREGATE PRINCIPAL AMOUNT OF DEBENTURES OR AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a)(4), (5) or (6) UNDER THE SECURITIES ACT (A
"NON-INSTITUTIONAL ACCREDITED INVESTOR") THAT IS PURCHASING AT LEAST $250,000
IN AGGREGATE PRINCIPAL AMOUNT OF DEBENTURES; (2) AGREES THAT IT WILL NOT
WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR
OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE
UPON CONVERSION OF SUCH SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY
THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT IS
PURCHASING DEBENTURES IN AGGREGATE PRINCIPAL AMOUNT OF AT LEAST $100,000 OR
TO A NON-INSTITUTIONAL ACCREDITED INVESTOR THAT IS
- ----------------------
1 This legend should be included only if the Security is issued in global
form.
<PAGE>
102
PURCHASING DEBENTURES IN AGGREGATE PRINCIPAL AMOUNT OF AT LEAST $250,000, AND
THAT, IN EITHER CASE, PRIOR TO SUCH TRANSFER, FURNISHES TO CHASE MANHATTAN
BANK AND TRUST COMPANY, NATIONAL ASSOCIATION, AS
TRUSTEE (OR ANY SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND WARRANTIES RELATING TO THE RESTRICTIONS ON
TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE FORM OF LETTER CAN BE OBTAINED
FROM SUCH TRUSTEE), (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED
BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
ACT AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER; AND (3)
AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED
HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(E) ABOVE) A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY
TRANSFER OF THE SECURITY EVIDENCED HEREBY WITHIN TWO YEARS AFTER THE ORIGINAL
ISSUANCE OF SUCH SECURITY (OTHER THAN A TRANSFER PURSUANT TO CLAUSE (2)(E)
ABOVE), THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE
HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO
THE TRUSTEE (OR ANY SUCCESSOR TRUSTEE, AS APPLICABLE). IF THE PROPOSED
TRANSFER IS PURSUANT TO CLAUSE (2)(C) OR 2(D) ABOVE, THE HOLDER MUST, PRIOR
TO SUCH TRANSFER, FURNISH TO THE TRUSTEE (OR ANY SUCCESSOR TRUSTEE, AS
APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE
COMPANY MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED
UPON THE EARLIER OF THE TRANSFER OF THE SECURITY EVIDENCED HEREBY PURSUANT TO
CLAUSE (2)(E) ABOVE OR THE EXPIRATION OF TWO YEARS FROM THE ORIGINAL ISSUANCE
OF THE SECURITY EVIDENCED HEREBY. AS USED HEREIN, THE TERMS "UNITED STATES"
AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.
<PAGE>
103
INHALE THERAPEUTIC SYSTEMS, INC.
6 3/4% Convertible Subordinated Debenture due 2006
CUSIP NO. 457 191____
No._______ $_______________
INHALE THERAPEUTIC SYSTEMS, INC., a Delaware corporation (the
"Company", which term includes any successor corporation under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_______________, or its registered assigns, the principal sum of ______________
U.S. Dollars ($____________________) on October 13, 2006.
Interest Payment Dates: April 13 and October 13, commencing
April 13, 2000
Regular Record Dates: March 31 and September 30
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
<PAGE>
104
IN WITNESS WHEREOF, the Company has caused this Security to
be duly executed manually or by facsimile by its duly authorized officers.
Dated: October 13, 1999 INHALE THERAPEUTIC SYSTEMS, INC.
By:_____________________________________
Name:
Title:
By:_____________________________________
Name:
Title:
<PAGE>
105
Trustee's Certificate of Authentication
This is one of the 6 3/4% Convertible Subordinated Debentures due 2006
described in the within-named Indenture.
CHASE MANHATTAN BANK AND TRUST
COMPANY, NATIONAL ASSOCIATION,
as Trustee
By:_____________________________
Authorized Signatory
Dated: October 13, 1999
<PAGE>
106
[REVERSE OF SECURITY]
INHALE THERAPEUTIC SYSTEMS, INC.
6 3/4% Convertible Subordinated Debenture due 2006
Capitalized terms used herein but not defined shall have the
meanings assigned to them in the Indenture referred to below unless otherwise
indicated.
1. Principal and Interest.
Inhale Therapeutic Systems, Inc., a Delaware corporation (the
"Company") promises to pay interest on the principal amount of this Security
at the Interest Rate from the date of issuance until repayment at Maturity,
redemption or repurchase. The Company will pay interest on this Security
semiannually in arrears on April 13 and October 13 of each year (each an
"Interest Payment Date"), commencing April 13, 2000.
Interest on the Securities shall be computed (i) for any full
semiannual period for which a particular Interest Rate is applicable on the
basis of a 360-day year of twelve 30-day months and (ii) for any period for
which a particular Interest Rate is applicable shorter than a full semiannual
period for which interest is calculated, on the basis of a 30-day month and,
for such periods of less than a month, the actual number of days elapsed over
a 30-day month.
A Holder of any Security at the close of business on a Regular
Record Date shall be entitled to receive interest on such Security on the
corresponding Interest Payment Date. A Holder of any Security which is
converted after the close of business on a Regular Record Date and prior to
the corresponding Interest Payment Date (other than any Security whose
Maturity is prior to such Interest Payment Date) shall be entitled to receive
interest on the principal amount of such Security, notwithstanding the
conversion of such Security prior to such Interest Payment Date. However, any
such Holder which surrenders any such Security for conversion during the
period between the close of business on such Regular Record Date and ending
with the opening of business on the corresponding Interest Payment Date shall
be required to pay the Company an amount equal to the interest on the
principal amount of such Security so converted, which is payable by the
Company to such Holder on such Interest Payment Date, at the time such Holder
surrenders such Security for conversion. Notwithstanding the foregoing, any
such Holder which surrenders for conversion any Security which has been
called for redemption by the Company in a notice of redemption given by the
Company pursuant to Section 10.4 of the Indenture shall be entitled to
receive (and retain) such interest and need not pay the Company an amount
equal to the interest on the principal amount of such Security so converted
at the time such Holder surrenders such Security for conversion.
<PAGE>
In accordance with the terms of the Resale Registration
Rights Agreement, dated October 13, 1999, between the Company and Lehman
Brothers Inc., Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray
Inc., during the first 90 days following a Registration Default (as defined
in the Resale Registration Rights Agreement), the Interest Rate borne by the
Securities shall be increased by 0.25% on:
(A) January 12, 2000, if the shelf registration
statement (the "Shelf Registration Statement") is not filed prior to
or on January 11, 2000;
(B) April 11, 2000, if the Shelf Registration Statement
is not declared effective by the Securities and Exchange Commission
prior to or on April 10, 2000;
(C) the day after the fifth Business Day after the
Shelf Registration Statement, previously declared effective, ceases
to be effective or fails to be usable, if a post-effective amendment
(or report filed pursuant to the Exchange Act) that cures the Shelf
Registration Statement is not filed with the Securities and Exchange
Commission during such five Business Day period; or
(D) the day following the 45th or 60th day, as the case
may be, of any period that the prospectus contained in the Shelf
Registration Statement has been suspended, if such suspension has
not been terminated.
From and after the 91st day following such Registration Default, the Interest
Rate borne by the Securities shall be increased by 0.50%. In no event shall
the Interest Rate borne by the Securities be increased by more than 0.50%.
Any amount of additional interest will be payable in cash
semiannually, in arrears, on each Interest Payment Date and will cease to
accrue on the date the Registration Default is cured. The Holder of this
Security is entitled to the benefits of the Resale Registration Rights
Agreement.
2. Method of Payment.
Interest on any Security which is payable, and is
punctually paid or duly provided for, on any Interest Payment Date shall be
paid to the person in whose name that Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest.
Principal of, and premium, if any, and interest on, Global
Securities will be payable to the Depositary in immediately available funds.
Principal and premium, if any, on Physical Securities will
be payable at the office or agency of the Company maintained for such
purpose, initially the Corporate Trust Office of the Trustee. Interest on
Physical Securities will be payable by (i) U.S. Dollar check drawn on a bank
in The City of New York mailed to the address of the Person entitled thereto
as such address shall appear in the Register, or
<PAGE>
(ii) upon application to the Registrar not later than the relevant Record
Date by a Holder of an aggregate principal amount in excess of $5,000,000,
wire transfer in immediately available funds.
3. Paying Agent and Registrar.
Initially, Chase Manhattan Bank and Trust Company, National
Association, the Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change the Paying Agent or Registrar without
notice to any Holder.
4. Indenture.
The Company issued this Security under an Indenture, dated
as of October 13, 1999 (the "Indenture"), between the Company and Chase
Manhattan Bank and Trust Company, National Association, as trustee (the
"Trustee"). The terms of the Security include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended ("TIA"). This Security is subject to all such terms, and
Holders are referred to the Indenture and the TIA for a statement of all such
terms. To the extent permitted by applicable law, in the event of any
inconsistency between the terms of this Security and the terms of the
Indenture, the terms of the Indenture shall control.
5. Optional Redemption.
This Security is not redeemable prior to October 13, 2002.
This Security may be redeemed in whole or in part, upon not less than 20 nor
more than 60 days' notice, at any time on or after October 13, 2002, at the
option of the Company, at the Redemption Prices (expressed as percentages of
the principal amount) set forth below, plus any interest accrued but unpaid
to the Redemption Date.
<TABLE>
<CAPTION>
During the Twelve Months
Commencing Redemption Prices
---------- -----------------
<S> <C>
October 13, 2002 103.375%
October 13, 2003 102.250%
October 13, 2004 101.125%
October 13, 2005 100.000%
</TABLE>
Securities in original denominations larger than $1,000 may
be redeemed in part. If any Security selected for partial redemption is
converted in part before termination of the conversion right with respect to
the portion of the Security so selected, the converted portion of such
Security shall be deemed to be the portion selected for redemption (provided,
however, that the Holder of such Security so converted and deemed redeemed
shall not be entitled to any additional interest payment as a result of such
deemed redemption than such Holder would have otherwise been entitled to
receive upon conversion of such Security). Securities which have been
converted during a selection of Securities to be redeemed may be treated by
the Trustee as Outstanding for the purpose of such selection.
On and after the Redemption Date, interest ceases to accrue
on Securities or portions of Securities called for redemption, unless the
Company defaults in the payment of the Redemption Price.
<PAGE>
Notice of redemption will be given by the Company to the
Holders as provided in the Indenture.
6. Repurchase Right Upon a Change of Control.
If a Change in Control occurs, the Holder of Securities, at
the Holder's option, shall have the right, in accordance with the provisions
of the Indenture, to require the Company to repurchase the Securities (or any
portion of the principal amount hereof that is at least $1,000 or an integral
multiple thereof, provided that the portion of the principal amount of this
Security to be Outstanding after such repurchase is at least equal to $1,000)
at the Repurchase Price in cash, plus any interest accrued and unpaid to the
Repurchase Date.
Subject to the conditions provided in the Indenture, the
Company may elect to pay the Repurchase Price by delivering a number of
shares of Common Stock equal to (i) the Repurchase Price divided by (ii) 95%
of the average of the Closing Prices per share for the five consecutive
Trading Days immediately preceding and including the third Trading Day prior
to the Repurchase Date.
No fractional shares of Common Stock will be issued upon
repurchase of any Securities. Instead of any fractional share of Common Stock
which would otherwise be issued upon conversion of such Securities, the
Company shall pay a cash adjustment as provided in the Indenture.
A Company Notice will be given by the Company to the
Holders as provided in the Indenture. To exercise a repurchase Right, a
Holder must deliver to the Trustee a written notice as provided in the
Indenture.
7. Conversion Rights.
Subject to and upon compliance with the provisions of the
Indenture, the Holder of Securities is entitled, at such Holder's option, at
any time before the close of business on October 13, 2006, to convert the
Holder's Securities (or any portion of the principal amount hereof which is
$1,000 or an integral multiple thereof), at the principal amount thereof or
of such portion, into duly authorized, fully paid and nonassessable shares of
Common Stock of the Company at the Conversion Price in effect at the time of
conversion.
In the case of a Security (or a portion thereof) called for
redemption, such conversion right in respect of the Security (or such portion
thereof) so called, shall expire at the close of business on the second
Business Day preceding the Redemption Date, unless the Company defaults in
making the payment due upon redemption. In the case of a Change of Control
for which the Holder exercises its Repurchase Right with respect to a
Security (or a portion thereof), such conversion right in respect of the
Security (or portion thereof) shall expire at the close of business on the
Business Day preceding the Repurchase Date.
The Conversion Price shall be initially equal to $32.0075
per share of Common Stock. The Conversion Price shall be adjusted under
certain circumstances as provided in the Indenture.
<PAGE>
To exercise the conversion right, the Holder must surrender
the Security (or portion thereof) duly endorsed or assigned to the Company or
in blank, at the office of the Conversion Agent, accompanied by a duly signed
conversion notice to the Company. Any Security surrendered for conversion
during the period from the close of business on any Regular Record Date to
the opening of business on the corresponding Interest Payment Date (other
than any Security whose Maturity is prior to such Interest Payment Date),
shall also be accompanied by payment in New York Clearing House funds or
other funds acceptable to the Company of an amount equal to the interest
payable on such Interest Payment Date on the principal amount of the
Securities being surrendered for conversion.
No fractional shares of Common Stock will be issued upon
conversion of any Securities. Instead of any fractional share of Common Stock
which would otherwise be issued upon conversion of such Securities, the
Company shall pay a cash adjustment as provided in the Indenture.
8. Subordination.
The Indebtedness evidenced by this Security is, to the
extent and in the manner provided in the Indenture, subordinated and subject
in right of payment to the prior payment in full of all amounts then due on
all Senior Debt of the Company, and this Security is issued subject to such
provisions of the Indenture with respect thereto. Each Holder of this
Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on such Holder's behalf to
take such action as may be necessary or appropriate to effectuate the
subordination so provided and (c) appoints the Trustee such Holder's
attorney-in-fact for any and all such purposes.
9. Denominations; Transfer; Exchange.
The Securities are issuable in registered form, without
coupons, in denominations of $1,000 and integral multiples of $1,000 in
excess thereof. A Holder may register the transfer or exchange of Securities
in accordance with the Indenture. The Registrar may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and
the Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture.
In the event of a redemption in part, the Company will not
be required (a) to register the transfer of, or exchange, Securities for a
period of 15 days immediately preceding the date notice is given identifying
the serial numbers of the Securities called for such redemption, or (b) to
register the transfer of, or exchange, any such Securities, or portion
thereof, called for redemption.
In the event of redemption, conversion or repurchase of the
Securities in part only, a new Security or Securities for the unredeemed,
unconverted or unrepurchased portion thereof will be issued in the name of
the Holder hereof.
10. Persons Deemed Owners.
<PAGE>
The registered Holder of this Security shall be treated as
its owner for all purposes.
11. Unclaimed Money.
The Trustee and the Paying Agent shall pay to the Company
any money held by them for the payment of principal, premium, if any, or
interest that remains unclaimed for two years after the date upon which such
payment shall have become due. After payment to the Company, Holders entitled
to the money must look to the Company for payment as general creditors unless
an applicable abandoned property law designates another Person, and all
liability of the Trustee and such Paying Agent with respect to such money
shall cease.
12. Discharge Prior to Redemption or Maturity.
Subject to certain conditions contained in the Indenture,
the Company may discharge its obligations under the Securities and the
Indenture if (1) (a) all of the Outstanding Securities shall become due and
payable at their scheduled Maturity within one year or (b) all of the
Outstanding Securities are scheduled for redemption within one year, and (2)
the Company shall have deposited with the Trustee money and/or U.S.
Government Obligations sufficient to pay the principal of, and premium, if
any, and interest on, all of the Outstanding Securities on the date of
Maturity or redemption, as the case may be.
13. Amendment; Supplement; Waiver.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities
under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in aggregate principal amount of the
Outstanding Securities (or such lesser amount as shall have acted at a
meeting pursuant to the provisions of the Indenture). The Indenture also
contains provisions permitting the Holders of specified percentages in
principal amount of the Securities at the time Outstanding, on behalf of the
Holders of all the Securities, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon registration
of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security or such other
Security.
No reference herein to the Indenture and no provision of
this Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and
premium, if any, and interest (including Liquidated Damages, if any) on this
Security at the times, places and rate, and in the coin or currency, herein
prescribed or to convert this Security (or pay cash in lieu of conversion) as
provided in the
<PAGE>
Indenture.
14. Defaults and Remedies.
The Indenture provides that an Event of Default with
respect to the Securities occurs when any of the following occurs:
(a) the Company defaults in the payment of the
principal of or premium, if any, on any of the Securities when it
becomes due and payable at Maturity, upon redemption or exercise of
a Repurchase Right or otherwise, whether or not such payment is
prohibited by the subordination provisions of Article 13 of the
Indenture;
(b) the Company defaults in the payment of interest on
any of the Securities when it becomes due and payable and such
default continues for a period of 30 days, whether or not such
payment is prohibited by the subordination provisions of Article 13
of the Indenture;
(c) the Company fails to perform or observe any other
term, covenant or agreement contained in the Securities or the
Indenture and such default continues for a period of 60 days after
written notice of such failure is given as specified in the
Indenture;
(d) (i) the Company fails to make any payment by the end of
the applicable grace period, if any, after the maturity of any
Indebtedness for borrowed money in an amount in excess of $5,000,000
(provided that such failure shall not constitute an Event of Default
if (1) the Company determines, in good faith, that a lessor under a
lease described in clause (3)(a) of the definition of Indebtedness
set forth in the Indenture breached a covenant under the lease and
the Company has given notice of the breach to the lessor and the
Trustee and (2) as a result of the breach, the Company withholds
payment under the lease) (a "Default Exception"), or (ii) there is
an acceleration of any Indebtedness for borrowed money in an amount
in excess of $5,000,000 because of a default with respect to such
Indebtedness (other than a Default Exception) without such
Indebtedness having been discharged or such acceleration having been
cured, waived, rescinded or annulled, in the case of either clause
(i) or (ii) above, for a period of 30 days after written notice is
given to the Company as specified in the Indenture; and
(e) there are certain events of bankruptcy, insolvency
or reorganization of the Company.
If an Event of Default shall occur and be continuing, the
principal of all the Securities may be declared due and payable in the manner
and with the effect provided in the Indenture.
<PAGE>
15. Authentication.
This Security shall not be valid until the Trustee (or
authenticating agent) executes the certificate of authentication on the other
side of this Security.
16. Abbreviations.
Customary abbreviations may be used in the name of a Holder
or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by
the entireties), JT TEN (= joint tenants with right of survivorship and not
as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to
Minors Act).
17. Additional Rights of Holders of Transfer Restricted Securities.
In addition to the rights provided to Holders under the
Indenture, Holders of Transfer Restricted Securities shall have all the
rights set forth in the Registration Rights Agreement.
18. CUSIP Numbers.
Pursuant to a recommendation promulgated by the Committee
on Uniform Security Identification Procedures, the Company has caused CUSIP
numbers to be printed on this Security and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is
made as to the accuracy of such numbers either as printed on this Security or
as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
19. Governing Law.
The Indenture and this Security shall be governed by, and
construed in accordance with, the law of the State of New York.
20. Successor Corporation.
In the event a successor corporation assumes all the
obligations of the Company under this Security, pursuant to the terms hereof
and of the Indenture, the Company will be released from all such obligations.
<PAGE>
ASSIGNMENT FORM
To assign this Security, fill in the form below and have your
signature guaranteed: (I) or (we) assign and transfer this Security to:
- ------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
------------------------------------------------------
to transfer this Security on the books of the Company. The agent may substitute
another to act for him.
Dated: Your Name:
----------------- ----------------------------------------
(Print your name exactly as it appears
on the face of this Security)
Your Signature:
----------------------------------
(Sign exactly as your name appears
on the face of this Security)
Signature Guarantee*:
------------------------------
* PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION PROGRAM (OR
OTHER SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE).
<PAGE>
In connection with any transfer of this Security occurring prior to the date
which is the earlier of the end of the period referred to in Rule 144(k)
under the Securities Act, the undersigned confirms that without utilizing any
general solicitation or general advertising that:
[Check One]
[ ] (a) this Security is being transferred in compliance with the exemption
from registration under the Securities Act of 1933, as amended,
provided by Rule 144A thereunder.
or
[ ] (b) this Security is being transferred other than in accordance with (a)
above and documents are being furnished which comply with the
conditions of transfer set forth in this Security and the Indenture.
If none of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Security in the name of any Person
other than the Holder hereof unless the conditions to any such transfer of
registration set forth herein and in Sections 2.7, 2.8 and 2.9 of the
Indenture shall have been satisfied.
Dated:
-------------------- ---------------------------------------
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of the
within-mentioned instrument in every
particular, without alteration or
any change whatsoever.
Signature Guarantee:
---------------------------------------
Signature must be guaranteed by a
participant in a recognized
signature guaranty medallion program
or other signature guarantor
acceptable to the Trustee.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
<PAGE>
The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion, in each case for investment and not with a view
to distribution, and that it and any such account is a "Qualified
Institutional Buyer" within the meaning of Rule 144A under the Securities Act
of 1933 and is aware that the sale to it is being made in reliance on Rule
144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has
determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in
order to claim the exemption from registration provided by Rule 144A.
Dated:
------------------ -----------------------------------------------
NOTICE: To be executed by an executive officer
<PAGE>
CONVERSION NOTICE
TO: INHALE THERAPEUTIC SYSTEMS, INC.
150 Industrial Road
San Carlos, California 94070
The undersigned registered owner of this Security hereby
irrevocably exercises the option to convert this Security, or the portion
hereof (which is $1,000 principal amount or an integral multiple thereof)
below designated, into shares of Common Stock in accordance with the terms of
the Indenture referred to in this Security, and directs that the shares
issuable and deliverable upon such conversion, together with any check in
payment for fractional shares and any Securities representing any unconverted
principal amount hereof, be issued and delivered to the registered holder
hereof unless a different name has been indicated below. If shares or any
portion of this Security not converted are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer
taxes payable with respect thereto. Any amount required to be paid to the
undersigned on account of interest (including Liquidated Damages, if any)
accompanies this Security.
Dated: Your Name:
------------------- --------------------------------------
(Print your name exactly as it appears
on the face of this Security)
Your Signature:
---------------------------------
(Sign exactly as your name appears
on the face of this Security)
Signature Guarantee*:
---------------------------
Social Security or other Taxpayer
Identification Number:
--------------------------
Principal amount to be converted (if less than all): $
* PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION PROGRAM (OR
OTHER SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE).
<PAGE>
Fill in for registration of shares (if to be issued) and Securities (if to be
delivered) other than to and in the name of the registered holder:
------------------------------------------------------------
(Name)
------------------------------------------------------------
(Street Address)
------------------------------------------------------------
(City, State and Zip Code)
<PAGE>
NOTICE OF EXERCISE OF REPURCHASE RIGHT
TO: INHALE THERAPEUTIC SYSTEMS, INC.
150 Industrial Road
San Carlos, California 94070
The undersigned registered owner of this Security hereby
irrevocably acknowledges receipt of a notice from Inhale Therapeutic Systems,
Inc. (the "Company") as to the occurrence of a Change of Control with respect
to the Company and requests and instructs the Company to repay the entire
principal amount of this Security, or the portion thereof (which is $1,000
principal amount or an integral multiple thereof) below designated, in
accordance with the terms of the Indenture referred to in this Security,
together with interest (including Liquidated Damages, if any) accrued and
unpaid to, but excluding, such date, to the registered holder hereof, in cash.
Dated: Your Name:
----------------- -------------------------------------
(Print your name exactly as it appears
on the face of this Security)
Your Signature:
---------------------------------
(Sign exactly as your name appears
on the face of this Security)
Signature Guarantee*:
---------------------------
Social Security or other Taxpayer
Identification Number:
--------------------------
Principal amount to be repaid (if less than all): $
* PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION PROGRAM (OR
OTHER SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE).
<PAGE>
SCHEDULE OF EXCHANGES FOR PHYSICAL SECURITIES1
The following exchanges of a part of this Global Security
for Physical Securities have been made:
<TABLE>
<CAPTION>
Principal Amount
of this
Global Security Signature of
Amount of decrease in Amount of increase in following such authorized
Date of Principal Amount of Principal Amount of decrease officer of
Exchange this Global Security this Global Security (or increase) Trustee
-------- -------------------- -------------------- ------------- -------
<S> <C> <C> <C> <C>
</TABLE>
- --------------------------
1 This schedule should be included only if the Security is issued in global
form.
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE TO BE DELIVERED BY
TRANSFEREE IN CONNECTION WITH TRANSFERS
TO ACCREDITED INVESTORS
[Date]
Chase Manhattan Bank and Trust Company, National Association
101 California Street
Suite 2725
San Francisco, California 94111
Attention: Corporate Trust Administration
Re: INHALE THERAPEUTIC SYSTEMS, INC.
Ladies and Gentlemen:
In connection with the undersigned's proposed purchase of
$___________ aggregate principal amount of 6 3/4% Convertible Subordinated
Debentures due 2006 (the "Debentures") of Inhale Therapeutic Systems, Inc.
(the "Company"), the undersigned confirms, represents and warrants that:
(1) The undersigned is (a) an institutional "accredited
investor" within the meaning of Rule 501(a)(1), (2), (3) or (7)
under the Securities Act of 1933, as amended (the "Securities Act")
or an entity in which all of the equity owners are accredited
investors within the meaning of Rule 501 under the Securities Act
(an "Institutional Accredited Investor") or (b) an "accredited
investor" within the meaning of Rule 501(a)(4), (5) or (6) under the
Securities Act (a "Non-institutional Accredited Investor").
(2) (A) Any purchase of the Securities by the
undersigned will be for the undersigned's own account or for the
account of one or more other Institutional Accredited Investors or
Non-institutional Accredited Investors or as fiduciary for the
account of one or
more trusts, each of which is an "accredited investor" within the meaning of
Rule 501(a)(7) under the Securities Act and for each of which the undersigned
exercises sole investment discretion or (B) the undersigned is a "bank",
within the meaning of Section 3(a)(2) of the Securities Act, or a "savings
and loan association" or other institution described in Section
<PAGE>
3(a)(5)(A) of the Securities Act that is acquiring the Securities as
fiduciary for the account of one or more institutions for which the
undersigned exercises sold investment discretion.
(3) In the event that the undersigned is an Institutional
Accredited Investor that is purchasing Securities, the undersigned
will acquire Securities having a minimum aggregate principal amount
of $100,000 for its own account or for any separate account for
which the undersigned is acting.
(4) In the event that the undersigned is a
Non-institutional Accredited Investor that is purchasing Securities,
the undersigned will acquire Securities having a minimum aggregate
principal amount of $250,000 for its own account or for any separate
account for which the undersigned is acting.
(5) The undersigned has such knowledge and experience in
financial and business matters that the undersigned is capable of
evaluating the merits and risks of its investment in the Securities,
and the undersigned and any accounts for which it is acting is each
able to bear the economic risk of its or their investment.
(6) The undersigned is not acquiring the Securities with a
view to distribution thereof or with any present intention of
offering or selling any Securities or the Common Stock of the
Company issuable upon conversion thereof, except as permitted below;
provided that the disposition of the undersigned's property and the
property of any accounts for which the undersigned is acting as
fiduciary will remain at all times within the undersigned's control.
(7) The undersigned understands that the Securities and the
shares of Common Stock issuable upon conversion thereof have not
been registered under the Securities Act or any applicable state
securities laws.
(8) The undersigned agrees, on its own behalf and on behalf
of each account for which the undersigned acquires any Securities,
that if in the future the undersigned decides to resell or otherwise
transfer such Securities within two years after the original
issuance of the Securities, such Securities may be resold or
otherwise transferred only:
(A) to the Company or any subsidiary thereof;
(B) to a person which is a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act)
in compliance with Rule 144A under the Securities Act;
<PAGE>
(C) pursuant to an exemption from registration under
the Securities Act to an Institutional Accredited Investor
that is purchasing Securities having an aggregate principal
amount of at least $100,000 (or a number of shares of
Common Stock at least equal to $100,000 divided by $32.0075
(the initial conversion price)) or to a Non-institutional
Accredited Investor that is purchasing Securities having an
aggregate principal amount of at least $250,000 (or a
number of shares of Common Stock at least equal to $250,000
divided by $32.0075 (the initial conversion price)), and
that, in either case, prior to such transfer, furnishes to
you (or the transfer agent, as the case may be) a signed
letter substantially in the form of this letter;
(D) pursuant to the exemption from registration
provided by Rule 144 under the Securities Act (if
available); or
(E) pursuant to a registration statement which has
been declared effective under the Securities Act (and
continues to be effective at the time of such transfer).
The undersigned further agrees to provide to any person purchasing
any of the Securities from us a notice advising such purchaser that
resales of the Securities are restricted as stated herein.
(9) The undersigned understands that, on any proposed
resale of any Securities, the undersigned will be required to
furnish to you and the Company such certifications, legal opinions
and other information as you and the Company may reasonably require
to confirm that the proposed sale complies with the foregoing
restrictions. The undersigned further understands that the
Securities purchased by the undersigned will be in definitive form
and will bear a legend to the foregoing effect.
Each of the Company, the Trustee and the initial purchasers of
the Securities are entitled to rely upon this letter and are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceedings or official inquiry with respect to
the matters covered hereby.
<PAGE>
Very truly yours,
By:
------------------------------
Name:
Title:
Address:
<PAGE>
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
January 6, 2000
Inhale Therapeutic Systems, Inc
150 Industrial Road
San Carlos, CA 94070
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Inhale Therapeutic Systems, Inc., a Delaware corporation
(the "Company"), of a Registration Statement on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission pursuant to which the
Company is registering under the Securities Act of 1933, as amended, of the
resale by the holders thereof of a total of $93,625,000 principal amount 6
3/4% Convertible Subordinated Debentures due October 13, 2006 (the
"Debentures") and the shares of Common Stock issuable upon conversion thereof
(the "Shares"). The Debentures were issued pursuant to the Indenture dated
October 13, 1999 between the Company and Chase Manhattan Bank and Trust
Company, National Association (the "Indenture").
In connection with this opinion, we have examined copies of the Indenture, the
Debentures and such other documents and have made such other inquiries and
investigations of law as we have deemed necessary or appropriate to enable us to
render the opinion expressed below. We have assumed the genuineness and
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents where due execution and delivery are a prerequisite
to the effectiveness thereof. With respect to our opinion as to the
enforceability of the Debentures, we have relied upon the opinion of Sullivan &
Cromwell.
Our opinion is expressed only with respect to the federal laws of the United
States of America, the General Corporation Law of the State of Delaware and the
laws of the State of California. We express no opinion as to whether the laws of
any particular jurisdiction other than those identified above are applicable to
the subject matter hereof.
On the basis of the foregoing and in reliance thereon, we are of the opinion
that (i) the Debentures constitute valid and binding obligations of the Company,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws of general application
relating to or affecting creditors' rights, by general principals of equity, and
by an implied covenant of good faith, and (ii) upon issuance upon conversion of
the Debentures in accordance with their terms, the Shares will be validly
issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Sincerely,
Cooley Godward LLP
/s/ Mark P. Tanoury
Mark P. Tanoury
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-3 of Inhale Therapeutic Systems, Inc. and in the related Prospectus of
Inhale Therapeutic Systems, Inc. for the registration of 2,925,095 shares of its
common stock and for the registration of $93,625,000 of 6.75% Convertible
Subordinated Debentures due October 13, 2006, of our report dated January 22,
1999 with respect to the financial statements of Inhale Therapeutic Systems,
Inc. included in its Annual Report (Form 10-K) for the year ended December 31,
1998, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 6, 2000
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM T-1
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
-----------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(B)(2)____
-------------------------
CHASE MANHATTAN BANK AND TRUST COMPANY,
NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
95-4655078
(I.R.S. Employer Identification No.)
101 California Street Suite #2725
San Francisco, California
(Address of principal executive offices)
94111
(Zip Code)
------------------
INHALE THERAPEUTIC SYSTEMS, INC.
(Exact name of Obligor as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3134940
(I.R.S. Employer Identification No.)
150 Industrial Road
San Carlos, California
(Address of principal executive offices)
94070-6256
(Zip Code)
--------------------------------
6 3/4% Convertible Subordinated Debentures due 2006
(Title of Indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency, Washington, D.C.
Board of Governors of the Federal Reserve System, Washington,
D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
None.
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
Exhibit 1. Articles of Association of the Trustee as Now in Effect
(see Exhibit 1 to Form T-1 filed in connection with
Registration Statement No. 333-41329, which is incorporated
by reference).
Exhibit 2. Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection
with Registration Statement No. 333-41329, which is
incorporated by reference).
Exhibit 3. Authorization of the Trustee to Exercise Corporate Trust
Powers (contained in Exhibit 2).
Exhibit 4. Existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No.
333-41329, which is incorporated by reference).
Exhibit 5. Not Applicable
Exhibit 6. The consent of the Trustee required by Section 321 (b)
of the Act (see Exhibit 6 to Form T-1 filed in connection
with Registration Statement No. 333-41329, which is
incorporated by reference).
Exhibit 7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its
supervising or examining authority.
Exhibit 8. Not Applicable
Exhibit 9. Not Applicable
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, Chase Manhattan Bank and Trust Company, National Association, has duly
caused this statement of eligibility and qualification to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of San
Francisco, and State of California, on the 3rd of January, 2000.
CHASE MANHATTAN BANK AND TRUST
COMPANY, NATIONAL ASSOCIATION
By /s/ Hans H. Helley
-----------------------------
Hans H. Helley
Assistant Vice President
3
<PAGE>
EXHIBIT 7. Report of Condition of the Trustee.
CONSOLIDATED REPORT OF CONDITION OF CHASE MANHATTAN BANK AND TRUST COMPANY, N.A.
--------------------------------------------
(Legal Title)
LOCATED AT 1800 CENTURY PARK EAST, STE. 400 LOS ANGELES, CA 94111
---------------------------------------------------------------------
(Street) (City) (State) (Zip)
AS OF CLOSE OF BUSINESS ON JUNE 30, 1999
-----------------------------------
ASSETS DOLLAR AMOUNTS IN THOUSANDS
<TABLE>
<S> <C> <C> <C>
1. Cash and balances due from
a. Noninterest-bearing balances and currency and coin (1,2) 1,910
b. Interest bearing balances (3) 0
2. Securities
a. Held-to-maturity securities (from Schedule RC-B, column A) 0
b. Available-for-sale securities (from Schedule RC-B, column D) 1,266
3. Federal Funds sold (4) and securities purchased agreements to resell 60,200
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C) 50
b. LESS: Allowance for loan and lease losses 0
c. LESS: Allocated transfer risk reserve 0
d. Loans and leases, net of unearned income, allowance, and
reserve (item 4.a minus 4.b and 4.c) 50
5. Trading assets 0
6. Premises and fixed assets (including capitalized leases) 233
7. Other real estate owned (from Schedule RC-M) 0
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) 0
9. Customers liability to this bank on acceptances outstanding 0
10. Intangible assets (from Schedule RC-M) 1,203
11. Other assets (from Schedule RC-F) 2,064
12a. TOTAL ASSETS 66,926
</TABLE>
(1) INCLUDES CASH ITEMS IN PROCESS OF COLLECTION AND UNPOSTED DEBITS.
(2) THE AMOUNT REPORTED IN THIS ITEM MUST BE GREATER THAN OR EQUAL TO THE SUM OF
SCHEDULE RC-M, ITEMS 3.a AND 3.b
(3) INCLUDES TIME CERTIFICATES OF DEPOSIT NOT HELD FOR TRADING.
(4) REPORT "TERM FEDERAL FUNDS SOLD" IN SCHEDULE RC, ITEM 4.a "LOANS AND
LEASES, NET OF UNEARNED INCOME" AND IN SCHEDULE RC-C, PART 1.
4
<PAGE>
<TABLE>
<S> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from
Schedule RC-E) 37,379
(1) Noninterest-bearing 5,680
(2) Interest-bearing 31,699
b. In foreign offices, Edge and Agreement subsidiaries, and IBF'
(1) Noninterest-bearing
(2) Interest-bearing
14. Federal funds purchased (2) and securities sold under agreements to
repurchase 0
15. a. Demand notes issued to the U.S. Treasury 0
b. Trading liabilities 0
16. Other borrowed money (includes mortgage indebtedness and obligations
under capitalized leases):
a. With a remaining maturity of one year or less 0
b. With a remaining maturity of more than one year through three years 0
c. With a remaining maturity of more than three years 0
17. Not applicable
18. Bank's liability on acceptances executed and outstanding 0
19. Subordinated notes and Debentures (3) 0
20. Other liabilities (from Schedule RC-G) 4,218
21. Total liabilities (sum of items 13 through 20) 41,597
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus 0
24. Common stock-- 600
25. Surplus (exclude all surplus related to preferred stock) 12,590
26. a. Undivided profits and capital reserves 12,139
b. Net unrealized holding gains (losses) on available-for-sale securities 0
27. Cumulative foreign currency translation adjustments
28. a. Total equity capital (sum of items 23 through 27) 25,329
29. Total liabilities, equity capital, and losses deferred pursuant to 12 U.S.C.
1823 (j) (sum of items 21 and 28.c) 66,926
</TABLE>
