<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-35828
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 3, 2000)
UP TO
$26,000,000
AXYS PHARMACEUTICALS, INC.
Up to 26,000 Units Consisting of
8% SENIOR SECURED CONVERTIBLE NOTES DUE 2004 and
WARRANTS to Purchase 1,841,360 Shares of Our Common Stock
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THE COMPANY THE SENIOR CONVERTIBLE NOTES
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- We are an early stage biopharmaceutical company - Maturity: October 1, 2004.
focused on the discovery, development and - Interest: We will pay interest on the notes
commercialization of therapeutic small molecules. quarterly in cash, in arrears, on March 15, June 15,
September 15 and December 15 of each year,
THE UNITS starting December 15, 2000. At our option, we
may pay interest with shares of our common stock
- We are offering up to $26,000,000 aggregate amount in lieu of cash payments.
of our units consisting of our 8% Senior Secured
Convertible Notes due 2004, Class A warrants - Conversion: The notes are convertible into
and Class B warrants. shares of our common stock at any time at a
- We will use the net proceeds of this offering for conversion price of $7.06 subject to adjustment
operating costs, capital expenditures and working under certain circumstances. Our common stock
capital needs, and other general corporate is quoted on the Nasdaq National Market under
purposes. the symbol "AXPH." On September 20, 2000, the
- We expect to deliver units to purchasers on closing price of our common stock was $6.75 per
September 22, 2000. share.
- Repurchase Option: The holders of notes shall
THE WARRANTS have the right, but not the obligation, to
require us to repurchase all or a portion of the
- We are offering Class A warrants and notes at a price equal to 100% of the outstanding
Class B warrants that will each entitle you to principal amount price of the notes plus accrued
purchase 920,680 shares of our common stock at an and unpaid interest, upon the occurrence of certain
exercise price of $8.82 and $10.59, respectively, repurchase events.
subject to certain conditions and adjustments.
- The Class A warrants and Class B warrants will - Redemption: We cannot redeem the notes prior to
expire on October 1, 2004. their maturity.
- Ranking: The notes will be our senior
LISTING AND QUOTATION obligations. They will rank pari passu in right
of payment with all our existing and future
- None of the units, the notes or the warrants will senior indebtedness and senior to all our
be listed or quoted on any securities exchange or existing and future subordinated indebtedness.
quotation system. - Security: The notes are secured by
6,682,500 shares of common stock of Discovery
Partners International, Inc., in which we own a
minority interest, and related agreements.
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OFFERING PRICE PLACEMENT AGENT FEES PROCEEDS TO COMPANY
-------------- -------------------- -------------------
Per Unit .................................... 100% 5.5%(1) 94.5%
Total........................................ $26,000,000 $1,430,000 $24,570,000
(1) Subject to limited exceptions.
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INVESTING IN THE UNITS INVOLVES RISKS, WHICH WE DESCRIBE IN THE "RISK FACTORS"
SECTION BEGINNING ON PAGE S-6 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 5 OF THE
PROSPECTUS THAT IS ALSO PART OF THIS DOCUMENT.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
THE PLACEMENT AGENT IS DIAZ & ALTSCHUL CAPITAL, LLC.
SEPTEMBER 22, 2000
<PAGE> 2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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PAGE
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About This Prospectus Supplement................................................................ ii
Incorporation by Reference...................................................................... ii
Summary......................................................................................... S-1
The Offering.................................................................................... S-3
Risk Factors.................................................................................... S-6
Use of Proceeds................................................................................. S-11
Price Range of Our Common Stock................................................................. S-11
Capitalization.................................................................................. S-12
Dilution........................................................................................ S-13
Selected Historical Financial Information....................................................... S-13
Ratio of Earnings to Fixed Charges.............................................................. S-14
Description of Units............................................................................ S-15
Description of Notes............................................................................ S-15
Description of Warrants......................................................................... S-48
Description of Capital Stock.................................................................... S-52
Certain U.S. Federal Income Tax Consequences.................................................... S-55
Plan of Distribution............................................................................ S-62
Legal Matters................................................................................... S-62
PROSPECTUS
PAGE
About Axys..................................................................................... 4
The Offering................................................................................... 4
Risk Factors................................................................................... 5
Forward-Looking Statements..................................................................... 12
Where You Can Find More Information About Axys and this Offering............................... 12
Ratio of Earnings to Fixed Charges............................................................. 13
Description of Debt Securities................................................................. 13
Description of Warrants........................................................................ 19
Description of Common Stock.................................................................... 19
Use of Proceeds................................................................................ 20
Plan of Distribution........................................................................... 20
Legal Matters.................................................................................. 21
Experts........................................................................................ 21
</TABLE>
---------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus that is also a part
of this document. We have not authorized anyone to provide you with different
information. We are not making an offer to sell the securities in any state
where the offer is not permitted. You should not assume that the information
contained in this prospectus supplement or the accompanying prospectus is
accurate as of any date other than the date on the front cover of these
documents.
i
<PAGE> 3
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement is a supplement to the prospectus that is
also a part of this document. This prospectus supplement and the accompanying
prospectus are part of a registration statement that we filed with the SEC using
a shelf registration process. Under the shelf registration process, we may offer
from time to time debt securities and warrants to purchase our common stock up
to an aggregate amount of $35,000,000, of which this offering is a part. In the
accompanying prospectus, we provide you with a general description of the
securities we may offer from time to time under our shelf registration
statement. In this prospectus supplement, we provide you with specific
information about the securities we are selling in this offering. Both this
prospectus supplement and the prospectus include important information about us,
the securities we are offering and other information you should know before
investing. This prospectus supplement also adds, updates and changes information
contained in the prospectus. You should read both this prospectus supplement and
the prospectus as well as additional information described under "Incorporation
by Reference" immediately below before investing in our senior secured
convertible notes and warrants.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. We incorporate by reference in this prospectus
supplement and the accompanying prospectus the following documents listed below
and the information we indicate under "Where You Can Find More Information About
Axys and This Offering" on page 12 of the prospectus:
1. Our quarterly reports on Form 10-Q for the quarter ended March
31, 2000 filed with the SEC on May 12, 2000 and for the quarter ended
June 30, 2000 filed with the SEC on August 14, 2000.
2. Our Current Reports on Form 8-K filed with the SEC on August
2, 2000, August 3, 2000, September 14, 2000 and September 15, 2000.
We will provide to you at no cost a copy of any and all of the
information incorporated by reference into the registration statement of which
this prospectus is a part. You may make a request for copies of this information
in writing or by telephone. Requests should be directed to:
Axys Pharmaceuticals, Inc.
Attention: Investor Relations
180 Kimball Way
South San Francisco, CA 94080
(650) 829-1000
The information incorporated by reference is an important part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede this information. Further, all filings we make under the
Securities Exchange Act of 1934 after the date of the initial registration
statement and prior to effectiveness of the registration statement shall be
deemed to be incorporated by reference into this prospectus.
ii
<PAGE> 4
SUMMARY
This section contains a general summary of the information contained in
this prospectus supplement. It may not include all the information that is
important to you. You should read the entire prospectus supplement and the
accompanying prospectus and the documents incorporated by reference before
making an investment decision.
THE COMPANY
We are an early stage biopharmaceutical company focused on the
discovery, development and commercialization of therapeutic small molecules. We
focus our own resources on discovering and developing therapeutics for the
treatment of various types of cancer and we collaborate with large
pharmaceutical companies in discovering therapeutics for chronic diseases for
which there are large markets.
We are incorporated in Delaware. The address of our executive offices
is 180 Kimball Way, South San Francisco, CA 94080. Our telephone number is
650-829-1000. You may visit us at our World Wide Web address at
http://www.axyspharm.com. Information contained on our World Wide Web site is
not part of this prospectus supplement or the accompanying prospectus. In this
prospectus supplement, "Axys," "we," "us," and "our" refer to Axys
Pharmaceuticals, Inc. unless the context requires otherwise.
RECENT DEVELOPMENTS
In April 2000, we closed a definitive merger agreement to combine our
subsidiary Axys Advanced Technologies, Inc., or "AAT," with Discovery Partners
International, Inc., or DPI. Under the agreement, AAT merged with a subsidiary
of DPI and we received as consideration 7,425,000 shares of common stock of DPI,
$50,000 in cash, $550,000 in a form of note receivable and a warrant to purchase
200,000 additional shares of DPI at $8.00 per share. On July 27, 2000, DPI
closed an initial public offering of 5.75 million shares of its common stock
(including 750,000 shares of common stock sold pursuant to the underwriters
over-allotment option) at a price per share of $18.00 resulting in gross
proceeds of $103.5 million. DPI's common stock is quoted on the Nasdaq National
Market under the symbol "DPII."
In May 2000, one of our collaboration partners, Bayer AG, decided to
discontinue development of the compound known as BAY 44-3428 for asthma. Bayer
AG had previously selected BAY 44-3428 for development as an oral treatment for
asthma based on the demonstrated in vivo efficacy of the compound in primate
studies. Bayer AG's decision to discontinue development was based on its view
that the toxicological properties of the compound precluded advancement into
clinical development. Based on toxicological studies of a tryptase inhibitor
compound from a chemical class that is different from BAY 44-3428, we believe
that the toxicological properties of BAY 44-3428 are not related to tryptase
inhibition.
In July 2000 we entered into a common stock purchase agreement with
Acqua Wellington North American Equity Fund, Ltd., or "Acqua Wellington"
pursuant to which we sold 1,639,344 shares of our common stock to Acqua
Wellington at a negotiated price per share of $6.10 based on the volume weighted
average price of our common stock on July 20, 2000 for an aggregate amount of
$10 million. Under the common stock purchase agreement, we may, from time to
time and in our sole discretion issue and sell additional shares of our common
stock to such investment fund in an aggregate amount of up to $40 million at a
price per share equal to the daily volume weighted average price of our common
stock over a certain period of time, less a discount ranging from 4.5% to 6.0%
depending on the price of our common stock. In addition, from time to time, and
at our sole discretion, we may grant the Acqua Wellington a call option to
purchase shares of our common stock in an amount worth up to the applicable
amount being sold by us at a price equal to the greater of the daily volume
weighted average price of our common stock on the day Acqua Wellington notifies
us of its election to exercise its call option or the threshold price (as
determined pursuant to the common stock purchase agreement) of our
common stock, less a discount ranging from 4.5% to 6.0%.
S-1
<PAGE> 5
On September 15, 2000, we filed a current report on Form 8-K with the
SEC containing our press release in which we announced that John Walker, our
chief executive officer and Chairman, has informed us that he intends to step
down from his position as chief executive officer for family reasons.
S-2
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THE OFFERING
THE UNITS
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ISSUER..................................... Axys Pharmaceuticals, Inc., a Delaware corporation.
SECURITIES OFFERED......................... Up to 26,000 units, each consisting of one 8%
Senior Secured Convertible Note due 2004 in the
principal amount of $1,000, one Class A warrant to
purchase 35.41 shares of our common stock and one
Class B warrant to purchase 35.41 shares of our
common stock.
ISSUE PRICE................................ $1,000 per unit.
USE OF PROCEEDS............................ We will use the net proceeds of this offering for
operating costs, capital expenditures and working
capital needs and other general corporate
purposes.
THE SENIOR CONVERTIBLE NOTES
NOTES OFFERED.............................. Up to $26,000,000 aggregate principal amount of 8%
Senior Secured Convertible Notes.
MATURITY DATE.............................. October 1, 2004.
INTEREST................................... Interest on the notes will accrue at the rate of
8% per annum and will be payable quarterly on
March 15, June 15, September 15 and December 15
commencing on December 15, 2000. We may, at our
option, pay interest in shares of our common
stock in lieu of cash if we satisfy the
requirements of the supplemental indenture.
RANKING.................................... The notes will be our senior obligations. They
will rank pari passu in right of payment with all
our existing and future senior indebtedness and
senior to all our existing and future
subordinated indebtedness.
SECURITY................................... The notes are secured by 6,682,500 shares of
common stock of Discovery Partners International,
Inc., or "DPI," a provider of products and
services to pharmaceutical and biotechnology
companies, and related agreements.
REPURCHASE OPTION ......................... The holders of the notes have the right, but not
the obligation, to require us to repurchase all
or a portion of the notes at a price equal to
100% of the principal amount of the notes plus
accrued and unpaid interest if:
- there is no reported sale price of our common
stock on the Nasdaq, NYSE or AMEX for any
period of five consecutive trading days;
- there is a "Fundamental Change" as defined in
the supplemental indenture relating to the
notes;
- we are unable for 20 trading days (whether or
not consecutive) in a 365 consecutive day
period to issue shares of our common stock
upon exercise of the warrants due to the
requirements of the Securities Act of 1933,
as amended, the Securities Exchange Act of
1934, as amended or any of the rules and
regulations
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S-3
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promulgated thereunder or because the registration
statement relating to the notes and the warrants
contained a statement of fact that is false or
misleading in a material way, provided, however,
we are entitled to an aggregate 20 additional
trading days during which we are unable to sell
shares of our common stock without such inability
constituting a repurchase event;
- we sell, transfer or otherwise dispose of the
shares of common stock of Discovery Partners
International, Inc. held as collateral or the
shares of common stock of Akkadix Corporation
that we own.
RESTRICTIVE COVENANTS...................... The supplemental indenture governing the notes
will, among other things, restrict our and our
restricted subsidiary's ability to:
- incur certain indebtedness;
- pay dividends or make other distributions in
respect of our capital stock;
- make certain investments;
- create, incur or permit to exist any lien on
any of our property, including the collateral
and the shares of common stock of Akkadix
Corporation that we own, except permitted liens;
- sell any of our assets that are material to
our business;
- sell the shares of common stock of Discovery
Partners International, Inc. held as collateral
or shares of common stock of Akkadix Corporation
that we own except as provided in the supplemental
indenture;
- liquidate, dissolve or otherwise wind-up our
affairs;
- sell or issue any of our capital stock that is
convertible into our common stock at a price
that varies based on changes in the market
price of our common stock;
- issue any of our common stock or capital stock
that is convertible into our common stock
under any agreement that provides for
repricing or adjusting the price at which our
common stock is issued in connection therewith
or which adjusts the number of shares of our
common stock issued in connection therewith;
- enter into any equity line of credit; or
- engage in certain transactions with
affiliates.
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S-4
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THE WARRANTS
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WARRANTS OFFERED........................... 26,000 Class A warrants and 26,000 Class B warrants
that, when exercised, will entitle the holders to
acquire an aggregate of 920,680 shares of our common
stock each.
EXERCISE................................... Each Class A warrant and Class B warrant will entitle
its holder to purchase 35.41 and 35.41 shares of our
common stock, respectively, at an exercise price of
$8.825 and $10.59, respectively, subject to certain
conditions and adjustments.
EXPIRATION................................. October 1, 2004.
ORIGINAL ISSUE DISCOUNT ................... Because a portion of the issue price of each unit
will be allocable to the warrants, the notes will
be issued with original issue discount for U.S.
federal income tax purposes. Accordingly, unless
the amount of original issue discount is minimal,
original issue discount will accrue from the
issue date of the notes and will be included as
interest income periodically in a U.S. holder's
gross income for U.S. federal income tax purposes
in advance of the receipt of cash payments to
which the income is attributable. See "Certain
U.S. Federal Income Tax Consequences."
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RISK FACTORS
See the "Risk Factors" section of this prospectus supplement beginning
on page S-6 and of the accompanying prospectus beginning on page 5 for a
description of risks you should carefully consider before investing in the
units.
FINANCIAL INFORMATION
In this prospectus supplement and the accompanying prospectus, we have
incorporated by reference (a) our Annual Report on Form 10-K for the year ended
December 31, 1999, which contains our consolidated financial statements and (b)
our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000 and
June 30, 2000, respectively. We have also incorporated by reference, among other
things, our Current Report on Form 8-K filed on September 13, 2000, which
contains the financial statements of Discovery Partners International, Inc.,
including the consolidated balance sheets of Discovery Partners International,
Inc. as of December 31, 1998 and 1999 and June 30, 2000 (unaudited) and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 1997, 1998 and 1999 and for the
periods ended June 30, 1999 and June 30, 2000 (unaudited).
S-5
<PAGE> 9
RISK FACTORS
Before investing in the units, you should carefully consider the risk
factors described below and in the accompanying prospectus, as well as the other
information included or incorporated by reference in this prospectus supplement
and the prospectus. The prospectus includes important risk factors relating to
our business beginning on page 5.
FACTORS RELATING TO THIS OFFERING AND OUR SECURITIES
We anticipate that we will have negative cash flow for the foreseeable future.
The development of our pharmaceutical products requires significant
research and development expenditures before we can sell them. We have not
generated any pharmaceuticals sales revenue to date and do not expect any of our
products to be commercially available for a number of years. We have generated
negative cash flow from operating activities since our incorporation in 1989 and
expect to generate negative cash flow for the foreseeable future. We cannot
assure you that we will be able to create enough pharmaceuticals sales revenue
to generate positive cash flow from our core operations.
If we cannot generate revenues, achieve and sustain profitability or
generate positive cash flow from operating activities in the future, we will not
be able to make cash principal and interest payments with respect to the notes
or meet our other debt service or working capital requirements, and the value of
our notes, warrants and common stock, as a result, would be materially reduced.
We expect to incur significant operating losses for the foreseeable future.
Our anticipated cash flow from operations for the year 2000 will be
insufficient to cover our operating expenses and fixed charges. The process of
developing our products will require significant additional research and
development, preclinical testing and clinical trials, as well as regulatory
approval. These activities, together with our general and administrative
expenses are expected to result in significant operating losses for the
foreseeable future.
Our increased leverage could affect our ability to service our debt.
We are, and will continue after the offering to be, highly leveraged. At
June 30, 2000, after giving pro forma effect to the offering, assuming sale of
all 26,000 units, we would have had total indebtedness of approximately $49.8
million (of which $26 million would have consisted of the notes and the balance
would have consisted of outstanding balances under our and our subsidiary's
revolving line of credit and capital lease obligations) and stockholders' equity
of approximately $64.3 million. Our losses from continuing operations would have
been insufficient to cover our fixed charges by approximately $49.8 million and
$21.9 million for the year ended December 31, 1999 and for the six months ended
June 30, 2000, respectively. The supplemental indenture limits but does not
prohibit our ability to incur substantial additional indebtedness in the future.
See "Capitalization" and "Descriptions of Notes."
Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, our indebtedness, including the notes, or to fund
planned capital expenditures and research and development expenses will depend
on our future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. We may need to refinance all or a portion of the
principal of the notes on or prior to maturity. There can be no assurance that
our business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable us to service our
indebtedness, including the notes, or to fund our other liquidity needs. In
addition, there can be no assurance that we will be able to effect any such
refinancing on commercially reasonable terms or at all.
S-6
<PAGE> 10
The degree to which we will be leveraged following the offering could
have important consequences to holders of the notes, including, but not limited
to:
(1) making it more difficult for us to satisfy our obligations with respect
to the notes,
(2) increasing our vulnerability to general adverse economic and industry
conditions,
(3) limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, research and development and
other general corporate requirements,
(4) requiring the dedication of a substantial portion of our cash flow from
operations or other cash resources to the payment of principal of, and
interest on, our indebtedness, thereby reducing the availability of such
cash to fund working capital, capital expenditures, research and
development or other general corporate purposes,
(5) limiting our flexibility in planning for, or reacting to, changes in our
business and industry, and
(6) placing us at a competitive disadvantage compared to less leveraged
competitors.
In addition, the supplemental indenture will contain restrictive
covenants that will limit, but not prohibit, our ability to, among other things,
borrow additional funds. If we fail to comply with the covenants in the
supplemental indenture, there may be an event of default which, if not cured or
waived, could have a material adverse effect on us. In addition, the degree to
which we are leveraged could prevent us from repurchasing all of the notes
tendered to us upon the occurrence of a repurchase event under the supplemental
indenture. See "Description of Notes--Repurchase at the Option of Holders."
The notes are effectively subordinated to our existing secured indebtedness.
Holders of any of our secured indebtedness or secured indebtedness of
our subsidiaries will have claims that are prior to the claims of the holders of
the notes with respect to the assets securing such other indebtedness. Notably,
we are party to a $30 million revolving line of credit with Foothill Capital
Corporation which is secured by liens on all of our cash and cash equivalents,
and our marketable investments (excluding the shares of DPI and Maxim
Pharmaceuticals, Inc. that we own). In addition, one of our subsidiaries, PPGx,
Inc., is party to a $9 million revolving line of credit, which is guaranteed by
PPD, Inc., our minority partner in PPGx, Inc. The notes will be effectively
subordinated to all such secured indebtedness with respect to such assets. In
the event of any distribution or payment of our assets in any foreclosure,
dissolution, winding-up, liquidation, reorganization, or other bankruptcy
proceeding, holders of our other secured indebtedness will have a prior claim to
our assets that constitute their collateral. After payment on the notes with
respect to proceeds from assets securing the notes, holders of the notes will
participate ratably with all holders of our unsecured indebtedness that is
deemed to be of the same class as the notes, and potentially with all of our
other general creditors, based upon the respective amounts owed to each holder
or creditor, in any of our remaining assets. In any of the foregoing events,
there can be no assurance that there would be sufficient assets to pay amounts
due on the notes. As a result, holders of the notes may receive less, ratably,
than holders of other secured indebtedness.
As of August 31, 2000, we had no outstanding balance under our revolving
line of credit and the balance outstanding under PPGx, Inc.'s revolving line of
credit was $9 million. The supplemental indenture limits but does not prohibit
the incurrence of substantial additional indebtedness by us and our subsidiaries
in the future.
We may not be able to fund a "Repurchase Event."
Upon a repurchase event, which is defined in the section captioned
"Description of Notes--Repurchase at the Option of Holders," we will be required
to offer to repurchase all or a portion of the outstanding notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase. However, there can be no
S-7
<PAGE> 11
assurance that sufficient funds will be available at the time of any repurchase
event to make any required repurchases of the notes tendered. Notwithstanding
these provisions, we could enter into certain transactions, including certain
recapitalizations, that would not constitute a repurchase event but would
increase the amount of debt outstanding at such time. See "Description of
Notes--Repurchase at the Option of Holders."
You may have to include original issue discount in your gross income for U.S.
federal income tax purposes.
Because a portion of the issue price of each unit will be allocable to
the warrants, the notes will be issued with original issue discount for U.S.
federal income tax purposes. Consequently, original issue discount will accrue
from the issue date of the notes and will be included in the gross income of a
U.S. holder of notes for U.S. federal income tax purposes in advance of the
receipt of cash payments on such notes to which the income is attributable,
unless the amount of original issue discount is minimal. See "Certain U.S.
Federal Income Tax Consequences."
There is no active trading market for the securities we are offering.
There is no existing market for the units, notes or warrants, and we are
not applying to list the units, notes or warrants on any securities exchange or
to include them in any automated quotation system. There can be no assurance as
to the liquidity of any markets that may develop for the units, notes or
warrants, the ability of holders of the units, notes or warrants to sell their
units, notes or warrants, or the prices at which holders would be able to sell
their units, notes or warrants. Future trading prices of the units, notes or
warrants, if any, will depend on many factors, including, among other things,
prevailing interest rates, our operating results and the market for similar
securities.
In addition, the exercisability of the warrants is subject to the
continued effectiveness of the registration statement under which the warrants
are being issued. If we fail to maintain the continued effectiveness of the
registration statement, we may be precluded by law from issuing shares of common
stock upon exercise of the warrants; and even if we were legally permitted to
issue such shares of common stock under those circumstances, those shares would
be restricted securities for securities laws purposes and could not be freely
transferred or resold except in compliance with federal and state securities
laws.
The holders of the notes and warrants will experience substantial dilution upon
conversion of the notes or exercise of the warrants.
As of June 30, 2000, the net book value of assets per share was $1.82.
On a pro forma basis giving effect to this offering, assuming sale of all 26,000
units, the net book value of assets per share would have been (a) $2.47,
assuming immediate conversion of all notes only (without the exercise of all
warrants), (b) $2.16, assuming immediate exercise of all Class A warrants only
(without the exercise of any Class B warrants or conversion of any notes), (c)
$2.21, assuming immediate exercise of all Class B warrants only (without the
exercise of any Class A warrants or conversion of any notes) and (d) $2.79,
assuming the immediate conversion of notes and the exercise of all Class A
warrants and Class B warrants. The conversion price of the notes is $7.06 per
share and the exercise price of Class A warrants and Class B warrants are $8.82
per share and $10.59 per share, respectively. The purchasers of the notes and
warrants will experience substantial dilution in net book value of assets per
share and earnings per share upon the conversion of the notes or exercise of the
warrants. See "Dilution."
FACTORS RELATING TO THE COLLATERAL FOR THE NOTES
The collateral may not be sufficient to satisfy any amounts we owe under the
notes and the indenture.
The notes are secured by a pledge of 6,682,500 shares of common stock of
Discovery Partners International, Inc., or "DPI," in which we own a minority
interest and some related shareholders, investors rights and standstill
agreements. We do not represent that the value of the securities we are pledging
to secure the notes will be sufficient now or at any time in the future to repay
the principal of the notes or accrued but unpaid interest. Any claim for the
difference between the amount realized by holders of the notes from the sale of
collateral securing the notes and our obligations under the notes will rank
equally in right of payment with all of our other unsecured senior indebtedness.
On July 27, 2000, DPI closed an initial public offering of 5.75 million
shares of its common stock at a price per share of $18.00 (including 750,000
shares of common stock sold pursuant to the underwriters over-allotment option).
There can be no assurance that an established trading market will develop for
DPI's common stock after its initial public offering or that its common stock
will garner a price per share that values the collateral consisting of equity
interests in DPI in an amount that provides sufficient security for the notes.
S-8
<PAGE> 12
Your rights in the collateral may be adversely affected by bankruptcy
proceedings.
The right of the indenture trustee or collateral agent to exercise its
rights in and dispose of the collateral upon acceleration of our existing
indebtedness is likely to be significantly impaired if federal bankruptcy
proceedings are commenced by or against us prior to or possibly even after the
trustee or collateral agent has exercised such rights and disposed of the
collateral. Under the United States Bankruptcy Code, a secured creditor such as
the trustee or collateral agent is prohibited from exercising its rights in its
security from a debtor in a bankruptcy case, or from disposing of collateral,
without bankruptcy court approval. Moreover, bankruptcy law permits the debtor
to continue to retain and to use collateral, and the proceeds, products, rents
or profits of such collateral, even though the debtor is in default under the
applicable debt instruments, provided that the secured creditor is given
"adequate protection." The term "adequate protection" is not defined under
bankruptcy law and, because of the broad discretionary powers of a bankruptcy
court, it is impossible to predict how long payments under the notes could be
delayed following commencement of a bankruptcy case, whether or when the trustee
or collateral agent would repossess or dispose of the collateral, or whether or
to what extent holders of the notes would be compensated for any delay in
payment or loss of value of the collateral through the requirements of "adequate
protection." Furthermore, in the event the bankruptcy court determines that the
value of the collateral is not sufficient to repay all amounts due on the notes,
the holders of the notes would have "undersecured claims." Federal bankruptcy
laws do not permit the payment or accrual of interest, costs and attorneys' fees
for "undersecured claims" during a debtor's bankruptcy case.
Our interests in the collateral securing the notes are effectively subordinated
in right of payment to creditors of DPI.
The notes are secured by 6,682,500 shares of common stock of DPI, in
which we own a minority interest. Holders of indebtedness of, and trade
creditors of, DPI would generally be entitled to payment of their claims from
the assets of DPI before such assets were made available for distribution to us.
The supplemental indenture will not limit the incurrence of additional
indebtedness by DPI, will permit further investments by us in DPI, subject to
certain limitations, and will not require DPI or our other subsidiaries to
guarantee the notes. In the event of a bankruptcy, liquidation or reorganization
of DPI, holders of any of DPI's indebtedness and other creditors will have a
claim to the assets of DPI that is prior to our interest in those assets. There
can be no assurance that the assets of DPI would be sufficient to satisfy the
claims of its creditors or that our share of any remaining assets available for
distribution to its equity holders would be sufficient to repay the notes.
Our DPI stock which secures the notes is subject to a variety of contracts that
could bind the trustee, or holders in a foreclosure sale, and diminish the value
of our DPI stock.
We are party to a number of contracts that relate to and restrict our
rights with respect to, our DPI stock which secures the notes. These contracts
are a Standstill Agreement, an Investors' Rights Agreement and a lock-up
agreement. These contracts among other things contain restrictions on transfer
of our DPI stock. However, these contracts permit us to make a bona fide pledge
of our DPI stock to secure the notes and will permit the trustee to take title
to our DPI stock or to sell our DPI stock if (a) such action is part of the
enforcement against our DPI stock of a security interest we had, via a bona fide
pledge, granted to the trustee and (b) the assignee agrees in writing to become
a party to and bound by the contracts.
S-9
<PAGE> 13
The Second Amended and Restated Investors' Rights Agreement, among
other things, governs the rights of certain investors, including us, to cause
DPI to register certain shares of DPI's common stock, or "Registrable
Securities." A condition precedent to DPI's obligation to register any
Registrable Securities is that the each holder thereof furnish information
regarding itself, the Registrable Securities and the intended method of
disposition required to effect the registration of each such holder's
Registrable Securities. In connection with these registration rights, we, as a
holder of Registrable Securities, have agreed to certain "market standoff"
provisions for specified periods following the effective date of a registration
statement. We may not cause DPI to register our shares of DPI common stock that
we own until June 27, 2001, the date that is eleven months after the effective
date of DPI's initial public offering. The DPI stock that we own has not been
registered with the Securities and Exchange Commission and constitutes
restricted securities for securities laws purposes. There can be no assurance as
to the liquidity of the DPI stock we own or the ability of the trustee or the
holders to sell such DPI stock if the trustee were to foreclose on the DPI stock
before such date.
Pursuant to the Standstill Agreement between us and DPI, we have agreed
that for a restricted period, neither we nor any of our representatives on our
behalf or as part of a group will, without the prior written consent of DPI upon
express authorization by DPI's board of directors: (a) acquire any voting
securities or rights to acquire voting securities of DPI or any of its
subsidiaries or successors; (b) make any solicitation of shareholder consents or
proxies to vote with respect to DPI's voting securities; (c) make any public
announcement with respect to, or proposal for, any extraordinary transaction
involving DPI or any of its securities or assets (other than a disposition of
our DPI shares); (d) form or in any way participate in a group in connection
with any of the foregoing or the holding or voting of DPI voting securities; (e)
otherwise seek to influence or control the management, board of directors or
policies of DPI, except through the nomination of DPI directors as permitted by
the Standstill Agreement; (f) take any action that would require DPI to make a
public announcement regarding any of the foregoing or (g) publicly request DPI
or its representatives to amend or waive any provisions of this section of the
Standstill Agreement. The restricted period began on April 28, 2000 and ends on
the earlier of April 28, 2010 and the date on which we, together with all
members of any group of which we are a member, own less than 5% of the then
outstanding DPI common stock. At each annual shareholder meeting while DPI
common stock is registered, DPI has agreed to include on its management slate of
director nominees, a number of persons designated by us equaling the number of
directors we could have elected alone with the DPI shares owned by us on April
28, 2000 and still then owned of record by us, and we have agreed to vote for,
and cause our representatives to vote for, the entire management slate of
director nominees.
In connection with the initial public offering of common stock of DPI,
we entered into a lock-up agreement with Chase Securities Inc. pursuant to which
we agreed not to, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of common stock of DPI or any securities
convertible into or exchangeable or exercisable for or any other rights to
purchase or acquire common stock of DPI that we own, without the prior written
consent of Chase Securities Inc. for a period of 180 days from the effective
date of the registration statement with respect to DPI's initial public
offering. DPI closed its initial public offering on July 27, 2000, which means
the lock-up period will last until January 24, 2001. As an inducement for Chase
Securities Inc. to consent to the pledge of shares of common stock of DPI that
we won as collateral for the notes, Chase Securities Inc. has required that the
trustee execute a lock-up agreement pursuant to which the trustee will agree to
the same restrictions contained in the lock-up agreement we executed as set
forth above. If the trustee were to foreclose on the DPI stock during any such
lock-up period, it would be unable to sell the DPI stock for the duration for
the lock-up period.
The trustee has specifically agreed to be bound by the provisions of and
burdens of the Standstill Agreement and Investors' Rights Agreement. If we are
unable to fulfill our obligations under the notes and the trustee seizes the
collateral, so long as such contracts are in effect, the trustee's rights in the
DPI stock will be limited thereby and the trustee and any person to whom such
stock is sold would be required to be bound by such contracts. As a result of
these restrictions, the DPI stock could become more difficult to sell and the
value of such stock could be diminished.
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<PAGE> 14
USE OF PROCEEDS
We anticipate our net proceeds from the sale of these securities to be
$24.2 million after deducting placement agent fees and expenses and estimated
offering expenses, assuming all 26,000 units are sold. We expect to use the
net proceeds of this offering for operating costs, capital expenditures and
working capital needs, and other general corporate purposes.
PRICE RANGE OF OUR COMMON STOCK
Our common stock has traded on the Nasdaq National Market under the
symbol "AXPH" since our initial public offering in November 1993. The table
below presents, for the calendar quarters indicated, the high and low per share
closing prices of our common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
CALENDAR 1998
First Quarter ............................... $10.75 $7.66
Second Quarter .............................. 8.75 6.50
Third Quarter ............................... 7.75 3.38
Fourth Quarter .............................. 7.06 3.69
CALENDAR 1999
First Quarter ............................... $8.13 $3.75
Second Quarter .............................. 4.50 3.00
Third Quarter ............................... 4.97 3.56
Fourth Quarter .............................. 4.96 2.69
CALENDAR 2000
First Quarter ......................... $20.06 $4.19
Second Quarter ........................ 8.38 3.94
Third Quarter (through September 20, 2000) 8.06 5.03
</TABLE>
On September 20, 2000, the reported closing sale price of our common
stock on the Nasdaq National Market was $6.75 per share. As of August 31, 2000,
there were approximately 530 stockholders of record of our common stock.
S-11
<PAGE> 15
CAPITALIZATION
The following table sets forth our actual capitalization as of June 30,
2000 and our capitalization as adjusted to give effect to the offering assuming
all 26,000 units were sold. The capitalization table as adjusted includes the
debt issuance net of the discount associated with the fair value of the
warrants. You should read this table in conjunction with our consolidated
financial statements and accompanying notes which we incorporate herein by
reference. See "Incorporation by Reference" on page ii of this prospectus
supplement and "Where You Can Find More Information About Axys and this
Offering" on page 12 in the accompanying prospectus.
<TABLE>
<CAPTION>
Actual As Adjusted
----------- -----------
(in thousands)
<S> <C> <C>
Capital lease and debt obligations,
net of current portion ............................. $ 8 $ 8
Long Term Debt (Net of
Discount of 6,000) ................................. -- $ 20,000
Stockholders' Equity:
Preferred Stock .................................... -- --
Common Stock, par value $.001 per share,
50,000,000 authorized; 35,323,146 shares
outstanding on an Actual basis and on an
As Adjusted basis (including discount of 6,000).. 326,532 332,532
Accumulated other comprehensive loss................ 2,116 2,116
Accumulated deficit................................. (264,308) (264,308)
----------- -----------
Total stockholders' equity...................... (64,340) 70,340
----------- -----------
Total Capitalization .................................. $ 64,348 $ 90,348
=========== ===========
</TABLE>
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<PAGE> 16
DILUTION
The net tangible book value of our common stock as of June 30, 2000 was
approximately $64.3 million or $1.82 per share. Net tangible book value per
share represents the amount of total actual tangible assets less total actual
tangible liabilities, divided by shares of our common stock outstanding.
Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of our common stock issuable
upon conversion of the notes or exercise of the Class A warrants and Class B
warrants being purchased in this offering and the pro forma net tangible book
value per share of our common stock immediately after completion of this
offering and assumes that the warrants and notes are exercised or converted
immediately after the offering as described below.
Our pro forma net tangible book value as of June 30, 2000 would have
been approximately $96.3 million or $2.47 per share of our common stock,
assuming the immediate conversion of all the notes only (without the exercise of
any warrants). This represents an immediate increase in net tangible book value
of $.65 per share to our existing stockholders, and an immediate dilution of net
tangible book value of $5.09 per share to holders of the notes.
Our pro forma net tangible book value as of June 30, 2000 would have
been approximately $78.5 million or $2.16 per share of our common stock,
assuming immediate exercise of the Class A warrants only (without the exercise
of any Class B warrants or conversion of any notes). This represents an
immediate increase in net tangible book value of $.34 per share to our existing
stockholders, and an immediate dilution of net tangible book value of $6.66 per
share to holders of the Class A warrants.
Our pro forma net tangible book value as of June 30, 2000 would have
bene approximately $80.1 million or $2.21 per share of our common stock,
assuming immediate exercise of the Class B warrants only (without the exercise
of any Class A warrants or conversion of any notes). This represents an
immediate increase in net tangible book value of $.39 per share to our existing
stockholders, and an immediate dilution of net tangible book value of $8.38 per
share to holders of the Class B warrants.
Our pro forma net tangible book value as of June 30, 2000 would have
been approximately $114.2 million or $2.79 per share of our common stock,
assuming immediate conversion of all notes and exercise of all Class A and Class
B warrants. This represents an immediate increase in net tangible book value of
$.97 per share to our existing stockholders, and an immediate dilution of net
tangible book value of $4.77 per share with respect to holders of the notes,
$6.03 per share with respect to the holders of Class A warrants and $7.80 per
share with respect to the holders of Class B warrants.
SELECTED HISTORICAL FINANCIAL INFORMATION
In this prospectus supplement and the accompanying prospectus, we have
incorporated by reference (a) our Annual Report on Form 10-K for the year ended
December 31, 1999, which contains our consolidated financial statements and (b)
our Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2000 and
June 30, 2000, respectively. We have also incorporated by reference, among other
things, our Current Report on Form 8-K filed on September 13, 2000 which
contains the financial statements of Discovery Partners International, Inc.,
including the consolidated balance sheets of Discovery Partners
International, Inc. as of December 31, 1998 and 1999 and June 30, 2000
(unaudited) and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended December 31, 1997, 1998 and
1999 and for the periods ended June 30, 1999 and June 30, 2000 (unaudited).
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<PAGE> 17
RATIO OF EARNINGS TO FIXED CHARGES
The following table presents our historical ratios of earnings to fixed
charges for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
Six Months Ended -----------------------------------------------
June 30, 2000 1999 1998(1) 1997 1996 1995
---------------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Ratio.................... * * * * * *
Deficiency............... $21,933 $49,806 $153,843 $10,967 $5,928 $23,733
</TABLE>
* Earnings for the period indicated were insufficient to cover fixed charges.
(1) Deficiency includes charges resulting from acquired in-process research and
development costs of $124,888
For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as net loss from continuing operations before adjustments
for minority interests in consolidated subsidiaries and income from equity
investees, plus fixed charges. Fixed charges consist of interest expense, and
estimated interest within rental expense.
S-14
<PAGE> 18
The following description of the particular terms of the securities offered
hereby (referred to in the accompanying prospectus as the "debt securities")
supplements, and to the extent inconsistent replaces, the description of the
general terms and provisions of the debt securities set forth in the
accompanying prospectus.
DESCRIPTION OF UNITS
Each unit consists of one of our 8% Senior Secured Convertible Notes due
2004 in the principal amount of $1,000, one Class A warrant to purchase 35.41
shares of our common stock and one Class B warrant to purchase 35.41 shares of
our common stock. The notes and the warrants are permitted to be sold separately
after the issuance of the units.
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, "Axys" refers
only to Axys Pharmaceuticals, Inc. and not to any of its subsidiaries.
We will issue the notes under an indenture, as modified by a first
supplemental indenture, between us and U.S. Bank Trust National Association, as
trustee. When we refer to the indenture the terms of the notes include those
stated in the indenture, the supplemental indenture thereto and those made part
of the indenture by reference to the Trust Indenture Act of 1939. The provisions
of the indenture referred to below under the subcaption "Security" also define
the terms of the pledges that will secure the notes.
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of these notes. We have filed copies of the indenture as exhibits to the
registration statement which includes this prospectus. Certain defined terms
used in this description but not defined below under "--Certain Definitions"
have the meaning assigned to them in the indenture.
The registered holder of a note will be treated as the owner of it for
all purposes. Only registered holders will have rights under the indenture.
BRIEF DESCRIPTION OF THE NOTES
These notes:
- are convertible into shares of our common stock;
- are our general obligations;
- are secured by a first priority pledge of 6,682,500 shares of common stock
of Discovery Partners International, Inc. we own and an interest in
related contract rights;
- are pari passu in right of payment to all of our existing and future debt
that is senior to the notes; and
- are senior in right of payment to any of our future subordinated
indebtedness.
In the event of a bankruptcy, liquidation or reorganization of any of
our subsidiaries or minority interests, these subsidiaries and minority
interests will pay the holders of their debt and their trade creditors before
they will be able to distribute any of their assets to us. Our subsidiaries and
minority interests generated 37% of our consolidated revenues in the
twelve-month period ended December 31,1999 and held 27% of our consolidated
assets as of December 31, 1999.
PRINCIPAL, MATURITY AND INTEREST
We will issue notes with a maximum aggregate principal amount of up to
$26,000,000. We will issue notes in denominations of $1,000 and integral
multiples of $1,000. The notes will mature on October 1, 2004.
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<PAGE> 19
Interest on the notes will accrue at the rate of 8% per annum and will
be payable quarterly in arrears on March 15, June 15, September 15, and December
15, commencing on December 15, 2000. We will make each interest payment to the
holders of record at the close of business on the fifth business day preceding
such interest payment dates.
Interest on the notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
ISSUANCE OF COMMON STOCK IN LIEU OF CASH INTEREST
We may, at our option, which we refer to as the "Stock Payment Option,"
make a payment of interest on the notes wholly or partly in shares of our common
stock, which we refer to as "Interest Shares," provided the issuance of Interest
Shares upon such exercise of the Stock Payment Option shall have been authorized
by the board of directors.
We may not exercise the Stock Payment Option with respect to any payment
of interest on the notes if:
(1) the number of shares of our common stock authorized, unissued and
unreserved for all purposes other than payment of interest on the notes,
or held in our treasury, after taking into account shares of common
stock required to be reserved for conversion of the notes and exercise
of the warrants, is insufficient to pay the portion of such interest to
be paid in common stock;
(2) the issuance or delivery of Interest Shares or the public resale of such
Interest Shares by the holders who are not our affiliates for the
purposes of the Securities Act of 1933, as amended, would require
registration or filing with or approval of any governmental authority
under any law or regulation, and such registration, filing or approval
has not been effected or obtained or is not in effect;
(3) the Interest Shares shall not at the time of issuance have been
authorized for listing, upon official notice of issuance, on the
principal securities exchange on which our common stock is then listed
and traded;
(4) the Interest Share Price for the Interest Shares is less than the par
value of the common stock;
(5) an event of default has occurred and is continuing on the applicable
interest payment date or at any time thereafter to and including the
date on which we deliver such Interest Shares to the holders; or
(6) our common stock is neither (i) listed or admitted for trading on a
national securities exchange nor (ii) quoted on Nasdaq.
We shall have the right to elect the Stock Payment Option for the notes
with respect to a particular interest payment date only if we give notice of
such election to the trustee and the holders of the notes on or before the date
that is 25 trading days prior to such interest payment date. Any election of the
Stock Payment Option for a particular interest payment date shall be applicable
pro rata (based on the amount of interest payable on such interest payment date)
to all notes that are outstanding on such interest payment date. If we elect the
Stock Payment Option with respect to a particular interest payment date, we will
issue to each holder of notes in respect of such interest payment date the
aggregate number of whole shares of common stock determined by dividing the per
share Interest Share Price of the common stock on the applicable interest
payment date into an amount equal to the total amount of lawful money of the
United States of America which such holder would receive if the aggregate amount
of interest on the notes held by such holder which is being paid in Interest
Shares were being paid in such lawful money.
The Interest Shares for such interest payment date shall become issuable
on such interest payment date and we shall deliver, or cause to be delivered,
the appropriate number of Interest Shares to the holders within three trading
days after the applicable interest payment date. If in any case we fail to
deliver or cause to be delivered such
S-16
<PAGE> 20
number of Interest Shares to the holders within five trading days after such
interest payment date, then in addition to any other liabilities we may have
hereunder and under applicable law, we will be liable to the holders for all
out-of-pocket expenses and any direct damages or liabilities incurred by the
holders as a result of such failure, and such holder may by written notice or
oral notice (promptly confirmed in writing), given at any time prior to delivery
to such holder of the Interest Shares, require payment in cash of the interest
in respect of which we exercised the Stock Payment Option, in which case the
amount of such interest shall be immediately due and payable, with default
interest thereon from the applicable interest payment date until paid in full
and upon such cash payment in full we shall not be obligated to issue such
Interest Shares to such holder.
We shall deliver to the trustee and each holder, on or prior to the date
on which Interest Shares for such payment of interest on the notes are required
to be received by the holders, a certificate setting forth (a) the total amount
of the cash interest payment to which such respective holder is entitled, (b)
the portion of such interest payment being made in Interest Shares, (c) the
Interest Share Price and the market price on each trading day used in computing
the Interest Share Price, (d) the number of Interest Shares allocable to such
payment, as calculated pursuant to the indenture, (e) any rounding adjustment to
such number or any payment necessary to be made pursuant to the indenture, (f) a
brief statement of the facts requiring such adjustment, and (g) a brief
statement that none of the conditions preventing the election of the Stock
Payment Option by us, as set forth in the indenture, has occurred and is
continuing and that all of the requirements of the indenture have been met. Such
certificate shall be conclusive evidence of the correctness of the calculation
of the number of Interest Shares allocable to the payments to which such
certificate relates and of any adjustments to such number made pursuant to the
indenture in the absence of manifest error. On or before the pertinent interest
payment date, we shall issue, or cause the issuing agent to prepare and issue,
the Interest Shares in the names of the holders or their respective nominees
before being so delivered by us on such interest payment date.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
All payments of principal and interest on the notes will be made at the
office or agency of the paying agent and registrar for the notes within the City
and State of New York unless we elect to make interest payments by check mailed
to the holders at their address set forth in the register of holders. In
addition, we may, at our option, make interest payments in shares of common
stock, in lieu of cash if we satisfy the requirements in the indenture described
above under the heading "--Issuance of Common Stock In Lieu of Cash Interest."
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. We may
change the paying agent or registrar without prior notice to the holders of the
notes, and we or any of our subsidiaries may act as paying agent or registrar.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the
indenture. The registrar and the trustee may require a holder to furnish
appropriate endorsements and transfer documents in connection with a transfer of
notes. Holders will be required to pay all taxes due on transfer.
CONVERSION
The holder of any convertible note will have the right, exercisable at
any time following the date of original issuance thereof and prior to repurchase
or maturity, to convert the principal amount thereof, or any portion of such
principal amount that is at least $10,000 (or such lesser principal amount
thereof as shall be outstanding at such time), into shares of our common stock
at a conversion price of $7.06 per share, subject to adjustment as described
below, which we refer to as the "Conversion Price". If we do not have available
for issuance upon conversion of the notes shares of common stock sufficient for
issuance upon such conversion, the holders will have the right to receive cash
in an amount equal to the number of shares of our common stock which we are
unable to issue
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<PAGE> 21
multiplied by the average market price of our common stock for the five
consecutive trading days immediately prior to the applicable conversion date.
In connection with conversion of a note or portion thereof, the holder
will not be entitled to payment or credit in respect of accrued and unpaid
interest on such note or portion thereof converted. No fractional shares will be
issued upon conversion, but a cash adjustment will be made for any fractional
shares.
ADJUSTMENT
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including:
(1) the payment of a dividend or the making of a distribution to all
holders of the outstanding common stock in shares of common
stock;
(2) the issuance of rights or warrants (other than any rights or
warrants referred to clause(4) below) to all holders of our
outstanding shares of common stock entitling them (for a period
expiring within 45 days after the date fixed for the
determination of stockholders entitled to receive such rights or
warrants) to subscribe for or purchase shares of common stock at
a price per share less than the current market price on the
record date fixed for the determination of stockholders entitled
to receive such rights or warrants;
(3) the subdivision of the outstanding shares of common stock into a
greater number of shares of common stock or the combination of
the outstanding shares of common stock into a smaller number of
shares of common stock;
(4) the distribution to all holders of our common stock of shares of
any class of our capital stock (other than any dividends or
distributions to which clause (1) above applies) or evidences of
our indebtedness, cash or other assets (including securities,
but excluding any rights or warrants referred to in clause (2)
above, dividends and distributions paid exclusively in cash and
distributions made upon a merger or consolidation);
(5) the distribution to all holders of our common stock of cash
(excluding any cash that is distributed upon a merger or
consolidation or as part of a distribution referred to clause
(4) above) in an aggregate amount that, combined with (1) the
aggregate amount of any other such distributions to all holders
of our common stock made exclusively in cash within the 12
months the date of payment of such distribution, and in
respect of which no adjustment pursuant to this clause (5) has
been made, and (2) the aggregate of any cash plus the fair
market (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 us or any of our subsidiaries for all or any portion of
the common stock concluded within the 12 months preceding the
date of payment of such distribution, and in respect of which no
adjustment pursuant to clause (6) below has been made, exceeds
10% of the product of (x) the current market price on the record
date with respect to such distribution times (y) the number of
shares of common stock outstanding on such date, unless we elect
to reserve such cash for distribution to the holders of notes
upon conversion of the notes;
(6) a tender offer made by us or any of our subsidiaries for all or
any portion of our common stock expires and such tender offer
(as amended upon the expiration thereof) requires the payment to
stockholders of an aggregate consideration having a fair market
value (as determined by the board of directors, whose
determination shall be conclusive and described in a board
resolution) that combined together with (1) the aggregate of the
cash plus the fair market value (as determined by the board of
directors, whose determination shall be conclusive and described
in a board resolution), as of the expiration of such tender
offer, of consideration payable in respect of any
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<PAGE> 22
other tender offers, by us or any of our subsidiaries for all or
any portion of our common stock expiring within the 12 months
preceding the expiration of such tender offer and in respect of
which no adjustment pursuant to this clause (6) has been made
and (2) the aggregate amount of any distributions to all holders
of our 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 clause (5) above has been made,
exceeds 10% of the product of (i) the current market price as of
the last time tenders could have been made pursuant to such
tender offer (as it may be amended) times (ii) the number of
shares of common stock outstanding (including any tendered
shares) at such time; and
(7) the issuance of shares of our common stock or common stock
equivalents by us, other than an issuance pro rata to all
holders of our outstanding common stock, at a price below the
specified market value of such common stock at the time of
such issuance, except:
- issuances for which the Conversion Price is adjusted
pursuant to clause (1) above;
- issuances in connection with an offering for
cash for our account that is underwritten on a firm
commitment basis and is registered under the Securities Act
of 1933, as amended or sold in an offering primarily to
"qualified institutional buyers" as defined in, and in a
transaction under, Rule 144A under the Securities Act of
1933, as amended;
- issuances upon conversion of the notes or exercise of the
warrants;
- issuances of Interest Shares;
- issuances upon exercise of options, warrants or other
rights outstanding as of the date of the supplemental
indenture in accordance with the terms thereof; or
- issuances pursuant to the common stock purchase
agreement, dated as of July 21, 2000 between us and Acqua
Wellington North American Equities Fund, Ltd.
If we reclassify or change our outstanding common stock or consolidate,
merge or combine with another person or sell or convey substantially all of our
assets to any person, in either case, as a result of which holders of our common
stock become entitled to receive stock, security or other property or assets
with respect to their shares of common stock, we, the successor person or
purchasing person, as the case may be, shall enter into an agreement with the
trustee providing that the notes will become convertible into the kind and
amount of stock, securities, property or assets which the holders of the notes
would have owned immediately after the transaction if the holders had converted
their notes immediately before the effective date of the transaction.
The indenture also provides that if the Conversion Price is adjusted as
a result of the issuance of rights, warrants or options and some or all of those
rights, warrants or options expire unexercised, the Conversion Price shall be
readjusted to take into account the actual number of such rights, warrants or
options, which were exercised.
We will not be required to adjust the Conversion Price unless such
adjustment would require an increase or decrease of at least 1% in such price;
provided that any non-adjustment is carried forward and taken into consideration
in any subsequent adjustment.
We will be permitted to make such reductions in the Conversion Price as
we, in our discretion, determine to be advisable in order that any stock
dividend, subdivision of shares, distribution of rights to purchase stock or
securities or distribution of securities convertible into or exchangeable for
stock which we make to our stockholders will not be taxable to the recipients.
RESERVATION OF SHARES
We will reserve and keep available, free of pre-emptive rights in our
treasury a sufficient number of shares of our common stock to allow for
conversion of all outstanding notes. Failure by us to maintain such shares in
treasury would constitute a breach of the indenture.
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SECURITY
The notes will be secured by a pledge of 6,682,500 shares of common
stock of Discovery Partners International, Inc. which we own.
The notes will also be secured by a security interest in our interest
in the following contracts which relate to our investment in DPI:
- the Standstill Agreement made as of April 28, 2000 by and between DPI
and the Company; and,
- the Second Amended and Restated Investors' Rights Agreement made as
of April 28, 2000, as amended, by and between DPI and the Investors
listed on Schedule A thereto.
The trustee will initially hold the shares of DPI stock that are
collateral pursuant to the terms of the indenture which will define the terms of
the pledges that secure the notes. These pledges will secure the payment and
performance when due of all of our obligations under the indenture and the notes
as provided in the indenture.
In general so long as no event of default has occurred and is
continuing, we will be entitled to receive all cash dividends, interest and
other payments made upon or with respect to the collateral pledged by us and to
exercise any voting and other consensual rights pertaining to the collateral
pledged by us.
Upon the occurrence and during the continuance of an event of default,
(1) all of our rights to exercise such voting or other consensual rights
will cease, and all such rights will become vested in the trustee,
which, to the extent permitted by law, will have the sole right to
exercise such voting and other consensual rights;
(2) all of our rights to receive all cash dividends, interest and other
payments made upon or with respect to the collateral will cease and such
cash dividends, interest and other payments will be payable to the
trustee; and
(3) the trustee may sell or dispose of the collateral or any part thereof in
accordance with the terms of the indenture. All funds distributed under
the indenture and received by the trustee for the benefit of the holders
will be distributed by the trustee in accordance with the provisions of
the indenture.
The trustee will determine the circumstances and manner in which the
collateral will be disposed of, including, but not limited to, the determination
of whether to release all or any portion of the collateral from the liens
created by the indenture and whether to foreclose on the collateral following an
event of default.
The collateral will be released:
(1) upon the full and final payment and performance of all of our
obligations under the indenture and the notes;
(2) if the collateral is sold in accordance with the applicable provisions
of the indenture;
(3) upon defeasance of the indenture in accordance with the applicable
provisions of the indenture;
(4) upon a permitted substitution of funds or government obligations as
replacement collateral in accordance with the applicable provisions of
the indenture; or
(5) with the prior written consent of a majority of the holders.
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REPURCHASE AT THE OPTION OF HOLDERS
If a repurchase event occurs, each holder of notes will have the right,
but not the obligation, to require us to repurchase the repurchase portion of
such holder's notes, or any portion thereof on the applicable repurchase date.
Within 5 business days following any repurchase event, we will mail a notice to
the trustee and each holder stating the transaction or transactions that
constitute the repurchase event, the date by which the repurchase right must be
exercised and the procedures which a holder must follow to exercise the
repurchase right. To exercise the repurchase right, a holder shall deliver to
us, with a copy to the trustee, on or before the twentieth day after our notice
(or if no such notice is given, within 40 days after such holder first learns of
the repurchase event) a notice setting forth the name of such holder and the
principal amount of notes to be repurchased from such holder. In the event that
the value of the collateral is at least 150% of the amount by which (a) our
obligations on the notes exceed (b) the principal thereof or we substitute the
collateral for funds or governmental obligations in accordance with the
indenture on the date of such repurchase event, then we will repurchase the
portion of the notes from the holders electing to exercise their repurchase
rights 60 days from the last date a holder may exercise such rights. If the
value of the collateral does not equal at least 150% of the amount by which (x)
our obligations on the notes exceed (y) the principal thereof or we do not
substitute the collateral on the date of the repurchase event, we will
repurchase the portion of the notes from the holders electing to exercise their
repurchase rights 30 days from the last date a holder may exercise such rights.
We will comply with the requirements of Rule 14e-l under the Exchange Act and
any other securities laws and regulations thereunder to the extent those laws
and regulations are applicable in connection with the repurchase of the notes as
a result of a repurchase event.
On the applicable repurchase date, we will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly tendered
pursuant to our notice;
(2) deposit with the paying agent an amount equal to the repurchase price in
respect of all notes or portions of notes properly tendered; and
(3) deliver or cause to be delivered to the trustee the notes so accepted
together with a certificate stating the aggregate principal amount of
notes or portions of notes being purchased by us.
The trustee will promptly pay, in immediately available funds, to each
holder of notes properly tendered the repurchase price for such notes to such
account as specified by such holder in writing to us at least one business day
prior to the applicable repurchase date, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each new note will be in a principal amount
of $1,000 or an integral multiple of $1,000.
In case of any repurchase event as specified in clause (b) of the
definition of such term, we shall be entitled to satisfy our obligations to
repurchase notes under Article VII of the supplemental indenture by causing a
third party to make payment on the applicable repurchase date of the applicable
repurchase prices of all notes required to be repurchased by us, in which case
we shall notify the holders of such fact, with a copy to the trustee, at least
five business days prior to such repurchase date; provided, however, that
nothing herein shall relieve us of our obligation for payment of such
repurchase prices if such third party shall fail to pay the same when due.
The provisions described above that require us to repurchase the notes
following a repurchase event will be applicable whether or not any other
provisions of the indenture are applicable. Except as described above with
respect to a repurchase event, the indenture does not contain provisions that
permit the holders of the notes to require that we repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
Future credit agreements or other agreements relating to indebtedness
to which we become a party may contain restrictions and provisions that prohibit
us from purchasing any notes, or that provide that certain change of control
events with respect to us would constitute a default under the agreements
governing such indebtedness. In the event a repurchase event occurs at a time
when we are prohibited from purchasing notes, we could seek the consent of our
senior lenders to purchase the notes or could attempt to refinance the
borrowings that contain such
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prohibition. If we do not obtain such a consent or repay such borrowings, we
will remain prohibited from purchasing the notes. In that case, our failure to
purchase tendered notes would constitute an event of default under the indenture
which would, in turn, constitute a default under such indebtedness.
ASSET SALES
We shall not, and shall not permit any of our restricted subsidiaries
to:
(1) sell, convey or otherwise dispose of (including, without limitation, by
way of lease or license) any assets which are material to our business,
properties, operations, condition (financial or other), results of
operations or prospects or those of our restricted subsidiaries, taken
as a whole, in a single transaction or a series of related transactions
(including, without limitation, in a transaction between us and any
subsidiary or other affiliate);
(2) sell, convey, pledge, transfer or otherwise dispose of any of the
pledged securities or the shares of preferred stock of Akkadix
Corporation we own, which we refer to as the "Akkadix Shares," except in
each such case as permitted by the indenture; or
(3) liquidate, dissolve or otherwise wind up our affairs.
Notwithstanding the foregoing restrictions, we shall be permitted to
sell, convey or otherwise dispose of the pledged securities or the Akkadix
Shares so long as:
(1) the net cash proceeds of such sale, conveyance or other disposition
(plus the amount of any cash in addition to such proceeds which cash is
deposited by us with the trustee as collateral in connection with such
Permitted Collateral or Akkadix Disposition and which may be applied to
pay the repurchase price of such notes) are sufficient to pay in full
all amounts we are required to pay by reason of the repurchase rights of
the holders (assuming all holders exercise their repurchase rights to
the full extent permitted thereby),
(2) the terms of such sale, conveyance or other disposition provide for us
to make payment by deposit with the trustee on or before the date of
such sale, conveyance or other disposition of an amount in cash (or
instrument payable in next day funds) which, together with the amount of
any cash in addition to such proceeds which cash is deposited by us with
the trustee on or before such date as collateral in connection with such
Permitted Collateral or Akkadix Disposition and which may be applied to
pay the repurchase price of notes, is at least equal to the amount
specified in the immediately preceding clause (1),
(3) after giving effect to such sale, conveyance or other disposition, the
value of the collateral as to which the trustee holds a perfected first
priority security interest is at least equal to 150% of the amount by
which the (A) amount of the obligations exceeds (B) the principal amount
of notes that are outstanding and of which the holders have the right to
require repurchase by reason of such sale, conveyance or other
disposition (whether or not such right has been exercised), plus accrued
interest thereon to the date of determination, and
(4) no default or event of default has occurred and is continuing.
CERTAIN COVENANTS
INCURRENCE OF INDEBTEDNESS
We will not, and will not permit any restricted subsidiary to, create,
assume, incur or in any manner become liable in respect of, including, without
limitation, by reason of any business combination transaction (all of which are
referred to herein as "incurring"), any indebtedness other than permitted
indebtedness; provided,
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however, that if at any time during any period of 20 consecutive trading days
commencing after the closing date of the offering of the notes on each such
trading day: (a) the common stock shall be listed on Nasdaq, the NYSE or the
AMEX, and the market price of our common stock shall be at least 200% of the
Conversion Price in effect on each such trading day, (b) no event of default
shall have occurred or be continuing and no repurchase event shall have occurred
with respect to which any holder has the right to require repurchase of any note
pursuant to the indenture or with respect to which any holder has exercised such
right and we shall not have paid or deposited in accordance with the indenture
the applicable repurchase price, (c) the registration statement shall be
effective and available for use by us for the sale of shares of our common stock
to holders of the warrants upon exercise of the warrants and is reasonably
expected to remain effective and available after such period of 20 trading days
and (d) we shall have furnished to the holders and the trustee a certificate
certifying the matters set forth in the immediately preceding clauses (a)
through (c), then thereafter we shall no longer be obligated to comply with this
covenant.
LIENS
We will not, and will not permit any of our restricted subsidiaries to,
create, assume or suffer to exist any lien upon all or any part of our property
of any character, whether owned at the time the supplemental indenture is
executed or thereafter acquired, except permitted liens.
We (a) will not create, incur or permit to exist, will defend the
collateral against, and will take such other action as is necessary to remove,
any lien or claim on or to the collateral, other than the liens created by the
supplemental indenture and by certain permitted liens that are inchoate liens,
and (b) will defend the right, title and interest of the trustee in and to any
of the collateral against the claims and demands of all persons whomsoever.
In addition, we will not create, incur or permit to exist, will defend
the Akkadix Shares against, and will take such other action as is necessary to
remove, any lien or claim on or to the Akkadix Shares other than liens created
by the supplemental indenture and by certain permitted liens that are inchoate
liens. Notwithstanding the foregoing limitation, we shall be permitted to create
liens on the Akkadix Shares so long as:
(1) any such lien secures only indebtedness for borrowed money that is
permitted indebtedness and our obligations relating thereto;
(2) no default or event of default will result from such incurrence;
(3) we shall have received a bona fide offer from one or more persons to
provide such indebtedness to us with such lien on the Akkadix Shares;
(4) we shall have given the holders at least 10 days' notice, with a copy to
the trustee, which notice shall include statements of the amount of such
indebtedness, the material terms of such indebtedness and the time or
period within which the closing of the funding of such indebtedness is
to occur (but in no event sooner than 30 days or later than 90 days
after we give such notice to the holders) and copies of any proposed
documents relating to such indebtedness, and during such 10-day period
each holder shall have the right to notify us, with a copy to the
trustee, that such holder wishes to provide such holder's pro rata
portion of such indebtedness to us, such pro rata portion to be
determined from the ratio of the principal amount of such holder's note
or notes that are outstanding to the aggregate principal amount of all
notes that are outstanding, in each case at the close of business on the
date such notice is given by us, which we refer to as the "Initial
Allocation," and whether such holder wishes to provide more than such
holder's Initial Allocation (and if so, the amount such holder wishes
to provide in excess of such holder's Initial Allocation, which amount
may be all of such Indebtedness or any portion thereof as so specified
by such holder);
(5) if within such 10-each period (x) no holder so notifies us that it
wishes to provide such indebtedness or (y) one or more holders so notify
us that such holder or holders wish to provide such indebtedness but the
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aggregate amount of such indebtedness which such holder or holders wish
to provide (including all amounts in excess of their Initial
Allocations), as stated in such notices or notices from such holder or
holders to us, is less than the amount of such indebtedness as stated in
our notice to the holders given pursuant to clause (4) of this
covenant, then in the case of either the preceding clause (x) or (y) no
holder shall have any right to provide such indebtedness and we shall be
entitled to complete the financing of such indebtedness on the terms,
and on or before the date, or within the period, as the case may be,
specified in such notice from us to the holders;
(6) if within such 10-day period one or more holders so notify us that they
wish to provide such indebtedness and the aggregate amount of such
indebtedness which such holder or holders wish to provide (including all
amounts in excess of their Initial Allocations), as stated in such
notice or notices from such holder or holders to us, is at least equal
to the amount of such indebtedness as stated in our notice to the
holders given pursuant to the preceding clause (4), then each holder who
so notifies us shall be entitled to provide such pro rata portion of
such indebtedness on the terms set forth in our notice to the holders
given in accordance with the preceding clause (4); and, if all holders
do not notify us that they wish to provide their Initial Allocations of
such indebtedness, each holder who shall have notified us that such
holder wishes to provide more than its Initial Allocation shall be
entitled to provide a portion of the amount of such indebtedness in
excess of the aggregate amount thereof which the holders have offered to
provide based on their Initial Allocations, with the portion of such
excess allocated to each holder to be based on the ratio of the amount
of such excess which such holder offered to provide to the aggregate
amount such excess that all holders offered to provide (which procedure
shall be followed successively until such excess is fully allocated to
such holders);
(7) the closing of the transaction for such indebtedness with the holder or
holders entitled to provide such indebtedness and the creation of such
lien shall occur at such time or such period specified in the notice
given by us to the holders pursuant to the preceding clause (4); and
(8) if one or more holders shall be entitled in accordance with the
preceding clause (6) to provide such indebtedness and such holder or
holders default in their obligations to provide such indebtedness, then
we shall promptly give notice to the holders of such default, with a
copy to the trustee, and, notwithstanding any other provision of this
covenant, we shall have 60 days after such default to complete such
indebtedness financing on terms no more favorable to the lenders
providing such indebtedness than those contained in the notice provided
by us to the holders in accordance with the preceding clause (4).
If for any reason such closing and creation of such lien do not occur
within the applicable period provided in this covenant, thereafter any proposed
creation of a lien on any of the Akkadix Shares shall again be subject to the
requirements of this covenant.
ADDITIONAL COLLATERAL
In case any stock dividend shall be declared on any of the pledged
securities, or any shares of stock or fractions thereof shall be issued pursuant
to any stock split involving any of the pledged securities, or any distribution
of capital shall be made on any of the pledged securities or from the issuer of
any pledged securities, or any property shall be distributed upon or with
respect to the pledged securities or from the issuer of any pledged securities
pursuant to any recapitalization or reclassification of the capital of the
issuer of any pledged securities, or pursuant to a reorganization thereof, the
shares or other property so distributed shall be delivered to the trustee as
additional collateral security for the obligations. We will forthwith deliver to
the trustee certificates therefor, accompanied by three undated stock powers
duly executed in blank by us for each such certificate, with appropriate
signature guarantees, in the case of capital stock or such other instruments of
transfer as are acceptable to the trustee, and will promptly thereafter deliver
to the trustee an Officers' Certificate describing such stock and certifying
that the same has been duly pledged to the trustee and deposited with the
trustee hereunder.
If an event of default occurs, then during any period in which an event
of default is continuing, all cash dividends payable in respect of the pledged
securities shall be paid to the trustee and retained by it as part of the
collateral. The trustee shall also be entitled to retain as part of the
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collateral the following, all of which shall be received directly by the
trustee:
(1) all other or additional stock or securities or property (other than
cash) paid or distributed by way of dividend or otherwise, as the case
may be, in respect of the pledged securities;
(2) all other or additional stock or other securities or property (including
cash) paid or distributed in respect of the pledged securities by way of
stock-split, spin-off, split-up, reclassification, combination of shares
or similar rearrangement; and
(3) all other or additional stock or other securities or property (including
cash) which may be paid in respect of the collateral by reason of any
consolidation, merger, exchange of stock, conveyance of assets,
liquidation, dissolution, or similar corporate reorganization.
All dividends, distributions or other payments which are received by us
contrary to the provisions of this covenant shall be received in trust for the
benefit of the trustee, shall be segregated from our other property or funds and
shall be forthwith paid over to the trustee by delivery to the trustee as
collateral in the same form as so received (with any necessary endorsement). If,
upon the dissolution or liquidation (in whole or in part) of any issuer of
pledged securities, any sum shall be paid upon or with respect to any of the
pledged securities, such sum shall be paid over to the trustee to be held by the
trustee as additional collateral security for the obligations.
DISPOSITION OF COLLATERAL
We will not sell, transfer, lease, assign or otherwise dispose of any of
the collateral to any person, including, without limitation, any subsidiary, or
attempt, offer or contract to do so except as expressly permitted by indenture.
TRANSACTIONS WITH AFFILIATES
We will not, and will not permit any of our subsidiaries, directly or
indirectly, to pay any funds to or for the account of, make any investment
(whether by acquisition of stock or indebtedness, by loan, advance, transfer of
property, guarantee or other agreement to pay, purchase or service, directly or
indirectly, any indebtedness, or otherwise) in, lease, sell, transfer or
otherwise dispose of any assets, tangible or intangible, to, or participate in,
or effect any transaction in connection with, any joint enterprise or other
joint arrangement with, any of our affiliates, except as in existence on the
date the note purchase agreements are executed and delivered by the parties
thereto and except on terms to us or, in the case of any such payment,
investment or transaction between any of our restricted subsidiaries and any
affiliate, to such subsidiary, no less favorable than terms that could be
obtained by us or such restricted subsidiary from a person that is not our
affiliate, as determined in good faith by the board of directors; provided,
however, that we may enter into a transaction with any restricted subsidiary, if
the terms of the transaction do not (i) adversely affect the validity or
enforceability of any transaction document, (ii) materially impair our ability
to perform our obligations under the transaction documents, (iii) impair the
existence, validity or priority of the trustee's lien on and security interest
in the collateral, or (iv) impair the rights of the holders, or the trustee to
enforce any of their respective rights or remedies pursuant to the transaction
documents.
LIMITATION ON ISSUANCES OF SECURITIES
We shall not, and shall not permit any of our restricted subsidiaries to
(a) issue any common stock equivalent that directly or indirectly is convertible
into, exchangeable for, or otherwise entitles the holder to acquire, shares of
common stock at a price that varies based on changes in the market price of the
common stock, (b) directly or indirectly issue any common stock or common stock
equivalent under any agreement or arrangement that provides for re-pricing or
adjusting the price at which common stock is issued in connection therewith or
which adjusts the number of shares of common stock issued in connection
therewith, (c) enter into any agreement for the issuance of shares of our common
stock under an arrangement for us to draw down from a commitment by any
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person to issue shares of our common stock or which allows us or such subsidiary
to exercise any put right with respect to shares of common stock or any similar
transaction.
INVESTMENT COMPANY STATUS
We will not be or become an open-end investment trust, unit investment
trust or face-amount certificate company that is or is required to be registered
under Section 8 of the Investment Company Act of 1940, as amended.
RECORDS
We will keep and maintain at our own cost and expense satisfactory and
complete records of the collateral, including, without limitation, a record of
all payments received and all credits granted with respect to the accounts that
constitute part of the collateral. For the further security of the trustee for
the ratable benefit of the holders, we will grant to the trustee, for the
ratable benefit of the holders, a security interest in all of our books and
records pertaining to the collateral, and we shall turn over any such books and
records for inspection at our office to the trustee or any holder or to their
respective representatives during normal business hours at the request of the
trustee upon reasonable prior notice from the trustee or such holder to us.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an event of default:
(1) we fail to pay any installment of interest on any note when due and such
failure continues for a period of five business days after the due date
thereof;
(2) we fail to pay the principal of the notes on the maturity date of the
notes;
(3) we fail to issue or cause to be issued shares of common stock (a) to any
holder upon exercise by such holder of such holders' conversion rights
in accordance with the supplemental indenture and notes or (b) to the
holder of any warrant upon exercise by such holder of such holder's
purchase rights in accordance with the terms of such warrant, in either
such case, within two trading days after the due date therefor in
accordance with the terms of the notes, the indenture, or any warrant,
as the case may be; provided, however, that if such failure occurs
solely by reason of any action that the issuing agent has taken or
failed to take, then no event of default shall occur under this covenant
unless we fail so to issue or cause to be issued such shares of our
common stock within four trading days after the due date therefor in
accordance with the terms of the notes, the indenture or any warrant;
(4) we default in our performance of, or breach, any covenant or warranty in
Section 1005 or 1006 of the original indenture or Sections 5.01, 5.03,
5.05, 5.06, 5.07, 5.08, 5.09, 5.13, 5.14, 5.17, 5.18 or 5.21 of the
supplemental indenture;
(5) we default in the performance, or breach, of any covenant or warranty in
the indenture (other than a default pursuant to clause (3) or which has
expressly been included in the indenture solely for the benefit of a
series of securities other than the notes), and continuance of such
default or breach for a period of fifteen business days after there has
been given, by registered or certified mail, to us by the trustee or to
us and the trustee by the holders of at least 25% in principal amount of
the notes of this series a written notice specifying such default or
breach and requiring it to be remedied and stating that such notice is a
"Notice of Default" hereunder or within 30 business days after such
notice is given if, and only if, such default is reasonably capable of
cure within 30 business days after such notice is given and at all times
during such 30 business day period we have been diligently taking action
to cure such default and such cure cannot reasonably be completed in
such 15-business day period;
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(6) any of our representations or warranties made herein or in any
agreement, statement or certificate given in writing pursuant hereto or
in connection herewith (including, without limitation, the transaction
documents) shall be false or misleading in any material respect when
made and, to the extent susceptible to cure, such breach shall not have
been cured within ten business days after there has been given, by
facsimile transmission or registered or certified mail, to us by the
trustee or to us and the trustee by the holders of at least 25% in
principal amount of the notes of this series a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" hereunder;
(7) any court of competent jurisdiction shall enter one or more final
judgments against us or any of our restricted subsidiaries or any of
their respective properties or other assets in an aggregate amount in
excess of $1,000,000, which is not vacated, bonded, stayed, discharged,
satisfied or waived for a period of 45 consecutive days;
(8) (a) we or any of our restricted subsidiaries shall default in any
payment with respect to any indebtedness for borrowed money (other than
the notes) which indebtedness has an outstanding principal amount in
excess of $1,000,000, individually or $2,000,000 in the aggregate, for
us and our subsidiaries, beyond the period of grace, if any, provided in
the instrument or agreement under which such indebtedness was created or
(b) any of our indebtedness or indebtedness of any of our restricted
subsidiaries which has an outstanding principal amount in excess of
$1,000,000 individually, or $2,000,000 in the aggregate, shall, in
accordance with its terms, be declared to be due and payable, or
required to be prepaid other than by a regularly scheduled or required
payment prior to the stated maturity thereof;
(9) our common stock shall cease to be listed on any of Nasdaq, the NYSE or
the AMEX;
(10) the entry by a court having jurisdiction in the premises of (a) a decree
or order for relief in respect of us in an involuntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (b) a decree or order adjudging
us bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in
respect of us under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator, or
other similar official for us or for any substantial part of our
property, or ordering the winding up or liquidation of our affairs, and
the continuance of any such decree or order for relief of any such other
decree or order unstayed and in effect for a period of 90 consecutive
days;
(11) a voluntary case or proceeding under any applicable 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
we consent to the entry of a decree or order for relief in respect of us
in an involuntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or to
the commencement of any bankruptcy or insolvency case or proceeding
against us, or the filing by us of a petition or answer or consent
seeking reorganization or relief under any applicable federal or state
law, or we consent to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee,
trustee, sequestrator or similar official of us or of any substantial
part of its
property, or we make an assignment for the benefit of creditors, or we
admit in writing of our inability to pay our debts generally as they
become due, or we take corporate action in furtherance of any such
action; or
(12) the trustee shall cease to have a first priority perfected security
interest for the benefit of the holders in any of the collateral, other
than collateral that has been released from the lien of the indenture in
accordance with the terms of the indenture; or any of the pledged
securities shall not be duly and validly authorized, fully paid and
non-assessable shares of capital stock of the issuer thereof.
In the case of an event of default arising from certain events of
bankruptcy or insolvency, with respect to us, all outstanding notes will become
due and payable immediately without further action or notice. If any other
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event of default occurs and is continuing, the trustee or the holders of at
least 25% in principal amount of the then outstanding notes may declare all the
notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except
as provided in the indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power.
The holders of a majority in aggregate principal amount of the notes
then outstanding by notice to us and the trustee may on behalf of the holders of
all of the notes waive any existing event of default and its consequences under
the indenture except a continuing event of default in the payment of interest
on, or the principal of, the notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any event of default, we
are required to deliver to the trustee a statement specifying such event of
default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
None of our directors, officers, employees, incorporators or
stockholders, as such, shall have any liability for any of our obligations under
the notes, the indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have all of our
obligations discharged with respect to the outstanding notes, which we refer to
as "Legal Defeasance," except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of and interest on such notes when such
payments are due from the trust referred to below;
(2) our obligations with respect to the notes concerning (a) issuing
temporary notes, (b) registration and transfer of notes, (c) mutilated,
destroyed, lost or stolen notes, (d) the maintenance of an office or
agency for payment, (e) money for security payments held in trust, and
(f) the right of holders to convert their notes and exercise their
warrants and our obligation to deliver shares of common stock upon such
conversion or exercise;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
our obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture .
In addition, we may, at our option and at any time, elect to have the
our obligations released with respect to certain covenants that are described in
the indenture, which we refer to as "Covenant Defeasance," and thereafter any
omission to comply with those covenants shall not constitute an event of default
with respect to the notes. In the event a Covenant Defeasance occurs, certain
events (except non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer constitute
an event of default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for the benefit
of the holders of the notes, cash in U.S. dollars, government
obligations, or a combination thereof, in such amounts as will be
sufficient, in the
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opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on
the outstanding notes on the stated maturity, and we must specify
whether the notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, we shall have delivered to the trustee
an opinion of counsel confirming that (a) we have received from, or
there has been published by, the Internal Revenue Service a ruling or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
holders of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we shall have delivered to the
trustee an opinion of counsel confirming that the holders of the
outstanding notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(4) we must deliver to the trustee a certificate stating that neither the
notes nor any other securities of the same series, if then listed on any
securities exchange, will be delisted as a result of such Legal
Defeasance or Covenant Defeasance;
(5) no event of default shall have occurred and be continuing either: (a) on
the date of such deposit or (b) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(6) such Legal Defeasance or Covenant Defeasance shall not cause the trustee
to have a conflicting interest within the meaning of the Trust Indenture
Act of 1939, as amended (assuming all notes are in default within the
meaning of such act);
(7) such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any agreement or
instrument to which we are a party or by which we are bound;
(8) such Legal Defeasance or Covenant Defeasance will not result in the
trust constituting an investment company within the meaning of the
Investment Company Act of 1940, as amended, unless such trust shall be
registered under such act or exempt from registration thereunder; and
(9) we must deliver to the trustee a certificate and an opinion of counsel,
each stating that all conditions precedent relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Without the consent of each holder affected, an amendment or waiver may
not (with respect to any notes held by a non-consenting holder):
(1) reduce the principal of or change the fixed maturity of any note or
change our obligations with respect to the repurchase of the notes;
(2) reduce the rate of or change the time for payment of interest on any
note;
(3) make any note payable in money other than that stated in the notes or
change the place of payment where the notes are payable;
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(4) impair the right to institute suit for enforcement of any payment on or
after the maturity date of the notes;
(5) modify the provisions of the indenture relating to subordination of the
notes and warrants in a manner adverse to the holders of notes;
(6) reduce the percentage in principal amount of notes whose holders must
consent to an amendment, supplement or waiver;
(7) make any change in the amendment and waiver provisions in the indenture;
or
(8) make any change that adversely affects the right of holders to convert
any security given for the notes pursuant to the indenture or decrease
the conversion rate or increase the Conversion Price of any note.
Notwithstanding the preceding, without the consent of any holder of
notes, we and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of our obligations to holders of notes in
the case of a merger or consolidation or sale of all or substantially
all of our assets;
(4) to make any change that would provide any additional rights or benefits
to the holders of notes or that does not adversely affect the legal
rights under the indenture of any such holder; or
(5) to comply with requirements of the Securities and Exchange Commission in
order to effect or maintain the qualification of the indenture under the
Trust Indenture Act.
CONCERNING THE TRUSTEE
If the trustee becomes one of our creditors, the indenture limits its
right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict, apply to the
Securities and Exchange Commission for permission to continue or resign to the
extent and in the manner provided by the Trust Indenture Act.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an event of default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Accounts" means all rights to payment for goods sold or leased or for
services rendered, whether or not such rights have been earned by performance.
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"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the subject person. For purposes
of this definition, "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
"Akkadix" means Akkadix Corporation, a California corporation, and its
successors.
"Akkadix Shares" means the 3,000,000 shares of Series A Preferred Stock,
$.001 par value per share, of Akkadix registered in the name of the Company, any
other shares of capital stock of Akkadix owned by the Company from time to time,
and any shares of capital stock of Akkadix into or for which such shares shall
be converted, exchanged, changed or reclassified.
"AMEX" means the American Stock Exchange, Inc.
"Applicable Rate" means 8 percent per annum; provided, however, that if
an event of default shall have occurred, then the Applicable Rate shall be
increased to the default rate during the period from the date of such event of
default until the date no event of default is continuing (or in either such case
such lesser rate as shall be the highest rate permitted by applicable law).
"Board of Directors" means the board of directors of the Company.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the board of directors, or duly authorized committee thereof (to the extent
permitted by applicable law), and to be in full force and effect on the date of
such certification, and delivered to the holder.
"Business Day" means any day other than a Saturday, Sunday or a day on
which commercial banks in The City of New York or the State of California are
authorized or required by law or executive order to remain closed.
"California UCC" means the Uniform Commercial Code as in effect from
time to time in the State of California.
"Cash, Cash Equivalents and Eligible Investment Balances" of any person
on any date shall be determined from such person's books maintained in
accordance with Generally Accepted Accounting Principles, and means (without
duplication) the sum of (1) the cash accrued by such person and its subsidiaries
on a consolidated basis on such date and available for use by such person and
its subsidiaries on such date, (2) all assets which would, on a consolidated
balance sheet of such person and its subsidiaries prepared as of such date in
accordance with Generally Accepted Accounting Principles, be classified as cash
equivalents and (3) all Eligible Marketable Securities in the amount thereof
that would be shown on such balance sheet.
"Chattel Paper" shall have the meaning assigned to such term under the
Code.
"Code" means the California UCC or the New York UCC, as applicable.
"Collateral" means each of the following, whether now existing or
hereafter arising:
(1) the pledged securities;
(2) all of the Company's right, title and interest in and to all
Contracts relating to any of the pledged securities, including, without
limitation, the DPI Contracts;
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(3) all General Intangibles of the Company, whether now existing or
hereafter arising, in any way relating to or arising from items (1)
through (2) immediately above;
(4) all cash, securities, rights and other property at any time or from
time to time received, receivable or otherwise distributed in respect of
items (1) through (3) immediately above;
(5) all insurance policies to the extent they relate to items (1)
through (4) immediately above;
(6) all books, ledgers, books of account, records, writings, databases,
information and other property relating to, used or useful in connection
with, evidencing, embodying, incorporating, or referring to any of the
foregoing in this definition;
(7) to the extent not otherwise included, all Proceeds, products, rents,
issues, profits and returns of and from any and all of the foregoing in
this definition, which Proceeds may be in the form of accounts, Chattel
Paper, Inventory or otherwise; and
(8) any funds or government obligations deposited by the Company with
the trustee pursuant to Article 13 of the indenture or Section 6.11 of
the supplemental indenture.
"Collateral Substitution" means the substitution by the Company of
collateral pursuant to Section 6.11(a) of the supplemental indenture, and which
will occur on the date that the Company is entitled, in accordance with such
Section 6.11(a), to the release of all collateral other than the collateral so
deposited by the Company with the trustee pursuant to such Section 6.11(a).
"Collateral Value" as of any date means the sum of the following:
(1) all cash held by the trustee on such date that constitutes
collateral; and
(2) the fair market value, as set forth in a certificate signed by a
Financial Advisor and delivered to the trustee, of all pledged
securities held by the trustee on such date that constitute collateral,
taking into account any restrictions on sale of such pledged securities
other than the restrictions arising from the Security Interest;
provided, however, that only such items of collateral listed in the preceding
clauses (1) and (2) as to which the trustee has a first priority perfected
security interest for the benefit of the holders shall be included in the
calculation of collateral value.
"Common Stock" includes the Company's common stock, $.001 par value, and
the related Preferred Share Purchase Rights (and any similar rights issued with
respect to the common stock) as authorized on the date hereof, and any other
securities into which or for which the common stock or the related Preferred
Share Purchase Rights (and any similar rights issued with respect to the common
stock) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise and any stock (other than
common stock) and other securities of the Company or any other person which the
holders at any time shall be entitled to receive, or shall have received, on the
conversion of the notes, in lieu of or in addition to common stock.
"Common Stock Equivalent" means any warrant, option, subscription or
purchase right with respect to shares of common stock, any security convertible
into, exchangeable for, or otherwise entitling the holder thereof to acquire,
shares of common stock or any warrant, option, subscription or purchase right
with respect to any such convertible, exchangeable or other security.
"Company" shall have the meaning provided in the first paragraph of the
supplemental indenture.
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"Company DPI Agreements" means, collectively, all agreements between or
among the Company and DPI, other than the DPI Contracts, whether existing at the
date of the supplemental indenture or entered into thereafter.
"Company Certificate" means a certificate of the Company signed by an
Officer.
"Company Notice" means a Company Notice in the form set forth in Section
7.04 of the supplemental indenture.
"Computation Date" shall have the meaning provided in Section 5.09 of
the supplemental indenture.
"Consolidated Net Current Assets" means the Net Current Assets of the
Company and its restricted subsidiaries consolidated in accordance with
Generally Accepted Accounting Principles.
"Contracts" shall have the meaning assigned to such term under the Code.
"Conversion Date" means the date on which a Conversion Notice is given
in accordance with Section 8.02(a).
"Conversion Notice" means a duly executed Notice of Conversion of 8%
Senior Secured Convertible Note due 2004 substantially in the form set forth in
Section 2.04 of the supplemental indenture.
"Conversion Price" means $7.06, subject to adjustment as provided in
Section 8.03 of the supplemental indenture.
"Credit Agreement" means that certain Credit Agreement, dated as of July
26, 1999, as amended, by and between the Company and Foothill Capital
Corporation, providing for up to $30 million of revolving credit borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and as amended, modified, renewed,
refunded, replaced or refinanced from time to time without increasing the
principal amount of borrowings thereunder and in compliance with the
requirements of the supplemental indenture.
"Current Market Price" shall mean the arithmetic average of the daily
market prices per share of common stock for the ten consecutive trading days
immediately prior to the date in question; provided, however, that (1) if the
"ex" date (as hereinafter defined) for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to the
conversion price pursuant to Section 8.03(a), (b), (c), (d), (e), (f), or (g) of
the supplemental indenture occurs during such ten consecutive trading days, the
market price for each trading day prior to the "ex" date for such other event
shall be adjusted by multiplying such market price by the same fraction by which
the conversion price is so required to be adjusted as a result of such other
event, (2) if the "ex" date for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to the
conversion price pursuant to Section 8.03(a), (b), (c), (d), (e), (f), or (g)
occurs on or after the "ex" date for the issuance or distribution requiring such
computation and prior to the day in question, the market price for each trading
day on and after the "ex" date for such other event shall be adjusted by
multiplying such market price by the reciprocal of the fraction by which the
conversion price is so required to be adjusted as a result of such other event,
and (3) if the "ex" date for the issuance or distribution requiring such
computation is prior to the day in question, after taking into account any
adjustment required pursuant to clause (1) or (2) of this proviso, the market
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 8.03(d) or (f), whose determination shall be
conclusive and described in a board resolution) of the evidences of
indebtedness, shares of capital stock or assets being distributed applicable to
one share of common stock as of the close of business on the day before such
"ex" date. For purposes of any computation under Section 8.03(f), the current
market price of the common stock on any date shall be deemed to be the
arithmetic average of the daily market 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)
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that requires an adjustment to the conversion price pursuant to Section 8.03(a),
(b), (c), (d), (e), (f) or (g), occurs on or after the Expiration Time for the
tender offer requiring such computation and prior to the day in question, the
market price for each trading day on and after the "ex" date for such other
event shall be adjusted by multiplying such market price by the reciprocal of
the fraction by which the conversion price is so required to be adjusted as a
result of such other event. For purposes of this paragraph, the term "ex" date,
(1) when used with respect to any issuance or distribution, means the first date
on which the common stock trades, regular way, on the relevant exchange or in
the relevant market from which the market price was obtained without the right
to receive such issuance or distribution, (2) when used with respect to any
subdivision or combination of shares of common stock, means the first date on
which the common stock trades, regular way, on such exchange or in such market
after the time at which such subdivision or combination becomes effective, and
(3) when used with respect to any tender 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 tender offer. Notwithstanding the foregoing, whenever
successive adjustments to the conversion price are called for pursuant to
Section 8.03, such adjustments shall be made to the current market price as may
be necessary or appropriate to effectuate the intent of Section 8.03 and to
avoid unjust or inequitable results as determined in good faith by the board of
directors.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would become, an event of default.
"Default Interest" shall have the meaning provided in the first
paragraph of the note.
"Default Rate" means 15 percent per annum (or such lesser rate equal to
the highest rate permitted by applicable law).
"Depositary" means The Depository Trust Company.
"Documents" shall have the meaning assigned to such term under the Code.
"DPI" means Discovery Partners International, Inc., a Delaware
corporation, and its successors.
"DPI Contracts" means the Standstill Agreement made as of April 28, 2000
by and between DPI and the Company; and the DPI Investors' Rights Agreement.
"DPI Escrow Agreement" means the Indemnity Escrow Agreement, dated as of
April 28, 2000, by and among DPI, the Company and U.S. Trust Company National
Association, as Escrow Agent.
"DPI Investors' Rights Agreement" means the Second Amended and Restated
Investors' Rights Agreement made as of April 28, 2000 by and between DPI and
the Investors listed on Schedule A thereto, including the Company, as amended
by Amendment No. 1 to Second Amended and Restated Investors' Rights Agreement
dated as of June 30, 2000 by and between DPI and the Investors parties thereto,
including the Company.
"DPI Merger Agreement" means the Agreement and Plan of Merger, dated as
of April 11, 2000, by and among DPI and DPII Newco, LLC, a Delaware limited
liability company and a wholly-owned subsidiary of DPI, Axys Advanced
Technologies, Inc., a Delaware corporation, and the Company, as in effect on the
date of the supplemental indenture.
"Eligible Marketable Securities" of any person on any date means the
amount of marketable securities which would be reflected as short-term
investments on a consolidated balance sheet of such person and its subsidiaries
prepared as of such date in accordance with Generally Accepted Accounting
Principles on a basis consistent with the most recently published audited
consolidated balance sheet of such person and its subsidiaries at the time of
such determination.
"Event of Default" shall have the meaning provided in Section 4.01 of
the supplemental indenture.
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"Excluded Transaction" means a consolidation or merger of the Company or
any subsidiary with or into another entity where all of the following
requirements are met:
(1) the stockholders of the Company immediately prior to such
transaction collectively own at least 40% of the outstanding voting
securities of the surviving entity of such consolidation or merger (or
of the Company, in the case of a consolidation or merger of a subsidiary
in which the Company is not a constituent corporation in such
consolidation or merger) immediately following such transaction;
(2) such other entity and its affiliates are principally engaged in
businesses of the same general types as the Company and the
subsidiaries;
(3) the ratio of pro forma combined Net Cash, Cash Equivalents and
Eligible Investment Balances immediately prior to consummation of such
consolidation or merger to the pro forma combined Quarterly Cash
Requirements immediately prior to consummation of such consolidation or
merger, in each such case of the surviving entity of such consolidation
or merger (or of the Company, in the case of a consolidation or merger
of a subsidiary in which the Company is not a constituent corporation in
such consolidation or merger) shall not be less than the ratio of the
Company's Net Cash, Cash Equivalents and Eligible Investment Balances to
the Company's Quarterly Cash Requirements, in each such case immediately
prior to consummation of such consolidation or merger; and
(4) the board of directors shall have determined prior to consummation
of such consolidation or merger, as evidenced by a board resolution,
that consummation of such consolidation or merger will not adversely
affect the ability of the Company to pay and perform its obligations to
the holders under the transaction documents.
Any such consolidation or merger shall be an Excluded Transaction only if the
Company shall have delivered to the trustee at least ten days prior to
consummation of such consolidation or merger an Officers' Certificate signed by
the Company's Chief Executive Officer or Chief Financial Officer setting forth
in reasonable detail the facts showing that such consolidation or merger is an
Excluded Transaction.
"Expiration Time" shall have the meaning provided in Section 8.03(f) of
the supplemental indenture.
"Fundamental Change" means:
(1) Any consolidation or merger of the Company or any subsidiary with or
into another entity (other than a consolidation or merger of a
subsidiary into the Company or a wholly-owned subsidiary and other
than an Excluded Transaction) where the stockholders of the Company
immediately prior to such transaction do not collectively own at least
51% of the outstanding voting securities of the surviving entity of such
consolidation or merger (or of the Company, in the case of a
consolidation or merger of a subsidiary in which the Company is not a
constituent corporation in such consolidation or merger) immediately
following such transaction; or the sale of all or substantially all of
the assets of the Company and the subsidiaries in a single transaction
or a series of related transactions; or
(2) The occurrence of any transaction or event in connection with which
all or substantially all the common stock shall be exchanged for,
converted into, acquired for or constitute the right to receive
consideration (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all
common stock which is (or will, upon consummation of or immediately
following such transaction or event, will be) listed on the NYSE or the
AMEX or approved for quotation on Nasdaq or any similar United States
system of automated dissemination of transaction reporting of securities
prices; or
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(3) The acquisition by a person or entity or group of persons or
entities acting in concert as a partnership, limited partnership,
syndicate or group, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases or otherwise, of
beneficial ownership of securities of the Company representing 50% or
more of the combined voting power of the outstanding voting securities
of the Company ordinarily (and apart from rights accruing in special
circumstances) having the right to vote in the election of directors
other than pursuant to a Negotiated Transaction.
"General Intangibles" shall have the meaning assigned to such term under
the Code.
"Generally Accepted Accounting Principles" for any person means the
generally accepted accounting principles and practices applied by such person
from time to time in the preparation of its audited financial statements.
"Government Obligations" means direct obligations of, or obligations the
timely payment of the principal of and the interest on which are unconditionally
guaranteed by, the United States of America and which are not, by their terms,
callable.
"Hedging Obligations" means, with respect to any specified person, the
obligations of such person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such person
against fluctuations in interest rates.
"Holder Notice" means a holder Notice in the form set forth in Section
7.05 of the supplemental indenture.
"Indebtedness" as used in reference to any person means all indebtedness
of such person for borrowed money, the deferred purchase price of property,
goods and services and obligations under leases which are required to be
capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such person or
in effect guaranteed by such person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such person, although such person
has not assumed or become liable for the payment of such indebtedness, and, for
all purposes hereof, such indebtedness shall be treated as though it has been
assumed by such person; provided, however, that "Indebtedness" shall not include
trade debt incurred in the ordinary course of business to trade creditors that
is payable on customary trade terms.
"Initial Allocation" shall have the meaning provided in Section 5.13 of
the supplemental indenture.
"Interest Payment Dates" shall mean each March 15, June 15, September
15 and December 15 and the Maturity Date.
"Interest Share Price" means, with respect to any interest payment date,
an amount equal to 95 percent of the arithmetic average of the market price of
one share of common stock for each of the ten consecutive trading days ending on
and including the trading day immediately preceding such interest payment date.
"Interest Shares" means the shares of common stock and the related
Preferred Share Purchase Rights issuable in payment of interest on the notes in
accordance with Section 3.02 of the supplemental indenture.
"Instrument" shall have the meaning assigned to such term under the
Code.
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"Inventory" shall have the meaning assigned to such term under the Code,
and in any event, including all inventory, merchandise, goods and other personal
property that are held by or on behalf of a person for sale or lease or to be
furnished under a contract of service or which give rise to any Account,
including returned goods.
"Issuance Date" means the date the notes were first issued to the
original holders of the notes.
"Issuing Agent" means Computershare Investor Services, LLC, its
successor or such other person who shall be serving as transfer agent and
registrar for the common stock and who shall have been authorized by the Company
to act as conversion agent for the notes in accordance with the issuing agent
Instruction and the name, address and telephone number of whom shall have been
given to the trustee and the holders by notice from the Company.
"Issuing Agent Instruction" means the issuing agent instruction from the
Company to the issuing agent for the benefit of the holders and the holders from
time to time of the Warrants.
"Lien" shall mean any lien, mortgage, security interest, chattel
mortgage, pledge, equity or other encumbrance (statutory or otherwise) of any
kind, including, without limitation, any agreement to give any of the foregoing,
any conditional sales or other title retention agreement, any lease in the
nature thereof, and the filing of or the agreement to give any financing
statement under the Code of any jurisdiction or similar evidence of any
encumbrance, whether within or outside the United States.
"Majority Holders" means at any time holders who hold notes that are
Outstanding which, based on the Outstanding principal amount thereof, represent
a majority of the aggregate Outstanding principal amount of all the notes.
"Market Price" with respect to any security on any day shall mean the
closing bid price of such security on such day on the Nasdaq or the NYSE or the
AMEX, as applicable, or, if such security is not listed or admitted to trading
on the Nasdaq, the NYSE or the AMEX, on the principal national securities
exchange or quotation system on which such security is quoted or listed or
admitted to trading, in any such case as reported by Bloomberg, L.P. or, if not
quoted or listed or admitted to trading on any national securities exchange or
quotation system, the average of the closing bid and asked prices of such
security on the over-the-counter market on the day in question, as reported by
the National Quotation Bureau Incorporated, or a similar generally accepted
reporting service, or if not so available, in such manner as furnished by any
New York Stock Exchange member firm selected from time to time by the board of
directors for that purpose, or a price determined in good faith by the board of
directors, whose determination shall be conclusive and described in a board
resolution.
"Maturity Date" means October 1, 2004.
"Nasdaq" means the Nasdaq National Market.
"Negotiated Transaction" means an acquisition by a person or entity or
group of persons or entities acting in concert as a partnership, limited
partnership or group, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, of beneficial ownership
of securities of the Company representing 50% or more of the combined voting
power of the outstanding voting securities of the Company ordinarily (and apart
from rights accruing in special circumstances) having the right to vote in the
election of directors which acquisition meets all of the following requirements:
(1) such acquisition is made pursuant to a written agreement to which
the Company is a party and which has been approved by the board of
directors prior to such acquisition and which the Company and the other
parties have entered into prior to such transaction; and
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(2) such agreement provides for the acquisition by such person, entity,
group of persons or group of entities making such acquisition of such
outstanding voting securities of the Company of all of the outstanding
voting securities of the Company at the same price and in the same form
of consideration per share for all voting securities of the Company of
the same class or series.
"Net Cash, Cash Equivalents and Eligible Investment Balances" of any
person on any date means the consolidated Cash, Cash Equivalents and Eligible
Investment Balances of such person and its subsidiaries on such date less the
sum (without duplication) of (1) the amount of any outstanding indebtedness of
such person or any of its subsidiaries which, directly or indirectly, is secured
in whole or in part by, or restricts the use of, the consolidated Cash, Cash
Equivalents and Eligible Investment Balances of such person or any of its
subsidiaries plus (2) the amount of outstanding indebtedness of such person and
its subsidiaries which on such date is classified as short-term debt in
accordance with Generally Accepted Accounting Principles.
"Net Current Assets" of any person at any date shall be determined from
books of such person maintained in accordance with Generally Accepted Accounting
Principles, and means as of such date
(1) the value shown by such books of all assets, exclusive of patents,
patent applications, trademarks, copyrights, trade names, good will,
organizational expense, research and development, other intangibles,
treasury stock and unamortized debt, discount and expense, classified as
current assets as of such date;
less
(2) all current liabilities of such person.
"New York UCC" means the Uniform Commercial Code as in effect from time
to time in the State of New York.
"Newly Issued Shares" shall have the meaning provided in Section
8.03(g) of the supplemental indenture.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Non-Recourse Debt" means indebtedness:
(1) as to which neither the Company nor any of its restricted
subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
indebtedness), (b) is directly or indirectly liable as a guarantor or
otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that the
holders of the indebtedness may have to take enforcement action against
an unrestricted subsidiary) would permit upon notice, lapse of time or
both any holder of any other indebtedness of the Company or any of its
restricted subsidiaries to declare a default on such other indebtedness
or cause the payment of such other indebtedness to be accelerated or
payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing by the Company
that they will not have any recourse to the stock or assets of the
Company or any of its restricted subsidiaries.
"Note Purchase Agreements" means the Note Purchase Agreements, dated as
September 20, 2000, by and between the Company and the several original holders
of the Notes.
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"Notes" means the Company's 8% Senior Secured Convertible Notes due
2004 issued pursuant to the Original Indenture and supplemental indenture.
"NYSE" means the New York Stock Exchange, Inc.
"Obligations" means:
(1) the full and prompt payment when due of all obligations and
liabilities to the holders, whether now existing or hereafter arising,
under the notes, the supplemental indenture or the other transaction
documents and the due performance and compliance with the terms of the
notes and the other transaction documents;
(2) any and all sums advanced in accordance with the terms of the notes,
the supplemental indenture or applicable law by the trustee or any
holder in order to preserve the collateral or to preserve the trustee's
security interest in the collateral;
(3) in the event of any proceeding for the collection or enforcement of
any obligations or liabilities of the Company referred to in the
immediately preceding clauses (1) and (2) in accordance with the terms
of the notes and the supplemental indenture, the reasonable expenses of
re-taking, holding, preparing for sale, selling or otherwise disposing
of or realizing on the collateral, or of any other exercise by the
trustee of its rights hereunder, together with reasonable attorneys'
fees and court costs; and
(4) any amounts for which any holder is entitled to indemnification
under Section 5.11 of the supplemental indenture.
"Officer" means the Chairman of the Board, the Chief Executive Officer,
the President or the Chief Financial Officer of the Company.
"Permitted Collateral or Akkadix Disposition" means a sale, transfer or
other disposition of collateral or the Akkadix Shares in accordance with, and as
permitted by, Section 5.03(b)(1) of the supplemental indenture; provided,
however, that if during the period of 20 consecutive trading days ending on and
including the trading day immediately preceding the closing of a Permitted
Collateral or Akkadix Disposition on each such trading day (a) the common stock
shall be listed on Nasdaq, the NYSE or the Amex, and the market price of the
common stock shall be at least 200% of the conversion price in effect on each
such trading day (b) no event of default shall have occurred or be continuing
and no repurchase event shall have occurred with respect to which any holder has
the right to require repurchase of any note pursuant to Article Seven or with
respect to which any holder has exercised such right and the Company shall not
have paid or deposited in accordance with Section 9.14 of the Supplemental
Indenture the applicable repurchase price, (c) the registration statement shall
be effective and available for use by the Company for the sale of shares of
common stock to holders of the Warrants upon exercise of the Warrants and is
reasonably expected to remain effective and available after such period of 20
trading days, and (d) the Company shall have furnished to the holders and the
trustee a Company Certificate certifying the matters set forth in the
immediately preceding clauses (a) through (c), then such Permitted Collateral or
Akkadix Disposition shall not constitute a repurchase event.
"Permitted Indebtedness" means
(1) with respect to the Company or any of its restricted
subsidiaries:
(a) indebtedness outstanding on the Issuance Date and identified
on Schedule I to the supplemental indenture;
(b) indebtedness incurred after the Issuance Date in an
aggregate amount not to exceed $5 million at any one time
outstanding so long as (x) such indebtedness is incurred for the
purpose of
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acquiring, constructing or improving an interest in real estate
owned or used or to be owned or used by the Company or one of
its restricted subsidiaries (or for the purpose of acquiring the
capital stock or similar equity interests of a restricted
subsidiary of the Company that is formed for the limited purpose
of owning same and does not own or hold any other material
assets) and does not exceed the purchase price of the interest
in real estate, capital stock or other equity interest so
acquired plus reasonable transaction expenses or the cost of
such construction or improvements plus reasonable transaction
expenses, as the case may be, (y) such indebtedness, if secured,
is secured solely by the interest of the Company or one of its
restricted subsidiaries in the real estate so acquired,
constructed or improved and rights related thereto and (z) the
holder of such indebtedness shall not have recourse to the
Company or any subsidiary for payment thereof or performance of
any obligation relating thereto;
(c) indebtedness incurred after the Issuance Date in an
aggregate amount not to exceed $15 million at any one time
outstanding so long as (x) such indebtedness is incurred for the
purpose of acquiring equipment owned or used or to be owned or
used by the Company or one of its restricted subsidiaries (or
for the purpose of acquiring the capital stock or similar equity
interests of a restricted subsidiary of the Company that is
formed for the limited purpose of owning same and does not own
or hold any other material assets) and does not exceed the
purchase price of the equipment, capital stock or other equity
interest so acquired plus reasonable transaction expenses and
(y) such indebtedness, if secured, is secured solely by the
interest of the Company or one of its restricted subsidiaries in
the equipment so acquired and rights related thereto;
(d) endorsements for collection or deposit in the ordinary
course of business;
(e) indebtedness of the Company incurred under and in accordance
with the Credit Agreement in an aggregate amount not to exceed
$30 million at any time outstanding;
(f) indebtedness represented by the notes;
(g) permitted refinancing indebtedness issued in exchange for,
or the net proceeds of which are used to refund, refinance or
replace, indebtedness that is identified in subclauses (a)
through (h) or (j) of this clause (1) of this definition;
(h) hedging obligations that are incurred by the obligor on
indebtedness that is identified in subclauses (a) and (e) of
this clause (1) of this definition (or permitted refinancing
indebtedness that is identified in subclause (g) of clause (1)
of this definition and that refunds or replaces such
indebtedness) that does not have a fixed rate of interest and
which hedging obligations are incurred solely for the bona fide
purpose of fixing or hedging interest rate risk with respect to
such indebtedness;
(i) indebtedness constituting reimbursement obligations with
respect to letters of credit issued in the ordinary course of
business in respect of workers' compensation claims or
self-insurance, or other indebtedness with respect to
reimbursement type obligations regarding workers' compensation
claims or self-insurance, and obligations in respect of
performance and surety bonds and completion guarantees incurred
in the ordinary course of business; provided, however, that upon
the drawing of such letters of credit or the incurrence of such
indebtedness, such obligations are reimbursed within 30 days
following such drawing or incurrence;
(j) indebtedness in an aggregate amount at any one time
outstanding not to exceed the greater of (A) $10 million and (B)
an amount equal to 20% of the Consolidated Net Current Assets of
the Company and its restricted subsidiaries, and in the case of
both the preceding clauses (A) and (B) (x) which is subordinated
to the notes on the Subordination Terms and (y) for which
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no payment of principal of such indebtedness is scheduled to be
due prior to the date that is one year after the Maturity Date;
and
(k) guarantees by the Company or any of its restricted
subsidiaries of indebtedness of the Company or any of its
restricted subsidiaries which indebtedness is permitted
indebtedness that is of the type or character specified in
subclauses (a), (c), (d), (e), (h) or (i) of clause (1) of this
definition (including any such permitted indebtedness so
specified that may have been incurred pursuant to subclause (g)
of clause (1) of this definition) or subclause (a) of clause (2)
of this definition; and
(2) in the case of any restricted subsidiary of the Company:
(a) indebtedness owed by such restricted subsidiary to the
Company; and
(b) indebtedness of such restricted subsidiary to another
restricted subsidiary of the Company in an aggregate amount not
to exceed $5 million at any one time outstanding for all
restricted subsidiaries of the Company; and
(c) indebtedness of a restricted subsidiary of the Company
existing at the time such restricted subsidiary is acquired by
the Company so long as immediately prior to such acquisition the
amount by which (x) the outstanding amount of such indebtedness
of such restricted subsidiary exceeds (y) the Cash, Cash
Equivalents and Eligible Investment Balances of such restricted
subsidiary does not exceed 20% of the fair market value of the
assets of such restricted subsidiary, as set forth in a
certificate of the chief financial officer of the Company
delivered by the Company to the trustee prior to such
acquisition;
so long as, in the case of any indebtedness specified in subclauses (c), (e) and
(j) of clause (1) of this definition (including any indebtedness that is of the
type or character specified in subclause (c), (e) or (j) of clause (1) of this
definition and that the Company may propose to incur as permitted refinancing
indebtedness pursuant to subclause (g) of clause (1) of this definition) or
indebtedness specified in clause (2) of this definition, at the time of
incurrence of such indebtedness no default or event of default (A) has occurred
and is continuing by reason of Section 4.01(a), 4.01(b), 4.01(c) (with respect
to Sections 5.03, 5.06, 5.13, 5.14, 5.17, 5.18 and 5.21 of the supplemental
indenture only), 4.01(d) (with respect to Sections 5.10, 5.12, 5.15 and 5.16 and
Article Six of the supplemental indenture only), 4.01(h), 4.01(i) (with respect
to Section 501(2) of the Original Indenture only) or 4.01(k) of the supplemental
indenture or (B) would result from such incurrence; provided, however, that,
notwithstanding the occurrence or continuation of any default or event of
default, the Company and its restricted subsidiaries shall not be prohibited
from incurring indebtedness specified in clauses (c), (e) and (j) of clause (1)
of this definition (including any indebtedness that is of the type or character
specified in subclause (c), (e) or (j) of clause (1) of this definition and that
the Company may propose to incur as permitted refinancing indebtedness pursuant
to subclause (g) of clause (1) of this definition) or indebtedness specified in
clause (2) of this definition so long as at the time of such incurrence (x) the
Collateral Substitution shall have occurred or (y) the collateral value is at
least 300% of the amount of the Obligations and, in the case of either the
preceding clause (x) or (y), no default or event of default would result from
such incurrence.
"Permitted Liens" means any of the following liens, so long as (except
in the case of clause (2) of this definition) such lien does not relate to any
of the collateral or the Akkadix Shares:
(1) liens upon any property of any restricted subsidiary or restricted
subsidiaries of the Company as security for indebtedness owing to the
Company;
(2) liens securing the notes ratably;
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(3) liens for taxes or assessments or governmental charges or levies on
the property of the Company or any of its restricted subsidiaries if
such taxes or assessments or charges or levies shall not at the time be
due and payable or if the amount, applicability, or validity of any such
tax, assessment, charge or levy shall currently be contested in good
faith by appropriate proceedings or necessary preliminary steps are
being taken to contest, compromise or settle the amount thereof or to
determine the applicability or validity thereof and if the Company or
such restricted subsidiary, as the case may be, shall have set aside on
its books reserves (segregated to the extent required by sound
accounting practice) deemed by it adequate with respect thereto;
deposits or pledges to secure payment of worker's compensation,
unemployment insurance, old age pensions or other social security;
deposits or pledges to secure performance of bids, tenders, contracts
(other than contracts for the payment of money borrowed or credit
extended), leases, public or statutory obligations, surety or appeal
bonds, or other deposits or pledges for purposes of like general nature
in the ordinary course of business; mechanics', carriers', workers',
repairmen's or other like liens arising in the ordinary course of
business securing obligations which are not overdue for a period of 60
days, or which are in good faith being contested or litigated, or
deposits to obtain the release of such liens; liens created by or
resulting from any litigation or legal proceedings or proceedings being
contested in good faith by appropriate proceedings, provided any
execution levied thereon shall be stayed; leases made, or existing on
property acquired, in the ordinary course of business; landlords' liens
under leases to which the Company or any of its restricted subsidiaries
is a party; and zoning restrictions, easements, licenses or restrictions
on the use of real property or minor irregularities in title thereto;
provided that all such liens described in this subsection (3) do not, in
the aggregate, materially impair the use of such property in the
operations of the business of the Company or any of its restricted
subsidiaries or the value of such property for the purpose of such
business;
(4) liens existing on the Issuance Date and listed in Schedule 4(r) to
the note purchase agreement and liens created by the Company on the
property covered by the liens so listed on such Schedule 4(r) which
liens secure permitted refinancing indebtedness issued in accordance
with subclause (g) of clause (1) of the definition of permitted
indebtedness that is issued to refinance indebtedness specified in
subclause (a) of clause (1) of the definition of permitted indebtedness.
(5) judgment liens not giving rise to an event of default;
(6) any interest or title of a lessor under any lease permitted by
subclauses (b) and (c) of clause (1) of the definition of permitted
indebtedness (including any such lease entered into pursuant to
subclause (g) of clause (1) of the definition of permitted
indebtedness);
(7) purchase money liens to finance the purchase price of property or
assets purchased by the Company or any of its restricted subsidiaries
acquired in the ordinary course of business; provided, however, that the
lien securing such indebtedness shall be created within 180 days of such
acquisition, the amount of such indebtedness so secured in connection
with any such acquisition of property or assets shall not exceed the
purchase price of such property or assets and the lien securing such
indebtedness shall not extend to any property or assets other than the
property or assets so acquired;
(8) liens upon specific items of inventory or other goods of any person
and on proceeds thereof securing such person's obligations in respect of
banker's acceptances issued or created for the account of such person to
facilitate the purchase, shipment, or storage of such inventory or other
goods;
(9) liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating
to such letters of credit and products and proceeds thereof;
(10) leases, subleases, licenses or sublicenses granted to others that
do not materially interfere with the ordinary course of business of the
Company and its restricted subsidiaries and which are entered into in
compliance with Section 5.03 of the supplemental indenture; and
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(11) liens arising from filing Uniform Commercial Code financing
statements regarding leases permitted by subclauses (b), (c) and (g) of
clause (1) of the definition of permitted indebtedness so long as the
collateral described in such financing statement is limited to the
property covered by such leases;
so long as, in the case of any lien specified in clauses (6) and (7) of this
definition, at the time such lien is created (A) no default or event of default
has occurred and is continuing by reason of Section 4.01(a), 4.01(b), 4.01(c)
(with respect to Sections 5.03, 5.06, 5.13, 5.14, 5.17, 5.18 and 5.21 of the
supplemental indenture only), 4.01(d) (with respect to Sections 5.10, 5.12, 5.15
and 5.16 and Article Six of the supplemental indenture only), 4.01(h), 4.01(i)
(with respect to Section 501(2) of the Original Indenture only) or 4.01(k) of
the supplemental indenture or (B) would result from such creation of such lien;
provided, however, that, notwithstanding the occurrence or continuation of any
default or event of default, the Company and its restricted subsidiaries shall
not be prohibited from creating any lien specified in clauses (6) and (7) of
this definition so long as at the time such lien is created (x) the Collateral
Substitution shall have occurred or (y) the collateral value is at least 300% of
the amount of the obligations and, in the case of either the preceding clause
(x) or (y), no default or event of default would result from the creation of
such lien.
"Permitted Refinancing Indebtedness" means any indebtedness of the
Company or any of its restricted subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other indebtedness of the Company or any of its restricted subsidiaries
(other than intercompany indebtedness); provided that all of the following
requirements are met:
(1) the principal amount (or accreted value, if applicable, determined
in accordance with Generally Accepted Accounting Principles) of such
permitted refinancing indebtedness does not exceed the principal amount
(or accreted value, if applicable, determined in accordance with
Generally Accepted Accounting Principles) of the indebtedness extended,
refinanced, renewed, replaced, defeased or refunded (plus all accrued
interest on the indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded and the amount of all expenses and
premiums incurred in connection therewith);
(2) such permitted refinancing indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded;
(3) if the indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such permitted refinancing indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment
to, the notes on terms at least as favorable to the holders of notes as
those contained in the documentation governing the indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded;
(4) such indebtedness is incurred by such of the Company or its
restricted subsidiary that is the obligor on the indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded;
(5) the indebtedness that is being extended, refinanced, renewed,
replaced, defeased or refunded will not remain outstanding after the
incurrence of such permitted refinancing indebtedness; provided,
however, that in the case of any extension, refinancing, renewal,
replacement, defeasance or refunding of indebtedness referred to in
subclause (a), through (h) or (j) of clause (1) of the definition of
permitted
indebtedness, if prior notice to the holder or holders of the
indebtedness to be extended, refinanced, renewed, replaced, defeased or
refunded is required in order to repay such indebtedness, then such
indebtedness may remain outstanding for up to 60 days after the
incurrence of such permitted refinancing indebtedness so long as on or
before the date of incurrence of such permitted refinancing indebtedness
the Company or the applicable restricted subsidiary shall have (a) given
such notice to the holder or holders of such indebtedness and (b)
irrevocably deposited in trust with a trustee (other than the Company or
any subsidiary), for the exclusive benefit of the holder or holders of
the indebtedness being extended,
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refinanced, renewed, replaced, defeased or refunded, an amount at least
equal to the aggregate amount that the Company or such restricted
subsidiary will be obligated to pay in respect of such indebtedness from
such date to the date of payment in full of such indebtedness; and
(6) such indebtedness is of the type or character specified in
subclauses (a) through (f) or (h) through (k) of clause (1) of the
definition of permitted indebtedness or subclause (a) or (b) of clause
(2) of the definition of permitted indebtedness.
"Person" means any natural person, corporation, partnership, limited
liability company, trust, incorporated organization, unincorporated association
or similar entity or any government, governmental agency or political
subdivision.
"Pledged Securities" means:
(1) the outstanding shares of capital stock of DPI described on Schedule
II to the supplemental indenture as "Pledged Securities"; and
(2) any and all other shares of capital stock or other securities of DPI
and any and all rights to acquire capital stock or other securities of
DPI hereafter acquired by the Company and required to be delivered to
the trustee in accordance with Section 5.21 of the supplemental
indenture.
"Preferred Share Purchase Rights" means the Preferred Share Purchase
Rights issued or issuable pursuant to the Rights Agreement (or any similar right
hereafter issued by the Company with respect to the common stock).
"Proceeds" shall have the meaning assigned to such term under the Code.
"Quarterly Cash Requirements" of any person as of any date means the
cash used in operating activities and for payment of indebtedness of such person
and its subsidiaries, determined on a consolidated basis, for the fiscal quarter
of such person most recently completed prior to the date of such determination,
as would be shown on a consolidated statement of cash flows of such person and
its subsidiaries for such fiscal quarter prepared in accordance with Generally
Accepted Accounting Principles.
"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).
"Registration Statement" means the Company's Registration Statement on
Form S-3 under the 1933 Act (Registration No. 333-35828), as amended by any post
effective amendment thereto, including all documents and reports incorporated
therein by reference.
"Repurchase Date" means with respect to any Repurchase Event:
(a) the date that is 60 days after the last date any holder may exercise
the repurchase right pursuant to Article VII of the supplemental indenture with
respect to such repurchase event so long as (1) on the date such repurchase
event occurs the Collateral Substitution has occurred or (2) on the date such
repurchase event occurs and at all times thereafter to such 60th day the
collateral value is at least 200% of the amount of the Obligations;
(b) if the immediately preceding clause (a) of this definition is not
applicable on the date such repurchase event occurs, the date that is 30 days
after the last date any holder may exercise the repurchase right pursuant to
Article VII of the supplemental indenture with respect to such repurchase event;
or
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(c) if the preceding clause (a) of this definition is applicable on the
date such repurchase event occurs, and thereafter the Company fails to continue
to meet the requirements of such clause (a), the later of (1) that date that is
30 days after the last date any holder may exercise the repurchase right
pursuant to Article VII of the supplemental indenture with respect to such
repurchase event and (2) the date that is five business days after the date the
Company no longer continues to meet the requirements of such clause (a).
"Repurchase Event" means the occurrence of any one or more of the
following events:
(a) For any period of five consecutive trading days following the date
hereof there shall be no reported sale price of the common stock on any
of Nasdaq, the NYSE or the AMEX;
(b) Any Fundamental Change;
(c) The inability of the Company for twenty trading days (whether or not
consecutive) on or after the Issuance Date in any period of 365
consecutive days to sell shares of common stock to the holders of
Warrants upon exercise of the Warrants pursuant to the registration
statement (1) by reason of the requirements of the 1933 Act, the 1934
Act or any of the rules or regulations under either thereof or (2) due
to the registration statement containing any untrue statement of
material fact or omitting to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
other failure of the registration statement to comply with the rules and
regulations of the SEC; provided, however, that at any time prior to the
Maturity Date the Company shall be entitled to an aggregate of 20
additional trading days during which it is unable so to sell shares of
common stock to the holders of Warrants without such inability
constituting a repurchase event under this clause (c) of this
definition.
(d) Any Permitted Collateral Disposition or Akkadix Disposition.
"Repurchase Percentage" means 100%.
"Repurchase Portion" means, with respect to a particular repurchase
event:
(a) in the case of a repurchase event specified in clause (b) or (c) of
the definition of the term repurchase event, 100 percent;
(b) in the case of a repurchase event specified in clause (d) of the
definition of the term repurchase event, if, after giving effect to the
sale, conveyance or other disposition giving rise to such repurchase
event, the collateral value of the remaining collateral as to which the
trustee holds a perfected first priority security interest is at least
equal to 150% of the amount by which (x) the amount of the obligations
exceeds (y) the principal amount of notes that are Outstanding and of
which the holders have the right to require repurchase pursuant to
Article Seven of the supplemental indenture by reason of such sale,
conveyance or other disposition (whether or not such right has been
exercised), plus accrued interest thereon to the date of determination,
then the quotient, expressed as a percentage, obtained by dividing (x)
an amount equal to 50 percent of the amount of gross proceeds from such
Permitted Collateral or Akkadix Disposition by (y) the principal amount
of notes that are Outstanding at the close of business on the business
day immediately preceding such Permitted Collateral or Akkadix
Disposition; and
(c) in the case of a repurchase event specified in clause (d) of the
definition of the term repurchase event, if, after giving effect to the
sale, conveyance or other disposition giving rise to such repurchase
event, the collateral value of the collateral as to which the trustee
holds a perfected first priority security interest would be less than
150% of the amount by which (x) the amount of the obligations exceeds
(y) the principal amount of the notes that are Outstanding and of which
the holders have the right to require repurchase pursuant to Article
Seven of the supplemental indenture by reason of such sale, conveyance
or other disposition (whether or not such right has been exercised),
plus accrued interest thereon to the date of determination if 50% of the
gross proceeds of such sale, conveyance or other disposition (plus the
amount
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of any cash in addition to such proceeds which cash is deposited
by the Company with the trustee as Collateral in connection with such
Permitted Collateral or Akkadix Disposition and which may be applied to
pay the repurchase price of such notes) were applied to repurchase of
notes pursuant to Article Seven of the supplemental indenture, then the
quotient, expressed as a percentage, obtained by dividing (x) such
amount of the gross proceeds from such Permitted Collateral or Akkadix
Disposition as shall be necessary so that, assuming such amount of such
gross proceeds (plus the amount of any cash in addition to such proceeds
which cash is deposited with the trustee as collateral in connection
with such Permitted Collateral or Akkadix Disposition and which may be
applied to pay the repurchase price of such notes) is applied to
repurchase notes pursuant to Article Seven of the supplemental
indenture, the collateral value of the collateral as to which the
trustee holds a perfected first priority security interest would be at
least 150% of the amount by which the amount of the obligations exceeds
the principal amount of notes Outstanding that would be so repurchased
by (y) the principal amount of notes that are Outstanding at the close
of business on the business day immediately preceding such Permitted
Collateral or Akkadix Disposition.
"Repurchase Price" means with respect to any repurchase of a note
pursuant to Sections 7.01 and 7.02 of the supplemental indenture an
amount in cash equal to the sum of (1) the product of (x) the Repurchase
Percentage times (y) the outstanding principal amount of such note to be
repurchased in accordance with Article Seven of the supplemental
indenture plus (B) accrued and unpaid interest on such principal amount
to the date the repurchase price is required to be paid plus (C) accrued
and unpaid default Interest, if any, thereon at the default rate to the
date of such repurchase.
"Restricted Subsidiary" of a person means any subsidiary of the referent
person that is not an unrestricted subsidiary.
"Rights Agreement" means the Rights Agreement, dated as of October 8,
1998, between the Company and Computershare Investor Services, LLC, as Rights
Agent.
"SEC" means the Securities and Exchange Commission.
"Securities" shall have the meaning provided in Section 8.03(d) of the
supplemental indenture.
"Security Interest" means the security interest granted in, and the
collateral assignment of, the collateral pursuant to the supplemental indenture.
"Share Payments" shall have the meaning provided in Section 5.09 of the
supplemental indenture.
"Specified Market Value" when used with respect to the common stock as
of a specified date means with respect to each share of common stock the average
of the closing prices of the common stock sold on all securities exchanges
(including the Nasdaq and the Nasdaq SmallCap Market) on which the common stock
may at the time be listed, or, if there have been no sales on any such exchange
on such day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on such day the common stock is not so
listed, the average of the representative bid and asked prices quoted in the
NASDAQ System as of 4:00 p.m., New York City time, or, if on such day the common
stock is not quoted in the NASDAQ System, the average of the highest bid and
lowest asked price on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of five trading
days consisting of the day as of which the Specified Market Value of common
stock is being determined (or if such day is not a trading day, the trading day
next preceding such day) and the four consecutive trading days prior to such
day. If on the date for which Specified Market Value is to be determined the
common stock is not listed on any securities exchange or quoted in the NASDAQ
System or the over-the-counter market, the Specified Market Value of common
stock shall be the highest price per share which the Company could then obtain
from a willing buyer (not an employee or director of the Company at the time of
determination) for shares of common stock sold by the Company, from authorized
but unissued shares, as determined in good faith by the board of directors.
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"Stock Payment Option" shall have the meaning provided in Section
3.02(a) of the supplemental indenture.
"Subordination Terms" means the terms set forth in Schedule III to the
supplemental indenture or such other terms of subordination as shall have been
approved in advance of the incurrence of the applicable indebtedness by the
majority holders in their sole discretion, as evidenced by the written approval
of the majority holders given to the Company and the trustee prior to incurrence
of such indebtedness.
"Subsidiary" means any corporation or other entity of which a majority
of the capital stock or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by the Company.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on which any of the national securities
exchange or Nasdaq which then constitutes the principal securities market for
the common stock is open for general trading of securities.
"Transaction Documents" means the Original Indenture, the supplemental
indenture, the notes, the note purchase agreements, the Warrants and the other
agreements, instruments and documents contemplated hereby and thereby.
"Trigger Event" shall have the meaning provided in Section 8.03(d) of
the supplemental indenture.
"Unrestricted Subsidiary" means PPGx, Inc. and its subsidiaries and any
subsidiary of the Company that is designated by the board of directors as an
unrestricted subsidiary pursuant to a board resolution, but only to the extent
that such subsidiary:
(1) has no indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any restricted subsidiary of the
Company unless the terms of any such agreement, contract, arrangement or
understanding comply with Section 5.07 of the supplemental indenture
(such compliance to be determined without regard to the proviso to such
Section 5.07);
(3) is a person with respect to which neither the Company nor any of its
restricted subsidiaries has any direct or indirect obligation (a) to
subscribe for additional equity interests or (b) to maintain or preserve
such person's financial condition or to cause such person to achieve any
specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any indebtedness of the Company or any of its
restricted subsidiaries.
Any designation of a subsidiary of the Company as an unrestricted subsidiary
will be evidenced to the trustee by filing with the trustee a certified copy of
the board resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the preceding
conditions. If, at any time, any unrestricted subsidiary would fail to meet the
preceding requirements as an unrestricted subsidiary, it will thereafter cease
to be an unrestricted subsidiary for purposes of the supplemental indenture and
will become a restricted subsidiary of the Company for purposes of the
supplemental indenture, and any indebtedness, liens and activities of such
subsidiary will be deemed to be incurred or engaged in by a restricted
subsidiary of the Company as of such date and shall be required to comply as of
such date with the requirements of the supplemental indenture applicable to the
Company and its restricted subsidiaries. The board of directors of the Company
may at any time designate any unrestricted subsidiary to be a restricted
subsidiary of the Company; provided, however, that such designation will be
deemed to be an incurrence of indebtedness by a restricted subsidiary of the
Company of any outstanding indebtedness of such
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unrestricted subsidiary and such designation will only be permitted if (1) such
indebtedness is permitted under the supplemental indenture; and (2) no default
or event of default would be in existence following such designation.
"Warrants" means the Common Stock Purchase Warrants of the Company
issued to the original holders of the notes pursuant to the note purchase
agreements.
"Weighted Average Life to Maturity" means, when applied to any
indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of such indebtedness, by (b) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the
making of such payment; by
(2) the outstanding principal amount of such indebtedness at such date.
DESCRIPTION OF THE WARRANTS
We are offering Class A warrants and Class B warrants to purchase shares
of our common stock, which we refer to collectively as the "Warrants." A copy of
the form of Class A warrant and Class B warrant is available to prospective
investors as provided under "--Where You can Find Additional Information About
Axys and this Offering." The following summary of certain provisions of the
Warrants does not purport to be complete and is qualified in its entirety by
reference to the form of Warrants, including the definitions therein of certain
terms used below.
GENERAL
Each Class A warrant and Class B warrant, when duly exercised, including
payment in full of the applicable purchase price, will entitle the holder
thereof to receive 35.41 fully paid and nonassessable shares of our common
stock, par value $.001 per share at an exercise price of $8.82 and $10.59 per
share, respectively, which we refer to as the "Purchase Price," subject to
adjustment. The Purchase Price of the Warrants and the number of shares of our
common stock issued upon exercise of the Warrants are both subject to adjustment
in certain cases referred to below.
As of the date of closing of the offering of the units, the holders of
the Warrants would be entitled, in the aggregate, to purchase 1,841,360 fully
paid and nonassessable shares of our common stock.
The Warrants will be exercisable on and after the date of closing of the
units and prior to 5:00 p.m., New York City time, on October 1, 2004, which
we refer to as the "Expiration Date." The exercise and transfer of the Warrants
will be subject to applicable federal and state securities laws. This prospectus
supplement and the registration statement of which it is a part, relates to the
units, the notes, the Warrants and the shares of common stock issued upon
exercise of the Warrants. We have agreed for the benefit of the holders of the
Warrants to use commercially reasonable efforts to maintain the effectiveness of
the registration statement to enable exercise of the Warrants, with some limited
exceptions.
The Warrants may be exercised by surrendering to us the warrant
certificates evidencing the Warrants to be exercised with the accompanying
subscription form in the form attached to the Warrant, properly completed and
duly executed, together with payment of the applicable Purchase Price. Payment
of the Purchase Price may be made (1) in the form of cash in U.S. dollars or by
certified or official bank check payable to our order, or by wire transfer of
immediately available funds to our account, or if we have appointed an agent in
respect of the Warrants, such agent for our account or (2) by tendering Warrants
having a net issuance value equal to the Purchase Price. Upon surrender of the
warrant certificate and payment of the applicable Purchase Price, we will
deliver or cause to be delivered, to or upon the written order of the holder,
within three trading days, stock certificates representing the number of whole
shares of our common stock to which the holder is entitled. If less than all the
Warrants evidenced
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by a warrant certificate are to be exercised, a new warrant certificate will be
issued for the remaining number of Warrants.
No fractional shares of common stock will be issued upon exercise of the
Warrants. We will pay to the holder of the Warrants at the time of exercise an
amount in cash equal to the current fair market value of shares of common stock
multiplied by such fractional share of common stock to be issued.
The holders of the Warrants will not have any voting rights or other
rights as one of our stockholders, nor the right to vote or to consent or to
receive notice as one of our stockholders on any matters or with respect to any
rights whatsoever as one of our stockholders. No dividends or interest shall be
payable or accrue in respect of the Warrants. The holder of the Warrants will
not be entitled to share in our assets in the event of our liquidation,
dissolution or winding up. In the event of a bankruptcy or reorganization is
commenced by or against us, a bankruptcy court may hold that unexercised
Warrants are executory contracts, which may be subject to rejection by us with
approval of the bankruptcy court, and the holders of the Warrants may, even if
sufficient funds are available, receive nothing or a lesser amount as a result
of the bankruptcy case then they would be entitled to if they had exercised
their Warrants prior to the commencement of the bankruptcy case.
In the event of a taxable distribution to holders of our common stock
that results in an adjustment to the number of shares of common stock or other
consideration for which a Warrant may be exercised, the holders of the Warrants
may, in certain circumstances be deemed to have received a distribution subject
to United States federal income tax as a dividend. See "Certain Income Tax
Consequences."
ADJUSTMENTS
The number of shares of common stock purchasable upon exercise of the
Warrants and the Purchase Price will be subject to adjustment in certain events,
including:
(1) the distribution to holders of our common stock or other
securities of:
- other or additional stock or other securities or property
(other than cash) by way of a dividend,
- any cash (other than cash dividends payable solely out of
our earnings or earned surplus), or
- other or additional stock or other securities or property
(including cash) by way of spin-off, split-up,
reclassification, recapitalization, combination of shares or
similar corporate rearrangement,
except distributions for which adjustments are made under
clauses (2) and (3) below;
(2) the issuance of additional shares of our common stock as a
dividend or other distribution on our outstanding common stock,
the subdivision or reclassification of our outstanding shares of
common stock, or the combination of our outstanding shares of
common stock into a smaller number of shares of common stock;
(3) the issuance of rights or warrants to all holders of our
outstanding shares of common stock entitling them to subscribe
for or purchase shares of our common stock at a price per share
less than the current fair market value on the record date fixed
for the determination of stockholders entitled to receive such
rights or warrants;
(4) the issuance of shares of our common stock or common stock
equivalents, other than an issuance pro rata to all holders of
our outstanding common stock, at a price below the current fair
market value of our common stock at the time of such issuance,
except:
- issuances for which the Purchase Price is adjusted pursuant
to clause (2) above;
- issuances in connection with an offering for cash for our
account that is underwritten on a firm commitment basis and is
registered under the Securities Act of 1933, as amended, or
sold in an offering to "qualified institutional buyers" as
defined in, and in a transaction under, Rule 144A of the
Securities Act of 1933, as amended;
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- issuances upon conversion of the notes or Warrants;
- issuances of Interest Shares;
- issuances of shares of common stock pursuant to the exercise
of options, warrants or other rights outstanding as of the
date of issuance of the notes in accordance with their terms
in effect on such date; and
- issuances of shares of common stock pursuant to the common
stock purchase agreement.
In the event of a Reorganization Event (as defined in the Warrant), we
shall cause effective provisions to be made so that the Warrants will become
exercisable into the kind and amount of shares of stock and other securities and
property (including cash) which the holders of the Warrants would have owned
immediately after the transaction if the holders had exercised their Warrants
immediately before the effective date of the Reorganization Event, except for a
Reorganization Event pursuant to which we or our successors, as the case may be,
and each holder execute a written agreement as provided in the Warrant as more
particularly described in the next paragraph.
In the event of:
- any reclassification or change of the outstanding shares of our
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),
- we consolidate, merge or combine with another corporation as a result
of which holders of our common stock become entitled to receive
stock, securities or other property or assets (including cash) with
respect to or in exchange for such common stock, or
- any sale or conveyance of our properties and assets as, or
substantially as, an entirety to any other person as a result of
which holders of our 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,
then we or the successor person or purchasing person, as the case may be, shall
execute with each holder a written agreement providing that:
- such holder's Warrant shall thereafter entitle the holder to purchase
the kind and amount of shares of stock and other securities or
property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, combination, sale or
conveyance by the holder of a number of shares of our common stock
issuable upon exercise of such holder's Warrant immediately prior to
such reclassification, change, consolidation, merger, combination,
sale or conveyance,
- such successor person or purchasing person shall be jointly and
severally liable with us for the payment and performance of all of
our obligations under the Warrant and note purchase agreement, and
- if registration or qualification is required under the Securities Act
of 1933, as amended, or applicable state law for the Warrants or the
issuance to the holder of the shares of such shares of stock and
other securities so issuable upon exercise of the Warrants, such
registration or qualification shall be completed prior to such
reclassification, change, consolidation, merger, combination or sale.
The Warrants also provide that if the Purchase Price is adjusted as a
result of the issuance of rights, Warrants or options and some or all of those
rights, warrants or options expire unexercised, the Purchase Price shall be
readjusted to take into account the actual number of such rights, warrants or
options, which were exercised.
We will be permitted to make such reductions in the Purchase Price as
we, in our discretion, determine to be advisable in order that any stock
dividend, subdivision of shares, distribution of rights to purchase stock or
securities or distribution of securities convertible into or exchangeable for
stock which we make to our stockholders will not be taxable to the recipients.
We will not be required to adjust the Purchase Price unless such
adjustment would require an increase or decrease of at least 1% in such price;
provided that any non-adjustment is carried forward and taken into consideration
in any subsequent adjustment.
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RESERVATION OF SHARES
We will agree in the Warrants that, so long as any Warrants are
outstanding, we will maintain in our treasury a sufficient number of shares of
common stock to allow for exercise in full of all outstanding Warrants. Failure
by us to maintain such shares in treasury would constitute a breach of the
Warrants.
AMENDMENT
The Warrants and any terms thereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Warrants.
Reference is made to the warrants for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Aggregate Purchase Price" means at any time an amount equal to the
product obtained by multiplying (x) the Purchase Price times (y) the number of
shares of common stock for which the warrant may be exercised at such time.
"AMEX" means the American Stock Exchange, Inc.
"Expiration Date" means October 1, 2004.
"Other Securities" means any stock (other than our common stock) and
other securities of the Company or any other person which the holder at any time
shall be entitled to receive, or shall have received, on the exercise of the
warrant, in lieu of or in addition to common stock, or which at any time shall
be issuable or shall have been issued in exchange for or in replacement of
common stock or other securities pursuant to the warrant.
"Purchase Price" means $8.82 with respect to the Class A warrants and
$10.59 with respect to the Class B warrants, subject to adjustment as provided
in the warrant.
"Reorganization Event" means the occurrence of any one or more of the
following events:
(i) any consolidation, merger or similar transaction of the Company or
any Subsidiary with or into another entity (other than a merger or
consolidation or similar transaction of a Subsidiary into the Company or
a wholly-owned Subsidiary); or the sale or transfer of all or
substantially all of the assets of the Company and the Subsidiaries in a
single transaction or a series of related transactions; or
(ii) the occurrence of any transaction or event in connection with which
all or substantially all the Common Stock shall be exchanged for,
converted into, acquired for or constitute the right to receive
securities of any other Person (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, share exchange,
combination, reclassification, recapitalization, or otherwise); or
(iii) the acquisition by a Person or group of Persons acting in concert
as a partnership, limited partnership, syndicate or group, as a result
of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, of beneficial ownership of securities
of the Company representing 50%
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or more of the combined voting power of the outstanding voting
securities of the Company ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of
directors.
DESCRIPTION OF CAPITAL STOCK
Set forth below is certain information concerning our capital stock and
a brief summary of the material provisions of our bylaws.
GENERAL
Our authorized capital stock is:
- 50,000,000 shares of common stock, par value $.001 per share; and
- 10,000,000 shares of preferred stock, par value $.001 per share, of
which 500,000 shares are designated as Series A Junior Participating
Preferred Stock.
As of September 19, 2000, 37,086,800 shares of common stock were issued
and outstanding, no shares of Series A Junior Participating Preferred Stock were
issued and outstanding, 3,424,147 shares of common stock were reserved for
issuance upon the exercise of outstanding options and 557,127 shares of common
stock were reserved for issuance upon the exercise of outstanding warrants.
Our shares of common stock currently outstanding are traded on the
Nasdaq National Market under the symbol "AXPH." All shares of common stock
issued will be duly authorized, fully paid and nonassessable.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share owned
of record on all matters submitted to a vote of stockholders. Subject to the
preferential rights of any outstanding series of preferred stock and to any
restrictions on the payment of dividends imposed under the terms of our
indebtedness, the holders of common stock are entitled to receive such dividends
as may be declared from time to time by our board of directors out of funds
legally available therefor. We may not declare or pay dividends or distribution
on any share of our common stock, unless immediately after we declare a dividend
or distribution on the common stock, we declare a dividend or distribution on
the Series A Junior Participating Preferred Stock. Holders of common are
entitled, after payment of all prior claims, to receive pro rata all of our
assets upon a liquidation of the Company. Holders of common stock have no
preemptive rights.
PREFERRED STOCK
Our board of directors is authorized to divide the preferred stock into
series and, with respect to each series, to determine the preferences and rights
and the qualifications, limitations or restrictions of the series, including the
dividend rights, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, sinking fund provisions, number of shares constituting
the series and the designation of such series. Our board of directors may,
without stockholder approval, issue additional preferred stock of existing or
new series with voting and other rights that could adversely affect the voting
powers of the holders of common stock and could have certain anti-takeover
effects.
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RIGHTS AGREEMENT
On October 8, 1998, our board of directors declared a dividend of one
preferred share purchase right, which we refer to as a "Right," on each share of
our common stock outstanding at the close of business on October 28, 1998 and
further authorized and directed the issuance of one Right with respect to each
share of our common stock that becomes outstanding after October 28, 1998. The
Rights are governed by a Rights Agreement, dated as of October 28, 1998, by and
between Axys and Computershare Investor Services, LLC, as rights agent. Each
Right entitles its holder to purchase .01 shares of Series A Junior
Participating Preferred Stock, par value $.001 per share which we refer to as
the "Series A Preferred Stock," at a purchase price of $35 per share, subject to
adjustment. Each holder of a Right may exercise such Right upon the earlier of:
- the first date that we or any person makes a public announcement that
such person is a beneficial owner of 15% or more of our common stock
then outstanding which we refer to as an "Acquiring Person" or
- the tenth business day after the date of commencement by any person
(other than us or any of our subsidiaries, our employee benefit plan
or one of our subsidiaries or an entity holding shares of common
stock for or pursuant to such employee benefit plan) of, or the first
public announce of the intention of any person to commence a tender
or exchange offer, the consummation of which would result in any
person becoming an Acquiring Person (the earlier of such dates being
herein referred to as, the "Distribution Date").
From and after any time any person becomes an Acquiring Person, any Rights
beneficially owned by such Acquiring Person, or an associate, affiliate or
transferee of such Acquiring Person, shall become null and void without any
further action on our part.
Each holder of a Right shall have the right, for a period of 60 days
after the later date that any person becomes an Acquiring Person or a
registration statement with respect to the Rights and the securities purchasable
upon the exercise of the Rights is declared effective, to receive upon exercise
of such holder's Right shares of common stock in lieu of Series A Preferred
Stock. In the event any holder of Rights elects to receive shares of common
stock in lieu of Series A Preferred Stock, we may, if the board of directors
determines that such action is necessary and appropriate, pay cash, property,
shares of common stock other securities or nay combination thereof upon the
exercise of such holder's Right in lieu of issuing shares of common stock.
The holders of Rights shall have no voting rights and shall not be
entitled to vote upon any matter submitted to our stockholders at any meeting
thereof, to give or withhold consent to any of our corporate actions to receive
notice of meetings or other actions affecting stockholders, or be entitled to
receive dividends or subscription rights, and the holders of Rights shall not be
deemed for any purpose the holder of the Series A Preferred Stock or any of our
other securities which may at any time be issuable upon the exercise of such
holder's Rights, until such holder exercises such holder's Rights pursuant to
the Rights Agreement.
We may redeem the Rights, at any time, prior to the earlier date that
any person becomes an Acquiring Person or the date that the Rights expire at a
redemption price of $.01 per Right, subject to adjustment. We may, at our
option, issue shares of our common stock in lieu of redeeming the Rights for
cash.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Each holder of "Series A Preferred Stock" is entitled to 100 votes for
each share of Series A Preferred Stock owned of record on all matters submitted
to a vote of the stockholders. Holders of the Series A Preferred Stock and
holders of shares of our common stock and any other capital stock of the Company
shall vote together as one class on all matters submitted to a vote of our
stockholders.
Subject to the rights of holders of any shares of any preferred stock
ranking prior and superior to the Series A Preferred Stock, the holders of
Series A Preferred Stock are entitled to receive dividends as may be declared
from time to time by our board of directors out of funds legally available
therefor payable quarterly in an amount equal to the greater of (a) $1.00 or (b)
100 times the aggregate amount of all cash dividends and non-cash dividends
declared on shares of common stock since the preceding dividend payment date. In
the event any dividends on the Series A Preferred Stock are in arrears,
thereafter, and until all accrued and unpaid dividends and distributions,
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whether declared or not, on shares of Series A Preferred Stock, we may not,
subject to certain exceptions, (a) declare or pay dividends or make other
distributions on shares of common stock ranking junior or on a parity with the
Series A Preferred Stock (except dividends paid ratably on the Series A
Preferred Stock and such parity stock) or (b) redeem or otherwise acquire shares
of any stock ranking junior or on a parity with the Series A Preferred Stock.
Upon our liquidation, dissolution or winding-up, holders of Series A
Preferred Stock are entitled to receive $100 per share of Series A Preferred
Stock plus accrued and unpaid dividends to the date of such liquidation,
dissolution or winding-up before any distribution is made to (a) holders of
shares of any stock ranking junior to the Series A Preferred Stock or (b)
holders of any stock on parity with the Series A Preferred Stock (except
distributions made ratably on the Series A Preferred Stock and such parity
stock).
The Series A Preferred Stock ranks, with respect to the payments of
dividends and the distribution of assets, junior to all series of any other
class of our preferred stock. Holders of shares of Series A Preferred Stock have
no preemptive rights.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that our directors are not
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, except to the extent provided by applicable
law.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain anticipated U. S.
federal income tax consequences of the purchase, ownership and disposition of
the notes, warrants and common stock acquired as payment of interest or upon
conversion of the notes or exercise of the warrants as of the date hereof. This
summary deals only with notes, warrants and common stock held as capital assets
by initial holders who purchase notes and warrants at the offering price, and
does not deal with special situations, such as those dealers in securities,
financial institutions, insurance companies, tax exempt organizations, real
estate investment companies, regulated investment companies, and holders whose
"functional currency" is not the U.S. dollar, or special rules with respect to
straddle or "hedging" transactions. The discussion below is based upon the
Internal Revenue Code of 1986, as amended, which is referred to as the "Code,"
and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified, including
retroactively, so as to result in federal income tax consequences different from
those discussed below. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING OF NOTES OR WARRANTS, OR CONVERTING NOTES OR EXERCISING WARRANTS, OR
THE UNDERLYING SHARES OF COMMON STOCK THAT MAY BE SPECIFIC TO THEM, INCLUDING
THE TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN LAWS.
As used herein, the term "U.S. holder" means a beneficial owner of a
note or warrant that is for United States federal income tax purposes:
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity created or organized
under the laws of the United States or any political subdivision thereof or
therein,
(3) an estate or trust described in Section 7701(a)(30) of the Code, or
(4) a person whose worldwide income or gain is otherwise subject of
U.S. federal income taxation on a net income basis.
A "Non-U.S. holder" means a beneficial owner of a note that is not a
U.S. holder.
U.S. HOLDERS
ALLOCATION OF ISSUE PRICE AMONG NOTES AND WARRANTS
Since the original purchasers of the notes will also acquire warrants,
each note will be treated for U.S. federal income tax purposes as having been
issued as part of an "investment unit" consisting of the note and associated
warrants. The issue price of a unit will be the first prices at which a
substantial portion of the units are sold for money excluding sales to bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers. The issue price of each unit must
be allocated between the notes and warrants based upon their relative fair
market values. The allocation will be used to determine the U.S. holders' income
tax basis in the warrants, the U.S. holders' initial tax basis in the notes, and
as described below, the issue price of the notes. We will allocate the issue
price of each unit among the note and the warrants comprising such unit in
accordance with our determination of their relative fair market values on the
issue date. This allocation will not be binding on the Internal Revenue Service,
who may refer to as the "IRS", which we may challenge such allocation. However,
a U.S. holder is bound by such allocation, unless the U.S. holder discloses in a
timely filed U.S. federal income tax return of the U.S. holder for the taxable
year in which it acquires the units that it intends to use an allocation that is
inconsistent with our allocation.
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PAYMENTS OF STATED INTEREST
Although not free from doubt, we intend to take a position that stated
interest on the notes constitutes qualified stated interest. If so, payments of
stated interest on the notes (whether paid in cash or common stock) generally
will be taxable to a U.S. holder as ordinary interest income at the time such
payments are accrued or received (in accordance with the U.S. holder's method of
accounting for U.S. federal income tax purposes). Alternatively, a U.S. holder
may elect to include stated interest on the notes, as well as original issue
discount, or "OID," described below in gross income on a constant-yield basis.
The mechanics and implications of such an election are beyond the scope of this
discussion and, as a result, U.S. holders should consult their own tax advisors
regarding the advisability of making such an election.
Because of the possibility that the stated interest, if paid in common
stock, may have value that exceeds the stated interest as of the payment date,
it is possible that the notes are subject to the OID regulations that govern
contingent payment or alternative payment schedules. We intend to take the
position that the stated interest will be assumed to be paid at the stated rate
in cash for purposes of the OID rules. However, if the stated interest is paid
in common stock the value of which differs from the stated interest, the holders
may be required to include the value of such common stock issued (rather than
the stated interest) as interest payment in their income, and solely for
purposes of applying the OID rules, the notes may be deemed retired and reissued
at their adjusted issue price.
ORIGINAL ISSUE DISCOUNT
The notes will be issued with OID for federal income tax purposes. Each
U.S. holder of a note with OID exceeding a de minimis amount is required to
include OID in income as it accrues on a yield-to-maturity basis over the term
of the discount note in advance of cash payments attributable to such income,
regardless of whether the holder is a cash or accrual basis taxpayer. The amount
of OID with respect to a discount note equals the excess of the stated
redemption price at maturity of such discount note over its issue price.
The issue price of a note will equal the portion of the issue price of
the unit allocated to the note as described under "-- Allocation of Issue Price
Among Notes and Warrants." The stated redemption price at maturity of a note is
the total of all payments on the note that are not payments of "qualified stated
interest." A qualified stated interest payment is a payment of stated interest
unconditionally payable, in cash or property, other than debt instruments of the
issuer, at least annually at a single fixed rate during the entire term of the
note that appropriately takes into account the length of intervals between
payments. Although not free from doubt, we believe that the term "property" for
this purpose includes our shares. If so, stated interest on the notes will
likely be treated as qualified stated interest. The amount of OID is considered
de minimis and thus ignored if it is less than 1/4 of 1 percent of the stated
redemption price at maturity multiplied by the number of complete years to
maturity. Under this rule, depending on the allocation of the issue price of a
unit among a note and the accompanying warrants, the notes may be issued with a
more than de minimis amount of OID.
A U.S. holder of a debt instrument that bears OID in excess of a de
minimis amount is required to include in gross income an amount equal to the sum
of the daily portions of OID for each day during the taxable year in which the
U.S. holder holds the debt instrument. The daily portions of OID are determined
by allocating to each day in an accrual period the pro rata portion of the OID
that is allocable to the accrual period. The amount of OID that is allocable to
an accrual period with respect to the notes, if they are issued with more than
de minimis OID, generally will be equal to the product of the adjusted issue
price of such notes at the beginning of the accrual period (which equals the
issue price of the notes determined as described above, generally increased by
all prior accruals of OID and decreased by the amount of payments made on the
notes other than qualified stated interest) and the notes' yield-to-maturity,
which is the discount rate, which, when applied to all payments under the notes,
results in a present value equal to the issue price of the notes. In the case of
the final accrual period, the allocable OID generally is the difference between
the amount payable at maturity, other than qualified stated interest, and the
adjusted issue price at the beginning of the accrual period. All payments on a
discount note, other than qualified stated interest, generally will be viewed
first as a payment of previously accrued OID, to the extent thereof, with
payments considered made from the earliest accrual period and, then as a payment
of principal.
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We do not intend to treat the possibility of a repurchase of the notes
at the option of holders as affecting the computation of OID. However, there is
no certainty that such treatment will be respected, and holders may wish to
consult their advisors with respect to the treatment of certain contingencies
under the regulations governing OID.
We will furnish annually to the IRS and to U.S. holders, other than with
respect to certain exempt holders, including, in particular, corporations,
information with respect to the OID accruing with respect to the notes, if they
are issued with more than de minimis OID.
SALE OR PURCHASE OF THE NOTES
Upon the disposition of a note by sale, exchange or repurchase by Axys
at the option of the holder, a U.S. holder generally will recognize gain or loss
equal to the difference, if any, between
(1) the amount realized of the disposition (other than amounts
attributable to accrued and unpaid interest) and
(2) the U.S. holder's tax basis in the note.
Assuming the note is held as a capital asset, such gain or loss will
generally constitute capital gain or loss and will be long-term capital gain or
loss if the U.S. holder has held such note for longer than one year. A U.S.
holder's tax basis in a note generally will equal the portion of the issue price
of a unit allocated to the note, increased by OID on the note, if any,
previously included, or currently includible, in such holder's gross income to
the date of disposition, and reduced by any payments other than payments of
qualified stated interest made on such note. If a note is sold, disposed of or
repurchased by Axys between interest payment dates, the portion of the amount
realized on the disposition that is attributable to interest accrued to the date
of sale must be reported as interest income by a cash method investor and by an
accrual method investor that has not included the interest in income as it
accrued.
CONVERSION OF THE NOTES
A U.S. holder will generally not recognize income, gain or loss upon
conversion of the note into common stock, except with respect to any cash
received in lieu of shares (including a fractional share). The receipt of cash
in lieu of shares will generally result in capital gain or loss (or dividend
income under certain circumstances) in an amount equal to cash minus the basis
of the note allocable to the cashed-out portion. In addition, a U.S. holder will
recognize income with respect to the receipt of cash or common stock in payment
of interest, if any, where such interest has not already been included in
income. The holder's tax basis in the common stock received upon conversion will
be the same as the holder's tax basis in the note at the time of conversion,
excluding any tax basis allocable to cash received in lieu of shares, and the
holding period for the common stock received upon conversion will include the
holding period of the note converted.
ADJUSTMENT TO CONVERSION PRICE
Holders of convertible debt instruments such as the notes may, in
certain circumstances, be deemed to have received constructive distributions
where the conversion ratio of such instruments is adjusted. Adjustments to the
conversion price made pursuant to a bona fide reasonable adjustment formula
which has the effect of preventing the dilution of the interest of holders of
the debt instruments, however, will generally not be considered to result in a
constructive distribution of stock. Certain of the possible adjustments provided
in the notes, including, without limitation, adjustments in respect of taxable
dividends to other stockholders, will not qualify as being pursuant to a bona
fide reasonable adjustment formula. If such adjustments are made, the U.S.
holders of notes might be deemed to have received constructive distributions
taxable as dividends. Moreover, in certain other circumstances, the failure to
adjust the conversion ratio on the notes may result in a deemed taxable dividend
to holders of common stock.
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TAX TREATMENT OF WARRANTS
A U.S. holder will recognize gain or loss upon the sale, redemption,
lapse or other taxable disposition of a warrant in an amount equal to the
difference between the amount of cash and the fair market value of other
property received, if any, by the U.S. holder and the U.S. holder's tax basis in
the warrant. A U.S. holder's tax basis in a warrant will equal that portion of
the cost of the unit that is allocated to the warrant, which will be allocated
under the rules for allocating the issue price of a unit described in "--
Allocation of Issue Price Among Notes and Warrants" above. Such gain or loss
will generally be capital gain or loss if the common stock to which the warrants
relate would be a capital asset in the hands of the warrant holder and will be
long-term capital gain or loss if the holding period exceeds one year.
The cash exercise of a warrant will not be a taxable event for the
exercising U.S. holder, except with respect to cash, if any, received in lieu of
a fractional share. A U.S. holder will have a tax basis in the shares of common
stock received upon exercise of a warrant equal to such U.S. holder's tax basis
in the warrant surrendered, plus the amount of cash paid for the exercise price,
as adjusted for a fractional share for which cash is received, if any. A U.S.
holder will generally have a holding period in shares of common stock acquired
upon exercise of a warrant that commences on the day after the date of exercise
of the warrant.
An adjustment to the exercise price or conversion ratio of the warrants,
or the failure to make such adjustments, may in certain circumstances result in
constructive distributions to the holders of the warrants that could be taxable
as dividends under Section 305 of the Code. In such event, a holder's tax basis
in the warrant would be increased by the amount of any such dividend.
DIVIDENDS PAID ON COMMON STOCK
A U.S. holder generally will be required to include in gross income as
ordinary dividend income the amount of any distributions paid on the common
stock to the extent that such distributions are paid out of our current or
accumulated earnings and profits as determined for U.S. federal income tax
purposes. Distributions in excess of such earnings and profits will reduce the
U.S. holder's tax basis in our common stock and, to the extent such excess
distributions exceed such tax basis, will be treated as gain from a sale or
exchange of such common stock. Corporate holders may by entitled to a dividends
received deduction with respect to such distributions and are urged to consult
their own tax advisors in this regard.
DISPOSITION OF COMMON STOCK
Upon the sale or other disposition of common stock, a U.S. holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the sale and such holder's adjusted tax basis in the
common stock. Gain or loss upon the disposition of the common stock will be
long-term if, at the time of the disposition, the holding period for the common
stock exceeds one year.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments
made on, and proceeds from the sale of, the notes, warrants and common stock
acquired by the exercise of a warrant held by a noncorporate U.S. holder within
the United States.
Payments made on, and proceeds from the sale of, the notes, warrants and
common stock acquired on the exercise of a warrant may be subject to a "backup"
withholding tax of 31% unless the holder complies with certain identification or
exemption requirements. Any amounts so withheld will be allowed as a credit
against the holder's income tax liability, or refunded, provided the required
information is provided to the IRS.
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CERTAIN POTENTIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO US AND TO U.S.
CORPORATE HOLDERS
The notes may constitute applicable high yield discount obligations, or
"AHYDOs," if:
(1) their yield to maturity equals or exceeds the sum of the relevant
applicable federal rate, or "AFR," plus five percentage points and
(2) the notes are issued with significant OID.
In such event, we would not be entitled to deduct OID that accrues with
respect to such notes until amounts attributable to such OID are paid. In
addition, if the notes constitute AHYDOs and their yield to maturity exceeds the
sum of the relevant AFR plus six percentage points, that excess being referred
to as the "Excess Yield," our deduction for the "disqualified portion" of the
OID accruing on the notes would be disallowed. Subject to otherwise applicable
limitations, holders that are U.S. corporations will be entitled to a dividends
received deduction, generally at a rate of 70%, with respect to any disqualified
portion of the accrued OID to the extent that we have sufficient current or
accumulated earnings and profits. If the disqualified portion exceeds our
current and accumulated earnings and profits, the excess would continue to be
taxed as ordinary OID income in accordance with the OID rules described above.
FOREIGN HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. holder.
For purposes of withholding tax on interest and dividends discussed
below, a Non-U.S. holder as defined above, includes a non-resident fiduciary of
an estate or trust. For purposes of the following discussion, interest,
dividends and gain on the sale, exchange or other disposition of a note, warrant
or common stock will be considered to be "U.S. trade or business income" if such
income or gain is:
(1) effectively connected with the conduct of U.S. trade or business or
(2) in the case of a treaty resident, attributable to permanent
establishment, or, in the case of an individual, a fixed base in the United
States.
TAXATION OF INTEREST
Generally any interest paid, or OID accrued, to a Non-U.S. holder of a
note that is not U.S. trade or business income will not be subject to U.S. tax
if the interest qualifies as "portfolio interest." Generally interest on the
notes will qualify as portfolio interest if:
(1) the Non-U.S. holder does not actually or constructively own 10% or
more of the total voting power of all of our voting stock and is not a
"controlled foreign corporation" with respect to which we are a "related person"
within the meaning of the Code,
(2) the beneficial owner, under penalty of perjury, certifies that the
beneficial owner is not a U.S. person and such certificate provides the
beneficial owner's name and address, and
(3) the Non-U.S. holder is not a bank receiving interest on an extension
of credit made pursuant to a loan agreement made in the ordinary course of its
trade of business.
The gross amount of payments of interest, or OID, to a Non-U.S. holder
that do not qualify for the portfolio interest exemption and that are not U.S.
trade or business income will be subject to U.S. federal income tax at the rate
of 30%, unless a U.S. income tax treaty applies to reduce or eliminate
withholding. U.S. trade or business
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income will be taxed at regular U.S. rates rather than the 30% gross rate. In
the case of a Non-U.S. holder that is a corporation, such U.S. trade or business
income may also be subject to the branch profits tax, which is generally imposed
on a foreign corporation on the actual or deemed repatriation from the United
States of earnings and profits attributable to U.S. trade or business income at
a 30% rate. The branch profits tax may not apply, or may apply at a reduced
rate, if a recipient is a qualified resident of a country with which the U.S.
has an income tax treaty. To claim the benefit of a tax treaty or to claim
exemption from withholding because the income is U.S. trade or business income,
the Non-U.S. holder must provide a properly executed Form W-8BEN or W-8ECI, or
such successor forms as the IRS designates, as applicable, prior to the payment
of interest. These forms must be periodically updated. Under new regulations
which are effective with respect to payments made after December 31, 2000, a
Non-U.S. holder who is claiming the benefits of a treaty may be required to
obtain a U.S. taxpayer identification number, which may require providing
certain documentary evidence issued by foreign governmental authorities to
provide residence in the foreign country. Certain special procedures are
provided in such new regulations for payments through qualified intermediaries.
DIVIDENDS ON COMMON STOCK
Dividends paid on our common stock that are not effectively connected
with the conduct of a trade or business within the U.S. will be subject to U.S.
federal income tax, which generally will be withheld at a rate of 30% of the
gross amount of the dividends, unless the rate is reduced by an applicable
income tax treaty. Under the currently applicable Treasury regulations,
dividends paid to an address in a country other than the U.S. are presumed to be
paid to a resident of such country for purposes of the withholding, unless the
payor has knowledge to the contrary, and, under the current interpretation of
Treasury regulations, for purposes of determining the applicability of a tax
treaty rate. However, under the new withholding regulations, if a non-U.S.
holder wishes to claim the benefit of an applicable treaty rate, such holder
would be required to satisfy certain certification and other requirements. In
addition, under the new withholding regulations, we may elect to withhold only
on the portion of dividend distributions paid out of our accumulated, and
reasonably estimated current, earnings and profits.
SALES, EXCHANGE OR REPURCHASE OF THE NOTES, WARRANTS OR COMMON STOCK
Except as described below and subject to the discussion concerning
backup withholding, any gain realized by a Non-U.S. holder on the sale, exchange
or repurchase of a note, warrant or common stock generally will not be subject
to U.S. federal income tax, unless:
(1) such gain is U.S. trade or business income,
(2) subject to certain exceptions, the Non-U.S. holder is an individual
who holds the note, Warrant or common stock as a capital asset and is present in
the U.S. for 183 days or more in the taxable year of the disposition,
(3) the Non-U.S. holder is subject to tax pursuant to the provisions of
U.S. tax law applicable to certain U.S. expatriates (including certain former
citizens or residents of the U.S.), or
(4) in the case of the disposition of warrants or common stock, we are a
U.S. real property holding corporation.
CONVERSION OF THE NOTES
A Non-U.S. holder generally will not be subject to U.S. federal income
tax on the conversion of notes into common stock, except with respect to cash,
if any, received in lieu of shares of common stock or cash in lieu of common
stock received as a payment of interest, where such interest does not qualify
for the portfolio interest exemption. Cash received in lieu of shares may give
rise to gain that would be subject to the rules described below for the sale of
notes. Cash or common stock treated as issued for accrued interest would be
treated as interest under the rules described above.
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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the IRS and to each Non-U.S. holder any
interest or dividend that is subject to withholding or is exempt from U.S.
withholding tax pursuant to a tax treaty, or interest that is exempt from U.S.
tax under the portfolio interest exception. Copies of these information returns
may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. holder
resides.
Treaty regulations provide that backup withholding and additional
information reporting will not apply to payments of principal on the notes by us
to a Non-U.S. holder if the holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes an exemption (provided that
neither we nor our paying agent has actual knowledge that the holder is a U.S.
person or that the conditions of any other exemption are not, in fact,
satisfied).
As a general matter, information reporting and backup withholding will
not apply to a payment of proceeds of a sale effected outside the U.S. by a
foreign office of a foreign broker. However, information reporting requirements,
but not backup withholding, will apply to a payment of the proceeds of the sale
of notes, warrants or common stock effected outside the U.S. by a foreign office
of a broker if the broker:
(1) is a U.S. person,
(2) derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,
(3) is a "controlled foreign corporation" as to the United States or
(4) with respect to payments made after December 31, 2000, is a foreign
partnership that, at any time during its taxable year, is 50% or more, by income
or capital interest, owned by U.S. persons or is engaged in the conduct of a
U.S. trade or business unless the broker has documentary evidence in its records
that the holder is a non-U.S. holder and certain conditions are met, or the
holder otherwise establishes an exemption. Payment by a U.S. office of a broker
of the proceeds of a sale will be subject to both backup withholding and
information reporting unless the holder certifies its non-United States status
under penalties of perjury or otherwise establishes an exemption.
New regulations make certain modifications to some of the withholding,
backup withholding and information reporting rules described above. The new
regulations generally attempt to unify certification requirements and modify
reliance standards. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
Any amounts withheld under the backup withholding rules from a payment
to a Non-U.S. holder will be allowed as a refund or a credit against such
Non-U.S. holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
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PLAN OF DISTRIBUTION
Under the terms and subject to the conditions contained in an agreement
dated September 12, 2000, by and between us and Diaz & Altschul Capital, LLC,
who is referred to as the "Placement Agent," we will pay the Placement Agent a
combined structuring fee and placement fee equal to 5.5% of the aggregate
purchase price of units sold by the Company, subject to limited exceptions. We
have also agreed to reimburse the Placement Agent for its reasonable expenses,
including legal fees, in connection with the offering in an amount not to exceed
$50,000. The Placement Agent will be acting on a best efforts basis in
soliciting offers to purchase the units on our behalf.
The Placement Agent and its affiliates may from time to time perform
services for us and our affiliates in the future for which they will receive
customary compensation. Diaz & Altschul Advisors, LLC, an affiliate of the
Placement Agent, serves as an investment advisor to certain purchasers of
units.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon by
Latham & Watkins, New York, New York. Alan C. Mendelson, a partner at Latham &
Watkins, is one of our directors and also owns 18,329 shares of our common stock
and has options to purchase an additional 40,000 shares of our common stock.
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PROSPECTUS
AXYS PHARMACEUTICALS, INC.
$35,000,000
DEBT SECURITIES
WARRANTS TO PURCHASE COMMON STOCK
This prospectus will allow us to issue our debt securities and warrants to
purchase our common stock over time. This means:
- we may issue the debt securities and warrants offered in this
prospectus from time to time;
- we will provide a prospectus supplement each time we issue our debt
securities and warrants;
- the prospectus supplement will inform you about the specific terms of
that offering and also may add, update or change information contained
in this document; and
- you should read this document and any prospectus supplement carefully
before you invest.
Axys' common stock is traded on the Nasdaq National Market under the
symbol "AXPH". On July 7, 2000, the last reported sale price for our common
stock on the Nasdaq National Market was $7.6875 per share.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is August 3, 2000
<PAGE> 67
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ABOUT AXYS.........................................................................................4
THE OFFERING.......................................................................................4
RISK FACTORS.......................................................................................5
FORWARD-LOOKING STATEMENTS.........................................................................12
WHERE YOU CAN FIND MORE INFORMATION ABOUT AXYS AND THIS OFFERING...................................12
RATIO OF EARNINGS TO FIXED CHARGES.................................................................13
DESCRIPTION OF DEBT SECURITIES.....................................................................14
DESCRIPTION OF WARRANTS............................................................................19
DESCRIPTION OF COMMON STOCK........................................................................19
USE OF PROCEEDS....................................................................................20
PLAN OF DISTRIBUTION...............................................................................20
LEGAL MATTERS......................................................................................21
EXPERTS............................................................................................21
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION OR REPRESENTATIONS PROVIDED OR
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS OR ANY RELATED PROSPECTUS
SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ANY DIFFERENT
INFORMATION OR TO MAKE ANY DIFFERENT REPRESENTATIONS IN CONNECTION WITH ANY
OFFERING MADE BY THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR SOLICITATION OF AN OFFER TO BUY, IN ANY STATE WHERE THE OFFER OR
SALE IS PROHIBITED. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY SALE MADE
UNDER THIS PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION
IN THIS PROSPECTUS IS CORRECT AS OF ANY DATE AFTER THE DATE OF THIS PROSPECTUS.
3
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ABOUT AXYS
Axys is a leader in the integration of life science technologies with a focus
on small molecule drug discovery. We seek to build shareholder value through
- the discovery and development of our own drugs for the treatment of
cancer;
- a broad and diversified pipeline of drug discovery and development
programs for chronic diseases partnered with world-class pharmaceutical
companies; and
- the spin-out of affiliated businesses in combinatorial chemistry,
pharmacogenomics and agricultural biotechnology that utilize the company's
technologies. Our affiliated businesses are intended to provide capital
for Axys' drug discovery and development programs. Our subsidiary PPGX,
INC. manages our pharmacogenomics business. Our affiliate AKKADIX
CORPORATION runs an agricultural biotechnology business. In April 2000 we
completed the previously announced spin-out of our subsidiary AXYS
ADVANCED TECHNOLOGIES, INC. which conducted our combinatorial chemistry
business. We merged Axys Advanced Technologies, Inc. with a subsidiary of
Discovery Partners International, Inc. As a result of the merger, we
received shares in Discovery Partners International, Inc. in exchange for
our shares of Axys Advanced Technologies, Inc. and became a minority
shareholder of Discovery Partners International, Inc.
In recent years, the advent of new drug discovery technologies, including
functional genomics, bioinformatics, computational sciences, structure-based
drug design, combinatorial chemistry, high throughput screening and
pharmacogenomics, has offered great potential for streamlining the lengthy and
expensive process of drug discovery. Axys has assembled a premier platform for
drug discovery by combining and integrating these new technologies with the
traditional pharmaceutical sciences, including medicinal chemistry and
pharmacology. We are using these integrated technologies to identify more
quickly and efficiently both novel molecular targets associated with disease and
small molecule compounds, which are important for oral delivery, that can be
used as drugs against these targets.
We are a Delaware corporation. Our executive offices are located at 180
Kimball Way, South San Francisco, CA 94080 and our telephone number is (650)
829-1000. Our World Wide Web address is http://www.axyspharm.com. Information
contained on our World Wide Web site should not be considered to be part of this
prospectus. In this prospectus, "Axys", "we", "us", and "our" refer to Axys
Pharmaceuticals, Inc. unless the context requires otherwise.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Debt securities and warrants to purchase common stock.. $35,000,000 in aggregate amount
Common Stock outstanding............................... 35,281,749 shares
Use of proceeds........................................ For operating costs, capital expenditures and
working capital needs and other general corporate
purposes
Nasdaq National Market symbol.......................... AXPH
</TABLE>
The number of shares of common stock outstanding is based on the number of
shares outstanding as of June 27, 2000, and excludes:
- 3,447,326 shares subject to options outstanding as of June 27, 2000, at a
weighted average exercise price of $5.4469 per share;
- 606,044 additional shares that we could issue under our stock option
plans;
- 488,094 additional shares that we could issue under our employee stock
purchase plan;
- 557,127 shares subject to warrants outstanding as of June 27, 2000, at a
weighted average exercise price of $12.04; and
- shares which may be issued pursuant to the Company's shelf registration
filed on April 28, 2000 with respect to the issuance of up to $50,000,000
aggregate amount of the Company's common stock.
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This prospectus provides you with a general description of the securities we may
offer. Each time we offer securities, we will provide you with a prospectus
supplement that will describe the specific amounts, prices and terms of the
securities we offer. The prospectus supplement also may add, update or change
information contained in this prospectus.
We may sell securities to or through underwriters, dealers or agents or directly
to purchasers. We and our agents reserve the sole right to accept and to reject
in whole or in part any proposed purchase of securities. The prospectus
supplement, which we will provide to you each time we offer securities, will set
forth the names of any underwriters, dealers or agents involved in the sale of
securities, and any applicable fee, commission or discount arrangements with
them. See "Plan of Distribution."
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES OFFERED PURSUANT TO THIS PROSPECTUS INVOLVES
A HIGH DEGREE OF RISK. THE SECURITIES OFFERED PURSUANT TO THIS PROSPECTUS SHOULD
NOT BE PURCHASED IF YOU CANNOT AFFORD THE LOSS OF YOUR ENTIRE INVESTMENT.
PURCHASERS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN CONJUNCTION
WITH THE OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS
PROSPECTUS BEFORE PURCHASING OR OTHERWISE ACQUIRING OUR SECURITIES OFFERED
PURSUANT TO THIS PROSPECTUS.
IF WE FAIL TO DISCOVER OR DEVELOP OR ARE DELAYED IN THE DEVELOPMENT OF
PHARMACEUTICALS, OUR BUSINESS AND RESULTS OF OPERATIONS WILL BE ADVERSELY
AFFECTED.
All of our potential pharmaceutical products are in various stages of
research and development and will require significant additional research and
development efforts before we can sell them. These efforts include extensive
preclinical and clinical testing and lengthy regulatory review and approval by
the FDA. The development of our new pharmaceutical products is highly uncertain
and subject to a number of significant risks. We do not expect any of our
pharmaceuticals to be commercially available for a number of years.
Pharmaceuticals that appear to be promising at early stages of development may
not reach the market for a number of reasons, including the following:
- We or our collaborators may not successfully complete any research and
development efforts;
- Any pharmaceuticals we develop may be found to be ineffective or to cause
harmful side effects during preclinical testing or clinical trials;
- We may fail to obtain required regulatory approvals for any products we
develop;
- We may be unable to manufacture enough of any potential products at an
acceptable cost and with appropriate quality;
- Our products may not be competitive with other existing or future
products; and
- Proprietary rights of third parties may prevent us from commercializing
our products.
IF WE FAIL TO OBTAIN ADDITIONAL FINANCING TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO COMPLETE OUR PRODUCT DEVELOPMENT EFFORTS.
The development of our potential drugs will require substantially more money
than we currently have. That means we will have to obtain commitments for
substantial funds in order to conduct the costly and time-consuming research and
preclinical and clinical testing activities necessary to develop our drugs. We
cannot be certain that any financing will be available when needed. If we fail
to secure additional financing, as we need it, we will have to delay or
terminate our drug development programs.
We plan to be able to meet some of our needs for money through the sale of
our interests in our affiliated businesses and we are actively pursuing several
alternatives. However, those businesses are still in relatively early stages of
development. We cannot be certain that these businesses will prove to be
financially successful or that we will be able to sell our interest in these
businesses for a substantial amount of money or at all.
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Even if we are successful in obtaining financing from sale of our interests
in these affiliated businesses, we believe we will still need to pursue other
financing opportunities to fund our research and development. Our future
financing needs will depend on many factors, including the following:
- scientific progress in the research and development of drug development
programs;
- the size and complexity of these programs;
- the timing, range and results of preclinical studies and clinical trials;
- our ability to establish new and maintain existing collaborations;
- our ability to achieve any milestones under such collaborations; and
- the time and costs involved in getting regulatory approvals or in filing,
enforcing or prosecuting patents.
In February, 2000, we entered into definitive purchase agreements for the
sale of an aggregate 3.5 million newly issued shares of Axys Pharmaceuticals,
Inc. common stock to selected institutional and other accredited investors for
$31.5 million in gross proceeds. We intend to use net proceeds from this private
placement for working capital and other general corporate purposes.
We expect that existing cash and investments, revenues from existing
collaborations, and the net proceeds from our March 2000 private placement,
together with the anticipated net proceeds of this offering and other debt
financing which we believe is available to us, will enable us to maintain
current and planned operations for 18-24 months. We continue to actively pursue
a variety of financing alternatives.
The drug development process is expensive and we are at an early stage of
development. Therefore, we expect that we will need to continue to raise money
for a number of years until we achieve substantial product or royalty revenues,
if ever. We expect that we will seek additional funding through new
collaborations, the extension of existing collaborations, through sale of our
interests in our affiliated businesses, or through public or private equity or
debt financings. We cannot be certain that additional funding will be available
or that the terms will be acceptable. Existing stockholders will experience
dilution of their investment if we raise additional funds by issuing equity. If
adequate funds are not available, we may delay, reduce or eliminate any of our
research or development programs. Furthermore, we may obtain funds through
arrangements with collaborative partners or others that require us to give up
rights to technologies or products that we would otherwise seek to develop or
commercialize ourselves.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR LONGER THAN EXPECTED, WE MAY BE
UNABLE TO CONTINUE OPERATIONS AND OUR STOCK PRICE MAY DECLINE.
We may never achieve or sustain profitability. We have experienced
significant operating losses since the company started. We have not generated
any pharmaceutical product sales revenue. For the year ended December 31, 1999
and the three month period ended March 31, 2000, we generated a net loss of
approximately $48 million and $8.5 million, respectively. As of December 31,
1999 and March 31, 2000, we had an accumulated deficit of approximately $277
million and 286 million, respectively. We expect that we will continue to incur
significant operating losses over at least the next several years as our
research and development efforts and preclinical and clinical testing activities
continue. Our future profitability depends on our ability to complete product
development and obtain regulatory approval for our drug candidates. If we fail
to become profitable or are unable to sustain profitability on a quarterly or
annual basis, we may be unable to continue operations and our stock price may
decline.
IF WE FAIL TO MAINTAIN OUR EXISTING COLLABORATIVE RELATIONSHIPS AND ENTER INTO
NEW COLLABORATIVE RELATIONSHIPS, DEVELOPMENT OF OUR PRODUCTS COULD BE DELAYED OR
WE MAY NEED TO OBTAIN OTHER SOURCES OF REVENUE.
Our strategy for the development, clinical testing, manufacturing and
commercialization of most of our pharmaceuticals has included entering into
collaborations with corporate partners. We rely to a large extent on the
activities of our collaborators with respect to the development and
commercialization of our pharmaceuticals. All of our collaboration agreements
may be canceled under certain circumstances. In addition, the amount and timing
of resources to be devoted to research, development, eventual clinical trials
and commercialization activities by our collaborators are not within our
control. We cannot guarantee that our partners will perform their obligations as
expected. If any of our collaborators terminate or elect to cancel their
agreements or otherwise fail to conduct their collaborative activities in a
timely manner, the development or commercialization of pharmaceuticals may be
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delayed. For example, virtually all of our genomics collaborations have been
cancelled or terminated over time. If in some cases we assume responsibilities
for continuing unpartnered programs after cancellation of a collaboration, we
may be required to devote additional resources to product development and
commercialization or we may cancel certain development programs.
A large portion of our revenues to date have resulted from these
collaborations. The research funding phase of most of our collaborations will
come to an end in the next few years unless continued or extended by agreement
with our collaborators. If our collaborations are not extended or we do not
enter into additional collaborative relationships, we will have to seek other
sources of revenue, including additional financing and/or sell interests in our
affiliated businesses. We cannot be certain that we will receive any additional
revenue from these arrangements beyond the minimum contractual commitments of
our partners.
We have active pharmaceutical product research and development collaborations
with several different partners, including Bayer, Merck, Aventis (formerly
Rhone-Poulenc Rorer), and Signal Pharmaceuticals.
IF WE FAIL TO SATISFY FDA SAFETY AND EFFICACY REQUIREMENTS IN OUR CLINICAL
TRIALS FOR ANY PHARMACEUTICAL, WE WILL BE UNABLE TO COMPLETE THE DEVELOPMENT AND
COMMERCIALIZATION OF THAT PHARMACEUTICAL PRODUCT.
Either we or our collaborators must show through preclinical studies and
clinical trials that each of our pharmaceuticals is safe and effective in humans
for each indication before obtaining regulatory clearance from the FDA for the
commercial sale of that pharmaceutical. If we fail to adequately show the safety
and effectiveness of a pharmaceutical, regulatory approval could be delayed or
denied. The results from preclinical studies and early clinical trials are often
different than the results that are obtained in large-scale testing. We cannot
be certain that we will show sufficient safety and effectiveness in our clinical
trials that would allow us to obtain the needed regulatory approval. A number of
companies in the pharmaceutical industry, including biotechnology companies,
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials.
Any drug is likely to produce some level of toxicity or undesirable side
effects in animals and in humans when administered at sufficiently high doses
and/or for a long period of time. Unacceptable toxicities or side effects may
occur in the course of toxicity studies or clinical trials. If we observe
unacceptable toxicities or side effects, we, our collaborators or regulatory
authorities may interrupt, limit, delay or halt the development of the drug. In
addition, these unacceptable toxicities or side effects could prevent approval
by the FDA or foreign regulatory authorities for any or all indications.
We currently have one compound, APC 2059, in clinical trials for inflammatory
bowel disease. We are performing clinical trials to determine the safety and
effectiveness of APC 2059 for the treatment of inflammatory bowel disease. As
these clinical trials are intended to establish proof-of-principle in humans, we
cannot be certain that we will be able to complete the clinical trials
successfully. Finally, we cannot be certain that any other drug candidates which
may enter clinical trials will successfully complete those trials or that we or
our collaborators will be able to show the safety and effectiveness of these
drug candidates.
In addition, one of our collaboration partners Bayer AG, decided to
discontinue development of the compound known as BAY 44-3428 for asthma based on
its view that the toxicological properties of the compound precluded advancement
into clinical development. Bayer AG had previously selected BAY 44-3428 for
development as an oral treatment for asthma based on the demonstrated in vivo
efficacy of the compound in primate studies. Based on toxicological studies of a
tryptase inhibitor compound from a chemical class that is different from BAY
44-3428, we believe that the toxicological properties of BAY 44-3428 are not
related to tryptase inhibition. We cannot make any assurance that Bayer AG will
select any other compound for further development in lieu of BAY 44-3428 or that
Bayer AG will continue as one of our collaboration partners on the development
of any other drugs.
IF WE FAIL TO OBTAIN REGULATORY APPROVALS TO COMMERCIALLY MANUFACTURE OR SELL
ANY OF OUR PHARMACEUTICALS, OR IF APPROVAL IS DELAYED, WE WILL BE UNABLE TO
GENERATE REVENUE FROM THE SALE OF OUR PRODUCTS.
We must obtain regulatory approval before marketing or selling our future
drug products. In the United States, we must obtain FDA approval for each drug
that we intend to commercialize. The FDA approval process is lengthy and
expensive, and approval is never certain. Products distributed abroad are also
subject to foreign government
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regulation. The process of obtaining FDA and other required regulatory approvals
can vary a great deal based upon the type, complexity and novelty of the
products involved. Delays or rejections may be encountered based upon additional
government regulation from future legislation or administrative action or
changes in FDA policy during the period of clinical trials and FDA regulatory
review. Similar delays also may be encountered in foreign countries.
None of our drug candidates has received regulatory approval. If we fail to
obtain this approval, we will be unable to commercially manufacture and sell our
drug products. We have several drugs in various stages of preclinical and
clinical development. These products are not expected to be available for
several more years. Because of the risks and uncertainties involved in
development of drug products, our drug candidates could take significantly
longer to gain approval than we expect or may never gain approval. If regulatory
approval is delayed, our management's credibility, the value of our company and
our operating results could be adversely affected. Even if regulatory approval
of a product is granted, we cannot be certain that we will be able to obtain the
labeling claims necessary or desirable for the successful promotion of those
products.
Even if we obtain regulatory approval, we may be required to continue
clinical studies even after we have started selling a pharmaceutical. In
addition, identification of certain side effects after a drug is on the market
or the occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical testing or clinical
trials and changes in labeling of the product. This could delay or prevent us
from generating revenues from the sale of that drug or cause our revenues to
decline.
If regulatory approval is obtained, we will also be subject to ongoing
existing and future FDA regulations and guidelines and continued regulatory
review. In particular, we or any third party that we use to manufacturer the
drug or our collaborators will be required to adhere to regulations setting
forth current good manufacturing practices. The regulations require that we
manufacture our products and maintain our records in a particular way with
respect to manufacturing, testing and quality control activities. Furthermore,
we or our third party manufacturers or our collaborators must pass a
pre-approval inspection of our manufacturing facilities by the FDA before
obtaining marketing approval.
Failure to comply with the FDA or other relevant regulatory requirements may
subject us to administrative or legally imposed restrictions. These include:
warning letters, civil penalties, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending New Drug Applications, called NDAs, or supplements to approved
NDAs.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.
Our success depends in large part on our ability to obtain patents, maintain
trade secrets and operate without infringing the rights of others, both in the
United States and in other countries.
Patents may not issue from any of our pending or future applications. Patent
applications in the United States are maintained in secrecy until the patent
issues. As a result, we cannot be certain that others have not filed patent
applications for technology covered by our pending patent applications or that
we were the first to invent the technology. In addition, an issued patent may be
challenged, invalidated or maneuvered around or it may otherwise not be
sufficient to protect our technology. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions. As a result, it is difficult to predict the broadness of
claims allowed in biotechnology and pharmaceutical patents or their
enforceability.
Our commercial success also depends, in part, on not infringing patents
issued to others and not breaching the technology licenses upon which any of our
potential products are based. Competitors may have filed applications for, or
may have received patents and may obtain additional patents and rights relating
to, genes, products or processes that block or compete with ours. A number of
third parties have filed patent applications or received patents in the areas of
our programs. Some of these applications or patents may limit or hinder our
patent applications, or conflict in certain ways with claims made under our
issued patents. Furthermore, in the past we have been, and we may from time to
time in the future be, notified of claims that we are infringing patents or
other intellectual property rights owned by third parties.
We may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office. These proceedings determine the priority of
invention and the right to a patent for the technology in the U.S. In
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addition, lawsuits may be necessary to enforce any patents issued to us or to
determine the scope and validity of the rights of third parties. Lawsuits and
interference proceedings, even if they are successful, are expensive to pursue,
and we could use a substantial amount of our limited financial resources in
either case. An adverse outcome could subject us to significant liabilities to
third parties and require us to license disputed rights from third parties or to
cease using such technology.
It is also unclear whether our trade secrets will provide useful protection.
We protect our own technology and processes, in part, by confidentiality
agreements with our employees, consultants and certain contractors. However,
these agreements may be disregarded or breached, and we may not have adequate
remedies for any breach. In addition, it is possible that our trade secrets will
otherwise become known or be independently discovered by competitors.
Disputes may arise in the future with regards to the ownership of rights to
any technology developed with collaborators. These and other possible
disagreements with collaborators could lead to delays in the achievement of
milestones or receipt of royalty payments or in research, development and
commercialization of our pharmaceuticals. In addition, these disputes could
require or result in lawsuits or arbitration. Lawsuits and arbitration are
time-consuming and expensive. Even if we win, the cost of these proceedings
could adversely affect our business, financial condition and results of
operations. Furthermore, these proceedings could adversely affect our stock
price or our business reputation and may make the process of entering into
additional collaborative relationships more difficult.
BECAUSE WE DO NOT HAVE MANUFACTURING FACILITIES FOR OUR PROPOSED DRUG PRODUCTS
OR COMMERCIAL MANUFACTURING EXPERIENCE, WE COULD EXPERIENCE MANUFACTURING DELAYS
OR PROBLEMS THAT HURT OUR PRODUCT SALES.
We have no manufacturing facilities for our proposed drug products, and our
potential products have never been commercially manufactured. We must currently
rely on our collaborators, such as Bayer, Merck, and Aventis, to manufacture
products created by our collaborations. We believe that our collaborators or
contract manufacturers or we will be able to manufacture our compounds at a cost
and in quantities necessary to make them commercially acceptable. However, we
cannot be certain that this will be the case. If we or our collaborators or
third party manufacturers are unable to manufacture or contract with others for
a sufficient supply of our compounds on acceptable terms, we may have to delay
any of the following:
- our preclinical and clinical testing schedule;
- our submission of products for regulatory approval; or
- the market introduction and subsequent sales of products.
Any of these delays would adversely affect our financial condition and
results of operations.
In addition to us, our collaborators and contract manufacturers must adhere
to current Good Manufacturing Practices regulations enforced by the FDA through
its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, FDA approval of our products will not be granted
or will be delayed.
With respect to our subsidiary, Axys Advanced Technologies, we are developing
new manufacturing processes to meet the expanding demand for our combinatorial
chemistry libraries. We have never had to manufacture the quantities of
libraries we are committed to delivering during this year. We have experienced
problems in manufacturing in the past that have delayed shipments of libraries
and we may experience manufacturing problems in the future as we expand our
manufacturing capabilities. Problems in manufacturing could delay shipments of
combinatorial chemistry compounds and this would have a material adverse effect
on our financial condition and results of operations.
IF WE ARE UNABLE TO ESTABLISH MARKETING AND DISTRIBUTION CAPABILITIES OR ENTER
INTO ARRANGEMENTS WITH THIRD PARTIES, OUR ABILITY TO GENERATE REVENUES WILL BE
HARMED.
We currently have no sales, marketing or distribution capability. We will
rely on our collaborative relationships, such as those with Bayer, Merck and
Aventis, to market some of our future drug products. In addition, we may enter
into future collaborations in which we rely on our collaborator to market our
drug products. Revenues received under existing and future collaborations will
depend on the success of our collaborator in marketing our drugs. We
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cannot be certain that collaborators will devote sufficient resources to the
marketing and sale of our drugs or that the efforts of our collaborators will be
successful.
We may also decide to market certain of our future pharmaceuticals by
ourselves. To market any pharmaceuticals ourselves, we must develop a marketing
and sales force with technical expertise and the necessary supporting
distribution capability. If we are unable to develop a marketing and sales
force, we may be unable to effectively sell any of our pharmaceuticals. We do
not know whether we will desire to or be able to establish our own sales and
distribution capabilities or whether we will be able to enter into the necessary
supporting relationships with third parties.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR DRUGS, THERE MAY
BE NO COMMERCIALLY VIABLE MARKET FOR OUR PRODUCTS.
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of outside parties, such
as government health administrators, private health insurance companies and HMOs
seeking to contain or reduce the cost of health care. In some foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to
governmental control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to adopt
similar governmental control. In addition, an increasing emphasis on managed
care in the United States has and will continue to increase the pressure on
price of prescription drugs. 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. We cannot be certain that third parties will pay for the costs of our
drugs. Even if we obtain third party reimbursement, we cannot be certain that
reimbursement rates will allow us to profit from the sale of our drugs.
In addition, the announcement of cost containment proposals or efforts could
adversely affect our ability to raise capital and our stock price. In addition,
if these proposals or efforts adversely affect other pharmaceutical companies
that are prospective collaborators with Axys, our ability to establish or
maintain strategic alliances may be adversely affected.
IF PHYSICIANS, INSURERS AND PATIENTS DO NOT ACCEPT OUR PRODUCTS, WE MAY NOT
ACHIEVE SUFFICIENT REVENUE FROM SALE OF THOSE PRODUCTS.
Even if our pharmaceuticals are approved for sale, we are not certain that
physicians, health insurance companies or patients will accept them. If the
medical community and patients do not accept our products, sales of these
products will be adversely affected. The degree of market acceptance will depend
upon a number of factors, including obtaining regulatory approvals,
demonstrating proof in the medical community of the clinical effectiveness and
safety of our product candidates and their potential advantages over existing
treatment methods and reimbursement policies of government and third-party
payors.
IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUES AND OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.
This is a highly competitive business and many of our competitors have
substantially greater resources than we have. In addition, some of these
companies have considerably more experience in preclinical testing, clinical
trials and other regulatory approval procedures than we have.
Our competitors (including our collaborators) may develop, manufacture and
market products that are more effective or less expensive than ours. They may
also receive regulatory approval for their drugs faster than we can obtain them,
or may commercialize their drugs more quickly than we can. Many of our
competitors have greater financial and management resources than we do, and many
of them have significantly more experience in bringing drugs to market. If our
competitors successfully commercialize drugs to treat the indications that we
are working on before we do, or if their products are less expensive or more
effective than ours, demand for our drugs may suffer and our revenues may be
reduced.
Additionally, certain colleges and universities, governmental agencies and
other research organizations are conducting research in the same areas in which
we are working. These institutions are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for the use of
technology that they have developed. These institutions also may
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market competitive commercial products on their own or through joint ventures.
Currently, they compete with us in recruiting highly qualified scientific
personnel.
IF WE FAIL TO RECRUIT AND RETAIN PROFESSIONAL STAFF, OUR PRODUCT DEVELOPMENT
PROGRAMS WILL BE DELAYED.
We are highly dependent on the senior members of our scientific and
management staff. Retaining and attracting qualified personnel, consultants and
advisors is critical to our success. If we fail to recruit and retain qualified
personnel, our product development efforts will be delayed. We face intense
competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. We are
currently seeking to hire additional qualified scientific personnel to perform
research and development. In addition, we expect that we will need to add
management personnel and develop additional expertise by existing management
personnel in order to expand product development and clinical testing. We cannot
be certain that we will be able to attract and retain such individuals on
acceptable terms or at all.
In addition, our academic collaborators are not our employees. As a result,
we have limited control over their activities and can expect that only limited
amounts of their time will be dedicated to our activities. These academic
collaborators may also have relationships with other commercial entities, some
of whom may compete with Axys.
OUR STOCK MAY BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN VALUE.
Stock prices and trading volumes for biotechnology companies often fluctuate
widely for reasons which may be unrelated to their businesses. Our stock price
could decline as a result of many factors, including:
- announcements of technological innovations or new products by Axys or
other companies;
- developments or disputes concerning patents or other rights;
- publicity regarding actual or potential medical results from products
under development by Axys or other companies;
- regulatory developments in both the United States and foreign countries; -
public concern regarding the safety of biopharmaceutical products;
- any shortfall in our revenues or net income from that expected by
securities analysts;
- changes in analyst's estimates of our financial performance, the financial
performance or our competitors or the financial performance of
biotechnology companies in general;
- sales of large blocks of our common stock; or
- conditions in the financial markets or economy in general or the
biotechnology industry in particular.
In the past, following large price declines in the public market price of a
company's securities, securities litigation has often been initiated against
that company. Litigation of this type could result in substantial costs and
diversion of management's attention and resources. Any adverse determination in
litigation could subject us to substantial liabilities.
IF PRODUCT LIABILITY CLAIMS ARE BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL
LIABILITIES.
We may be exposed to liability claims resulting from the use of our products
in clinical trials, or the manufacturing, marketing and sale of any approved
products. These claims may be made directly by consumers, pharmaceutical
companies or others. We maintain product liability insurance coverage for claims
arising from the use of our products which are still in the developmental phase.
However, this insurance coverage is becoming increasingly expensive. We and our
collaborative partners may not be able to obtain and maintain commercially
reasonable product liability insurance. Furthermore, even if we maintain
insurance, the amount may not be enough to protect us against losses due to a
lawsuit. A successful product liability claim against Axys or series of claims
in excess of our insurance could adversely affect our results of operations and
our need for additional financing.
ANTI-TAKEOVER PROVISIONS UNDER DELAWARE LAW AND IN OUR CHARTER DOCUMENTS AND OUR
STOCKHOLDER RIGHTS PLAN COULD MAKE AN ACQUISITION OF AXYS MORE DIFFICULT.
In 1998, we adopted a stockholder rights plan, which may have the effect of
delaying or preventing an unsolicited takeover of the company. Our certificate
of incorporation and bylaws state that any action taken by stockholders must be
conducted at an annual or special meeting of stockholders and may not be
conducted by
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written consent. Only the board of directors, the Chairman of the Board or the
President may call special meetings of the stockholders. In addition, our board
of directors has the authority to issue additional shares of preferred stock and
to determine the rights of those shares without any further action by the
stockholders. Those rights could be senior to those of the common stockholders.
The issuance of preferred stock may make it more difficult for a third party to
acquire Axys. These and other charter provisions may discourage certain types of
transactions involving an actual or potential change in control of Axys. In
fact, these provisions may discourage transactions in which the stockholders
might otherwise receive a premium for their shares over then current prices, and
may limit the stockholders' ability to approve transactions that they think are
in their best interests.
Delaware law also prohibits corporations from engaging in a business
combination with any holders of 15% or more of their capital stock until the
holder has held the stock for three years unless, among other things, the board
approves the transaction. Also, under Delaware law, our board of directors may
adopt additional anti-takeover measures in the future.
FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus and the documents incorporated by
reference are forward-looking statements. These statements are based on our
current expectations, assumptions, estimates and projections about our business
and industry and involve known and unknown risks, uncertainties and other
factors that may cause our results, levels of activity, performance or
achievement to be materially different from any future results, levels of
activity, performance or achievements expressed or implied in or contemplated by
the forward-looking statements.
In some cases, you can identify forward-looking statements by words such as
"believe", "anticipate", "expect", "intend", "plan", "will", "may", "should",
"estimate", "predict", "potential", "continue", or the negative of such terms or
other similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. Our actual results could differ
materially from those anticipated in such forward-looking statements as a result
of several factors more fully described under the caption "Risk Factors" and the
documents incorporated by reference. You are cautioned not to place undue
reliance on these forward-looking statements.
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We do not intend to update
publicly any of the forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
WHERE YOU CAN FIND MORE INFORMATION
ABOUT AXYS AND THIS OFFERING
We have filed with the SEC a registration statement on Form S-3 to register
the securities 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 file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. You can request copies of these documents by contacting the
SEC and paying a fee for the copying cost. 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.
The SEC allows us to "incorporate by reference" information 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 an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. Further, all
filings we make under the Securities Exchange Act after the date of the initial
registration statement and prior to effectiveness of the registration statement
shall be deemed to be incorporated by reference into this prospectus. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Section 13(a), 13(c), 14 or 15 (d) of the
Securities Exchange Act of 1934:
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1. Our Annual Report on Form 10-K for the year ended December 31, 1999, filed
with the Securities and Exchange Commission on March 7, 2000;
2. Our quarterly report on Form 10-Q for the quarter ended March 31, 2000
filed with the commission on May 12, 2000;
3. Our Current Reports of Form 8-K filed with the Securities and Exchange
Commission on February 22, 2000 and May 15, 2000;
4. Our Definitive Proxy Statement filed with the Securities and Exchange
Commission on April 25, 2000 in connection with our 2000 Annual Meeting of
Stockholders;
5. The description of the common stock contained in our Registration
Statement on Form 8-A filed under the Securities Exchange Act of 1934, as
amended, including any amendment or report filed for the purpose of
updating such description.
We will provide to you at no cost a copy of any and all of the information
incorporated by reference into the registration statement of which this
prospectus is a part. You may make a request for copies of this information in
writing or by telephone. Requests should be directed to:
Axys Pharmaceuticals, Inc.
Attention: Investor Relations
180 Kimball Way South
San Francisco, CA 94080
(650) 829-1000
RATIO OF EARNINGS TO FIXED CHARGES
The following table presents our historical ratios of earnings to fixed
charges for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
THREE MONTHS ENDED ----------------------------------------------
MARCH 31, 2000 1999 1998(1) 1997 1996 1995
------------------ ------ --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Ratio.................... * * * * * *
Deficiency............... 8,900 49,806 153,843 10,967 5,928 23,733
</TABLE>
* Earnings for the period indicated were insufficient to cover fixed charges.
(1) Deficiency includes charges resulting from acquired in-process research and
development costs.
For purposes of determining the ratio of earnings to fixed charges, earnings are
defined as net loss from continuing operations before adjustments for minority
interests in consolidated subsidiaries and income from equity investees, plus
fixed charges. Fixed charges consist of interest expense, and estimated interest
within rental expense.
DESCRIPTION OF DEBT SECURITIES
We may offer debt securities of our company. These securities may be secured
or unsecured general obligations of our company which could be senior or junior
to our other obligations. They may be secured by some or all of our assets,
cash, properties or ownership interests in our subsidiaries and affiliated
companies. These obligations may be convertible or exchangeable into our common
stock.
GENERAL TERMS
A prospectus supplement will describe the terms of any debt securities that
we propose to issue and the prices at which we will offer them. The description
of the debt securities will include:
- the title of the debt securities;
- any limit on the aggregate principal amount of such debt securities;
- the person to whom any interest on any debt security will be paid;
- the date or dates on which we must pay the principal;
- the rate or rates at which the debt securities will bear interest, the
date or dates from which interest will accrue, and the dates on which we
must pay interest;
- if applicable, the conditions under which we may pay interest in shares of
our common stock;
- the place or places where we must pay the principal and any premium or
interest on the debt securities;
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- the terms and conditions on which we may redeem any debt security, if at
all;
- any obligation to redeem or purchase any debt securities, and the terms
and conditions on which we must do so;
- the denominations in which we may issue the debt securities;
- the manner in which we will determine the amount of principal of or any
premium or interest on the debt securities;
- the currency in which we will pay the principal and any premium or
interest on the debt securities;
- the principal amount of the debt securities that we will pay upon the
declaration of acceleration (if ever) of their maturity;
- the amount that will be deemed to be the principal amount for any purpose,
including the principal amount that will be due and payable upon any
maturity or that will be deemed outstanding as of any date;
- if applicable, the terms of any right to convert debt securities into, or
exchange debt securities for, shares of our common stock, including
whether such right is mandatory or permissive, how the exchange or
conversion would be calculated and, if applicable, any antidilution
provisions;
- the applicable events of default; and
- the applicable representations, warranties and covenants of our company.
EXCHANGE AND TRANSFER
Debt securities will be transferred or exchanged at the office of the
security registrar or at the office of any transfer agent designated by us.
We will not impose a service charge for any transfer or exchange, but we may
require holders to pay any tax or other governmental charges associated with any
transfer or exchange.
In the event of any potential redemption of debt securities of any series, we
will not be required to:
- issue, register the transfer of, or exchange, any debt security of that
series during the period specified in the applicable prospectus
supplement, or
- register the transfer of or exchange any debt security of that series
selected for redemption, in whole or in part, except the unredeemed
portion being redeemed in part.
We have initially appointed the trustee as the security registrar. Any
transfer agent, in addition to the security registrar, initially designated by
us will be named in the prospectus supplement. We may designate additional
transfer agents or change transfer agents or change the office of the transfer
agent. However, we will be required to maintain a transfer agent in each place
of payment for the debt securities of each series.
GLOBAL SECURITIES
The debt securities of any series may be represented, in whole or in part, by
one or more global securities. Each global security will:
- be registered in the name of a depositary that we will identify in a
prospectus supplement,
- be deposited with the depositary or nominee or custodian, and
- bear any required legends.
No global security may be exchanged in whole or in part for debt securities
registered in the name of any person other than the depositary or any nominee
unless:
- the depositary has notified us that it is unwilling or unable to continue
as depositary or has ceased to be qualified to act as depositary,
- an event of default is continuing, or
- any other circumstances described in a prospectus supplement.
As long as the depositary, or its nominee, is the registered owner of a
global security, the depositary or nominee will be considered the sole owner and
holder of the debt securities represented by the global security for all
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purposes under the indentures. Except in the above limited circumstances, owners
of beneficial interests in a global security:
- will not be entitled to have the debt securities registered in their
names,
- will not be entitled to physical delivery of certificated debt securities,
and
- will not be considered to be holders of those debt securities under the
indenture.
Payments on a global security will be made to the depositary or its nominee
as the holder of the global security. Some jurisdictions have laws that require
that certain purchasers of securities take physical delivery of such securities
in definitive form. These laws may impair the ability to transfer beneficial
interests in a global security.
Institutions that have accounts with the depositary or its nominee are
referred to as "participants." Ownership of beneficial interests in a global
security will be limited to participants and to persons that may hold beneficial
interests through participants. The depositary will credit, on its book-entry
registration and transfer system, the respective principal amounts of debt
securities represented by the global security to the accounts of its
participants.
Ownership of beneficial interests in a global security will be shown on and
effected through records maintained by the depositary, with respect to
participants' interests, or any participant, with respect to interests of
persons held by participants on their behalf.
Payments, transfers and exchanges relating to beneficial interests in a
global security will be subject to policies and procedures of the depositary.
The depositary policies and procedures may change from time to time. Neither we
nor the trustee will have any responsibility or liability for the depositary's
or any participant's records with respect to beneficial interests in a global
security.
PAYMENT AND PAYING AGENTS
The provisions of this paragraph will apply to the debt securities unless
otherwise indicated in the prospectus supplement. Payment of interest on a debt
security on any interest payment date will be made to the person in whose name
the debt security is registered at the close of business on the regular record
date. Payment on debt securities of a particular series will be payable at the
office of a paying agent or paying agents designated by us. However, at our
option, we may pay interest by mailing a check to the record holder. The
corporate trust office will be designated as our sole paying agent.
We may also name any other paying agents in the prospectus supplement. We may
designate additional paying agents, change paying agents or change the office of
any paying agent. However, we will be required to maintain a paying agent in
each place of payment for the debt securities of a particular series.
All moneys paid by us to a paying agent for payment on any debt security
which remain unclaimed for a period specified in the prospectus supplement will
be repaid to us. Thereafter, the holder may look only to us for such payment.
CONSOLIDATION, MERGER AND SALE OF ASSETS
We may not consolidate with or merge into any other person, in a transaction
in which we are not the surviving corporation, or convey, transfer or lease its
properties and assets substantially as an entirety to, any person, unless:
- the successor, if any, is a U.S. corporation, limited liability company,
partnership, trust or other entity,
- the successor assumes Axys' obligations on the debt securities and under
the indentures,
- immediately after giving effect to the transaction, no default or event of
default shall have occurred and be continuing, and
- certain other conditions are met.
EVENTS OF DEFAULT
The indenture defines an event of default with respect to any series of debt
securities as one or more of the following events:
(1) failure to pay principal of or any premium on any debt security of that
series when due,
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(2) failure to pay any interest on any debt security of that series for the
period specified in the prospectus supplement,
(3) failure to deposit any sinking fund payment, if applicable, when due,
(4) failure to perform any other covenant under the indenture that applies to
any debt security of that series and we do not cure such failure within
the period specified in the prospectus supplement after being given the
notice of such failure required in the indenture,
(5) our bankruptcy, insolvency or reorganization, and
(6) any other event of default specified in the prospectus supplement.
An event of default of one series of debt securities is not necessarily an
event of default for any other series of debt securities.
If an event of default, other than an event of default described in clause
(5) above, shall occur and be continuing, either the trustee or the holders of a
certain percentage of aggregate principal amount of the outstanding debt
securities of that series, as specified in the prospectus supplement, may
declare the principal amount of the debt securities of that series to be due and
payable immediately.
If an event of default described in clause (5) above shall occur, the
principal amount of all the debt securities of that series, will automatically
become immediately due and payable.
After acceleration the holders of a majority in aggregate principal amount of
the outstanding securities of that series may, under certain circumstances,
rescind and annul such acceleration if all events of default, other than the
non-payment of accelerated principal, or other specified amount, have been cured
or waived.
Other than the duty to act with the required care during an event of default,
the trustee will not be obligated to exercise any of its rights or powers at the
request of the holders unless the holders shall have offered to the trustee
reasonable indemnity. Generally, the holders of a majority in aggregate
principal amount of the outstanding debt securities of any series will 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.
A holder will not have any right to institute any proceeding under the
indentures, or for the appointment of a receiver or a trustee, or for any other
remedy under the indentures, unless:
(1) the holder has previously given to the trustee written notice of a
continuing event of default with respect to the debt securities of that
series,
(2) the holders of at least 25% in aggregate principal amount of the
outstanding debt securities of that series have made a written request
and have offered reasonable indemnity to the trustee to institute the
proceeding, and
(3) the trustee has failed to institute the proceeding and has not received
direction inconsistent with the original request from the holders of a
majority in aggregate principal amount of the outstanding debt securities
of that series within 60 days after the original request.
Holders may, however, sue to enforce the payment of principal, premium or
interest on any debt security on or after the due date or to enforce the right,
if any, to convert any debt security without following the procedures listed in
(1) through (3) above.
We will furnish the trustee an annual statement by our officers as to whether
or not we are in default in the performance of the indenture and, if so,
specifying all known defaults.
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MODIFICATION AND WAIVER
Axys and the trustee may make modifications and amendments to the indentures
with the consent of the holders of a majority in aggregate principal amount of
the outstanding securities of each series affected by the modification or
amendment.
However, neither we nor the trustee will be allowed to make any modification
or amendment without the consent of the holder of each outstanding security of
that series affected by the modification or amendment if such modification or
amendment would:
- change the stated maturity of any debt security,
- reduce the principal, premium, if any, or interest on any debt security,
- reduce the principal of an original issue discount security or any other
debt security payable on acceleration of maturity,
- change the place of payment or the currency in which any debt security is
payable,
- impair the right to enforce any payment after the stated maturity or
redemption date,
- if subordinated debt securities, modify the subordination provisions in a
materially adverse manner to the holders,
- if convertible debt securities, adversely affect the right to convert any
debt security, or
- change the provisions in the indenture that relate to modifying or
amending the indenture.
SATISFACTION AND DISCHARGE; DEFEASANCE
We may be discharged from our obligations on the debt securities of any
series if we deposit with the trustee enough cash to pay all the principal,
interest and any premium due to the stated maturity date or redemption date of
such debt securities.
The indenture contains a provision that permits us to elect:
- to be discharged from all of our obligations, subject to limited
exceptions, with respect to any series of debt securities then
outstanding, and/or
- to be released from our obligations under the following covenants and from
the consequences of an event of default resulting from a breach of these
covenants:
(1) the limitations on sale and leaseback transactions,
(2) the limitations on secured debt,
(3) if subordinated debt securities, the subordination provisions, and
(4) covenants as to payment of taxes and maintenance of properties.
To make either of the above elections, we will be required to deposit in
trust with the trustee enough money to pay in full the principal, interest and
premium on the debt securities. This amount may be made in cash and/or U.S.
government obligations. As a condition to either of the above elections, we will
be required to deliver to the trustee an opinion of counsel that the holders of
the debt securities will not recognize income, gain or loss for federal income
tax purposes as a result of the action.
If any of the above events occurs, the holders of the debt securities of the
series will not be entitled to the benefits of the indenture, except for the
rights of holders to receive payments on debt securities or the registration of
transfer and exchange of debt securities and replacement of lost, stolen or
mutilated debt securities.
NOTICES
Notices to holders will be given by mail to the addresses of the holders in
the security register.
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GOVERNING LAW
The indenture and the debt securities will be governed by, and construed
under, the law of the State of New York.
REGARDING THE TRUSTEE
The indenture will limit the right of the trustee, should it become a
creditor of Axys, to obtain payment of claims or secure its claims.
The trustee will be permitted to engage in certain other transactions.
However, if the trustee, acquires any conflicting interest, and there is a
default under the debt securities of any series for which they are trustee, the
trustee will be required to eliminate the conflict or resign.
DELAWARE GENERAL CORPORATION LAW SECTION 203
We are a Delaware corporation subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
transaction with an "interested stockholder" for a period of three years after
the date the person became an interested stockholder, unless (with certain
exceptions) the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed manner, as
described below.
The Section 203 restrictions do not apply if:
(1) the business combination or transaction is approved by our board of
directors before the date the interested stockholder obtained such
status,
(2) upon consummation of the transaction which resulted in the stockholder
obtaining such status, the stockholder owned at least 85% of the shares
of stock entitled to vote generally in the election of directors (the
"voting stock") that are outstanding at the time the transaction
commenced. The 85% calculation does not include those shares
- owned by directors who are also officers of the target corporation, or
- held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer, or
(3) if on or after the date the interested stockholder obtained such status,
the business combination is approved by our board of directors and at a
stockholder meeting by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.
Generally, a "business combination" includes a merger, asset sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns, or within three years prior to the determination of
interested stockholder status, did own, 15% or more of a corporation's voting
stock. Section 203 may prohibit or delay mergers or other takeover or change in
control attempts with respect to Axys. As a result, Section 203 may discourage
attempts to acquire us even though such transaction may offer our stockholders
the opportunity to sell their stock at a price above the prevailing market
price.
Notwithstanding anything contained herein the contrary, the prospectus
supplement with respect to any debt securities of any series may contain terms
and conditions different from or in addition to those terms and conditions set
forth above.
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DESCRIPTION OF WARRANTS
We may also issue warrants to purchase shares of our common stock in
connection with the issuance of our debt securities. A prospectus supplement
will describe the terms of any warrants that we propose to issue.
The description of the warrants to purchase our common stock will include:
- the offering price, if any:
- the number of shares of our common stock purchasable upon exercise of one
stock warrant and the initial price at which the shares may be purchased
upon exercise;
- the dates on which the right to exercise the stock warrants begin and
expire;
- U.S. federal income tax consequences;
- call provisions, if any;
- the currencies in which the offering price and the exercise price are
payable; and
- if applicable, the antidilution provisions of the stock warrants.
DESCRIPTION OF COMMON STOCK
Set forth below is certain information concerning our common stock and a
brief summary of the material provisions of our Bylaws.
GENERAL
Our authorized capital stock is:
50,000,000 shares of common stock, par value $.001 per share; and
10,000,000 shares of preferred stock, par value $.001 per share, of which
500,000 shares are designated as Series A Junior Participating Preferred
Stock.
As of June 27, 2000, 35,281,749 shares of common stock were issued and
outstanding, no shares of Series A Junior Participating Preferred Stock were
issued and outstanding, 3,447,326 shares of common stock were reserved for
issuance upon the exercise of outstanding options and 557,127 shares of common
stock were reserved for issuance upon the exercise of outstanding warrants.
Our shares of common stock currently outstanding are traded on the Nasdaq
National Market under the symbol "AXPH." All shares of common stock issued upon
any conversion or exchange of any debt securities of any series or any warrants
will, when issued in accordance with the terms of the applicable agreement be
duly authorized, fully paid and nonassessable.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share owned of
record on all matters submitted to a vote of stockholders. Subject to the
preferential rights of any outstanding series of preferred stock and to any
restrictions on the payment of dividends imposed under the terms of our
indebtedness, the holders of common stock are entitled to receive such dividends
as may be declared from time to time by our board of directors out of funds
legally available therefor. We may not declare or pay dividends or distribution
on any share of our common stock, unless immediately after we declare a dividend
or distribution on the common stock, we declare a dividend or distribution on
the Series A Junior Participating Preferred Stock. Holders of common are
entitled, after payment of all prior claims, to receive pro rata all of our
assets upon a liquidation of the Company. Holders of common stock have no
preemptive rights.
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USE OF PROCEEDS
We cannot guarantee that we will receive any proceeds in connection with this
offering.
We intend to use the net proceeds of this offering, if any, together with
other available funds, for operating costs, capital expenditures and working
capital needs and other general corporate purposes. We have not identified
precisely the amounts we plan to spend on each of these areas or the timing of
such expenditures. Proceeds of this offering may also be used to acquire
companies or products that complement our business, although we are not planning
or negotiating any such transactions as of the date of this prospectus. The
amounts actually expended for each purpose may vary significantly depending upon
numerous factors, including the amount and timing of the proceeds from this
offering and progress with our research and development programs. In addition,
expenditures will also depend upon the establishment of collaborative
arrangements with other companies, the availability of other financing and other
factors.
We anticipate that we will be required to raise substantial additional
capital to continue to fund our research and the development of our product
candidates. Additional capital may be raised through additional public or
private financing, as well as collaborative relationships, borrowings and other
available sources.
PLAN OF DISTRIBUTION
We may sell the debt securities and warrants being offered pursuant to this
prospectus:
- directly to purchasers;
- to or through underwriters;
- through dealers, agents or institutional investors; or
- through a combination of such methods.
The prospectus supplement for the securities we sell will describe the
offering of such securities, including:
- the name or names of any underwriters, agents or dealers;
- the purchase price and the proceeds to us from such offering;
- any underwriting discounts and other items constituting underwriters'
compensation;
- any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers; and
- whether the securities will trade on any securities exchange or the
Nasdaq National Market.
In addition, a prospectus supplement will disclose, if applicable, the
conditions under which we may pay interest in shares of our common stock.
UNDERWRITERS
If any underwriters are utilized in the sale of our debt securities and
warrants in respect of which this Prospectus is delivered, we will enter into an
underwriting agreement with such underwriters and the terms of the transaction
will be set forth in the applicable Prospectus Supplement, which will be used by
the underwriters to resell the securities in respect of which this Prospectus is
delivered to the public. The underwriters will acquire such securities for their
own account and may resell the securities from time to time, in one or more
transactions, at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. If underwriters are used in the sale of
our securities, prior to the commencement of the distribution of those
underwritten securities (i) copies of all proposed underwriting documents will
be sent to the NASD for review and (ii) the maximum compensation to be paid to
the underwriters in connection with the offering of those securities will be
approved by the NASD. Underwriters may be deemed to have received compensation
from us in the form of underwriting discounts or commissions and may also
receive commissions from the purchasers of these debt securities and warrants
for whom they act as agent. Underwriters may also sell these securities and
warrants to or through dealers. These dealers may receive compensation in the
form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for
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whom they may act as agent. Any initial public offering price and any discounts
or concessions allowed or reallowed or paid to dealers may be changed from time
to time.
The debt securities and warrants may also be offered and sold, if so
indicated in any Prospectus Supplement, in connection with a remarketing upon
their purchase, in accordance with a redemption or repayment pursuant to their
terms, or otherwise, by one or more firms ("remarketing firms"), acting as
principals for their own accounts or as agents for us. Any remarketing firm will
be identified and the terms of its agreement, if any, with us and its
compensation will be described in the applicable Prospectus Supplement.
Remarketing firms may be deemed to be underwriters in connection with the debt
securities and warrants remarketed thereby.
If so indicated in any Prospectus Supplement, we will authorize agents and
underwriters or dealers to solicit offers by certain purchasers to purchase our
securities from us at the public offering price set forth in the Prospectus
Supplement pursuant to delayed delivery contracts providing for payment and
delivery on a specified date in the future. Such contracts will be subject to
only those conditions set forth in the applicable Prospectus Supplement, and
such Prospectus Supplement will set forth the commission payable for
solicitation of such offers.
AGENTS
Offers to purchase our securities may be solicited by agents designated by us
from time to time. Any such agent, who may be deemed to be an underwriter as
that term is defined in the Securities Act, involved in the offer or sale of our
securities in respect of which this Prospectus is delivered will be named, and
any commissions payable by us to such agent set forth, in the Prospectus
Supplement. Unless otherwise indicated in the applicable Prospectus Supplement,
any such agent will be acting on a best efforts basis for the period of its
appointment. We may also sell our securities to an agent as principal.
DEALERS
If a dealer is utilized in the sale of our securities in respect of which
this Prospectus is delivered, we will sell such securities to the dealer, as
principal. The dealer may then resell such securities to the public at varying
prices to be determined by such dealer at the time of resale.
DIRECT SALES
We may sell any of our securities directly to purchasers. In the event we
sell directly to purchasers, we will not engage underwriters or agents in the
offer and sale of such securities.
INDEMNIFICATION
Underwriters, agents, dealers, and remarketing firms may be entitled under
agreements which may be entered into with us to indemnification by us against
certain liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for us in the
ordinary course of business.
LEGAL MATTERS
The legality of the securities offered hereby is being passed upon by Latham
& Watkins, New York, New York. Alan C. Mendelson, a partner at Latham & Watkins,
is a director of Axys and also owns 18,329 shares of Axys' common stock and has
options to purchase an additional 35,000 shares of Axys' common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 1999, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements are incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
21
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We have not authorized any dealer, Up to
salesperson or other person to give any $26,000,000
information or represent anything not
contained in this prospectus. You must 8% Senior Secured Convertible
not reply on any unauthorized Notes due 2004
information. This prospectus does not
offer to sell or buy any shares in any
jurisdiction where it is unlawful. The
information in this prospectus is
current as of September 22, 2000.
------------------------- and Warrants to Purchase 1,841,360 Shares of
Our Common Stock
TABLE OF CONTENTS
------------------------- Axys Pharmaceuticals, Inc.
PROSPECTUS SUPPLEMENT
Page -------------------------------
----
About This Prospectus Supplement...........S-ii PROSPECTUS
Incorporation by reference.................S-ii SUPPLEMENT
Summary....................................S-1
The Offering...............................S-3 -------------------------------
Risk Factors...............................S-6
Use of Proceeds............................S-11
Price Range of Our Common Stock............S-11 Diaz & Altschul Capital, LLC
Capitalization.............................S-12
Dilution...................................S-13
Selected Historical Financial Information..S-13 September 22, 2000
Ratio of Earnings to Fixed Charges.........S-14
Description of Units.......................S-15
Description of Senior Convertible Notes....S-15
Description of Warrants....................S-48
Description of Capital Stock...............S-52
Certain Income Tax Consequences............S-55
Plan of Distribution.......................S-62
Legal Matters..............................S-62
PROSPECTUS
About Axys.................................4
The Offering...............................4
Risk Factors...............................5
Forward-Looking Statements.................12
Where You Can Find More Information About
Axys and This Offering...................12
Ratio of Earnings to Fixed Charges.........13
Description of Debt Securities.............13
Description of Warrants....................19
Description of Common Stock................19
Use of proceeds............................20
Plan of Distribution.......................20
Legal Matters..............................21
Experts....................................21
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