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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26244
SEQUANA THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 33-0550509
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11099 N. Torrey Pines Road, Ste. 160
La Jolla, California 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 452-6550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $113.3 million as of March 1, 1997. Shares
of common stock held by officers and directors and by each person who owns 5% or
more of the outstanding common stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 1, 1997, the registrant had 10,189,595 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the Registrant's Definitive Proxy Statement to be
furnished for the 1997 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Sequana Therapeutics, Inc. ("Sequana" or the "Company") was founded
to discover and characterize genes that cause or predispose individuals to
common diseases ("disease genes"). Sequana has developed a proprietary gene
discovery technology which is based on positional cloning, a method that uses
statistical analysis of disease inheritance patterns to isolate disease genes.
The Company believes that its integrated technology platform, which utilizes
high-throughput automated DNA analyzers, sophisticated robotics and advanced
computer systems to collect and analyze genetic information and establish its
relationship to disease, is the most rapid and efficient method of discovering
and characterizing disease genes. Sequana has also developed or acquired access
to a variety of technologies that the Company believes will be useful in
determining gene function. The Company believes that identification of disease
genes and determination of their biological function will provide insights into
the causes of common diseases and may facilitate the development of novel
prognostic, diagnostic and therapeutic products such as small molecule drugs,
recombinant proteins, gene therapy and antisense therapy. The Company's initial
focus is on discovering and characterizing disease genes associated with type II
diabetes, asthma, osteoporosis, obesity, schizophrenia, and manic depression,
among other common diseases. Additionally, Sequana expects to apply its
functional genomics and bioinformatics capabilities, including the study of
model organisms, to elucidate gene function, develop chemical screens, and
identify potential lead compounds for pharmaceutical development. In January
1996, Sequana announced the discovery of a gene associated with hereditary
melanoma, an often fatal form of skin cancer, and in April 1996, Sequana
announced the discovery of a gene associated with obesity in mice.
Sequana's business strategy is to utilize its gene discovery,
functional genomics and bioinformatics technologies to facilitate the
development and commercialization of prognostic, diagnostic and therapeutic
products. As an integral component of this strategy, the Company seeks to
establish strategic alliances with major pharmaceutical and biotechnology
companies in order to commercialize its technologies and leverage the resources
and expertise of its strategic alliance partners. The Company's existing
strategic alliances provide for technical and financial support during the gene
discovery and characterization phase and may include up-front fees, research
support, milestone payments and royalty payments on product sales. To date,
Sequana has entered into strategic alliances with Glaxo Wellcome Inc. ("Glaxo")
in the areas of type II diabetes and human obesity, Boehringer Ingelheim
International GmbH ("Boehringer Ingelheim") in the area of asthma and Corange
International, Ltd. ("Corange"), the parent company of Boehringer Mannheim GmbH
("Boehringer Mannheim"), in the area of osteoporosis. In January 1997, the
Company entered into an additional collaboration with Glaxo under which
Sequana's wholly-owned subsidiary, NemaPharm, Inc. ("NemaPharm"), will examine
the function of certain human genes using its propriety C. elegans technology.
The information set forth in this Business Section contains
forward-looking statements, including but not limited to statements concerning
the use of the Company's proprietary gene discovery technology to discover
disease genes, the use of its technologies in determining gene function and
identifying potential lead compounds for pharmaceutical development, research
and development time lines, the timing and
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likelihood of regulatory approval, the continuation of the Company's
collaborations with its partners, the Company's future capital requirements, and
business conditions and growth in the biotechnology and pharmaceutical
industries and general economy. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the aforementioned factors, as well as those set forth elsewhere in
this Form 10-K.
INDUSTRY BACKGROUND
Many diseases are believed to have a genetic basis. Genes, which are
found in nearly every living cell, code for specific gene products, generally
proteins. A typical human cell contains thousands of proteins essential to
normal cellular structure, growth and function. A defect in a single gene,
leading to the over-production, improper function or absence of a single
protein, may cause an imbalance in this complex cellular system and result in
disease.
Genes are unique sequences of DNA. DNA is composed of two "strands"
of nucleotides, or bases, which are joined together. There are four bases,
referred to as adenine (A), guanine (G), cytosine (C) and thymine (T).
Complementary base pairs (adenine-thymine; guanine-cytosine) bond, allowing the
two strands to be tightly associated. By determining the sequence of the bases
along a DNA strand, genes can be identified. Knowledge of the gene sequence
provides information regarding the protein it produces, but generally does not
provide information about the function of the protein in the complex metabolic
process.
The entire genetic content of an organism is referred to as its
genome. The human genome consists of approximately three billion base pairs of
DNA divided into 23 chromosomes, each containing a specific portion of the
estimated 100,000 human genes. Nearly all human cells contain pairs of each
chromosome, one maternal and one paternal in origin. An inherited chromosome,
however, may not be an exact copy of a parental chromosome because of the
occurrence of crossover events. Crossover events are the natural random
shuffling of the DNA strands between a parental chromosome pair during
chromosome replication. This results in the offspring inheriting recombinant
chromosomes from the parents. Crossover events occur approximately 30 times in
each genome replication and serve to increase genetic diversity in a species.
The three main approaches to gene discovery are functional cloning,
random sequencing and positional cloning. Functional cloning is a method of
discovering disease genes that depends on understanding the protein defect in
the metabolic pathway that causes disease. If the disease can be traced to a
specific protein defect, then determining the sequence of the defective protein
enables the identification of the disease gene. This is accomplished by
retracing the natural process by which the specific gene sequence encodes for
such protein. Developing an understanding of the specific protein defects that
lead to disease is difficult because the metabolic pathways involved in many
common diseases are not well understood.
Random sequencing is the determination of the order of a sufficient
number of bases in a gene fragment to allow the identification of the gene.
Random sequencing enables the rapid identification of genes, but generally does
not provide an understanding of the function of a gene or its role in a
particular disease. Any determination of function, or "characterization," of
randomly sequenced genes is dependent on structural similarities, or homology,
existing between such randomly sequenced genes and genes with
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known function. Genes with known function currently number fewer than 6,000, or
less than six percent of the estimated total number of human genes. The
characterization of novel randomly sequenced genes will require intensive
biological research even if there is homology to known genes. A number of groups
are randomly sequencing partial human genes and are expected to create a
publicly available collection of all of the estimated 100,000 human genes,
albeit largely without known function, within two years.
Positional cloning utilizes analysis of disease inheritance patterns
to isolate the chromosomes which contain target disease genes. Further
refinement of these locations can be accomplished by analyzing crossover events,
which occur with statistical regularity. Crossover events may be tracked using
markers, which are strands of DNA with known sequences at known locations across
the genome. By examining markers spread across chromosomes in hundreds of
families affected by a target disease, crossovers can be detected, allowing the
inheritance of subsections of chromosomes to be correlated with the presence or
absence of disease. As a result, the search for disease genes is effectively
narrowed to specific subsections of particular chromosomes. Because positional
cloning is based on the analysis of disease inheritance patterns, knowledge of
the metabolic pathway involved in a disease is not required.
SEQUANA'S GENE DISCOVERY TECHNOLOGY
Sequana's proprietary gene discovery technology is based on
positional cloning. Rather than emphasizing the random sequencing of a large
number of genes whose functions are unknown, Sequana is concentrating on rapidly
identifying and characterizing specific genes associated with common diseases.
Sequana has developed an integrated gene discovery technology platform comprised
of distinct modules: DNA collection; genotyping and linkage analysis; physical
mapping; and DNA sequencing and mutation detection. This technology utilizes
high-throughput automated DNA analyzers, sophisticated robotics and advanced
computer systems to collect and analyze genetic information and establish its
relationship to disease, and enables Sequana to pursue a number of gene
discovery programs simultaneously.
DNA Collection. Positional cloning is based on the analysis of
disease inheritance patterns. Determining such patterns with statistical
significance generally requires large and well-characterized DNA sample
collections. The suitability of a particular sample collection is based on a
number of factors, including accurate diagnosis of the underlying disease,
familial relationships, ethnic homogeneity and similar environmental factors
among patients. The typical size for a collection suitable for positional
cloning ranges from an estimated 2,000 to 5,000 samples; however, there can be
no assurance that the Company will not require substantially more samples to
find genes responsible for common diseases where environmental factors are
significant or genetic factors are complex.
Sequana actively seeks to identify and obtain exclusive access to
suitable DNA samples through collaborations with academic researchers,
clinicians and health care providers. Under the terms of these collaborations,
the collaborators are responsible for collection of DNA samples from individuals
and Sequana funds the expenses incurred in such collection. To support its gene
discovery programs the Company currently has access to approximately 30,000 DNA
samples through its existing collaborations. The Company believes that
replication of these DNA sample collections by others would be expensive and
time-consuming.
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Genotyping and Linkage Analysis. Genotyping is the use of markers to
determine the genetic constitution of individual DNA samples and measure the
variation between such samples. Linkage analysis is the study of the genotype
variations between affected and healthy individuals to determine the specific
regions of the genome that may be inherited with, or "linked" to, disease. This
process isolates target disease genes to a genomic region, usually representing
two to three million base pairs, or less than 0.1% of the entire genome.
Sequana has developed an advanced system to capture and store
genotype information in a computer database for linkage analysis. Sequana has
also developed proprietary genetic marker sets which, together with its
integrated technology platform, significantly increase the throughput of the
genotyping process compared to traditional methods. To date, the Company has
identified several regions containing genes associated with common diseases and
is in the process of further refining these regions and identifying additional
regions linked to common diseases. In November 1995, under the Company's
strategic alliance with Boehringer Ingelheim, the Company received a milestone
payment for identifying a genomic region that the Company believes contains a
gene associated with asthma.
Physical Mapping. Once the chromosomal region containing the target
disease gene is narrowed to two to three million base pairs, the Company begins
identifying genes in that region. Such a region typically contains 60 to 100
genes. To find the target disease gene, the Company must determine which of the
60 to 100 genes in a given region are associated with the disease state;
typically, only one or a few of these genes will be the target disease genes.
The Company begins this analysis by constructing an overlapping set of DNA
clones that spans the genomic region and by isolating genes in those clones.
Sequana also compares data with public and proprietary databases, which may
allow the Company to focus on those genes most likely to be associated with the
disease state. To date, the Company has used a variety of techniques and
proprietary tools to clone genes that are contained in several regions
associated with certain common diseases. In November 1995, under the Company's
strategic alliance with Boehringer Ingelheim, the Company received a milestone
payment for constructing an overlapping set of DNA clones that spans a genomic
region which the Company believes contains a gene associated with asthma.
DNA Sequencing and Mutation Detection. Target disease genes
identified through the physical mapping process are then sequenced using samples
from a group of normal, healthy individuals and from a group of individuals with
the target disease. The sequences are statistically analyzed to identify
mutations that may be responsible for the target disease state. Sequana uses
automated instrumentation, together with a variety of molecular biology
techniques and proprietary software developed by Sequana, to identify mutations
rapidly and accurately.
Sequana has identified several target disease genes and is currently
attempting to identify the corresponding mutations responsible for disease.
Using Sequana's DNA sequencing and mutation detection technology, Sequana,
together with the National Cancer Institute ("NCI"), identified a gene and a
corresponding mutation associated with hereditary melanoma. In addition, the
Company, in collaboration with The Jackson Laboratory, discovered a gene
associated with obesity in mice.
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SEQUANA'S FUNCTIONAL GENOMICS TECHNOLOGY
Once the Company has identified gene mutations which may be
associated with particular diseases, it seeks to analyze these genes to
determine their specific role in disease. Sequana has developed or acquired
access to a variety of technologies that the Company believes will be useful in
determining gene function, including methods to examine the role of human
disease genes in a variety of model organisms.
The yeast cell, nematode worm, fruit fly and mouse are
well-developed model organisms and, as a result, the Company believes they are
particularly useful models for the study of human gene function. Each of these
organisms exhibits certain similarities to humans at the genetic, molecular and
cellular levels, and mechanisms that operate in these organisms may also operate
in humans. Nearly all genes known to cause human disease have close counterparts
in one or more of these organisms. By studying gene function in these model
systems, Sequana believes it can achieve a better understanding of the molecular
mechanisms that cause or predispose individuals to common diseases. Using genes
which it discovers, as well as those discovered externally, Sequana seeks to
examine gene function, determine signaling pathways, and identify additional
genes that interact with known disease genes. The Company believes that this
information will enable Sequana and its partners to choose more effective
therapeutic intervention points for many common human diseases. Additionally,
Sequana's use of these functional genomics technologies may provide the Company
with opportunities for target-specific projects aimed at drug discovery.
Yeast Genetics. Sequana's developing program in yeast genetics uses
this well-characterized genome to examine the function of human genes. Among
other techniques employing this organism, Sequana is using yeast two-hybrid
systems for the study of genes relating to asthma and obesity, among other
diseases.
Nematode Genetics. Through the acquisition of NemaPharm in October
1996, Sequana gained access to proprietary technologies for the study of gene
function in the nematode worm, or C. elegans, one of the most thoroughly
understood multi-cellular organisms in terms of its anatomy, development,
behavior and genetics. The nematode worm is expected to be the first
multi-cellular organism to be fully sequenced, a task that is scheduled for
completion in early 1998. NemaPharm has applied for patents in the United States
on a proprietary nematode-based screening method. Sequana plans to employ
NemaPharm's technologies to develop animal models of human disease and use such
models to identify potential new therapeutic targets. Using NemaPharm's
proprietary NemaScreen(R) technology, Sequana also plans to develop novel
high-throughput screens for therapeutic leads.
Drosophila Genetics. Sequana is utilizing Drosophila, or fruit fly,
models to examine gene function and gene expression. The Company believes that
the fruit fly is particularly useful because many human gene families and
signaling pathways are also found in this model organism. Sequana has entered
into consulting agreements with two renowned Drosophila geneticists at the
University of California, San Diego, who serve as scientific advisors to the
Company in the use of Drosophila as a model system. Currently, Sequana is using
this model system to examine the function of certain genes related to obesity.
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Mouse Genetics. In the area of mouse genetics, Sequana is examining
gene function in transgenic mice using high-precision gene insertion
technologies and high-throughput gene inactivation technologies. The Company
believes that these technologies may offer a superior method for developing
animal models of certain human genetic diseases. Currently, the Company is
utilizing its mouse-related technologies in the study of asthma and obesity.
The Company may license or acquire additional technologies which it believes
could further complement its functional genomics capabilities.
SEQUANA'S BIOINFORMATICS TECHNOLOGY
Sequana's gene discovery programs create significant challenges in
information management, data analysis, quality control and process optimization.
Sequana has developed a proprietary bioinformatics system that integrates the
enormous amount of information produced by each of the gene discovery modules.
Data is collected by highly automated instrumentation, is stored in proprietary
relational databases and is analyzed by Sequana's scientists using sophisticated
computational tools. In addition, Sequana continuously uses its data to redesign
and improve its systems and analytical techniques and tools to make further gene
discovery efforts more effective and efficient.
SequaSearch(TM) Data Mining Tools and BioAgent db.(TM) Sequana has
developed proprietary software tools, computer networks, database management
systems and computer algorithms to exploit the genetic information contained in
publicly available databases. The Company's SequaSearch(TM) data mining tools
enable Sequana's scientists to continually monitor these external databases and
identify candidate genes implicated in common diseases or located within
disease-associated DNA regions identified by the Company. Sequana's BioAgent
db(TM) candidate gene database is the repository for information obtained
through the use of both SequaSearch(TM) as well as the Company's gene discovery
technology. The Company believes that the use of Sequana's BioAgent db(TM) may
significantly accelerate the discovery and characterization of many disease
genes and facilitate the identification of potential lead compounds for
pharmaceutical development.
GENE DISCOVERY PROGRAMS
The Company's initial focus is on discovering and characterizing
disease genes associated with type II diabetes, asthma, osteoporosis, obesity,
schizophrenia, and manic depression, among other common diseases. The
inheritance patterns of many common diseases are very complex, indicating that
such diseases are probably associated with defects in more than one gene.
Sequana believes that these diseases represent large market opportunities for
potential prognostic, diagnostic and therapeutic products because the causes of
such conditions are not well understood, current therapies for such diseases are
generally inadequate for treating the underlying cause of the disease and a
large number of individuals are affected by such diseases. The Company believes
that identifying disease genes and determining their biological function will
provide insights into the fundamental causes of common diseases and may
facilitate the development of novel prognostic, diagnostic and therapeutic
products such as small molecule drugs, recombinant proteins, gene therapy and
antisense therapy. The Company's principle gene discovery programs are
summarized below.
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Diabetes. Type II diabetes, also known as adult onset or non-insulin
dependent diabetes mellitus ("NIDDM"), is believed to be the result of a
combination of impaired release of insulin into the bloodstream and resistance
of the body to insulin. As in type I diabetes, type II diabetes is characterized
by high levels of glucose in the blood. Complications of the disease include
heart disease, circulatory problems, kidney disease, nerve damage and blindness.
Approximately five percent of the United States population, or 13 million
individuals, is affected by type II diabetes.
Sequana has entered into a strategic alliance with Glaxo to discover
genes associated with type II diabetes. Through collaborative agreements with
various academic institutions and health care providers and, through its
alliance with Glaxo, Sequana has access to more than 5,000 DNA samples from
individuals and families affected by type II diabetes. The Company is conducting
genotyping and linkage analysis with respect to type II diabetes and has
identified several genetic linkages to areas containing candidate disease genes.
Under the terms of the Company's strategic alliance with Glaxo, Glaxo has the
exclusive right to develop and commercialize therapeutic products based on genes
discovered as a result of the alliance. Sequana retains the rights to diagnostic
products based on genes discovered as a result of the alliance. See
"Business--Strategic Alliances."
Asthma. Asthma, characterized by generalized airway obstruction, is
estimated to affect five percent of the U.S. population, or approximately 13
million people. The precise causes of asthma are not well understood, and
current treatments for asthma are limited to controlling inflammation or
treating airway constriction through the use of bronchodilators.
Sequana has established a research collaboration with the Mt. Sinai
Hospital Corporation ("MSHC") in Toronto, Ontario, through which it gained
access to a population of approximately 300 individuals with a 30% incidence of
asthma. These individuals are inhabitants of Tristan da Cunha, an island in the
South Atlantic. The remote location of this island has isolated its inhabitants
from the outside world, offering a unique opportunity for the study of this
disease. All of the inhabitants are closely related through intermarriage, and
anecdotal evidence suggests that one of the island's original settlers suffered
from asthma, resulting in the high incidence of asthma in the current
population. In addition, MSHC has gathered DNA samples from affected families in
the Toronto area and from an extended family of over 150 members that live in a
remote location in China and suffer from a high incidence of asthma. Pursuant to
the research collaboration, the Company is obligated to share with MSHC license
fees, milestone payments and royalties that Sequana receives from third parties.
To date, Sequana has completed genotyping and linkage analysis of DNA samples
from these and other sources, has identified genomic regions which the Company
believes contain genes associated with asthma, has identified candidate disease
genes and is in the process of sequencing and searching for mutations in these
genes.
The Company has entered into a strategic alliance with Boehringer
Ingelheim in the area of asthma. Under the terms of this strategic alliance,
Boehringer Ingelheim has the exclusive right to develop and commercialize
therapeutic products based on genes discovered as a result of the alliance.
Sequana retains the rights to diagnostic products based on genes discovered as a
result of the alliance. See "Business--Strategic Alliances."
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Osteoporosis. Osteoporosis is a condition characterized by the loss
of bone mass that generally occurs with aging and is particularly rapid in women
after menopause. Nearly 25 million people suffer from osteoporosis in the United
States. The primary complications of the disease are compression fractures of
the vertebrae and hip fractures. There are a number of therapies for
osteoporosis, but none of them significantly restores functional bone mass.
Early treatment is believed to reduce the severity of the disease; therefore,
the Company believes that early identification of patients predisposed to
osteoporosis presents a significant opportunity.
Sequana has entered into collaborations with several academic
institutions to collect human DNA samples and bone density information for
osteoporosis research. In addition, Sequana has established a research
collaboration with the Southwest Foundation for Biomedical Research ("SFBR") in
San Antonio, Texas to study osteoporosis in baboons. SFBR studies indicate that
there is a strong inherited component to bone density in baboons. The Company
believes that the genetic analysis of baboons may provide leads to candidate
genes for human studies. Sequana is conducting genotyping and physical mapping
of human and baboon samples and has developed a proprietary genetic marker set
for genotyping in baboons. In addition, the Company is examining potential
candidate human disease genes.
The Company has entered into a strategic alliance with Corange in the
area of osteoporosis. Under the terms of this strategic alliance, Corange has
exclusive rights to develop and commercialize diagnostic and therapeutic
products for osteoporosis based on genes discovered as a result of such
alliance. See "Business--Strategic Alliances."
Obesity. Obesity has become one of the most common disorders of
modern society. In the United States alone, approximately 30 million individuals
can be classified as obese. Obesity is associated with a large number of
conditions including type II diabetes, hypertension, high cholesterol levels,
atherosclerosis, ischemic heart disease, osteoarthritis, gall bladder disease
and some forms of cancer. Published research suggests that genetic factors
controlling metabolism and appetite suppression may be involved in obesity. In
February 1996, Glaxo expanded its strategic alliance with the Company in the
area of type II diabetes to include the study of human obesity. In collaboration
with Glaxo and others, Sequana has access to DNA samples from more than 1,000
morbidly obese (more than 30% over ideal weight) individuals.
Sequana has also entered into a collaboration with The Jackson
Laboratory in Bar Harbor, Maine, to discover the genes responsible for obesity
in two specific mouse strains. In January 1996, the Company and The Jackson
Laboratory announced the discovery of a gene associated with obesity in mice.
The Company plans to use information regarding mouse obesity genes to assist in
isolating human gene counterparts.
Schizophrenia. Schizophrenia is a form of mental illness
characterized by disturbance in logical thinking, inappropriate emotions,
hallucinations, delusions, catatonic symptoms (exaggerated or severely
suppressed movement), violent behavior, withdrawal from reality or some
combination of these symptoms. Due to the diverse nature of these symptoms,
accurate diagnosis is difficult. Schizophrenia affects approximately one percent
of the worldwide population and usually appears in late adolescence or early
adulthood. Published research suggests that the condition has a strong genetic
component, although environmental factors appear to influence the onset and
severity of the disease. The underlying biochemical mechanisms are diverse and
not well understood. Current treatments for schizophrenia include tranquilizers
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and antipsychotic drugs; electric shock treatment for severe catatonia,
depression, or elation; and psychotherapy.
Sequana has entered into a collaboration with the State University
of New York at Stony Brook ("SUNY") with regard to schizophrenia. Through the
SUNY collaboration, the Company has access to DNA samples from approximately 400
families affected by schizophrenia. The Company believes that this patient
population is valuable due to its size and to SUNY's utilization of consistent
criteria for the accurate assessment of schizophrenic symptoms. Sequana is
conducting genotyping on the SUNY samples and has established linkage to an area
containing candidate disease genes. Sequana has also entered into collaborations
with other academic institutions to access additional DNA samples as well as
unique physical mapping tools for the candidate gene region.
Bipolar Disorder. Bipolar disorder is a psychiatric disorder
characterized by mood fluctuations between mania and depression and is estimated
to affect one percent of the United States population, or 2.5 million people.
Sequana has entered into a collaboration with the University of Pittsburgh in
Pittsburgh, Pennsylvania to collect DNA samples from individuals and families
with bipolar disorder. Sequana plans to collect DNA samples from approximately
500 families through this collaboration and the Company has entered into
collaborations with other academic institutions to access additional DNA
samples. Sequana is conducting genotyping on these samples and has established
linkage to a region containing candidate disease genes.
In an effort to focus its gene discovery efforts on areas which
provide the most significant commercial opportunities, the Company continually
evaluates its ongoing programs in light of the latest market information and
conditions, availability of third-party funding, technological advances and
other factors. As a result of such evaluations, the Company's gene discovery
programs have changed from time to time and the Company anticipates that they
may continue to do so in the future.
While the Company has used its gene discovery technology to identify
certain genes which it believes are associated with certain diseases, the
Company has identified only a limited number of genes using its technology and
has not fully described the function of any identified disease gene using its
functional genomics and bioinformatics technologies. There can be no assurance
that the Company's positional cloning technology and approach to gene discovery
will enable it to successfully identify and characterize specific genes that
cause or predispose individuals to the complex, polygenic diseases that are the
targets of its gene discovery programs. In addition, there can be no assurance
that the Company's functional genomics and bioinformatics technologies will
enable it to determine the function of any disease gene which it or others may
discover. The Company will be required to dedicate substantial resources over an
extended period to identify and characterize genes which may be implicated in
these disease states. Even if the Company successfully identifies and determines
the function of specific genes, there can be no assurance that its gene
discoveries will lead to the development of commercial products. To date,
relatively few products based upon genes have been developed and commercialized,
and there can be no assurance that the Company and other entities working in
collaboration with the Company will be able to develop commercial prognostic,
diagnostic and therapeutic products based upon the Company's gene discoveries.
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The Company's positional cloning technology requires the collection
of large numbers of DNA samples from affected individuals, their families and
other suitable populations and, therefore, the availability of such samples is
critical to the Company's ability to discover the genes responsible for common
diseases. The Company is highly dependent upon others for the collection and
supply of the DNA samples used in its research projects. The Company does not
currently have in its possession sufficient DNA samples to support all of its
gene discovery programs. There can be no assurance that the Company will be able
to obtain access to the DNA samples necessary to support its gene discovery
programs and any material lack of availability of such samples would have an
adverse effect on the Company's business.
STRATEGIC ALLIANCES
An integral component of Sequana's business strategy is to enter
into strategic alliances with major pharmaceutical and biotechnology companies
in order to develop and commercialize products based on information provided by
the Company's gene discovery, functional genomics and bioinformatics
technologies. Such corporate alliances may provide for financial and technical
support during the gene discovery and characterization phase, and may include
up-front fees, research support, milestone payments and royalty payments on
product sales. Entering into strategic alliances enables the Company to focus
its efforts on its gene discovery programs and to leverage the resources and
expertise of its strategic alliance partners in product development. As a
result, the Company avoids incurring the significant expenses required in
connection with the development and commercialization of therapeutic products.
To date, the Company has transferred rights to therapeutic applications of its
gene discoveries to its strategic alliance partners while generally retaining
rights to diagnostic applications for development by the Company or subsequent
licensing to third parties. The Company's existing strategic alliances are
summarized below.
Glaxo Wellcome Inc. In July 1994, Sequana and Glaxo entered into a
five year strategic alliance in the area of type II diabetes. In February 1996,
this alliance was expanded to include the study of human obesity. Under the
terms of this agreement, Glaxo paid the Company a $1 million up-front fee and is
obligated to make additional ongoing payments for research support. The Company
may receive additional payments upon the achievement of certain milestones and
royalties on sales of therapeutic products which may result from the alliance.
The agreement provides Glaxo with exclusive worldwide rights to develop and
commercialize therapeutic products based upon the Company's gene discoveries in
the areas of diabetes and human obesity. Sequana retains rights to develop and
commercialize diagnostic products based on such gene discoveries. Glaxo has the
right to terminate the agreement (subject to certain notification requirements)
beginning in July 1997, or earlier in the event the Company is acquired by
another pharmaceutical company. There can be no assurance that the Company's
research pursuant to the agreement will be successful in discovering the
targeted genes or that Glaxo will be successful in developing or commercializing
any products based upon the Company's gene discoveries. As a result, there can
be no assurance that any of the future milestone, royalty and other payments
contemplated by the agreement will ever be made.
In January 1997, the Company entered into a two year strategic
alliance with Glaxo under which Sequana's wholly-owned subsidiary, NemaPharm,
will examine the function of certain human genes using its proprietary C.
elegans technology. Glaxo is obligated to provide payments to the Company for
research support and to make certain additional payments contingent on
identification by the Company of targets
11
<PAGE> 12
used by Glaxo in its research programs. The Company may also receive royalties
on sales of products which may result from the alliance. There can be no
assurance that the Company's research pursuant to the agreement will be
successful in identifying targets or, in the event that any such targets are
identified, that products would be successfully developed or commercialized. As
a result, there can be no assurance that any of the future milestone, royalty or
other payments contemplated by the agreement will ever be made.
Boehringer Ingelheim International GmbH. In June 1995, Sequana
entered into a five year strategic alliance with Boehringer Ingelheim in the
area of asthma. Under the terms of the agreement, Boehringer Ingelheim made a $6
million equity investment in the Company and paid the Company an up-front fee of
$2 million. The Company receives ongoing payments for research support, and may
receive additional payments upon achievement of certain milestones and royalties
on sales of therapeutic products which may result from the alliance. The Company
received $2 million in milestone payments during 1995 in connection with
achieving two research milestones under the agreement. The Company is obligated
to share milestone payments and royalties with MSHC pursuant to the terms of the
Company's collaborative agreement with MSHC. Under the agreement with Boehringer
Ingelheim, Boehringer Ingelheim has exclusive worldwide rights to develop and
commercialize therapeutic products for asthma based on discovered genes. Sequana
retains the right to develop and commercialize diagnostic products based on such
gene discoveries. Boehringer Ingelheim has the right to terminate the agreement
(subject to certain notification requirements) beginning in June 1998, or
earlier in the event the Company is acquired by another pharmaceutical company.
There can be no assurance that the Company's research pursuant to the agreement
will be successful in discovering the targeted asthma genes or that Boehringer
Ingelheim will be successful in developing or commercializing any products based
upon the Company's gene discoveries. As a result, there can be no assurance that
any of the future milestone, royalty and other payments contemplated by the
agreement will ever be made.
Corange International, Ltd. In June 1995, Sequana and Corange, the
parent corporation of Boehringer Mannheim, entered into a five year strategic
alliance in the area of osteoporosis. Corange made a non-refundable payment of
$1 million to the Company and an investment fund affiliated with Corange made an
equity investment of $1 million in the Company. The Company receives ongoing
payments for research support and may receive additional payments upon
achievement of certain milestones and royalties on sales of diagnostic and
therapeutic products which may result from the alliance. Corange made an
additional $1.25 million equity investment in the Company in both 1995 and 1996.
In addition, Corange is obligated to invest $1.25 million in the Company each
year for the next three years by purchasing shares of common stock at a purchase
price equal to 135% of the per share market price of Sequana's common stock. The
agreement with Corange provides Corange with exclusive worldwide rights to
develop and commercialize diagnostic and therapeutic products based on
osteoporosis genes which may be discovered as a result of the alliance. Corange
has the right to terminate the agreement (subject to certain notification
requirements) beginning in February 1998, or earlier in the event the Company is
acquired by another pharmaceutical company. Upon such termination, the
obligation of Corange to purchase common stock of the Company also terminates.
There can be no assurance that the Company's research pursuant to the agreement
with Corange will be successful in discovering the targeted osteoporosis genes
or that Corange will be successful in developing or commercializing any products
based upon gene discoveries of the Company. As a result, there can be no
assurance that any of the future milestone, royalty or other payments
contemplated by the agreement will ever be made.
12
<PAGE> 13
In October 1994, Genentech, Inc. ("Genentech") made a $2 million
equity investment in the Company. In connection with this investment, the
Company granted certain first negotiation rights to Genentech with respect to
the development and commercialization of recombinant therapeutic or prophylactic
proteins. Such first negotiation rights continue until September 1999 and
require the Company to negotiate commercialization rights with Genentech with
respect to such potential products prior to granting such rights to other
parties or otherwise upon request by Genentech. Genentech has not exercised its
first negotiation rights to date and has waived such rights in connection with
Sequana's existing strategic alliances.
In January 1997, the Company and Memorial Sloan-Kettering Cancer
Center ("MSK") formed Genos Biosciences, Inc. ("Genos"), a new company focused
on the research and identification of genes and related genetic information of
value in the prognosis, diagnosis and possible treatment of certain common
cancers. The Company and MSK each own 50% of Genos and have committed to
contribute approximately $5 million each to fund its initial operations. The
Company invested $1.2 million in Genos in connection with its formation and
anticipates that Sequana's remaining commitment will be funded during 1997 and
early 1998. In connection with the formation of Genos, the Company sold a
warrant to MSK to purchase 350,000 shares of the Company's common stock
exercisable at a price of $17.38 per share. The Company's Chief Executive
Officer and Chief Financial Officer are members of the Board of Directors of
Genos.
The Company's strategy for commercialization of its gene discoveries
and related technologies depends upon the formation of various strategic
alliances and licensing agreements. There can be no assurance that the Company
will be able to establish additional strategic alliances or licensing
arrangements that the Company deems necessary to commercialize its technologies,
that any such arrangements will be on terms favorable to the Company, or that
the current or future strategic alliances or licensing arrangements will
ultimately be successful. With respect to current and potential future strategic
alliances and licensing arrangements, the Company will be dependent upon the
expertise and dedication of sufficient resources by these outside parties to
develop and commercialize products based on the Company's discoveries. The
Company's contractual arrangements with its strategic alliance partners do not
obligate them to develop or commercialize genes discovered by the Company and
there can be no assurance that current or future strategic alliance partners
will successfully develop and commercialize products based upon the Company's
discoveries.
PATENTS AND PROPRIETARY RIGHTS
The Company's commercial success will be dependent in part on its
ability to obtain patent protection on genes, or products based on genes,
discovered by it. The current criteria for obtaining patent protection for genes
whose functions have not been characterized are unclear. The Company's
positional cloning approach to gene discovery is directed at identifying novel
genes and characterizing their function. The Company generally intends to apply
for patent protection for all novel full-length gene sequences identified by the
Company. To date, the Company has filed patent applications for several genes
including genes associated with hereditary melanoma and asthma, as well as a
collection of patent applications associated with mouse obesity (tubby) and
related genes. The Company believes that by filing for additional patent
protection after the function of a gene has been characterized, the likelihood
that the Company will be able to obtain patent protection for such gene is
increased. However, there can be no assurance that the Company will be able to
obtain patent protection for such genes, and even if such patents
13
<PAGE> 14
are issued, the scope of the coverage or protection provided by any such patents
is uncertain. In addition, there can be no assurance that any patents, if
issued, will provide protection against any competitors, will provide the
Company with competitive advantages, or will not be challenged by others. In
addition, it is likely that the Company or its strategic alliance partners will
attempt to seek patent protection for products based on genes discovered by the
Company. There can be no assurance that any patent protection can be obtained
for any such products.
There are an estimated 100,000 genes in the human genome and the
Company believes that virtually all such genes will be identified, albeit
largely without known function, within two years. A number of groups are
attempting to rapidly identify and patent gene fragments and full-length genes
whose functions have not been characterized, as well as fully-characterized
genes. There is substantial uncertainty regarding the patentability of gene
fragments or genes without known function. There have been recent proposals for
review of the appropriateness of patents on gene fragments and genes. The
Congressional Office of Technology Assessment has announced that it is
conducting a review of this area with a particular focus on the patentability of
gene fragments. The United States Patent and Trademark Office initially rejected
a patent application by the National Institutes of Health on certain partial
genes. To the extent any patents issue on such partial or full-length genes, the
risk increases that the potential products of the Company or its strategic
alliance partners may give rise to claims that such products infringe the
patents of others. Such groups could bring legal actions against the Company or
its strategic alliance partners claiming damages and seeking to enjoin drug
screening, clinical testing, manufacturing or marketing of the affected
products. If any such actions are successful, in addition to any potential
liability for damages, the Company or its strategic alliance partners could be
required to obtain a license in order to continue to manufacture or market the
affected products. There can be no assurance that the Company or its strategic
alliance partners would prevail in any such action or that any license required
under any such patent would be made available upon commercially acceptable
terms. The Company believes that there may be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's management and financial resources.
The Company also relies on trade secret protection for its
confidential and proprietary information. The Company believes it has developed
proprietary technology for gene discovery and characterization, including
proprietary genetic marker sets, custom software and an integrated
bioinformatics system. The Company has sought patent protection for only limited
aspects of this technology. Additionally, the Company is developing a database
of DNA samples analyzed by it. The Company has taken security measures to
protect its data and is in the process of exploring ways to further enhance the
security for its data. There can be no assurance that such measures will provide
adequate protection for the Company's trade secrets or other proprietary
information. In addition, while the Company has entered into proprietary
information agreements with its employees, consultants and advisors, there can
be no assurance that these agreements will provide meaningful protection for the
Company's proprietary information in the event of unauthorized use or disclosure
of such information. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
14
<PAGE> 15
COMPETITION
Competition among entities attempting to identify and characterize
the genes responsible for causing diseases is intense and is expected to
increase. The Company will face competition from pharmaceutical and
biotechnology companies both in the United States and abroad. In addition,
significant research to identify and characterize genes is being conducted by
universities, other non-profit research institutions and United States and
foreign government-sponsored entities. A number of entities are attempting to
identify rapidly and patent randomly sequenced genes, typically without specific
knowledge of the function of such genes. In addition, the Company believes that
certain entities are pursuing a gene identification and characterization and
product development strategy based upon positional cloning. Any one of these
companies or other entities may discover and establish a competitive advantage
in one or more genes which the Company has identified and designated as a
product candidate. Some of these entities have reported gene discoveries,
including discovery of genes implicated in human breast cancer, Alzheimer's
disease and obesity in mice and humans. Other entities may have identified and
characterized other disease genes, which discoveries have not yet been publicly
reported. The Company also faces competition from these and other entities in
gaining access to DNA samples used in its research and development projects.
The Company believes that its ability to compete is dependent, in
part, upon its ability to create and maintain scientifically advanced
technology, the speed with which it can identify and characterize the genes
involved in targeted complex diseases, its strategic alliance partners' ability
to develop and commercialize pharmaceutical products based upon the Company's
gene discoveries, as well as its ability to attract and retain qualified
personnel, obtain patent protection or otherwise develop proprietary technology
or processes and secure sufficient capital resources for the expected
substantial time period between technological conception and commercial sales of
products based upon the Company's gene discoveries.
Many of the Company's competitors have substantially greater
research and product development capabilities and financial, scientific,
marketing and human resources than the Company. These competitors may succeed in
identifying and characterizing genes or developing products earlier than the
Company or its strategic alliance partners, obtaining authorization from the FDA
for such products more rapidly than the Company or its strategic alliance
partners, or developing products that are more effective than those proposed to
be developed by the Company or its strategic alliance partners. Any potential
products based on genes identified by the Company will face competition both
from companies developing gene-based products and from companies developing
other forms of treatment for particular diseases targeted by the Company.
Certain of the Company's and its strategic alliance partners' competitors may be
further advanced than the Company in identifying genes and developing potential
products that may compete with potential products of the Company or its
strategic alliance partners. There can be no assurance that research and
development by others will not render the products which the Company or its
strategic alliance partners may seek to develop obsolete or uneconomical or
result in treatments or cures superior to any other therapy developed by the
Company or its strategic alliance partners, or that any therapy developed by the
Company or its strategic alliance partners will be preferred to any existing or
newly developed technologies.
15
<PAGE> 16
GOVERNMENT REGULATION
Regulation by governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products which may be developed by the Company or a strategic
alliance partner of the Company. The nature and the extent to which such
regulation may apply to the Company or its strategic alliance partners will vary
depending on the nature of any such pharmaceutical products. Virtually all of
the Company's or its strategic alliance partners' pharmaceutical products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, human pharmaceutical products are subject to rigorous preclinical
and clinical testing and other approval procedures by the United States Food and
Drug Administration ("FDA") and similar health authorities in foreign countries.
Various federal and, in some cases, state statutes and regulations also govern
or influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such pharmaceutical products. The process of obtaining these
approvals and the subsequent compliance with appropriate federal and foreign
statutes and regulations are time-consuming and require the expenditure of
substantial resources.
Generally, in order to gain FDA pre-market approval, a company first
must conduct preclinical studies in the laboratory and in animal model systems
to gain preliminary information on an agent's efficacy and to identify any
safety problems. The results of these studies are submitted as a part of an
investigational new drug application ("IND"), which the FDA must review before
human clinical trials of an investigational drug can start. In order to
commercialize any products, the Company or its strategic alliance partner will
be required to sponsor and file an IND and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety, efficacy and
potency that are necessary to obtain FDA approval of any such products. Clinical
trials are normally done in three phases and generally take two to five years,
but may take longer, to complete. After completion of clinical trials of a new
product, FDA marketing approval must be obtained. If the product is classified
as a new drug, the Company or its strategic alliance partner will be required to
file a new drug application ("NDA") and receive approval before commercial
marketing of the drug. The testing and approval processes require substantial
time and effort and there can be no assurance that any approval will be granted
on a timely basis, if at all. NDAs submitted to the FDA can take, on average,
two to five years to receive approval. If questions arise during the FDA review
process, approval can take more than five years. Even if FDA regulatory
clearances are obtained, a marketed product is subject to continual review, and
later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market as well as possible
civil or criminal sanctions. For marketing outside the United States, the
Company will also be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
The Company also intends to develop diagnostic products based upon
genes that it identifies. The diagnostic products to be developed by the Company
or its strategic alliance partners are likely to be regulated by the FDA as
devices rather than drugs. The nature of the FDA requirements applicable to such
diagnostic devices depends on their classification by the FDA. A diagnostic
device developed by the Company or a strategic alliance partner would most
likely be classified as a Class III device, requiring pre-market approval.
Obtaining pre-market approval involves the costly and time-consuming process,
16
<PAGE> 17
comparable to that for new drugs, of conducting preclinical studies, obtaining
an investigational device exemption to conduct clinical tests, filing a
pre-market approval application, and obtaining FDA approval.
The Company's research and development activities involve the
controlled use of hazardous materials, chemicals and various radioactive
materials. The Company is subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of such materials
and certain waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any liability could exceed the resources of the
Company.
EMPLOYEES
As of December 31, 1996, the Company had 203 full-time employees, of
whom 53 hold Ph.D. or M.D. degrees and 36 hold other advanced degrees. Of the
Company's total work force, 172 are engaged in research and development
activities and 31 are engaged in business development, finance and
administration. The Company believes that its future success will depend, in
part, on its continuing ability to attract, retain and motivate qualified
scientific, technical and managerial personnel. The Company faces intense
competition in this regard from other companies, research and academic
institutions, government entities and other organizations. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES
The Company's principal administrative offices and research and
development laboratories are located in a research and development office park
in La Jolla, California. The Company currently leases approximately 53,000
square feet in this facility pursuant to a lease which expires in December 2001.
The Company also leases approximately 11,000 of additional space, primarily
research facilities, under leases which expire in 1999. The Company believes
that its facilities will be adequate to support its operations through 1997.
Thereafter, the Company believes that it will be able to secure additional
facilities for its continued operations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
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<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and key scientific employees of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kevin J. Kinsella 51 President, Chief Executive Officer and Director
Timothy J. R. Harris, Ph.D. 46 Senior Vice President, Research and Development, Chief Technical Officer
and Director
Carl D. Johnson, Ph.D. 48 Vice President Research, NemaPharm, Inc.
M. Scott Salka 35 Vice President, Operations and Chief Financial Officer
Alan J. Buckler, Ph.D. 37 Senior Director of Genomics
Lon R. Cardon, Ph.D. 31 Senior Director of Statistical Genetics
Spencer Emtage, Ph.D. 51 Senior Director of Biology
Jay B. Lichter, Ph.D. 35 Senior Director of Diagnostics
and Pharmacogenetics
</TABLE>
Kevin J. Kinsella is the founder of the Company and has been a director
since its inception in February 1993. Mr. Kinsella served as the Chairman of the
Board of Directors and acting chief executive of the Company until January 1995,
when he was named President and Chief Executive Officer. Mr. Kinsella also
served as Chief Financial Officer of the Company from January 1995 to September
1995. Mr. Kinsella was previously the Managing General Partner of Avalon
Ventures, a venture capital firm founded by him. Avalon Ventures established
over thirty companies, many of which are in the biopharmaceutical field,
including IMPATH Laboratories, Inc., Metra Biosystems, Inc. and Pharmacopeia,
Inc. Mr. Kinsella founded Aurora Biosciences Corporation, Athena Neurosciences
Inc., NeoRx Corporation, Vertex Pharmaceuticals Inc., Microcide Pharmaceuticals,
Inc. and Landmark Graphics Corporation. He received a B.S. from the
Massachusetts Institute of Technology ("MIT") and an M.A. from the Johns Hopkins
School of Advanced International Studies.
Timothy J.R. Harris has served as Senior Vice President, Research and
Development, Chief Technical Officer and a director of the Company since January
1994. From March 1989 to December 1993, Dr. Harris served as Director of
Biotechnology of Glaxo Group Research, Ltd., a pharmaceutical company. Prior to
that, Dr. Harris was a Senior Molecular Biologist at Celltech Ltd., a
biotechnology company. He received a B.Sc. in Biochemistry and an M.S. and Ph.D.
in General Virology from the University of Birmingham in England. He is the
author of approximately 60 research papers and inventor on five patent
applications.
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<PAGE> 19
Carl D. Johnson has served as Vice President, Research of NemaPharm
since the acquisition of NemaPharm by Sequana in October 1996. From 1991 through
September 1996, Dr. Johnson was President and Director of Research of NemaPharm
and was a Visiting Scientist at Massachusetts Institute of Technology. Prior to
that, Dr. Johnson was Director of Genetics of Cambridge NeuroScience, Inc. Dr.
Johnson received a B.S. in Chemistry from the University of Chicago and a Ph.D.
in Biochemistry and Genetics from the California Institute of Technology.
M. Scott Salka has served as Vice President, Operations and Chief
Financial Officer of the Company since September 1995 and served as Director of
Business Operations of the Company from April 1993 to September 1995. From June
1991 to March 1993, Mr. Salka served as a Financial Analyst for The BF Goodrich
Company, a manufacturer of specialty chemical and aerospace products. From 1986
to August 1990, he was a Financial Analyst for Unisys Corporation, a computer
company. Mr. Salka received a B.S. in Finance from San Diego State University
and an M.S. in Industrial Administration from the Graduate School of Industrial
Administration at Carnegie Mellon University.
Alan J. Buckler has served as Senior Director of Genomics of the
Company since February 1997 and served as Director of Genomics of the Company
from March 1996 to January 1997. From 1991 to February 1996, Dr. Buckler served
as Assistant Professor, Molecular Neurogenetics Laboratory, Massachusetts
General Hospital. From 1991 through 1995, Dr. Buckler also held various
appointments at Harvard University including, most recently, Assistant Professor
in Neurology. Dr. Buckler developed the technique of exon trapping for the
isolation of genes in cloned DNA and used this technology to find the genes for
neurofibromatosis type 2, Huntington's disease and diastrophic dysplasia. Dr.
Buckler was also involved in the discoveries of the Wilm's tumor and myotonic
dystrophy disease genes. Dr. Buckler received a B.A. in Biology from the
University of Chicago and a Ph.D. in Microbiology from the Boston University
School of Medicine.
Lon R. Cardon has served as Senior Director of Statistical Genetics
of the Company since February 1997, served as Director of Statistical Genetics
of the Company from August 1995 to January 1997 and has been with the Company
since September 1994. From June 1992 to August 1994, he was a post-doctoral
scholar in Mathematics at Stanford University, with a joint appointment in
Biostatistics at SRI International, a non-profit research institute. While at
Stanford, Dr. Cardon developed novel statistical procedures which he used to
localize a gene believed to be responsible for dyslexia. Dr. Cardon received a
B.A. in Biology/Psychology from the University of Puget Sound and a Ph.D. in
Behavioral Genetics from the University of Colorado, Boulder.
Spencer Emtage has served as Senior Director of Biology of the Company
since February 1997, and served as Director of Biology of the Company from April
1996 to January 1997. From 1980 to March 1996, Dr. Emtage held a variety of
positions at Celltech, Ltd., most recently Group Leader of Molecular Biology.
Dr. Emtage was involved in cloning genes for Influenza haemagglutinin and
Interferon-beta, developing vectors for gene expression in bacterial and
mammalian cells and in antibody engineering and production. Dr. Emtage received
his B.A. and Ph.D. in Biochemistry from Cambridge University in England.
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<PAGE> 20
Jay B. Lichter has served as Senior Director of Diagnostics and
Pharmacogenetics of the Company since February 1997 and served as Director of
Scientific Strategy of the Company from September 1995 to January 1997. Prior to
that, he served as Director of Genetics of the Company from August 1993 to
September 1995, and served as Director of Business Strategy from inception to
August 1993. From April 1992 to January 1993, Dr. Lichter was a post-doctoral
fellow at DuPont Merck Pharmaceutical Company. From April 1990 to April 1992,
Dr. Lichter was a post-doctoral fellow in Human Genetics at Yale University. Dr.
Lichter received a B.S. in Biochemistry from the University of Illinois,
Urbana-Champaign and a Ph.D. in Biological Chemistry from the University of
Illinois, Chicago.
20
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The common stock of the Company has been traded on the Nasdaq
National Market under the Symbol "SQNA" since the Company's initial
public offering on July 31, 1995. Prior to that time there was no
public market for the Company's common stock. The following table
sets forth for the periods indicated the high and low sale prices of
the common stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter $ 29.50 $ 18.00
Second Quarter 24.25 13.25
Third Quarter 19.00 12.75
Fourth Quarter 19.50 14.00
1995
Third Quarter (from July 31, 1995) 12.50 10.25
Fourth Quarter 24.38 10.50
</TABLE>
(b) Holders
The approximate number of holders of record of the Company's common
stock as of March 1, 1997 was 345.
(c) Dividends
The Company has never paid dividends on its common stock and does
not anticipate paying any such dividends in the foreseeable future.
The Company currently intends to retain its earnings, if any, for
the development of its business.
21
<PAGE> 22
ITEM. 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain consolidated financial data with respect
to the Company. The selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes
thereto.
<TABLE>
<CAPTION>
PERIOD FROM
FEB. 3, 1993
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH DEC. 31,
------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue under strategic alliances $ 9,705 $ 10,762 $ 2,389 $ --
Operating expenses:
Research and development 26,397 15,138 7,614 2,018
Charge for acquisition of in-process
research and development 3,366 -- -- --
General and administrative 5,005 3,078 1,494 356
-------- -------- -------- --------
34,768 18,216 9,108 2,374
-------- -------- -------- --------
Loss from operations (25,063) (7,454) (6,719) (2,374)
Interest income (expense), net 2,844 1,384 73 (5)
======== ======== ======== ========
Net loss $(22,219) $ (6,070) $ (6,646) $ (2,379)
======== ======== ======== ========
Net loss per share (1) $ (2.31) $ (0.92) $ (2.02) $ (1.26)
======== ======== ======== ========
Shares used in computing net
loss per share 9,625 6,578 3,284 1,893
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
investment securities $ 52,720 $ 41,338 $ 16,402 $ 1,987
Working capital 45,820 36,497 15,676 448
Total assets 66,093 48,001 21,108 2,728
Loans and capital lease obligations,
less current portion 4,524 2,804 2,156 --
Shareholders' equity 51,849 38,774 17,318 1,039
</TABLE>
- ----------
(1) Computed on the basis of net loss per share described in Note 1 of Notes
to Consolidated Financial Statements.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in February 1993 and has devoted
substantially all of its resources since that time to the development of an
integrated technology platform for discovering and characterizing genes
associated with common human diseases. The Company believes that identification
of disease genes and determination of their biological function will provide
insights into the fundamental causes of these diseases and may facilitate the
development of novel prognostic, diagnostic and therapeutic products. The
Company has incurred substantial operating losses since inception and, as of
December 31, 1996, had incurred a cumulative net loss of $37.3 million. The
Company anticipates incurring additional losses over at least the next several
years as it expands its gene discovery and functional genomics activities. Such
expansion may result in increases in both research and development and general
and administrative expenses.
The Company does not anticipate revenues from product sales in the
foreseeable future. The Company's sources of revenue for the next several years
will be payments under existing strategic alliances, license fees, proceeds from
the sale of rights, payments from future strategic alliances and licensing
arrangements, if any, and interest income. Certain payments under strategic
alliances are contingent upon the Company meeting established milestones.
Payments under strategic alliances and licensing arrangements will be subject to
significant fluctuation in both timing and amount and, therefore, the Company's
results of operations for any period may not be comparable to the results of
operations for any other period.
An integral component of Sequana's business strategy is to enter
into strategic alliances with major pharmaceutical and biotechnology companies
in order to develop and commercialize products based on information provided by
the Company's gene discovery, functional genomics and bioinformatics
technologies. In July 1994, the Company entered into a strategic alliance with
Glaxo to discover disease genes associated with type II diabetes. In February
1996, this alliance was expanded to include the study of human obesity. In June
1995, the Company entered into strategic alliances with Boehringer Ingelheim in
the area of asthma and with Corange in the area of osteoporosis. In January
1997, the Company entered into a strategic alliance with Glaxo in the area of
gene function analysis. Pursuant to the terms of the various agreements, the
Company has granted the strategic alliance partners exclusive worldwide rights
to develop and commercialize therapeutic products which may be discovered as a
result of the alliances. Sequana has retained the right to develop and
commercialize diagnostic products based on such gene discoveries, except in the
case of the Corange agreement. Under the terms of the strategic alliance
agreements, the Company receives ongoing payments for research support, and may
receive payments upon the achievement of certain research and product
development milestones and royalties on the sale of products resulting from the
alliance. Such agreements provide the strategic alliance partners certain rights
of early termination. See "Business--Strategic Alliances."
The information set forth in this report contains forward-looking
statements, including but not limited to statements concerning the Company's
future capital requirements and the expected time period during which the
Company's existing financial resources will meet such capital requirements, and
business conditions and growth in the biopharmaceutical and pharmaceutical
industries and general economy. The
23
<PAGE> 24
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of the aforementioned factors, as well as
those set forth elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
Revenue under strategic alliances totaled $9.7 million in 1996
compared to $10.8 million in 1995 and $2.4 million in 1994. Such revenue is
comprised of ongoing payments for research support and DNA sample collection, as
well as certain up-front and research milestone payments received pursuant to
the Company's strategic alliance agreements. The decrease in revenue in 1996,
relative to 1995, was primarily attributable to up-front payments received in
1995 which were recognized upon the commencement of the Company's strategic
alliances with Boehringer Ingelheim and Corange in June 1995. The increase in
revenue during 1995, relative to 1994, was primarily attributable to the
commencement of these two new strategic alliance agreements.
Research and development expenses increased to $26.4 million in 1996
from $15.1 million in 1995 and $7.6 million in 1994. Increases in research and
development expenses were primarily attributable to increased costs associated
with expansion of the Company's gene discovery efforts and establishment of a
broad-based functional genomics technology platform. Such costs consisted
primarily of increased personnel expenses, supply costs, and facility and
equipment expenses associated with expansion of the Company's research
organization. Research and development expenses also included costs associated
with the collection of patient information and DNA samples pursuant to
collaborative research agreements. The Company expects to continue expanding its
gene discovery and functional genomics activities in future periods, which is
anticipated to result in additional increases in research and development
expenses.
In connection with the Company's acquisition of NemaPharm (see Note
2 of Notes to Consolidated Financial Statements), the Company recorded a
non-cash charge for acquired in-process research and development of $3.4 million
during the fourth quarter of 1996. The Company may elect to pursue the
acquisition of additional technologies which it believes could further
complement its gene discovery and functional genomics capabilities.
General and administrative expenses increased to $5.0 million in
1996 from $3.1 million in 1995 and $1.5 million in 1994. Increases in general
and administrative expenses largely reflect expansion of the Company's
administrative organization to support increased research efforts and business
development activities. Such increases are comprised primarily of costs
associated with the addition of management and support personnel as well as
expenses related to Sequana's status as a public company (commencing in July
1995). General and administrative expenses in 1996 and 1995 also include
amortization of deferred compensation related to certain stock issuances and
option grants. General and administrative expenses are anticipated to increase
in future periods as a result of expansion necessary to support increases in
research and development programs and business development activities.
Interest income increased significantly during 1996 and 1995,
relative to the prior years, primarily due to higher levels of cash, cash
equivalents and investment securities resulting from public offerings of the
Company's equity securities and, to a lesser degree, funding under the Company's
strategic alliances.
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through public and private offerings of its equity securities (generating net
proceeds of approximately $80.5 million) and cash received pursuant to the
Company's strategic alliances ($25 million). At December 31, 1996, the Company
had cash, cash equivalents and investment securities totaling $52.7 million
compared to $41.3 million at December 31, 1995. The increase in cash, cash
equivalents and investment securities in 1996 is largely attributable to net
proceeds of approximately $30 million raised from the Company's follow-on public
offering in March 1996, which amount was reduced by cash used primarily to
finance the Company's operating activities and its equipment and related
financing activities.
Through December 31, 1996, the Company had acquired approximately
$12.5 million in furniture and equipment, of which approximately $9.3 million
was financed through capital leases and equipment loans. The Company has
commitments associated with its capital leases, loans and operating leases as
discussed further in Note 6 of Notes to Consolidated Financial Statements. In
addition to these commitments, the Company anticipates that it may invest up to
approximately $3 million in additional equipment during 1997. In October 1996,
the Company entered into a credit agreement with a bank which, subject to
compliance with certain financial covenants and conditions, provides the Company
the ability to finance up to an additional $6 million of capital expenditures or
other working capital requirements through September 1997.
In January 1997, the Company and Memorial Sloan-Kettering Cancer
Center ("MSK") formed Genos Biosciences, Inc. ("Genos"), a new company focused
on the research and identification of genes and related genetic information of
value in the prognosis, diagnosis and possible treatment of certain common
cancers. The Company and MSK each own 50% of Genos and have committed to
contribute approximately $5 million each to fund its initial operations. The
Company invested $1.2 million in Genos in connection with its formation and
anticipates that Sequana's remaining commitment will be funded during 1997 and
early 1998.
As of December 31, 1996, the Company's reported net operating loss
carryforwards were approximately $32.1 million and $1.2 million for federal and
state income tax purposes, respectively. If not utilized, the federal and state
tax loss carryforwards will begin to expire in 2008 and 1998, respectively. The
Company's ability to utilize these carryforwards is subject to certain
limitations.
The Company's future capital requirements and the adequacy of its
available funds will depend on many factors, including progress of its gene
discovery programs, the number and breadth of these programs, achievement of
milestones under strategic alliance arrangements, the decision of the Company to
acquire or develop technologies useful in discovering genes or determining gene
function, the ability of the Company to establish and maintain additional
strategic alliances and licensing arrangements, the progress of the development
and commercialization efforts of the Company's strategic alliance partners,
competing technological and market developments, the costs associated with
collection of patient information and DNA samples, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, the regulatory process and other factors.
25
<PAGE> 26
The Company believes that its existing cash, cash equivalents and
investment securities and anticipated cash flows from its current strategic
alliances will be sufficient to support the Company's operations through 1999.
The Company is actively seeking to establish new strategic alliances with
potential corporate partners, and may seek to raise additional financing through
public or private equity or debt financings or licensing arrangements. No
assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed or that, if available, such
financing or strategic alliance and licensing arrangements will be obtainable on
terms favorable to the Company or its shareholders. To the extent the Company
raises additional capital by issuing equity securities, ownership dilution to
shareholders will result. In the event that adequate funds are not available,
the Company's business may be adversely affected. The Company's forecast of the
period of time through which its financial resources will be adequate to support
its operations and the statements with regard to continued expansion of its gene
discovery and functional genomics activities are forward-looking statements, and
actual results and timing of certain events could vary. The factors described
earlier in this paragraph will impact the Company's future capital requirements
and the adequacy of its available funds which could cause the period of time
through which the Company's financial resources will be adequate to support its
operations to vary from that set forth above.
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 28
Consolidated Balance Sheets at December 31, 1996 and 1995 29
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1996 30
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended December 31, 1996 31
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1996 32
Notes to Consolidated Financial Statements 33
</TABLE>
27
<PAGE> 28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sequana Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Sequana
Therapeutics, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sequana
Therapeutics, Inc. as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
February 13, 1997
28
<PAGE> 29
SEQUANA THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,402,958 $ 13,512,688
Investment securities, available-for-sale 43,316,733 27,825,023
Other current assets 2,820,355 1,582,053
------------ ------------
Total current assets 55,540,046 42,919,764
------------ ------------
Furniture and equipment, net 8,285,305 4,438,611
Other assets 1,737,075 179,482
Notes receivable from officers and employees 530,844 463,000
------------ ------------
$ 66,093,270 $ 48,000,857
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,965,475 $ 2,775,380
Deferred revenue 3,357,936 2,311,856
Current portion of loans and capital lease obligations 2,396,523 1,335,720
------------ ------------
Total current liabilities 9,719,934 6,422,956
------------ ------------
Loans and capital lease obligations, less current portion 4,524,311 2,803,612
Commitments
Shareholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value; 50,000,000 shares
authorized, 10,113,243 shares and 8,125,632 shares
issued and outstanding at December 31, 1996
and 1995, respectively 10,113 8,126
Additional paid-in capital 90,611,609 55,484,707
Notes receivable from shareholders (237,040) (254,144)
Deferred compensation (1,220,650) (1,368,802)
Accumulated deficit (37,315,007) (15,095,598)
------------ ------------
Total shareholders' equity 51,849,025 38,774,289
------------ ------------
$ 66,093,270 $ 48,000,857
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
SEQUANA THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenue under strategic alliances $ 9,705,048 $ 10,761,731 $ 2,388,850
Operating expenses:
Research and development 26,396,844 15,138,109 7,614,501
Charge for acquisition of in-process
research and development 3,366,168 -- --
General and administrative 5,004,604 3,078,302 1,493,667
------------ ------------ ------------
34,767,616 18,216,411 9,108,168
------------ ------------ ------------
Loss from operations (25,062,568) (7,454,680) (6,719,318)
Other income (expense):
Interest income 3,276,968 1,653,312 247,250
Interest expense (433,809) (269,132) (174,194)
------------ ------------ ------------
Net loss $(22,219,409) $ (6,070,500) $ (6,646,262)
============ ============ ============
Net loss per share $ (2.31) $ (0.92) $ (2.02)
============ ============ ============
Shares used in computing net
loss per share 9,625,286 6,578,412 3,284,390
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
SEQUANA THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------------ ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 1,153,975 $ 1,154 336,247 $ 336 $ 3,416,666
Issuance of common stock -- -- 149,541 150 46,730
Issuance of preferred stock 3,091,785 3,092 -- -- 22,899,442
Deferred compensation for
issuance of stock and options -- -- -- -- 187,345
Amortization of deferred
compensation -- -- -- -- --
Repayment of notes receivable -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 4,245,760 4,246 485,788 486 26,550,183
Issuance of common stock -- -- 445,935 446 1,358,223
Issuance of preferred stock 388,889 389 -- -- 6,999,606
Issuance of common stock
in initial public offering -- -- 2,300,000 2,300 18,631,216
Conversion of preferred stock
to common stock (4,634,649) (4,635) 4,893,909 4,894 (259)
Deferred compensation for
issuance of stock and options -- -- -- -- 1,945,738
Amortization of deferred
compensation -- -- -- -- --
Repayment of notes receivable -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 -- -- 8,125,632 8,126 55,484,707
Issuance of common stock
in follow-on public offering -- -- 1,700,000 1,700 30,035,106
Issuance of common stock
in acquisition -- -- 158,451 158 3,197,907
Issuance of common stock -- -- 74,445 74 1,268,234
Issuance of common stock
on exercise of options -- -- 47,901 48 147,683
Issuance of common stock
on exercise of warrants -- -- 6,814 7 (7)
Deferred compensation for
issuance of stock and options -- -- -- -- 477,979
Amortization of deferred
compensation -- -- -- -- --
Repayment of notes receivable -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 -- $ -- 10,113,243 $ 10,113 $ 90,611,609
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
- FROM DEFERRED ACCUMULATED SHAREHOLDERS'
SHAREHOLDERS COMPENSATION DEFICIT EQUITY
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $ -- $ -- $ (2,378,836) $ 1,039,320
Issuance of common stock (27,500) -- -- 19,380
Issuance of preferred stock -- -- -- 22,902,534
Deferred compensation for
issuance of stock and options -- (187,345) -- --
Amortization of deferred
compensation -- 1,137 -- 1,137
Repayment of notes receivable 1,749 -- -- 1,749
Net loss -- -- (6,646,262) (6,646,262)
------------ ------------ ------------ ------------
Balance at December 31, 1994 (25,751) (186,208) (9,025,098) 17,317,858
Issuance of common stock (229,248) -- -- 1,129,421
Issuance of preferred stock -- -- -- 6,999,995
Issuance of common stock
in initial public offering -- -- -- 18,633,516
Conversion of preferred stock
to common stock -- -- -- --
Deferred compensation for
issuance of stock and options -- (1,945,738) -- --
Amortization of deferred
compensation -- 763,144 -- 763,144
Repayment of notes receivable 855 -- -- 855
Net loss -- -- (6,070,500) (6,070,500)
------------ ------------ ------------ ------------
Balance at December 31, 1995 (254,144) (1,368,802) (15,095,598) 38,774,289
Issuance of common stock
in follow-on public offering -- -- -- 30,036,806
Issuance of common stock
in acquisition -- -- -- 3,198,065
Issuance of common stock -- -- -- 1,268,308
Issuance of common stock
on exercise of options -- -- -- 147,731
Issuance of common stock
on exercise of warrants -- -- -- --
Deferred compensation for
issuance of stock and options -- (477,979) -- --
Amortization of deferred
compensation -- 626,131 -- 626,131
Repayment of notes receivable 17,104 -- -- 17,104
Net loss -- -- (22,219,409) (22,219,409)
------------ ------------ ------------ ------------
Balance at December 31, 1996 $ (237,040) $ (1,220,650) $(37,315,007) $ 51,849,025
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
SEQUANA THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(22,219,409) $ (6,070,500) $ (6,646,262)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,380,897 943,756 480,418
Amortization of deferred compensation 626,131 763,144 1,137
Charge for acquisition of in-process
research and development and other 3,274,266 77,276 46,374
Change in operating asset and liabilities,
net of acquisition:
Other current assets (1,212,022) (674,501) (758,156)
Accounts payable and accrued expenses 1,108,020 2,122,429 381,293
Deferred revenue 1,046,080 2,103,522 208,334
------------ ------------ ------------
Net cash used in operating activities (14,996,037) (734,874) (6,286,862)
INVESTING ACTIVITIES:
Purchases of investment securities (52,737,763) (26,874,478) (19,645,220)
Sales and maturities of investment securities 37,246,053 14,106,822 4,899,308
Purchases of furniture and equipment (2,402,076) (299,869) (415,863)
Other assets (1,522,468) 58,468 (68,904)
Notes receivable from employees (67,844) (60,000) (128,000)
------------ ------------ ------------
Net cash used in investing activities (19,484,098) (13,069,057) (15,358,679)
FINANCING ACTIVITIES:
Issuances of common stock, net 31,452,845 19,685,738 15,380
Issuance of convertible preferred stock, net -- 6,999,995 19,537,087
Proceeds from notes payable 1,000,000 -- 2,000,000
Repayments of loans and capital lease obligations (2,099,544) (959,691) (305,748)
Other financing activities 17,104 855 1,749
------------ ------------ ------------
Net cash provided by financing activities 30,370,405 25,726,897 21,248,468
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (4,109,730) 11,922,966 (397,073)
Cash and cash equivalents at beginning of year 13,512,688 1,589,722 1,986,795
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,402,958 $ 13,512,688 $ 1,589,722
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 421,830 $ 269,132 $ 145,302
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases and loans $ 3,751,046 $ 2,170,135 $ 3,151,303
============ ============ ============
Conversion of notes payable and advances from
shareholder to convertible preferred stock $ - $ - $ 3,333,333
============ ============ ============
Issuance of common stock for notes receivable $ - $ 229,248 $ 27,500
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
SEQUANA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Sequana Therapeutics, Inc. ("Sequana" or the "Company") is a
genomics company that uses industrial-scale gene discovery technology and
functional genomics to discover and characterize genes that cause certain common
diseases. The Company's proprietary gene discovery technology is based on
positional cloning, a method that uses statistical analysis of disease
inheritance patterns to isolate disease genes. The Company has ongoing discovery
programs in asthma, diabetes, obesity, osteoporosis, schizophrenia, manic
depression and other disease areas. The Company believes that identification of
disease genes and determination of their biological function will provide
insights into the causes of common diseases and may facilitate the development
of novel prognostic, diagnostic and therapeutic products.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, NemaPharm, Inc. ("NemaPharm") since the
date of acquisition (see Note 2). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly-liquid investments with maturities
of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company generally invests its excess cash in U.S. government
securities, high credit quality commercial paper, certificates of deposit and
money market accounts. Such investments are made in accordance with the
Company's investment policy which establishes guidelines relative to
diversification and maturities designed to maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates.
Investment Securities
The Company classifies its investment securities as
available-for-sale. Such securities are carried at fair value with unrealized
gains and losses, if any, reported as a separate component of shareholders'
equity. The cost of investment securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion is included in interest income. Realized gains
and losses are also included in interest income. The cost of securities sold is
based on the specific identification method.
33
<PAGE> 34
Furniture and Equipment
Furniture and equipment is stated at cost and depreciated over the
estimated useful lives of the assets (generally four to seven years) on a
straight-line basis. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the assets. Amortization of
equipment under capital leases is reported with depreciation of furniture and
equipment.
Research and Development Revenue and Expenses
Revenue under strategic alliances is recognized as research
activities are performed over the term of the agreements and upon the
achievement of certain milestones. Revenues for cost reimbursement are
recognized as the related costs are incurred. Advance payments received in
excess of amounts earned are classified as deferred revenue. Research and
development costs are expensed as incurred.
Net Loss Per Share
Net loss per share is computed using the weighted-average number of
shares outstanding during the periods, as adjusted for the effects of certain
rules of the Securities and Exchange Commission for the periods prior to the
Company's initial public offering ("IPO") in July 1995. Shares issuable upon the
exercise of outstanding stock options and warrants are not reflected for the
periods subsequent to the Company's IPO as their effect is anti-dilutive.
Stock Options
Effective January 1, 1996, the Company adopted FASB Statement No.
123, "Accounting for Stock-Based Compensation" (FAS 123). FAS 123 allows
companies to either account for stock-based compensation under the new
provisions of FAS 123 or under the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), but
requires pro forma disclosure in the footnotes to the financial statements as if
the measurement provisions of FAS 123 had been adopted. The Company elected to
continue to account for its stock-based compensation in accordance with
provisions of APB 25.
Asset Impairment
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of " (FAS 121). FAS
121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the estimated
undiscounted cash flows to be generated by those assets are less than the
assets' carrying amount. The adoption of the new standard had no effect on the
Company's financial position or results of operations.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year classifications.
34
<PAGE> 35
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
2. ACQUISITION
On October 15, 1996, the Company acquired all of the outstanding
capital stock of NemaPharm, a drug discovery company, through the issuance of
approximately 158,000 shares of the Company's common stock and options to
acquire 38,000 shares of the Company's common stock. The acquisition was
accounted for under the purchase method and, accordingly, the consolidated
financial statements include the operations of NemaPharm from the date of its
acquisition. The aggregate cost of NemaPharm of approximately $3.4 million was
charged to acquired in-process research and development during 1996. The
operations of NemaPharm had no material effect on the pro forma combined results
of operations of the Company and NemaPharm for the periods preceding the
Company's acquisition.
3. INVESTMENT SECURITIES
The estimated fair value of each investment security approximates
cost and, therefore, there are no unrealized gains or losses at December 31,
1996 and 1995. The estimated fair value of the Company's available-for-sale
securities by type is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
U.S. government securities $20,424,631 $12,891,330
Corporate obligations .... 13,896,127 8,845,812
Certificates of deposit .. 8,995,975 6,087,881
----------- -----------
$43,316,733 $27,825,023
=========== ===========
</TABLE>
The estimated fair value of available-for-sale securities by
contractual maturity as of December 31, 1996 is as follows:
<TABLE>
<S> <C>
Due within one year $27,287,680
Due after one year 16,029,053
-----------
$43,316,733
===========
</TABLE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Office furniture and equipment ............... $ 559,336 $ 242,539
Computer and scientific equipment ............ 11,318,393 5,751,504
Leasehold improvements ....................... 579,976 194,030
------------ -----------
12,457,705 6,188,073
Less accumulated depreciation and amortization (4,172,400) (1,749,462)
------------ -----------
Furniture and equipment, net ................. $ 8,285,305 $ 4,438,611
============ ===========
</TABLE>
35
<PAGE> 36
Included in furniture and equipment at December 31, 1996 and 1995,
is equipment under capital leases and loans aggregating $9.3 million and $5.5
million, respectively, all of which is pledged as security pursuant to the
Company's equipment financing agreements. Accumulated amortization with respect
to such equipment totaled $3.7 million and $1.6 million at December 31, 1996 and
1995, respectively.
5. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES
Notes receivable consist primarily of loans made to certain officers
and employees to facilitate their relocation. Such notes accrue interest at the
applicable federal rate, as adjusted yearly, and are due upon demand. The notes
are secured by approximately 88,000 shares of common stock and options to
purchase 219,000 shares of common stock at December 31, 1996.
6. LOAN AND LEASE OBLIGATIONS
The Company leases its facilities under operating leases that
generally provide for annual cost-of-living related increases. Certain equipment
is leased under operating and capital leases. Total rent expense under operating
leases was $2.1 million, $860,000 and $747,000, for the years ended December 31,
1996, 1995 and 1994, respectively.
In October 1996, the Company entered into a credit agreement with a
bank which, subject to compliance with certain financial covenants and
conditions, may be used by the Company to finance up to $7 million of capital
expenditures or other working capital requirements through September 1997.
Included in loans and capital lease obligations at December 31, 1996 was $1
million of loans obtained pursuant to this agreement. The agreement provides for
equal principal installments over a four-year period commencing in September
1997, along with interest based on Eurodollar rates (7.19% at December 31,
1996).
Minimum future obligations due under the Company's operating and capital
leases and loans as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASES
YEARS ENDED DECEMBER 31, LEASES AND LOANS
------------------------ ------ ---------
<S> <C> <C>
1997 $1,784,931 $2,730,391
1998 1,617,391 2,340,286
1999 1,490,023 1,702,652
2000 1,385,155 531,628
2001 1,426,997 187,500
---------- -----------
Total minimum lease payments $7,704,497 7,492,457
==========
Less amount representing interest (571,623)
-----------
Present value of capital lease and loan payments 6,920,834
Less current portion (2,396,523)
-----------
Long-term obligations under capital leases and loans $ 4,524,311
===========
</TABLE>
36
<PAGE> 37
7. SHAREHOLDERS' EQUITY
Common Stock
In March 1996, the Company raised net proceeds of $30 million
through a follow-on public offering of its common stock.
In August 1995, the Company completed its IPO of common stock
providing net proceeds of $18.6 million. Upon the closing of the Company's IPO,
all previously outstanding shares of preferred stock were converted into common
stock. The holders of the common stock issued upon conversion of the preferred
stock remain entitled to certain registration rights with respect to such
shares.
Deferred Compensation
The Company has recorded deferred compensation for the difference
between the price per share of certain stock sold and stock options granted and
the deemed fair value of such shares for accounting purposes. Deferred
compensation is amortized to expense over the vesting period of the related
stock and options. The Company recorded deferred compensation of approximately
$1.3 million in connection with the issuance of 208,333 shares of common stock
to the Company's President and Chief Executive Officer (in exchange for a
$187,500 promissory note) and the sale of 86,805 shares of common stock to two
affiliated shareholders for $78,125 in March 1995. The promissory note bears
interest at 7.2%, is secured by the 208,333 shares of common stock and becomes
due and payable upon the occurrence of certain events. Such shares vest over a
four year period, with the unvested shares subject to repurchase by the Company
at the original issue price in the event of this employee's termination.
Stock Warrants
At December 31, 1996, the Company had outstanding warrants to
purchase an aggregate of 111,471 shares of the Company's common stock. The
warrants are exercisable at prices ranging from $3 to $24 per share and expire
at various dates through 2005.
Stock Option Plans
In April 1994, the Company adopted the 1994 Incentive Stock Plan
(the "Plan"), under which, as amended, 1,063,125 shares of the Company's common
stock were reserved for issuance. The Plan provides for the grant of incentive
stock options to employees and nonstatutory stock options to employees and
consultants. Options under the Plan have a ten-year term and generally vest over
four years. The exercise price of incentive stock options must equal at least
the fair market value on the date of grant, and the exercise price of
nonstatutory stock options is as determined by the Board of Directors.
During 1995, the Company adopted the 1995 Director Option Plan (the
"Director Plan"), under which, as amended, 225,000 shares of the Company's
common stock were reserved for issuance to all non-employee members of the Board
of Directors. The Director Plan provides for the automatic grant of an option to
purchase shares of the Company's common stock at the time the non-employee joins
the Board of Directors. The options have a ten-year term, an exercise price
equal to the fair market value of the common stock on the date of grant, and
vest over four years.
37
<PAGE> 38
At December 31, 1996, options to purchase 75,000 shares of the Company's common
stock were granted and outstanding under the Director Plan with a
weighted-average exercise price of $10.90 per share.
Pro forma information regarding net loss and net loss per share is
required by FAS 123 and has been determined as if the Company had accounted for
its employee stock options under the alternative fair value method provided for
in FAS 123. The fair value for these options was estimated as of the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free interest
rates of 6.39% and 6.38% volatility factors of the expected market price of the
Company's common stock of 61%, and 33%; and a weighted-average expected life of
the option of 5 years. The weighted-average fair value of options granted during
the year ended December 31, 1996 was $10.06.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in highly subjective assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma net loss and pro forma net loss per share totaled
approximately $23.4 million and $2.43 per share, respectively, for the year
ended December 31, 1996. The pro forma results for 1995 were not materially
different than the reported results for the period. The pro forma results are
not likely to be representative of the effects of applying FAS 123 on the
reported net income or loss for future years as these amounts reflect the
expense associated with only one or two years of vesting.
The following table summarizes stock option activity under the Plan
and related information through December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
------- -----
<S> <C> <C>
Granted ........................ 208,080 $ .45
Exercised ...................... (123,749) .33
Cancelled ...................... (1,749) .31
-------- ------
Outstanding at December 31, 1994 82,582 .61
Granted ........................ 291,017 5.57
Exercised ...................... (43,203) 2.07
Cancelled ...................... (7,587) 1.28
-------- ------
Outstanding at December 31, 1995 322,809 4.87
Granted ........................ 571,099 15.95
Exercised ...................... (47,901) 3.08
Cancelled ...................... (68,590) 9.02
-------- ------
Outstanding at December 31, 1996 777,417 $12.75
======== ======
</TABLE>
38
<PAGE> 39
At December 31, 1996, options to purchase an aggregate of 137,624
shares of common stock were exercisable under the Plan at a weighted-average
exercise price of $8.96 per share, and options to purchase 70,855 shares of
common stock were available for future grant.
The following table summarizes information about stock options
outstanding under the Company's plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------
Wt. Avg.
Range of Number of Remaining Wt. Avg. Number of Wt. Avg.
Exercise Prices Options Contractual Life Ex. Price Options Ex. Price
- --------------- --------- ---------------- --------- --------- ---------
<C> <C> <C> <C> <C> <C>
$ .01 to 3.00 174,254 8.4 years $ 1.63 65,294 $ 1.48
9.00 to 11.00 139,524 8.7 years 10.03 38,064 10.10
15.25 to 18.50 468,281 9.6 years 16.05 39,716 16.30
21.00 to 24.12 70,358 9.3 years 21.77 12,245 23.61
- ---------------- ------- --------- --------- ------- ---------
$.01 to 24.12 852,417 9.2 years $ 12.59 155,319 $ 9.13
================ ======= ========= ========= ======= =========
</TABLE>
Employee Stock Purchase Plan
During 1995, the Company adopted the 1995 Employee Stock Purchase
Plan (the "Purchase Plan"), under which 200,000 shares of the Company's common
stock were reserved for issuance. The Purchase Plan provides for all eligible
employees to purchase the Company's common stock through payroll deductions at a
price equal to 85% of the lesser of the fair market value per share on the start
date of each overlapping two year offering period or on the date on which each
semi-annual purchase period ends. The Purchase Plan will terminate in May 2005.
As of December 31, 1996, 41,613 shares of common stock have been issued pursuant
to the Purchase Plan.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows at December
31, 1996:
<TABLE>
<S> <C>
Outstanding warrants 111,471
1994 Incentive Stock Plan 848,272
1995 Director Option Plan 225,000
1995 Employee Stock Purchase Plan 158,387
Other 46,686
---------
1,389,816
=========
</TABLE>
8. STRATEGIC ALLIANCES
Boehringer Ingelheim
In June 1995, the Company entered into a five year strategic
alliance with Boehringer Ingelheim International GmbH ("Boehringer Ingelheim")
in the area of asthma. Under the terms of the agreement, Boehringer Ingelheim
made a $6 million equity investment in the Company and paid the Company an
up-front fee of $2 million. The Company receives ongoing payments for
39
<PAGE> 40
research support, and may receive additional milestone payments and royalties on
the sale of therapeutic products resulting from the alliance. The Company
received $2 million in milestone payments during 1995 in connection with
achieving two research milestones under the agreement. The Company is obligated
to share milestone payments and royalties with a Collaborator. The Company
recognized revenue of $4.1 million and $5.9 million in the years ended December
31, 1996 and 1995, respectively, under this alliance. Boehringer Ingelheim has
the right to terminate the agreement (subject to certain notification
requirements) beginning in June 1998, or earlier in the event the Company is
acquired by another pharmaceutical company.
Corange
In June 1995, the Company and Corange International, Ltd.
("Corange"), the parent company of Boehringer Mannheim GmbH, entered into a five
year strategic alliance in the area of osteoporosis. Corange made a
non-refundable payment of $1 million to the Company, and an investment fund
affiliated with Corange made an equity investment of $1 million in the Company.
The Company receives ongoing payments for research support, and may receive
additional milestone payments and royalties on sales of diagnostic and
therapeutic products resulting from the alliance. Corange is also obligated to
purchase $1.25 million in shares of the Company's common stock for each of the
next three years at a purchase price equal to 135% of an average per share
market price. In accordance with the agreement, Corange purchased 37,538 shares
and 102,881 shares of the Company's common stock during 1996 and 1995,
respectively. The Company recognized revenue totaling $2.5 million and $2.0
million in the years ended December 31, 1996 and 1995, respectively, under this
alliance. Corange has the right to terminate the agreement (subject to certain
notification requirements) beginning in February 1998, or earlier in the event
the Company is acquired by another pharmaceutical company.
Glaxo
In July 1994, the Company entered into a five year strategic
alliance with Glaxo Wellcome Inc. ("Glaxo") in the area of type II diabetes. In
February 1996, this alliance was expanded to include the study of human obesity.
Under the terms of the agreement, Glaxo paid the Company a $1 million up-front
fee. The Company receives ongoing payments for research support, and may receive
additional milestone payments and royalties on the sale of therapeutic products
resulting from the alliance. The Company received a $500,000 milestone payment
during 1996 in connection with the attainment of a research milestone. The
Company recognized revenue totaling $3.0 million, $2.8 million and $1.4 million
in the years ended December 31, 1996, 1995 and 1994, respectively, under this
alliance. Glaxo has the right to terminate the agreement (subject to certain
notification requirements) beginning in July 1997, or earlier in the event the
Company is acquired by another pharmaceutical company.
In January 1997, the Company entered into a two year strategic
alliance with Glaxo in the area of gene function analysis. Glaxo is obligated to
provide payments to the Company for research support and to make certain
additional payments contingent on identification by the Company of targets used
by Glaxo in its research programs. The Company may also receive royalties on
sales of products resulting from the alliance.
40
<PAGE> 41
Genentech
In October 1994, Genentech, Inc. made a $2 million equity investment
in the Company and was granted first negotiation rights with respect to the
development and commercialization of recombinant therapeutic or prophylactic
proteins. The Company retains the ability to license rights to develop
therapeutic or prophylactic proteins as part of any such strategic alliances.
Collaborative Agreements
In April 1996, the Company entered into a collaborative agreement
with Aurora Biosciences Corporation ("Aurora"). Under the agreement, the Company
gained access to certain technologies and rights to contract with Aurora for the
application of Aurora's proprietary mammalian cell-based screening technology to
genetic targets selected by the Company. In connection with the agreement, the
Company also made a $1.5 million minority equity investment in Aurora, which
investment is recorded at cost and included in other assets at December 31,
1996. The Company's President and Chief Executive Officer is affiliated with
Avalon Ventures (a founder and shareholder of Aurora) and a shareholder and
member of the Board of Directors of Aurora.
The Company has entered into various agreements with academic
researchers, clinicians and health care providers (the "Collaborators") to
collect patient information and DNA samples related to the Company's research
activities. Certain of the agreements require the Company to pay royalties or
license fees to the Collaborators in the event the Company sells or licenses
products incorporating any inventions or technology developed under the
agreement. Payments under the agreements totaled approximately $5.3 million,
$5.7 million and $1.5 million for the years ended December 31, 1996, 1995 and
1994, respectively. The Company is obligated to make future payments for the
years 1997 through 1999 of approximately $2.9 million, $1.6 million and
$358,000, respectively, a significant portion of which will be reimbursed under
strategic alliances. Most agreements, however, may be terminated by the Company
with written notice ranging from 30 days to one year without significant
financial penalty.
9. INCOME TAXES
At December 31, 1996, the Company had federal and California income
tax net operating loss carryforwards of approximately $32,122,000 and
$1,191,000, respectively. The difference between the federal and California tax
loss carryforwards is primarily attributable to the capitalization of research
and development expenses for California income tax purposes and the fifty
percent limitation on California loss carryforwards.
The federal and California tax loss carryforwards will begin to
expire in 2008 and 1998, respectively, unless previously utilized. The Company
also has federal and California research tax credit carryforwards of
approximately $972,000 and $349,000, respectively, which will begin to expire in
2008 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code,
annual use of the Company's net operating loss and credit carryforwards may be
limited because of cumulative changes in ownership of more than 50% which have
occurred. However, the Company does not believe such limitation will have a
material impact upon the utilization of these carryforwards.
41
<PAGE> 42
Significant components of the Company's deferred tax assets and
liabilities are shown below. A valuation allowance of $14,233,000 has been
recognized to offset the deferred tax assets, as realization of such assets is
uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax liability--tax over book depreciation $ 298,000 $ 247,000
Deferred tax assets:
Net operating loss carryforwards 11,313,000 4,946,000
Research and development credits 1,199,000 617,000
Capitalized research and development 1,822,000 779,000
Other 197,000 148,000
------------ -----------
Total deferred tax assets 14,531,000 6,490,000
Valuation allowance for deferred tax assets (14,233,000) (6,243,000)
------------ -----------
Net deferred tax assets 298,000 247,000
------------ -----------
Net deferred tax liabilities (assets) $ -- $ --
============ ===========
</TABLE>
10. 401(K) PROFIT SHARING PLAN
The Company maintains a 401(k) profit sharing plan which allows
substantially all employees to contribute up to 15% of their salary, subject to
annual limitations. The Board of Directors may, at its sole discretion, approve
Company contributions. To date, there have been no Company contributions under
the plan.
11. JOINT VENTURE
In January 1997, the Company and Memorial Sloan-Kettering Cancer
Center ("MSK") formed Genos Biosciences, Inc. ("Genos"), a new company focused
on the research and identification of genes and related genetic information of
value in the prognosis, diagnosis and possible treatment of certain common
cancers. The Company and MSK each own 50% of Genos and have committed to
contribute approximately $5 million each to fund its initial operations. The
Company invested $1.2 million in Genos in connection with its formation and
anticipates that Sequana's remaining commitment will be funded during 1997 and
early 1998. In connection with the formation of Genos, the Company sold a
warrant to MSK to purchase 350,000 shares of the Company's common stock
exercisable at a price of $17.38 per share. The Company's Chief Executive
Officer and Chief Financial Officer are members of the Board of Directors of
Genos.
42
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors is incorporated by
reference from the section captioned "Election of Directors" contained in the
Company's Proxy Statement to be filed in connection with the Annual Meeting of
Shareholders to be held June 24, 1997. Information concerning executive officers
is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from the section captioned "Executive Compensation and Other Matters" contained
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from the section captioned "Record Date and Principal Share Ownership" contained
in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions with Management" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Reference is made to the Index to Financial Statements
under Item 8 of this report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules have been omitted because they are not
required under the related instructions, are
inapplicable or because the information required
thereby has been included in the financial statements of
the Registrant or the notes thereto.
(a)(3) Reference is made to Item 14 (c) below for Exhibits
required by Item 601 of Regulation S-K including
management contracts and compensatory plans and
arrangements.
43
<PAGE> 44
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended December 31, 1996.
(c) Exhibits
3.1(1) Restated Articles of Incorporation of the Registrant
3.3(2) Bylaws of the Registrant, as amended to date.
10.1(2) Shareholder Rights Agreement, dated October 21, 1994, as
amended to date.
10.2(2) 1994 Incentive Stock Plan
10.3(2) 1995 Employee Stock Purchase Plan
10.4(2) 1995 Director Stock Option Plan
10.5(2) Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.6(2) Master Lease Agreement dated November 1, 1993 by and between
Comdisco, Inc. and Registrant.
10.7(2)* Collaborative Research Agreement dated as of July 27, 1994 by
and between Registrant and Glaxo, Inc.
10.8(1) Expansion Lease by and between Health Science Properties, Inc.
and Registrant dated as of November 20, 1995.
10.9(2)* Collaborative Research Agreement dated as of June 30, 1995 by
and between Registrant and Corange International, Ltd.
10.10(2)*Collaborative Research Agreement dated as of June 12,
1995 by and between Registrant and Boehringer Ingelheim
International GmbH.
10.11(2) Employment Agreement dated February 28, 1995 between the
Registrant and Kevin J. Kinsella.
10.12(2) Consulting Agreement dated March 6, 1995 between the
Registrant and Irwin Lerner.
10.13(2) Letter Agreement dated September 7, 1993 between the
Registrant and Timothy J.R. Harris.
10.14(3)*Research Agreement dated as of April 2, 1996 by and between
the Registrant and Aurora Biosciences Corporation.
10.15(4) Merger Agreement and Plan of Reorganization between the
Registrant, Sequana Merger Sub, Inc., NemaPharm, Inc. and the
Shareholders of NemaPharm, Inc. dated July 19, 1996.
10.16** Loan Agreement between the Registrant and The Sumitomo Bank,
Limited dated as of October 23, 1996.
11.1(1) Computation of net loss per share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule.
- ----------------
* Confidential treatment has been granted with respect to certain
portions of this exhibit.
** Confidential treatment has been requested with respect to certain
portions of this exhibit.
44
<PAGE> 45
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 333-01226).
(2) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 33-93460).
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended June
30, 1996.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1996.
45
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEQUANA THERAPEUTICS, INC.
BY: /s/ KEVIN J. KINSELLA
--------------------------------
KEVIN J. KINSELLA
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
DATE: March 25, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kevin J. Kinsella and M. Scott Salka, and
each of them, his true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, to sign any and all amendments to this
Annual Report on Form 10-K and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or substitutes,
or any of them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF
OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KEVIN J. KINSELLA PRESIDENT, CHIEF EXECUTIVE OFFICER AND MARCH 25, 1997
- ---------------------------
KEVIN J. KINSELLA DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
/s/ M. SCOTT SALKA VICE PRESIDENT, OPERATIONS AND CHIEF MARCH 25, 1997
- ---------------------------
M. SCOTT SALKA FINANCIAL OFFICER (PRINCIPAL ACCOUNTING
AND FINANCIAL OFFICER)
/s/ TIMOTHY J.R. HARRIS SENIOR VICE PRESIDENT, RESEARCH AND MARCH 25, 1997
- ---------------------------
TIMOTHY J.R. HARRIS DEVELOPMENT, CHIEF TECHNICAL OFFICER
AND DIRECTOR
/s/ IRWIN LERNER CHAIRMAN OF THE BOARD OF DIRECTORS MARCH 25, 1997
- ---------------------------
IRWIN LERNER
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
DIRECTOR MARCH , 1997
- ----------------------------
HOWARD PALEFSKY
/s/ RICHARD DARMAN DIRECTOR MARCH 25, 1997
- ----------------------------
RICHARD DARMAN
/s/ THOMAS C. MCCONNELL DIRECTOR MARCH 25, 1997
- ----------------------------
THOMAS C. MCCONNELL
/s/ THOMAS F. STEPHENSON DIRECTOR MARCH 25, 1997
- ----------------------------
THOMAS F. STEPHENSON
</TABLE>
47
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Document Numbered Page
------ ----------------------- -------------
<S> <C> <C>
3.1(1) Restated Articles of Incorporation of the Registrant
3.3(2) Bylaws of the Registrant, as amended to date.
10.1(2) Shareholder Rights Agreement, dated October 21, 1994, as amended to
date.
10.2(2) 1994 Incentive Stock Plan
10.3(2) 1995 Employee Stock Purchase Plan
10.4(2) 1995 Director Stock Option Plan
10.5(2) Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.6(2) Master Lease Agreement dated November 1, 1993 by and between Comdisco,
Inc. and Registrant.
10.7(2)* Collaborative Research Agreement dated as of July 27, 1994 by and
between Registrant and Glaxo, Inc.
10.8(1) Expansion Lease by and between Health Science Properties, Inc. and
Registrant dated as of November 20, 1995.
10.9(2)* Collaborative Research Agreement dated as of June 30, 1995 by and
between Registrant and Corange International, Ltd.
10.10(2)*Collaborative Research Agreement dated as of June 12, 1995 by and
between Registrant and Boehringer Ingelheim International GmbH.
10.11(2) Employment Agreement dated February 28, 1995 between the Registrant and
Kevin J. Kinsella.
10.12(2) Consulting Agreement dated March 6, 1995 between the Registrant and
Irwin Lerner.
10.13(2) Letter Agreement dated September 7, 1993 between the Registrant and
Timothy J.R. Harris.
10.14(3)*Research Agreement dated as of April 2, 1996 by and between the
Registrant and Aurora Biosciences Corporation.
10.15(4) Merger Agreement and Plan of Reorganization between the Registrant,
Sequana Merger Sub, Inc., NemaPharm, Inc. and the Shareholders of
NemaPharm, Inc. dated July 19, 1996.
10.16** Loan Agreement between the Registrant and The Sumitomo Bank, Limited
dated as of October 23, 1996.
11.1(1) Computation of net loss per share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule.
</TABLE>
- ----------------
* Confidential treatment has been granted with respect to certain
portions of this exhibit.
** Confidential treatment has been requested with respect to certain
portions of this exhibit.
48
<PAGE> 49
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 333-01226).
(2) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 33-93460).
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended June
30, 1996.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1996.
49
<PAGE> 1
EXHIBIT 10.16
LOAN AGREEMENT
BETWEEN
SEQUANA THERAPEUTICS, INC.
AND
THE SUMITOMO BANK, LIMITED
OCTOBER 23, 1996
* Certain confidential portions of this Exhibit were omitted by means of
blacking out the text (the "Mark"). This Exhibit has been filed separately
with the Secretary of the Commission without the Mark pursuant to the
Company's Application Requesting Confidential Treatment under Rule 406 under
the Securities Act.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. DEFINITIONS............................................................................... 1
Section 1.1. Definitional Provisions...................................................... 1
ARTICLE II. LOAN...................................................................................... 1
Section 2.1. Term Note.................................................................... 1
Section 2.2. Use of Proceeds.............................................................. 4
Section 2.3. Payments..................................................................... 4
Section 2.4. Prepayments.................................................................. 5
Section 2.5. Indemnification; Increased Costs............................................. 6
Section 2.6. Investment Account and Custodian Account..................................... 7
Section 2.7. Change In Legality........................................................... 8
ARTICLE III. REPRESENTATIONS AND WARRANTIES............................................................ 8
Section 3.1. Organization................................................................. 8
Section 3.2. Power, Authority, Consents................................................... 9
Section 3.3. No Violation of Law or Agreements............................................ 9
Section 3.4. Due Execution, Validity, Enforceability...................................... 9
Section 3.5. Judgments, Actions, Proceedings.............................................. 9
Section 3.6. No Defaults, Compliance With Laws............................................ 10
Section 3.7. No Materially Adverse Contracts, Etc......................................... 10
Section 3.8. Financial Statements......................................................... 10
Section 3.9. Title to Properties; Leases.................................................. 10
Section 3.10. Priority of Liens........................................................... 11
Section 3.11. Patents, Copyrights, Licenses, Etc.......................................... 11
Section 3.12. Tax Returns................................................................. 11
Section 3.13. Regulation U; Margin Stock.................................................. 11
Section 3.14. Full Disclosure............................................................. 11
Section 3.15. ERISA....................................................................... 12
Section 3.16. Environmental Compliance.................................................... 12
Section 3.17. Other Regulations........................................................... 13
Section 3.18. Compliance with Securities Laws............................................. 14
Section 3.19. Solvency.................................................................... 14
Section 3.20. Subsidiaries or Affiliates.................................................. 14
Section 3.21. Pending Litigation.......................................................... 14
Section 3.22. Compliance with Investment Policy........................................... 14
ARTICLE IV. CONDITIONS PRECEDENT...................................................................... 14
Section 4.1. Conditions Precedent to the Effectiveness
of this Agreement............................................................ 14
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ARTICLE V. AFFIRMATIVE COVENANTS..................................................................... 16
Section 5.1. Books and Records............................................................ 16
Section 5.2. Inspections and Audits....................................................... 16
Section 5.3. Perform Obligations.......................................................... 16
Section 5.4. Fees and Expenses............................................................ 16
Section 5.5. Maintenance of Existence; Conduct of
Business..................................................................... 17
Section 5.6. Insurance.................................................................... 17
Section 5.7. Certain Taxes................................................................ 17
Section 5.8. Use of Proceeds.............................................................. 18
Section 5.9. Further Assurances With Respect To
Accounts..................................................................... 18
Section 5.10. Financial Covenants......................................................... 18
Section 5.11. Deposits Into Custodian Account............................................. 18
ARTICLE VI. DELIVERY OF FINANCIAL REPORTS,
DOCUMENTS AND OTHER INFORMATION........................................................... 19
Section 6.1. Annual Financial Statements.................................................. 19
Section 6.2. Quarterly Financial Statements............................................... 19
Section 6.3. 10Q and 10K Filings.......................................................... 19
Section 6.4. Cash and Covenant Reports.................................................... 20
Section 6.5. Other Information............................................................ 20
Section 6.6. No Default Certificate....................................................... 20
Section 6.7. Notices...................................................................... 20
ARTICLE VII. NEGATIVE COVENANTS........................................................................ 21
Section 7.1. Liens........................................................................ 21
Section 7.2. Changes in Business; Merger or
Consolidation; Disposition of Assets......................................... 22
Section 7.3. Change of Office Address..................................................... 23
Section 7.4. Violation of Agreement....................................................... 23
ARTICLE VIII. EVENTS OF DEFAULT......................................................................... 23
Section 8.1. Events of Default............................................................ 23
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ARTICLE IX. MISCELLANEOUS PROVISIONS.................................................................. 26
Section 9.1. Indemnity; Additional Fees................................................... 26
Section 9.2. Survival of Agreements and Representations................................... 26
Section 9.3. Modifications, Consents and Waivers.......................................... 26
Section 9.4. Entire Agreement............................................................. 26
Section 9.5. Remedies Cumulative.......................................................... 26
Section 9.6. Further Assurances........................................................... 26
Section 9.7. Notices...................................................................... 26
Section 9.8. Construction; Governing Law.................................................. 28
Section 9.9. Waiver of Jury Trial......................................................... 28
Section 9.10. Jurisdiction................................................................ 28
Section 9.11. Relationship of the Borrower and the Bank................................... 29
Section 9.12. Severability................................................................ 29
Section 9.13. Binding Effect; Assignment.................................................. 29
Section 9.14. Counterparts................................................................ 29
Section 9.15. Re-Establishment of Investment Account...................................... 29
APPENDIX A TO LOAN AGREEMENT -- DEFINITIONS................................................................... A-1
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<PAGE> 5
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made as of October 23, 1996 by
and between SEQUANA THERAPEUTICS, INC., a California corporation ("Sequana" or
the "Borrower"), and THE SUMITOMO BANK, LIMITED, a Japanese banking corporation
(the "Bank").
The Borrower and the Bank hereby agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. DEFINITIONAL PROVISIONS.
(a) Capitalized terms used in this Agreement and defined in
Appendix A hereto, which Appendix A is attached to this Agreement and by
this reference made a part hereof, shall have the respective meanings
specified in such Appendix A.
(b) All terms defined in Appendix A shall have such defined
meanings when used in any certificate or any other document made or
delivered pursuant to this Agreement unless otherwise defined in such
other document or certificate.
(c) All accounting terms not specifically defined in this
Agreement or in Appendix A hereto shall be construed in accordance with
generally accepted accounting principles as in effect in the United
States of America on the date of this Agreement.
ARTICLE II.
LOAN
SECTION 2.1. TERM NOTE.
(a) The Bank hereby agrees, on the terms and subject to the
conditions of this Agreement, to loan to the Borrower an aggregate
principal amount of Seven Million Dollars ($7,000,000) (the "Loan"). The
Bank will make an initial Disbursement to the Borrower on the Closing
Date in the amount of One Million Dollars ($1,000,000). During the
Availability Period, the Bank will make subsequent Disbursements to the
Borrower subject to the conditions set forth in Subsection 2.1(b). The
obligation of the Borrower to repay the Loan and to pay interest and all
other costs and charges payable hereunder will be evidenced by a
promissory note in the form of Exhibit 2.1 (the "Note") dated the
1
<PAGE> 6
* CONFIDENTIAL TREATMENT
REQUESTED
Closing Date and payable to the order of the Bank in the original
principal amount of Seven Million Dollars ($7,000,000).
(b) The Borrower shall submit a written request or a telephonic
request (provided that such telephonic request is confirmed in a written notice
by Borrower to the Bank within one (1) Business Day) for each Disbursement at
least three (3) Business Days prior to the desired funding date in the case of
any borrowing consisting of a Eurodollar Rate Loan Portion, and not later than
12:00 Noon (Chicago time) on the funding date in the case of any borrowing
consisting of a Prime Rate Loan Portion. The minimum amount for any Disbursement
shall be Five Hundred Thousand Dollars ($500,000). No Disbursement shall be made
after the occurrence of an Event of Default or any event which, with the giving
of notice or the lapse of time, or both, would constitute an Event of Default.
No Disbursement shall be made after the expiration of the Availability Period.
(c) The Loan shall bear interest, and the Borrower shall pay
interest on the outstanding principal balance of the Loan from the date
of the initial Disbursement to the Borrower until the Maturity Date, at
the following rates per annum:
(i) with respect to any portion of such Loan which is a
Eurodollar Rate Loan Portion, interest at a rate per annum on
such Eurodollar Rate Loan Portion equal (at all times during each
applicable Interest Period) to the Reserve Adjusted Eurodollar
Rate for such applicable Interest Period plus the Applicable
Margin; and
(ii) with respect to each portion of such Loan which is
not a Eurodollar Rate Loan Portion, interest at a rate per annum
on each such Loan Portion equal to the * .
Not later than 12:00 noon (Chicago time) on the third
Business Day prior to the initial funding of the Loan, the Borrower
shall provide written notice ("Initial Notice") to the Bank of the
dollar amount of the initial Disbursement which will be a Eurodollar
Rate Loan Portion for the initial Interest Period. In the event that the
Borrower fails to provide the Initial Notice in accordance with the
preceding sentence, then the outstanding principal balance of the Loan
shall bear interest at the Prime Rate until such time as Borrower has
given an Election Notice in accordance with Section 2.1(c) below.
Computations of interest on the Eurodollar Rate Loan Portion will be on
the basis of a 360 day year, for actual days elapsed with respect to
interest accruing. Computations of all other interest will be on the
basis of a 365 day or 366 day year, as the case may be, for actual days
elapsed with respect to interest accruing.
(d) The Borrower, upon written notice (the "Election Notice")
given to the Bank by not later than 12:00 noon (Chicago time) on the
third Business Day prior to the expiration of the Interest Period for
any Eurodollar Rate Loan Portion in the case of any continuation of a
Eurodollar Rate Loan Portion as such, and not later than 12:00 Noon
(Chicago time) on the conversion date in the case of any conversion into
a Prime Rate Loan Portion, may elect: (1) to continue such portion or
any part thereof as a Eurodollar Rate Loan Portion for the next
succeeding Interest Period; or (2) to convert such portion
2
<PAGE> 7
or any part thereof to a Prime Rate Loan Portion; or (3) a combination
thereof, effective the last day of such Interest Period.
At the end of each applicable Interest Period, in the
absence of a timely effective Election Notice to continue the applicable
Loan Portion as a Eurodollar Rate Loan Portion, the Borrower shall be
deemed to have elected to continue such Eurodollar Rate Loan Portion for
the next succeeding Interest Period of the same time period as the
applicable Interest Period which has most recently ended.
Notwithstanding anything herein to the contrary, if at the end of an
applicable Interest Period for a Eurodollar Rate Loan Portion, an Event
of Default has occurred and is continuing, then the Borrower shall have
no right to give an Election Notice, and the Bank may ignore any attempt
by the Borrower to give an Election Notice.
(e) An Election Notice with respect to any Eurodollar Rate Loan
Portion shall contain the following information:
(i) the dollar amount (if any) which is to be continued as
a Eurodollar Rate Loan Portion; and
(ii) with respect to the dollar amount to be continued as a
Eurodollar Rate Loan Portion, the new Interest Period.
Notwithstanding anything herein to the contrary, the
outstanding Loan balance may not at any time be comprised of more
than five (5) Eurodollar Rate Loan Portions at the same time
without the Bank's consent, which shall be in the Bank's sole and
absolute discretion. Once received by the Bank, any Election
Notice will be irrevocable for the applicable Eurodollar Rate Loan
Portion for the applicable Interest Period.
The Borrower hereby authorizes the Bank to record on
schedule(s) annexed to the Note (a) the date and amount of each Loan
Portion; (b) the term of the Interest Period for each Eurodollar Rate
Loan Portion; (c) the interest rate or rates for each Prime Rate Loan
Portion and the effective date(s) of all changes in such rates; and (d)
the date and amount of each principal and interest payment on each Loan
Portion made by the Borrower, and the Borrower agrees that all such
notations shall constitute prima facie evidence of the matters noted
absent manifest error, provided that the failure of the Bank to record
such information shall not reduce or affect the obligations of the
Borrower hereunder or under the Loan Agreement.
(f) In the event that on the date for determining the Reserve
Adjusted Eurodollar Rate to be paid by the Borrower in respect of any
Interest Period, the Bank determines in good faith (which determination
will be conclusive and binding on the Borrower) that by reason of
circumstances affecting the London interbank Eurodollar market, either
Eurodollar rates are not offered in the London interbank Eurodollar
market or adequate and fair means do not exist for ascertaining the
Reserve Adjusted Eurodollar Rate for such Interest Period, the Bank
shall promptly give to the Borrower telephonic notice (confirmed
3
<PAGE> 8
as soon as practicable in writing) of such determination. During the
existence of such circumstances, any existing Eurodollar Rate Loan
Portion in respect of which such circumstances exist will convert to a
Prime Rate Loan Portion at the end of the applicable Interest Period.
SECTION 2.2. USE OF PROCEEDS. The proceeds of the Loan shall be used by
the Borrower for the purpose of funding, or replenishing working capital
reserves used to fund, capital expenditures for enhancement of research and
development facilities, manufacturing facilities, acquisition of laboratory
equipment or other equipment and for general corporate purposes.
SECTION 2.3. PAYMENTS.
(a) Interest only shall be payable on each Interest Payment Date
during the period commencing on the date of the initial Disbursement and
continuing through and including September 30, 1997. Thereafter, the
Borrower will repay the principal amount of the Loan in forty-eight (48)
equal consecutive monthly installments of principal (each installment
being in an amount sufficient to amortize the outstanding principal
balance of the Loan over a period of forty-eight (48) months), together
with interest thereon commencing from the Closing Date, payable on the
last Business Day of each calendar month commencing with the first such
payment due on October 31, 1997 and continuing until the Maturity Date,
on which date the Borrower shall make a final payment in an amount equal
to all the then unpaid principal of the Loan and all unpaid interest
thereon. Notwithstanding the foregoing, repayment of the Loan and all
accrued and unpaid interest thereon may be accelerated upon the
occurrence and during the continuance of an Event of Default.
(b) The Borrower shall make all payments hereunder in U.S.
Dollars and in immediately available funds at the Bank's office at 233
S. Wacker Drive, Suite 5400, Chicago, Illinois 60606 (or at such other
office as the Bank may notify the Borrower in writing) via wire transfer
to Sumitomo Bank, Limited, Chicago Branch, ABA 071001850, through the
Federal Reserve Bank of Chicago, Reference: Sequana. Payments not made
prior to 2:00 p.m. (Chicago time) on the date of payment will be deemed
paid on the next Business Day. Payments which fall due on a day which is
not a Business Day will be payable on the next Business Day, with
interest to accrue to such date of payment. All payments hereunder and
under the Note shall be made without set-off or counterclaim and in such
amounts as may be necessary in order that all such payments shall not be
less than the amounts otherwise specified to be paid under this
Agreement or the Note, as the case may be.
(c) Any installment of interest only or of principal and interest
paid more than five (5) days late or any other amount payable hereunder
which is not paid when due, will bear (and the Borrower shall pay)
interest (to the extent permitted by law) from such due date until such
unpaid amount has been paid in full (whether before or after judgment)
at a rate per annum equal to three and one-half percent (3.5%) in excess
of the rate then applicable to each Loan Portion until the end of any
Interest Period then applicable to such Loan
4
<PAGE> 9
* CONFIDENTIAL TREATMENT
REQUESTED
Portion and thereafter at a rate per annum equal to three and one-half
percent (3.5%) in excess of the Prime Rate ("Default Rate").
(d) In partial consideration for the Bank making the Loan to the
Borrower, the Borrower shall pay to Bank: (i) a loan initiation fee
("Initiation Fee") in the aggregate amount of * with such Initiation
Fee to be due and payable in three (3) installments of * on the
Closing Date, October 31, 1996 and November 30, 1996; (ii) a loan
disbursement fee ("Funding Fee") in an amount equal to * of each
Disbursement amount, such Funding Fee to be due and payable on the date
any Disbursement is made to the Borrower, and (iii) during the period
that the Bank has any lending commitment hereunder, a commitment fee
("Commitment Fee") in an amount equal to * per annum of any portion of
the Loan not disbursed to the Borrower, with such Commitment Fee to be
due and payable, in arrears, on the last Business Day of each calendar
quarter and calculated on the actual daily amount of the undisbursed
portion of the Loan, provided that when any Disbursement occurs, the
Commitment Fee which has accrued on the portion of the unutilized Loan
being disbursed shall be credited against the Funding Fee payable with
respect to such Disbursement, and only the net amount of such Funding
Fee shall be payable at the time of such Disbursement. On the Closing
Date, Borrower hereby authorizes Bank to deduct and pay the portion of
the Initiation Fee which is due on the Closing Date, the Funding Fee for
the initial Disbursement made on the Closing Date, and all other
reasonable fees and expenses of the Bank identified in Section 4.1(h)
below, from the available proceeds of the Loan.
SECTION 2.4. PREPAYMENTS. Subject to this Section 2.4, the Borrower may,
upon five (5) Business Days' prior notice to the Bank, prepay the outstanding
amount of the Loan in whole or in part. In the event that the Borrower prepays
or is required to prepay any Eurodollar Rate Loan Portion by acceleration or
otherwise or fails to draw down or convert to a Eurodollar Rate Loan Portion
after giving notice thereof, the Borrower agrees to reimburse the Bank for its
expenses, funding losses and loss of anticipated profits due to such prepayment
or failure to draw. The Borrower and the Bank hereby agree that such expenses,
funding losses and loss of anticipated profits shall consist of the sum of:
(a) Principal amount of each such Eurodollar Rate Loan Portion
times (([number of days between the date of prepayment and the last day
in the applicable Interest Period] divided by 360), times the applicable
Interest Differential); plus
(b) All actual out-of-pocket expenses (other than those taken
into account in the calculation of the Interest Differential) incurred
by the Bank (excluding allocations of any expense internal to the Bank)
and reasonably attributable to such payment or prepayment.
Notwithstanding the foregoing, no prepayment fee shall be payable (and no credit
or rebate shall be required) if the product of the foregoing formula is not a
positive number. The Loan is not in a nature of a revolving loan; therefore,
amounts prepaid or repaid under the Note may not be reborrowed.
5
<PAGE> 10
SECTION 2.5. INDEMNIFICATION; INCREASED COSTS. If after the date of this
Agreement the Bank reasonably determines that any Regulatory Change, or
compliance by the Bank with any request or directive (whether or not having the
force of law) of any governmental authority, central bank or comparable agency
charged with the interpretation or administration of any applicable law, rule or
regulation which is effective or issued after the date hereof:
(a) Subjects the Bank to any tax, duty or other charge with
respect to the Loan or the Note, or changes the basis of taxation of
payments to the Bank of the principal of or interest on the Loan or any
other amounts due under this Agreement in respect of the Loan except for
changes in the rate of tax on the overall net income of the Bank or its
lending office imposed by the State of California or the jurisdictions
in which the Bank's principal executive office or applicable lending
office is located) (such non-excluded amounts, "Taxes"); or
(b) Imposes, modifies or deems applicable any reserve (including,
without limitation, any reserve imposed by the Board of Governors of the
Federal Reserve System), special deposit, liquidity, capital
maintenance, capital adequacy, capital ratio (including, but without
limitation thereto, any request by or requirement of any regulatory body
or official which affects the manner in which the Bank allocates capital
resources to its obligations hereunder), for the account of, or credit
extended by, the Bank or imposes on the Bank any other condition
affecting the Loan, or the Note;
and the result of any of the foregoing is to (A) impose a cost on or increase
the cost to the Bank of making or maintaining the Loan, or (B) cause an increase
in any capital requirement arising out of the making or maintenance of the Loan
or any obligation to the Borrower hereunder or (C) reduce the amount of any sum
received or receivable by the Bank under this Agreement or under the Note, by an
amount deemed by the Bank to be material, then, within ten (10) days after
demand by the Bank, the Borrower shall pay for the account of the Bank such
additional amount or amounts as will compensate the Bank for such increased cost
or reduction as such cost or reduction is incurred by the Bank. If the Bank
makes any claim for compensation under this Section 2.5, the Borrower may
immediately elect by written notice (or telephonic notice confirmed as soon as
practicable in writing) to the Bank to prepay the Loan (but subject to payment
of any other amounts due under Section 2.4 and this Section 2.5, including any
increased cost or reduction incurred through the date of such prepayment or
conversion). The Bank shall promptly notify the Borrower of any event of which
it has knowledge, occurring after the date hereof, which will entitle the Bank
to compensation pursuant to this Section 2.5. The Bank shall provide to the
Borrower a certificate claiming compensation under this Section 2.5, setting
forth the additional amount or amounts to be paid to it hereunder and showing in
reasonable detail the Bank's calculation thereof which shall be presumed to be
correct absent manifest error. In determining such amount, the Bank may use any
reasonable averaging and attribution methods. The Bank shall exercise reasonable
efforts to promptly provide the Borrower with notice of the imposition, or
overtly threatened exercise of, any Regulatory Change set forth in this Section
2.5 of which the Bank has actual knowledge, provided, however, that the failure
by the Bank to so provide such notice will not relieve the Borrower of any of
its obligations hereunder.
6
<PAGE> 11
The Bank agrees that it will use reasonable efforts to reduce or
eliminate any claim for compensation pursuant to this Section 2.5, including
designating a different lending office for the Loans, if such designation will
avoid the need for or reduce the amount of any such compensation, provided that
the Bank will not be obligated to take any actions that would, in the sole
opinion of the Bank, be disadvantageous to the Bank in any material respect (it
being understood that the incurrence of any unreimbursed cost or expense by the
Bank that would not have been incurred but for such action is material).
SECTION 2.6. INVESTMENT ACCOUNT AND CUSTODIAN ACCOUNT.
(a) Prior to the occurrence of a Trigger Event, the Borrower
shall hold at all times Cash and Cash Equivalents, which are not subject
to any Lien (other than General Tax Liens) or claim of any Person, in an
amount not less than the sum of (i) Ten Million Dollars ($10,000,000)
plus (ii) restricted cash and amounts which may be restricted in the
future pursuant to agreements between the Borrower and third parties, in
a custodial account (the "Investment Account") with an institution
approved by the Bank (such institution being referred to herein as the
"Account Holder"). The initial Account Holder will be Union Bank of
California, N.A. The amounts held in the Investment Account shall be
subject to the investment control of the Borrower. The Custodian in
respect of the Investment Account cannot be changed or a new Investment
Account opened without the Bank's prior written approval, which approval
shall not be unreasonably withheld. The Borrower shall deliver to the
Account Holder the Irrevocable Instructions and Power of Attorney in the
form of Exhibit 2.6.B (the "Irrevocable Instructions and Power of
Attorney).
(b) On or before the Closing Date, the Borrower, for the benefit
and on behalf of the Bank, shall establish and maintain or cause to be
established and maintained in the name of the Borrower an account (the
"Custodian Account") with Sumitomo Bank of New York Trust Company (the
"Bailee") under the Custodian Agreement and the Collateral Bailment
Agreement. Pursuant to the Restricted Account and Security Agreement by
and between the Bank and the Borrower, the Borrower has granted to the
Bank a security interest in all of its right, title and interest in the
Custodian Account, all deposits or investments held therein and all
proceeds thereof to secure payment and performance of the Borrower's
obligations hereunder. On or before the Closing Date, the Borrower shall
cause to be deposited in the Custodian Account the sum of One Thousand
Dollars ($1,000). So long as the Borrower is indebted to the Bank
hereunder and until payment in full of the Note and the Borrower's full
and complete performance of its obligations hereunder, the Custodian
Account shall at all times have a Restricted Account Balance of not less
than One Thousand Dollars ($1,000). The terms and conditions of the
Restricted Account and Security Agreement, the Collateral Bailment
Agreement, and the Custodian Agreement are incorporated herein by
reference.
7
<PAGE> 12
SECTION 2.7. CHANGE IN LEGALITY.
(a) In the event that at any time the Bank shall have reasonably
determined (which determination shall be presumed to be correct until
the contrary shall have been established) that by reason of a change in
any law or regulation or in the interpretation thereof by any
governmental authority charged with the interpretation thereof affecting
the Bank or the Eurodollar market and applicable to any Eurodollar Rate
Loan Portion, the making or continuation of a loan at the applicable
Reserve Adjusted Eurodollar Rate plus the Applicable Margin has become
unlawful, the Bank shall forthwith give written notice (or telephonic
notice, confirmed as soon as practicable in writing) to the Borrower and
the obligation of the Bank to make or maintain such Eurodollar Rate
Portion at the applicable Reserve Adjusted Eurodollar Rate plus the
Applicable Margin shall terminate and the Borrower shall forthwith upon
receipt of notice of such determination prepay such Eurodollar Rate Loan
Portion without premium or penalty (subject to Sections 2.4 and 2.5),
together with all interest accrued on the amount prepaid to the date of
prepayment. A certificate, setting forth (X) each event which the Bank
shall have determined makes the continuation of such Eurodollar Rate
Loan Portion unlawful and (Y) any additional amounts payable by the
Borrower under Sections 2.4 and 2.5 (and the basis therefor and the
Bank's computation thereof) upon prepayment of such Eurodollar Rate Loan
Portion, shall be furnished to the Borrower by the Bank and shall be
presumed correct absent manifest error.
(b) In the event that the Borrower is obligated to prepay a
Eurodollar Rate Loan Portion pursuant to clause (a) of this Section 2.7,
the Borrower shall have the right, upon written notice (or telephonic
notice confirmed as soon as practicable in writing) to the Bank, in lieu
of such prepayment, to elect to convert such Eurodollar Rate Portion to
a Prime Rate Loan Portion, effective on the date on which such
prepayment would otherwise be required to have been made, provided that
on the effective date of conversion the Borrower also shall pay all
interest accrued on the amount converted to the date of conversion and
such additional amounts, if any, payable by the Borrower under Section
2.4, as specified in the certificate furnished the Borrower pursuant to
said clause (a).
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Bank that:
SECTION 3.1. ORGANIZATION. Sequana is a corporation duly organized,
validly existing and in good standing under the laws of the State of California;
Sequana has the power to own its assets, to transact the business in which it is
presently engaged and in which it proposes to be engaged and is duly qualified
and in good standing in each jurisdiction in which the failure to qualify to do
business would materially adversely affect its financial condition and business
operations.
8
<PAGE> 13
SECTION 3.2. POWER, AUTHORITY, CONSENTS.
(a) Sequana has the power to execute, deliver and to perform
its obligations under the Loan Documents.
(b) Sequana has the power to borrow hereunder and has taken all
necessary action to authorize the borrowing hereunder on the terms and
conditions of this Agreement.
(c) Sequana has taken all necessary corporate action to authorize
the execution, delivery and performance of the Loan Documents.
(d) No consent or approval of any Person, no waiver of any Lien
or right of distraint or other similar right and no consent, license,
approval, authorization or declaration of any governmental authority,
bureau or agency is or will be required in connection with the execution
and delivery of the Loan Documents by Sequana, or the performance by
Sequana of its obligations thereunder or the validity, enforcement or
priority of the Loan Documents, or any Lien created and granted
thereunder, except such consents as have been obtained and copies of
which have been delivered to the Bank.
SECTION 3.3. NO VIOLATION OF LAW OR AGREEMENTS. The execution and
delivery of the Loan Documents and the performance by Sequana of its obligations
thereunder, will not violate any provision of law and will not conflict with or
result in a breach of any order, writ, injunction, ordinance, resolution,
decree, or other similar document or instrument of any court or governmental
authority, bureau or agency, domestic or foreign, Sequana's charter or bylaws or
create (with or without the giving of notice or lapse of time, or both) a
default under or breach of any agreement, bond, note or indenture to which
Sequana is a party, or by which it is bound or any of its properties or assets
is affected, or result in the imposition of any Lien of any nature whatsoever
upon any of the properties or assets owned by or used in connection with the
business of Sequana that would materially affect Sequana's financial condition.
SECTION 3.4. DUE EXECUTION, VALIDITY, ENFORCEABILITY. This Agreement and
each of the other Loan Documents has been, or upon the execution and delivery
thereof, will be, duly executed and delivered by Sequana, and each constitutes,
or, upon the execution and delivery thereof, will constitute, the valid and
legally binding obligation of Sequana, enforceable in accordance with its terms,
except to the extent that the enforcement thereof may be limited by applicable
bankruptcy, moratorium, insolvency, reorganization, or other similar laws or
equitable principles relating to the enforcement of creditors' rights generally.
SECTION 3.5. JUDGMENTS, ACTIONS, PROCEEDINGS. Except as set forth in
Schedule 3.5, there are no outstanding judgments, actions (including, without
limitation, derivative actions), suits or proceedings pending before any court
or governmental authority, bureau or agency, having a claim or amount in
controversy that exceeds $10,000 in any one instance or $50,000 in the aggregate
at any one time with respect to or, to the best of the Borrower's knowledge,
threatened against or affecting Sequana.
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SECTION 3.6. NO DEFAULTS, COMPLIANCE WITH LAWS. Sequana is not in
material default under any agreement, ordinance, resolution, decree, bond, note,
indenture, order or judgment to which it is a party or by which it is bound, or
its charter documents or bylaws, or any other agreement or other instrument by
which any of the properties or assets owned by it or used in the conduct of its
business is affected or evidencing, guaranteeing or relating to any outstanding
indebtedness, liability or obligation for borrowed money or lease obligations,
which default could have a material adverse effect on the business, operations,
financial condition or properties of Sequana, or on Sequana's ability to perform
its obligations under the Loan Documents. Sequana has complied and is in
compliance in all material respects with all applicable laws, ordinances and
regulations, including, without limitation, the regulations of the Food and Drug
Administration, the non-compliance with which could have a material adverse
effect on the business, operations, financial condition or properties of
Sequana, or on the ability of Sequana to perform its obligations under the Loan
Documents.
SECTION 3.7. NO MATERIALLY ADVERSE CONTRACTS, ETC. Sequana is not
subject to any charter, corporate or other legal restriction, or any judgment,
decree, order, rule or regulation that has, or is expected in the judgment of
the Borrower, to have a materially adverse effect on the business, assets or
financial condition of the Borrower. Sequana is not a party to any contract or
agreement that has or is expected, in the judgment of the officers of the
Borrower, to have any materially adverse effect on the business of the Borrower.
SECTION 3.8. FINANCIAL STATEMENTS.
(a) Sequana has furnished to the Bank its most recent audited
Financial Statements and all subsequent unaudited Financial Statements
which are available to the public. Each of the Financial Statements is
correct and complete in all material respects and presents fairly the
financial condition of the Borrower, at its date or for the respective
period, and has been prepared in accordance with generally accepted
accounting principles.
(b) The Borrower has no material obligation, liability or
commitment, direct or contingent, which is not reflected in the
Financial Statements or in any notes thereto in accordance with
generally accepted accounting principles.
(c) There has been no material adverse change in the financial
position or operations of the Borrower since the date of the Financial
Statement for the fiscal quarter ending June 30, 1996.
(d) The Borrower's fiscal year is the twelve (12) month period
ending on December in each year.
SECTION 3.9. TITLE TO PROPERTIES; LEASES. Except as disclosed in the
footnotes to the Financial Statements, Sequana owns all of the assets reflected
in the most recent balance sheet or acquired since that date (except property
and assets leased, sold or otherwise disposed of in the ordinary course of
business since that date), subject to no rights of others, including any
mortgages, ordinary or capital leases, conditional sales agreements, title
retention agreements, liens or other encumbrances other than Permitted Liens.
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SECTION 3.10. PRIORITY OF LIENS. The Liens which have been or will be
created and granted by the Loan Documents upon the execution and delivery
thereof constitute, or will constitute upon such execution and delivery, valid
first priority Liens on the properties and assets covered by the Loan Documents,
subject to no other liens.
SECTION 3.11. PATENTS, COPYRIGHTS, LICENSES, ETC. Sequana owns or has a
valid right to use all patents, copyrights, trademarks, trade names, licenses,
franchises, and rights in respect of the foregoing ("Intellectual Property
Rights"), adequate for the conduct of its business substantially as now
conducted without conflict with any rights of others, and there are no suits or
claims for infringement with respect to the Intellectual Property Rights except
as set forth in Schedule 3.11. Schedule 3.11 lists all pending suits or claims
for infringement with respect to Intellectual Property Rights.
SECTION 3.12. TAX RETURNS.
(a) The Borrower has filed all federal and state income tax
returns and, to the best of Borrower's knowledge, all material other tax
returns, reports, and declarations required to be filed by it and has
not failed to pay any taxes, or interest and penalties relating thereto,
on or before the due dates thereof except for returns, taxes, interest
or penalties with respect to which it has duly filed extensions or is
contesting the validity thereof by appropriate legal proceedings
diligently conducted in good faith. No audits of the federal income tax
returns of the Borrower are pending.
(b) Except to the extent that reserves therefor are reflected in
the Financial Statements, (i) there are no material federal, state or
local tax liabilities of the Borrower due or to become due for any tax
year ended on or prior to the date of the most recent balance sheet
included in the Financial Statements, whether incurred in respect of or
measured by the income of such entity, which are not properly reflected
in such balance sheet, and (ii) there are no material claims pending or,
to the knowledge of the Borrower proposed or threatened against the
Borrower for past federal, state or local taxes.
SECTION 3.13. REGULATION U; MARGIN STOCK. No part of the proceeds
received by the Borrower from the Loan will be used directly or indirectly for
the purpose of purchasing or carrying, or for payment in full or in part of
indebtedness which was incurred for the purposes of purchasing or carrying, any
margin stock as such term is defined in Regulation U of the Board of Governors
of the Federal Reserve System, 12 C.F.R., Chapter II, Part 221. The Borrower
does not own margin stock which would, in the aggregate, constitute a
substantial part of the assets of the Borrower.
SECTION 3.14. FULL DISCLOSURE. Neither the Financial Statements nor any
certificate, opinion, or any other statement made or furnished in writing to
Bank by or on behalf of the Borrower in connection with this Agreement or the
transactions contemplated herein, contains any untrue statement of a material
fact, or omits to state a material fact necessary to make the statements
contained therein or herein, in light of the circumstances under which they were
made, not misleading.
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SECTION 3.15. ERISA.
(a) Except as set forth in Schedule 3.15, none of the Borrower or
any of its Affiliates has pension or other employee benefit plans which
are subject to the provisions of Title IV of ERISA (any such plans which
have been or may hereafter be adopted or assumed by the Borrower are
hereinafter referred to individually as a "Plan" and, collectively, as
the "Plans"). In connection with the Plans, Borrower does not have, or
know of any likely event which will give rise to, any direct or
contingent material liabilities of the Borrower to the Pension Benefit
Guaranty Corporation ("PBGC"), the Department of Labor or the Internal
Revenue Service ("IRS").
(b) None of the Borrower or any of its Affiliates is a
participating employer in any Plan under which more than one employer
makes contributions as described in Sections 4063 and 4064 of ERISA.
(c) None of the Borrower or any of its Affiliates is a
participating employer in a multiemployer plan as defined in Section
4001(a) of ERISA, which participation could give rise to material
withdrawal liability on the part of the Borrower, as the case may be
under Subtitle E of Title IV of ERISA.
For purposes of this Agreement, all references to "ERISA" shall be
deemed to refer to the Employee Retirement Income Security Act of 1974
(including any sections of the Code) as heretofore amended and as it may
hereafter be amended or modified, and all regulations promulgated thereunder,
and all references to the Borrower in this Section 3.15, or in any other Section
of this Agreement relating to ERISA, shall be deemed to refer to the Borrower
and all other entities which are part of a Controlled Group with respect to the
Borrower.
SECTION 3.16. ENVIRONMENTAL COMPLIANCE. Except as set forth in Schedule
3.16, the Borrower has taken all necessary steps to comply in all material
respects with Environmental Laws (as hereinafter defined) and has determined
that:
(a) To the Borrower's knowledge, Borrower is not in violation, or
alleged violation, of any judgment, decree, order, law, license, rule or
regulation pertaining to environmental matters, including without
limitation, those arising under the Resource Conservation and Recovery
Act ("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments
and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act,
the Federal Clean Air Act, the Toxic Substances Control Act, each as
amended as of the date hereof, or any other federal, state or local
statute, regulation, ordinance, order or decree relating to health,
safety or the environment (hereinafter "Environmental Laws"), which
violation would have a material adverse effect on the business, assets
or financial condition of the Borrower;
(b) The Borrower has not received notice from any third party
including, without limitation, any federal, state or local governmental
authority, (i) that it has been identified by the United States
Environmental Protection Agency ("EPA") as a potentially responsible
12
<PAGE> 17
party under CERCLA with respect to a site listed on the National
Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that any
hazardous waste, as defined by 42 U.S.C. Section 9601(5), any hazardous
substances as defined by 42 U.S.C. Section 9601(14), any pollutant or
contaminant as defined by 42 U.S.C. Section 9601(33) and any toxic
substances, oil or hazardous materials or other chemicals or substances
regulated by any Environmental Laws ("Hazardous Substances") which it
has generated, transported or disposed of has been found at any site at
which a federal, state or local agency or other third party has
conducted or has ordered that it conduct a remedial investigation,
removal or other response action pursuant to any Environmental Law; or
(iii) that it is or shall be a named party to any claim, action, cause
of action, complaint, or legal or administrative proceeding (in each
case, contingent or otherwise) arising out of any third party's
incurrence of costs, expenses, losses or damages of any kind whatsoever
in connection with the release of Hazardous Substances;
(c) To the Borrower's knowledge: (i) the properties on which the
Borrower conducts its business have not been used by the Borrower for
the handling, processing, storage or Disposal of Hazardous Substances
except in accordance with applicable Environmental Laws; (ii) in the
course of any activities conducted by the Borrower, no Hazardous
Substances have been generated or are being used on property leased by
the Borrower on which the Borrower conducts its business except in
accordance with applicable Environmental Laws in regard to which the
failure to comply would have a material adverse effect on the Borrower's
business; (iii) there has been no Release or threatened Release of
Hazardous Substances by the Borrower on, upon, into or from the
properties on which the Borrower operates its business, which Release
would have a material adverse effect on the Borrower's business; (iv) to
the best of the Borrower's knowledge, there have been no Releases on,
upon, from or into any real property in the vicinity of any of the
properties on which the Borrower conducts its business, through soil or
groundwater contamination, which may have come to be located on, and
which would have a material adverse effect on the Borrower's business;
and (v) in addition, any Hazardous Substances that have been generated
by the Borrower on the properties on which the Borrower conducts its
business have been transported off-site only by carriers having an
identification number issued by the EPA, treated or Disposed of only by
treatment or disposal facilities maintaining valid permits as required
under applicable Environmental Laws, which transporters and facilities
have been and are, to the best of the Borrower's knowledge, operating in
compliance with such permits and applicable Environmental Laws; and
(d) none of the properties on which the Borrower conducts its
business is or is expected to be in violation of any applicable
environmental clean-up responsibility law or regulation or environmental
restrictive transfer law or regulation, in regard to which failure to
comply would have a material adverse effect on the environment or the
business, assets or financial condition of the Borrower.
SECTION 3.17. OTHER REGULATIONS. The Borrower is not subject to
regulation under the Investment Company Act of 1940, the Public Utility Holding
Company Act of 1935, the Federal
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Power Act, the Interstate Commerce Act, any state public utilities code or any
federal or state statute or regulations limiting its ability to incur
Indebtedness.
SECTION 3.18. COMPLIANCE WITH SECURITIES LAWS. All offers and sales of
securities of the Borrower have been made in material compliance with all
applicable federal and state securities laws, including without limitation the
Securities Act of 1933 and the Securities Exchange Act of 1934, both as amended.
SECTION 3.19. SOLVENCY. The Borrower is solvent and is not the subject
of bankruptcy or insolvency proceedings.
SECTION 3.20. SUBSIDIARIES OR AFFILIATES. The Borrower does not have any
Subsidiary or Affiliate (other than as set forth in Schedule 3.20).
SECTION 3.21. PENDING LITIGATION. Except as set forth in Schedule 3.21,
there are no lawsuits or claims pending against Borrower which could have a
material adverse affect on the Borrower's financial condition.
SECTION 3.22. COMPLIANCE WITH INVESTMENT POLICY. The Borrower is in
compliance in all material respects with its Investment Policy for investment of
Cash and Cash Equivalents. A true and correct copy of such Investment Policy is
attached as Schedule 8.1(j).
ARTICLE IV.
CONDITIONS PRECEDENT
SECTION 4.1. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS
AGREEMENT. The effectiveness of this Agreement and the obligations of the Bank
hereunder shall be subject to the following conditions precedent:
(a) The Borrower will have executed and delivered to the Bank the
Note, the Collateral Bailment Agreement, the Restricted Account and
Security Agreement, the Irrevocable Instructions and Power of Attorney,
the Custodian Agreement, the Financing Statement and an original
counterpart of this Agreement.
(b) The Bailee will have executed and delivered the Collateral
Bailment Agreement, the Custodian Agreement and the Restricted Account
and Security Agreement;
(c) The initial Account Holder will have executed and delivered
its consent to the Irrevocable Instructions and Power of Attorney to the
Bank;
(d) The Borrower shall have deposited One Thousand Dollars
($1,000) into the Custodian Account;
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(e) The Borrower will have otherwise fully complied with all
of the terms and conditions of the Loan Documents;
(f) The Borrower will have delivered to the Bank the following,
in form and substance acceptable to the Bank:
(i) a copy of the Certificate of Incorporation of
Sequana certified by the Secretary of State of California;
(ii) a copy of the by-laws of the Borrower certified by
its Secretary;
(iii) a copy of resolutions of the Board of Directors of
the Borrower authorizing the execution, delivery and performance
by the Borrower of this Agreement, the Note, the Loan Documents
and all instruments and documents provided for herein or therein,
certified by the Secretary of the Borrower;
(iv) a good standing certificate for the Borrower, dated
as of a date not more than ten (10) days prior to the Closing
Date from the Secretary of State of the State of California; and
(v) an incumbency certificate with respect to the
officers of the Borrower, certified by its Secretary.
(g) The legal counsel of the Borrower, will have delivered to the
Bank its favorable legal opinion as to the due organization, existence,
qualification to do business, and good standing of the Borrower, the due
authorization, execution and enforceability of this Agreement and the
other Loan Documents, the absence of pending and threatened litigation,
the non-contravention of other documents, instruments, laws, and
regulations, and such other matters as the Bank may require, in form and
substance reasonably satisfactory to the Bank;
(h) The Bank shall have received the portion of the Initiation
Fee which is due on the Closing Date, the Funding Fee for the Initial
Disbursement made on the Closing Date and all other fees and expenses
(including, without limitation, Bank's legal fees and expenses incurred
in the negotiation and preparation of the Loan Documents and any other
fees and expenses of the Bank for UCC searches or filing fees) required
to be paid to Bank on or before the Closing Date; and
(i) All representations and warranties of the Borrower contained
herein are true and correct as of the Closing Date and Borrower will
have executed and delivered to Bank such certificates with respect
thereto as Bank may reasonably require.
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ARTICLE V.
AFFIRMATIVE COVENANTS
So long as the Borrower is indebted to the Bank hereunder, and until
payment in full of the Note and full and complete performance of all of its
other obligations arising hereunder (except for the Borrower's obligations under
Section 5.7 or Section 9.1 to indemnify the Bank under certain circumstances
following the payment of the Note), the Borrower shall in all material respects:
SECTION 5.1. BOOKS AND RECORDS. Keep proper books of record and account
in a manner reasonably satisfactory to the Bank in which entries (which shall be
true and correct in all material respects) shall be made of all dealings or
transactions in relation to its business and activities.
SECTION 5.2. INSPECTIONS AND AUDITS. Permit the Bank to make or cause to
be made reasonable inspections and audits of any books, records and papers of
the Borrower and to make extracts therefrom and copies thereof at all such
reasonable times and upon reasonable notice, provided, however, that certain
areas of the Borrower's facilities may be restricted for reasons of health and
safety and the Bank will not be permitted access to such restricted areas.
SECTION 5.3. PERFORM OBLIGATIONS. Pay and discharge all of its material
obligations and liabilities including, without limitation, all taxes,
assessments and governmental charges upon its income and properties, when due,
unless and to the extent only that such obligations, liabilities, taxes,
assessments and governmental charges are contested in good faith and by
appropriate proceedings and that, to the extent required by generally accepted
accounting principles then in effect, proper and adequate book reserves relating
thereto are established by the Borrower, and provided that the Bank is
reasonably satisfied that the Accounts are not in danger of being the subject of
a Lien (except to the extent permitted by Section 7.1) or sold, forfeited or
lost as a result thereof and the Borrower has provided such security or other
assurances as Bank reasonably requests.
SECTION 5.4. FEES AND EXPENSES. Pay on demand: (i) all reasonable costs
and expenses (including, without limitation, legal fees, filing fees and UCC
search fees) of the Bank in connection with the preparation, execution and
delivery of this Agreement, and the other Loan Documents; (ii) all reasonable
costs and expenses of the Bank in enforcing the Borrower's performance of and
compliance with all agreements and conditions contained in the Loan Documents on
its part to be performed or complied with or in connection with the negotiation,
preparation and execution and delivery of any amendment, modification or
supplement of or to, or any consent or waiver under, any such document (or any
such instrument which is proposed but not executed and delivered) or relating to
any claim or action threatened, made or brought against the Bank arising out of
or relating to any extent to the Loan Documents, or the transactions
contemplated hereby or thereby; (iii) all reasonable costs and expenses
(including, without limitation, reasonable fees and disbursements of counsel)
suffered or incurred by the Bank in connection with the enforcement or the
payment of the Note or any other sum due to
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<PAGE> 21
it under any of the other Loan Documents or any of its other rights hereunder or
thereunder; and (iv) any and all reasonable costs and expenses incurred by Bank
in conducting lien searches, UCC searches or other due diligence investigations
which the Bank determines are necessary to monitor the Borrower's performance
hereunder and which are incurred after the Closing Date.
SECTION 5.5. MAINTENANCE OF EXISTENCE; CONDUCT OF BUSINESS. Preserve and
maintain its corporate existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business except
for transfers (including, without limitation, transfers in the form of paid-up
licenses) for reasonably equivalent value in the normal course of its business.
The Borrower shall comply in all material respects with all applicable laws,
rules, regulations, orders, writs, decrees and judgments and its charter and
bylaws, and with the material terms of all mortgages, indentures, leases,
contracts and other agreements and instruments binding upon the Borrower. The
Borrower will continue to engage in business of the same general type as now
conducted by the Borrower.
SECTION 5.6. INSURANCE. Maintain with financially sound and reputable
insurers insurance with respect to its properties and business against such
liabilities, casualties and contingencies and of such types and in such amounts
as shall be customary for businesses engaged in similar activities in similar
geographic areas. Without limiting the foregoing, the Borrower will (i) keep all
of its physical property insured against fire and extended coverage risks in
amounts and with deductibles equal to those generally maintained by businesses
engaged in similar activities in similar geographic areas, (ii) maintain all
such workers' compensation or similar insurance as may be required by law, and
(iii) maintain, in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar geographic
areas, general public liability insurance against claims for bodily injury,
death or property damage occurring on, in or about the properties of the
Borrower, business interruption insurance and product liability insurance.
Schedule 5.6 lists insurance of the Borrower currently in effect. The Borrower
shall furnish to the Bank, from time to time upon the Bank's request,
certificates or other evidence satisfactory to the Bank of compliance with the
foregoing.
SECTION 5.7. CERTAIN TAXES.
(a) If, under any law in effect on the date hereof, or under any
law subsequently enacted, it is determined that any U.S. federal, state
or local tax is payable in respect of the issuance of the Note, or in
connection with the filing or recording of any assignments, mortgages,
financing statements, or other documents (whether measured by the amount
of indebtedness secured or otherwise) as contemplated by this Agreement,
then the Borrower shall pay any such tax and all interest and penalties
thereon, if any, and shall indemnify the Bank against and save it
harmless from any loss or damage resulting from or arising out of the
nonpayment or delay in payment of any such tax.
(b) If any such tax or taxes shall be assessed or levied against
the Bank or any other holder of the Note, the Bank, or such other
holder, as the case may be, may notify the Borrower and make immediate
payment thereof, together with interest or penalties in connection
therewith, and will thereupon be entitled to and shall receive immediate
reimbursement therefor from the Borrower.
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(c) Notwithstanding any other provision contained in this
Agreement, the covenants and agreements of the Borrower in this Section
5.7 will survive for two years following the payment of the Note and the
termination of this Agreement.
SECTION 5.8. USE OF PROCEEDS. Use the proceeds of all Disbursements made
by the Bank hereunder only for the purpose specified in Section 2.2 -- "Use of
Proceeds." The Borrower will not use any of the proceeds of such Loans, directly
or indirectly, for the purpose of purchasing or carrying any margin stock or for
the purpose of purchasing or carrying or trading in any securities under such
circumstances as to involve the Borrower or the Bank in a violation of
Regulation G, T, U or X issued by the Federal Reserve Board.
SECTION 5.9. FURTHER ASSURANCES WITH RESPECT TO ACCOUNTS. Promptly
supply the Bank with such information concerning the Investment Account as the
Bank may reasonably request from time to time hereafter, including, without
limitation, Account statements which shall be delivered not less frequently than
quarterly (or more frequently if required pursuant to Section 6.4), which
Account statements will summarize the value of deposits and investments in the
Accounts.
SECTION 5.10. FINANCIAL COVENANTS. The Borrower on a consolidated basis
shall at all times maintain:
(i) A maximum ratio of Total Debt to Net Worth, as
calculated at the end of each fiscal quarter on the basis of the
average of the ratio of Total Debt to Net Worth for each of the
previous four fiscal quarters, of 0.5:1;
(ii) A minimum Current Ratio, as calculated on a
quarterly basis, of 2.0:1;
(iii) A minimum Net Cash Level equal to the then
outstanding principal balance due under the Note plus Fifteen
Million Dollars ($15,000,000);
(iv) Cash and Cash Equivalents, which are not subject to
any Lien or claim of any Person (other than General Tax Liens),
on hand in the Investment Account in an amount not less than the
sum of Ten Million Dollars ($10,000,000) plus restricted cash and
amounts which may be restricted in the future pursuant to
agreements between the Borrower and third parties; and
(v) A minimum Net Worth of Ten Million Dollars
($10,000,000).
The failure of the Borrower to maintain any of the covenants set forth in this
Section 5.10(i)-(v) and/or the occurrence of an Event of Default under Section
8.1 of this Agreement shall be a "Trigger Event."
SECTION 5.11. DEPOSITS INTO CUSTODIAN ACCOUNT. Upon the occurrence of a
Trigger Event, the Borrower will make, or, through the Account Holder pursuant
to the Irrevocable Instructions and Power of Attorney cause to be made, payments
or deposits to the Custodian Account such that after giving effect to such
payments or deposits the Restricted Account
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<PAGE> 23
Balance equals or exceeds the Required Restricted Account Balance. At the time
of each such payment, the Borrower will submit to the Bank a statement setting
forth the market values of marketable securities and the Restricted Account
Balance as of the date of deposit (after giving effect to any deposits made on
or before such day).
ARTICLE VI.
DELIVERY OF FINANCIAL REPORTS,
DOCUMENTS AND OTHER INFORMATION
So long as the Borrower is indebted to the Bank hereunder and until
payment in full of the Note and full and complete performance of all of its
other obligations arising hereunder, the Borrower shall deliver to the Bank:
SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. Annually, as soon as
available, but in any event within one hundred and twenty (120) days after the
last day of the fiscal year, the balance sheet of the Borrower as of such last
day of the fiscal year and statements of operations, stockholders' equity and
cash flows, for such fiscal year, on a consolidated basis, prepared in
accordance with generally accepted accounting principles consistently applied,
in reasonable detail, audited and opined on by independent public accountants
reasonably satisfactory to the Bank (which audit opinion shall contain no
qualification unsatisfactory to the Bank), to present fairly the financial
position and the results of operations of the Borrower as of the end of such
fiscal year and to have been prepared in accordance with generally accepted
accounting principles.
SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon as available, but
in any event within forty-five (45) days after the end of each fiscal quarter
ended on the last day of each March, June and September, balance sheets for the
Borrower as of the last day of each such quarter and statements of operations,
and cash flows, for such quarter, all in reasonable detail and on a consolidated
basis. Each such statement shall be certified on behalf of the Borrower by the
Borrower's director of finance or chief financial officer as fairly presenting
the financial position and the results of operations of the Borrower as of the
end of such fiscal quarter and as having been prepared in accordance with
generally accepted accounting principles consistently applied (subject to normal
adjustments).
SECTION 6.3. 10Q AND 10K FILINGS. At the time its Form 10-Q is released
to the public (which in all events shall be within forty-five (45) days after
the end of the fiscal quarters ended March, June and September or, if later, the
date of the filing of the Form 10-Q with the Securities and Exchange
Commission), a copy of each Form 10-Q; and, each year at the time its Form 10K
is released to the public (which in all events shall be within one hundred
twenty (120) days after the end of the Borrower's fiscal year), a copy of its
Annual Report to Stockholders along with its Form 10K.
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SECTION 6.4. CASH AND COVENANT REPORTS. The following reports,
statements or certificates: (i) at the same time as it delivers the Financial
Statements required under the provisions of Sections 6.1 -- "Annual Financial
Statements" and 6.2 -- "Quarterly Financial Statements", a report as to the
calculations with respect to, and compliance with, the financial covenants set
forth in Section 5.10(i) through 5.10(v); and (ii) within fifteen (15) days of
the end of each calendar quarter, a statement listing (A) the Borrower's Net
Cash Level at the end of such calendar quarter and the domicile of such cash and
investments and (B) the cash balances and Cash Equivalent Balances of the
Investment Account as of the end of such calendar quarter, provided that during
any period when the Borrower's Net Cash Level is less than an amount equal to
Thirty Million Dollars ($30,000,000), the Borrower shall submit to the Bank,
within fifteen (15) days of the end of each calendar month, a compliance
statement indicating the Borrower's actual Net Cash Level and listing all of the
Borrower's cash balances and Cash Equivalent Balances as of month end wherever
domiciled, accompanied by confirming statements of the custodians of such cash
balances and Cash Equivalent Balances.
SECTION 6.5. OTHER INFORMATION. Promptly after a written request
therefor, such other financial data or information evidencing compliance with
the requirements of this Agreement and the other Loan Documents as the Bank may
reasonably request from time to time.
SECTION 6.6. NO DEFAULT CERTIFICATE. At the same time as it delivers the
Financial Statements required under the provisions of Sections 6.1 -- "Annual
Financial Statements" and 6.2 -- "Quarterly Financial Statements," a certificate
of the Borrower signed on its behalf by an Authorized Signatory or its director
of finance, to the effect that, to the best of the Borrower's knowledge, no
Trigger Event hereunder has occurred or, if such cannot be so certified,
specifying in reasonable detail the exceptions, if any, to such statement.
SECTION 6.7. NOTICES.
(a) DEFAULTS. As soon as possible and in any event within seven
(7) days after the Borrower has knowledge of the occurrence or existence
of a Trigger Event or any event which with the giving of notice or
passage of time or both, would constitute either an Event of Default or
Trigger Event, the statement of the Borrower setting forth details of
such Trigger Event or event and the action which the Borrower proposes
to take with respect thereto.
(b) LITIGATION AND JUDGMENTS. Promptly after obtaining knowledge
thereof, written notification of any litigation or legal proceedings
instituted against the Borrower, regardless of the subject matter
thereof, having claims or amounts in controversy of more than $200,000
in any one instance or $200,000 in the aggregate at any one time, or of
one or more judgment(s) not covered by insurance, final or otherwise, in
an aggregate amount of $200,000 or more.
(c) ENVIRONMENTAL EVENTS. Promptly after obtaining knowledge or
receipt thereof, written notice of any of the following which has the
potential to materially adversely affect the assets, liabilities,
financial condition or operations of the Borrower: (i) any violation of
any Environmental Laws regarding the Borrower's operations; (ii) any
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<PAGE> 25
potential or known Release, or threat of Release, of any Hazardous
Substances at, from or into the Borrower's place of business which the
Borrower reports in writing or is reportable in writing (or for which
any written report supplemental to any oral report is made) to any
federal, state, or local environmental agency; (iii) any notice of
violation of any Environmental Laws or of any release or threatened
release of Hazardous Substances, including a notice or claim of
liability or potential responsibility from any third party (including
without limitation any federal, state or local governmental officials)
and including notice of any formal inquiry, proceeding, demand,
investigation or other action with regard to the Borrower's business
operation; or (iv) any expense or loss that has been identified by such
governmental authority in connection with the assessment, containment,
removal or remediation of any Hazardous Substances with respect to which
the Borrower may be liable.
ARTICLE VII.
NEGATIVE COVENANTS
So long as the Borrower is indebted to the Bank hereunder, and until
payment in full of the Note and full and complete performance of all of its
other obligations arising hereunder (except for the Borrower's obligations under
Sections 5.7 or Section 9.1 to indemnify the Bank under certain circumstances
following the payment of the Note), the Borrower shall not do, or permit to be
done, any of the following:
SECTION 7.1. LIENS. Without the Bank's consent, create or assume or
permit to exist, any Lien upon or with respect to any of its assets, or assign
or otherwise convey any right to receive income except the following Liens
("Permitted Liens"):
(a) Liens in favor of the Bank;
(b) Liens for taxes, assessments or governmental charges or
levies on property of the Borrower if the same shall not at the time be
delinquent or thereafter can be paid without interest or penalty or are
being contested in good faith and by appropriate proceedings which serve
as a matter of law to stay the enforcement thereof and as to which
adequate reserves have been made ("General Tax Liens");
(c) Liens imposed by law, such as carrier's, warehousemen's and
mechanic's liens and other similar Liens arising in the ordinary course
of business for sums not yet due or which are being contested in good
faith and by appropriate proceedings which serve as a matter of law to
stay the enforcement thereof and as to which adequate reserves have been
made;
(d) Liens arising out of pledgor deposits under workers'
compensation laws, unemployment insurance, social security, retirement
benefits or similar legislation;
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<PAGE> 26
(e) Permitted Purchase Money Liens (including, without
limitation, Liens arising in connection with equipment leases);
(f) Rights of other parties under technology licenses from the
Borrower granted in connection with the development, manufacture or
marketing of pharmaceutical or other products, or otherwise in the
ordinary course of business;
(g) Rights of the United States government in certain technology,
the development of which is or was funded in whole or in part by the
United States government; and
(h) Security deposits under leases of the Borrower's premises set
forth on Schedule 7.1 hereto and security deposits under any future
leases of the Borrower's premises, provided that the aggregate of the
security deposits under such future leases does not exceed the sum of
(i) $250,000 plus (ii) the lesser of two months rent under each such
lease or the actual security deposit under each such lease;
(i) Leases and subleases and licenses and sublicenses granted to
others in the ordinary course of the Borrower's business.
(j) Liens on insurance proceeds securing the payment of financed
insurance premiums.
(k) Easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, do not materially detract from the value of the property
subject thereto.
(l) Liens securing obligations in respect of capital leases of
assets subject to such leases provided that such Liens do not exceed the
in place value of the property.
(m) Liens in connection with operating leases and Liens granted
to secure obligations with respect to "off balance sheet" or synthetic"
leases (i.e., leases where for tax purposes the lessee is treated as the
owner of the leased property but for GAAP purposes the lease is treated
as an operating lease and the lessor is treated as the owner of the
leased property).
(n) Liens consisting of pledges of cash collateral or cash
equivalent collateral, provided that such Liens do not encumber
collateral of a value greater than the net cash loan proceeds received
by the Borrower in a loan transaction closing concurrently with the
creation of such Liens, provided further that no such Lien shall cover
any property maintained in the Investment Account or Custodian Account.
SECTION 7.2. CHANGES IN BUSINESS; MERGER OR CONSOLIDATION; DISPOSITION
OF ASSETS. Without the Bank's consent:
(a) Consolidate with, merge into or convey or transfer its
properties substantially as an entirety to, any Person, except that the
Borrower may participate in any merger in
22
<PAGE> 27
which the Borrower is the surviving entity so long as after giving
effect to such merger the Borrower remains in compliance with all
covenants and conditions of this Agreement.
(b) Liquidate or dissolve itself (or suffer any liquidation or
dissolution).
(c) Effect any disposition of all or a substantial portion of its
assets (whether in one or more transactions) except that (i) the
Borrower may dispose of obsolete or worn out equipment, (ii) the
Borrower may replace equipment with upgraded equipment and may
thereafter dispose of the equipment so upgraded and replaced, (iii) the
Borrower may engage in research and development transactions (each, an
"R&D Transaction") involving the licensing of the Borrower's rights in
certain technology to other persons, provided that Borrower receives
fair market consideration for such licensing and, provided that after
giving effect to each such R&D Transaction, the Borrower remains in
compliance with all covenants and conditions of this Agreement; and (iv)
dispose of other assets in the ordinary course of Borrower's business
provided that Borrower receives equivalent value on such disposition of
assets. The expenditure of Borrower's funds for research and development
and related business operations in the ordinary course of Borrower's
business shall not be considered a disposition for purposes of this
Subsection 7.2(c).
(d) Engage to any substantial extent in any line or lines of
business other then gene discovery and characterization, functional
genomics and genetic diagnostics, and the development of diagnostic and
therapeutic and agbio products in connection therewith and related
business activities.
SECTION 7.3. CHANGE OF OFFICE ADDRESS. Except upon five (5) days' prior
written notice to the Bank, change the address of its principal office or place
of business or the place where it maintains its records with respect to the
Accounts.
SECTION 7.4. VIOLATION OF AGREEMENT. Take any action the effect of which
would constitute a breach or violation of any provision of this Agreement.
ARTICLE VIII.
EVENTS OF DEFAULT
SECTION 8.1. EVENTS OF DEFAULT. If any one or more of the following
events ("Event of Default") shall occur and be continuing, the entire unpaid
balance of the principal of and interest on the Note and all other obligations
and Indebtedness of the Borrower to the Bank arising hereunder and under the
other Loan Documents will (i) in the case of any Event of Default of the types
referred to in subparagraph (e) hereinbelow, immediately become due and payable
without notice and (ii) in the case of any other Event of Default, immediately
become due and payable upon written notice to that effect given to the Borrower
by the Bank, without presentment or demand for payment, notice of non-payment,
protest or further notice or demand of any kind, all of which are expressly
waived by the Borrower. Upon an Event of Default, the
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<PAGE> 28
Bank shall have the rights and remedies provided for herein and in the other
Loan Documents and under applicable law and in equity, and the rights and
remedies provided for herein shall be cumulative and in addition to the rights
and remedies provided for therein. Each of the following shall constitute an
Event of Default:
(a) Failure by the Borrower to make any payment when due of any
amount payable under the Loan Documents, which failure is not cured
within five (5) days of the occurrence thereof.
(b) Failure by the Borrower to make any mandatory payments under
any borrowing agreement (other than the Loan Documents) to which the
Borrower is a party within any applicable grace period provided in such
agreement or any other default by the Borrower under any such borrowing
agreement and the failure of the Borrower to cure such default within
any applicable grace period, provided that no Event of Default will be
deemed to have occurred under this paragraph (b) with respect to any
indebtedness under any borrowing agreement if payment of such
indebtedness, after notice thereof having been given to the Bank, is
being contested by the Borrower in good faith and by appropriate
proceedings and such contest operates to prevent the other party to such
agreement from exercising its remedies against the Borrower or any of
its properties and the amount in dispute is in the aggregate less than
$250,000.
(c) Failure by the Borrower to perform or observe any material
term, condition or covenant of this Agreement or of any of the Loan
Documents (other than the covenants set forth in Section 5.10(i) through
5.10(v) which shall constitute a Trigger Event instead) which failure
(other than a failure which by its nature is not capable of cure and
other than a failure to perform or observe any term, condition or
covenant referred to or set forth in Subparagraphs (a), (b) and (c)
hereinabove) is not cured within thirty (30) days of the occurrence
thereof.
(d) Any representation or warranty made in writing to the Bank in
any of the Loan Documents or in connection with the making of the Loan
or a certificate, statement or report made or delivered in compliance
with this Agreement, will have been false or misleading in any material
respect when made or delivered.
(e) The Borrower makes an assignment for the benefit of
creditors, files a petition for bankruptcy, petitions or applies to any
tribunal for the appointment of a receiver, custodian, or any trustee
for it or a substantial part of its assets, or commences any proceeding
under any bankruptcy, reorganization, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, whether
now or hereafter in effect; or there will have been filed any such
petition or application, or any such proceeding has been commenced
against it, which remains undismissed for a period of sixty (60) days or
more; or any order for relief is entered in any such proceeding; or the
Borrower by any act or omission indicates its consent to, approval of or
acquiescence in any such petition, application or proceeding or the
appointment of a custodian, receiver or any trustee for it or any
substantial part of any of its properties; or the Borrower suffers
24
<PAGE> 29
any custodianship, receivership or trusteeship to continue undischarged
for a period of sixty (60) days or more.
(f) Any single judgment of $200,000 or more or a combination of
unsecured judgments aggregating $200,000 or more against the Borrower
not covered by insurance or any attachment or levy of execution against
any substantial part of the Borrower's properties for any amount (not
covered by insurance) remains unpaid, unstayed on appeal, undischarged,
unbonded or undismissed for a period of thirty (30) days or more.
(g) Any Loan Document ceases to be in full force and effect in
all material respects for any reason (other than due to the payment in
full of all amounts secured or evidenced thereby or due to discharge in
writing by the Bank).
(h) After the occurrence of a Trigger Event under Section 5.10,
the failure of the Borrower and/or the Account Holder to make the
requisite transfer to the Custodian Account as provided in Section 5.11
such that, not later than 5:00 P.M. in New York, New York on the first
Business Day following the occurrence of the Trigger Event, the
Restricted Account Balance equals or exceeds the Required Restricted
Account Balance.
(i) Upon the occurrence of a Trigger Event under Section 5.10,
the failure of the Borrower to execute and deliver, or cause to be
executed and delivered, any additional documents reasonably requested by
the Bank in connection with the transfer by the Borrower and/or Account
Holder to the Custodian Account as provided in Section 5.11 (including
without limitation any additional documents requested by the Bank in
order to further implement or perfect the pledge of assets held in the
Custodian Account and any additional opinion of the Borrower's counsel
on such matters the Bank may require, in a form and substance
satisfactory to Bank).
(j) Failure by the Borrower to comply in any material respect
with its "Investment Policy", for investment of all Cash and Cash
Equivalents or the Borrower's making a material change to such
investment policy without the Bank's prior written approval, which
approval shall not be unreasonably withheld. A copy of the Borrower's
Investment Policy is attached hereto as Schedule 8.1.(j).
(k) After the occurrence of a Trigger Event and the initial
transfer to the Custodian Account as provided in Section 5.11, the
failure of the Borrower and/or the Account Holder to make, within one
Business Day following the request of the Bank, such additional
transfers to the Custodian Account as may be necessary, from time to
time, to increase the Restricted Account Balance so that it equals the
Required Restricted Account Balance.
(l) The failure by the Borrower, at any time, to maintain a Net
Cash Level equal to the sum of (i) the then outstanding principal
balance under the Note plus (ii) Ten Million Dollars ($10,000,000).
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<PAGE> 30
ARTICLE IX.
MISCELLANEOUS PROVISIONS
SECTION 9.1. INDEMNITY; ADDITIONAL FEES. The Borrower shall indemnify
Bank against, and hold it harmless from, any loss, liabilities, damages, claims,
and reasonable costs and expenses (including reasonable attorneys' fees and
disbursements) suffered or incurred by the Bank arising out of, resulting from
or in any manner connected with, the Loan Documents, or any transaction related
hereto or thereto, except any such loss arising solely from the Bank's own gross
negligence or willful misconduct. The provisions of this Section 9.1 will
survive for a period of two (2) years following the repayment of the Note and
the termination of this Agreement.
SECTION 9.2. SURVIVAL OF AGREEMENTS AND REPRESENTATIONS. All agreements,
representations and warranties made herein will survive the delivery of the Loan
Documents and shall be in full force and effect during the term of this
Agreement.
SECTION 9.3. MODIFICATIONS, CONSENTS AND WAIVERS. No modification,
amendment or waiver of or with respect to any provision of the Loan Documents,
nor consent to any departure by a party from any of the terms or conditions
thereof shall in any event be effective unless it is in writing and signed by
the party against whom such modification, amendment, waiver or consent is sought
to be enforced. Any such waiver or consent will be effective only in the
specific instance and for the purpose for which given. No consent to or demand
on the Borrower in any case will, of itself, entitle it to any other or further
notice or demand in similar or other circumstances.
SECTION 9.4. ENTIRE AGREEMENT. This Agreement and the other Loan
Documents embody the entire agreement and understanding between the Bank and the
Borrower and supersede all prior agreements and understandings relating to the
subject matter hereof.
SECTION 9.5. REMEDIES CUMULATIVE. Each and every right granted to the
Bank hereunder or under any other document delivered hereunder or in connection
herewith, or allowed it by law or equity, is cumulative and may be exercised
from time to time. No failure on the part of the Bank or the holder of the Note
to exercise, and no delay in exercising, any right shall operate as a waiver
thereof, nor will any single or partial exercise of any right preclude any other
or future exercise thereof or the exercise of any other right.
SECTION 9.6. FURTHER ASSURANCES. At any time and from time to time, upon
the request of the Bank, the Borrower shall execute, deliver and acknowledge or
cause to be executed, delivered and acknowledged such further documents and
instruments and do such other acts and things as the Bank may reasonably request
to fully effect the purposes of the Loan Documents.
SECTION 9.7. NOTICES. All notices, requests, reports and other
communications pursuant to this Agreement must be in writing, either by letter
(delivered by hand or commercial delivery
26
<PAGE> 31
service or sent by certified mail, return receipt requested, except for routine
reports which may be by ordinary first class mail) or facsimile or telecopier,
addressed as follows:
If to Borrower: Sequana Therapeutics, Inc.
11099 North Torrey Pines Road, Suite 160
La Jolla, CA 92037
Attn: Thomas H. Aasen
Telephone: (619) 646-8231
Facsimile: (619) 452-6653
If to Borrower's counsel: Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Mike O'Donnell
Telephone: (415) 493-9300
Facsimile: (415) 493-6811
If to Bank: The Sumitomo Bank, Limited
Pine Street Center
100 Pine Street, Suite 3300
San Francisco, CA 94111-5219
Attn: Carole A. Daley, Vice President
Telephone: (415) 394-0868
Facsimile: (415) 394-9797
If to Bank's Counsel: Freed & Heinemann LLP
One Jackson Place
633 Battery Street, Suite 620
San Francisco, CA 94111
Attn: Peter M. Heinemann, Esq.
Telephone: (415) 986-0707
Facsimile: (415) 986-0999
Any notice, request or communication hereunder will be deemed to have been given
(i) on the day on which it is delivered by hand to such party at its address
specified above, (ii) if sent by mail, on the third (3rd) Business Day following
the day it was deposited in the mail, postage prepaid, or (iii) if sent by
telecopy, when transmitted addressed as aforesaid on a Business Day during
normal business hours and receipt is confirmed, on such Business Day. Any party
may change the person or address to whom or which notices are to be given
hereunder, by notice duly given hereunder, provided, however, that any such
notice will be deemed to have been given hereunder only when actually received
by the party to which it is addressed.
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SECTION 9.8. CONSTRUCTION; GOVERNING LAW.
(a) The headings used in this Agreement and the table of contents
are for convenience only and will not be deemed to constitute a part
hereof. All uses herein of the masculine gender or of singular or plural
terms will be deemed to include uses of the feminine or neuter gender or
plural or singular terms, as the context may require. All references
herein (including the definitions set out in Appendix A hereto) to any
agreements shall be to such agreement as amended or modified to the date
of reference. All references to a particular entity shall include a
reference to such entity's successors and permitted assigns. The words
"herein," "hereof" and "hereunder" refer to this Agreement as a whole
and not to any particular section or subsection of this Agreement.
"Including" means "including, without limitation".
(b) THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
WITHOUT REFERENCE TO ITS CONFLICT OF LAWS RULES.
SECTION 9.9. WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE BANK
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT
OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, ANY LOAN DOCUMENT OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR
ACTIONS OF THE BORROWER OR THE BANK. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE BANK PROVIDING THE LOAN DESCRIBED HEREIN.
SECTION 9.10. JURISDICTION.
(a) Each of the Borrower and the Bank hereby irrevocably and
unconditionally submits, for itself and its property, to service of
process (directly or on an agent) in California to the nonexclusive
jurisdiction of any California state court or Federal court of the
United States of America in each case sitting in San Francisco, and any
appellate court handling an appeal from any thereof, in any action or
proceeding arising out of or relating to this Agreement or any other
Loan Agreement, or for recognition or enforcement of any judgment, and
the Borrower and the Bank hereby irrevocably and unconditionally agree
that all claims in respect of any such action or proceeding may be heard
and determined in such California state or, to the extent permitted by
law, in such Federal court. Each of the Borrower and the Bank agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this
Agreement shall affect any right that a party may otherwise have to
bring any action or proceeding relating to this Agreement or any other
Loan Agreement against any other party or its respective properties in
the court of any jurisdiction.
(b) Each of the Borrower and the Bank hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection which it may now or hereafter have to
the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any such California state or Federal
court. Each
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of the Borrower and the Bank hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the
maintenance of such action or proceeding in any such court.
SECTION 9.11. RELATIONSHIP OF THE BORROWER AND THE BANK. The Borrower
and the Bank agree that nothing contained in this Agreement or any other
document executed in connection with the Loan is intended or shall be construed
to establish the Borrower and the Bank as joint venturers or partners; and the
Borrower hereby indemnifies and agrees to hold the Bank, its officers,
directors, agents and employees harmless from any and all damages resulting from
such a construction of the relationship of the parties hereto, except any such
damage arising solely from the Bank's own gross negligence or willful
misconduct.
SECTION 9.12. SEVERABILITY. The provisions of this Agreement are
severable, and if any clause or provision hereof shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability will affect only such clause or provision, or part thereof, in
such jurisdiction and will not in any manner affect such clause or provision in
any other jurisdiction, or any other clause or provision in this Agreement in
any jurisdiction. Each of the covenants, agreements and conditions contained in
this Agreement is independent and compliance by the Borrower with any of them
will not excuse noncompliance by the Borrower with any other.
SECTION 9.13. BINDING EFFECT; ASSIGNMENT.
(a) This Agreement will be binding upon and inure to the benefit
of the Borrower and its successors and its assigns as permitted herein
and to the benefit of Bank and its successors and assigns.
(b) The rights and obligations of the Borrower under this
Agreement may not be assigned or delegated without the prior written
consent of the Bank, and any purported assignment or delegation without
such consent shall be void.
(c) Bank, without the consent of the Borrower, may at any time
assign or grant participations to any other Person in all or part of its
rights and obligations under the Loan Documents; provided, however, that
no such assignment or participation may be made or shall be effective
unless the Bank shall have delivered prior notice thereof to the
Borrower of the proposed effective date and amount of such assignment or
participation and the identity of the proposed assignee or participant.
The Bank shall be the agent of all such assignees and participants for
the purpose of the receipt and delivery of funds and notices under the
Loan Documents unless the Borrower otherwise consents (which consent
will not unreasonably be withheld).
SECTION 9.14. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same document.
SECTION 9.15. RE-ESTABLISHMENT OF INVESTMENT ACCOUNT. If, after the
occurrence of a Trigger Event and after the deposits to the Custodian Account
required under Section 5.11 have
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been made, the Borrower's Net Cash Level is restored to a level which equals or
exceeds the sum of the then outstanding principal balance due under the Note
plus Twenty Million Dollars ($20,000,000), then Borrower may request that the
Investment Account be re-established by delivering a written notice to Bank (the
"Investment Account Re-Establishment Notice"). After Borrower's delivery to Bank
of the Investment Account Re-Establishment Notice, the Bank agrees that the
Investment Account may be re-established and all amounts held in the Custodian
Account less the Required Restricted Account Balance of One Thousand Dollars
($1,000) shall be transferred to the Investment Account on the date that all of
the following conditions have been satisfied ("Transfer Date"):
(a) the Borrower has delivered to the Bank a written statement,
accompanied by confirming statements of the custodians of such cash
balances and Cash Equivalent Balances, which is certified as to accuracy
by the Chief Financial Officer or director of finance of Borrower, which
evidences that the Borrower's Net Cash Level has been restored to a
level which equals or exceeds the sum of the then outstanding principal
balance due under the Note plus Twenty Million Dollars ($20,000,000);
(b) a Trigger Event shall not be continuing as of either the date
of the Investment Account Re-Establishment Notice or the Transfer Date;
(c) the Borrower shall have otherwise fully complied with,
performed or observed all material terms, conditions and covenants in
the Loan Documents as of the date of the Investment Account
Re-Establishment Notice and the Transfer Date;
(d) the Borrower, the Bank and the Account Holder shall have
executed and delivered such additional documents, reasonably required by
the Bank, necessary to re-establish the Investment Account in accordance
with the provisions of this Agreement and with Cash and Cash
Equivalents, which are not subject to any Lien or claim of any person
(other than General Tax Liens), on hand in the Investment Account (upon
re-establishment thereof) in an amount not less than the sum of Ten
Million Dollars ($10,000,000) plus restricted cash and amounts which may
be restricted in the future pursuant to agreements between the Borrower
and third parties, including without limitation, a re-affirmation of the
Irrevocable Instructions or execution of new irrevocable instructions
providing substantially the same terms and conditions as the Irrevocable
Instructions;
(e) the Borrower, the Bank and the Bailee (where necessary) shall
have executed and delivered such additional documents necessary to
release funds from the Custodian Account and transfer such funds to the
Investment Account and such additional documents, reasonably required by
the Bank, necessary to re-affirm and continue in full force and effect
the Custodian Agreement, the Collateral Bailment Agreement, the
Restricted Account and Security Agreement and the other Loan Documents;
and
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<PAGE> 35
(f) the Borrower shall have delivered to Bank an additional
opinion of Borrower's counsel on such matters as the Bank may reasonably
require with respect to the re-establishment of the Investment Account
and re-affirmation of the Loan Documents, in a form and substance
satisfactory to Bank.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
SEQUANA THERAPEUTICS, INC.
By: /s/ M. Scott Salka
---------------------------------------
Name: M. Scott Salka
-------------------------------------
Title: VP, CFO
-----------------------------------
By:
---------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
THE SUMITOMO BANK, LIMITED
By:
---------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
By:
---------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
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<PAGE> 36
(f) the Borrower shall have delivered to Bank an additional
opinion of Borrower's counsel on such matters as the Bank may reasonably
require with respect to the re-establishment of the Investment Account
and re-affirmation of the Loan Documents, in a form and substance
satisfactory to Bank.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
SEQUANA THERAPEUTICS, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
By:
---------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
THE SUMITOMO BANK, LIMITED
By: /s/ ANDREA B. SARGENT
---------------------------------------
Name: ANDREA B. SARGENT
-------------------------------------
Title: VICE PRESIDENT AND MANAGER
-----------------------------------
By: /s/ CAROLE A. DALEY
---------------------------------------
Name: CAROLE A. DALEY
-------------------------------------
Title: VICE PRESIDENT
-----------------------------------
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* CONFIDENTIAL TREATMENT
REQUESTED
APPENDIX A TO LOAN AGREEMENT -- DEFINITIONS
The following words shall have the meanings specified below in the
Section of the Agreement referred to below.
"ACCOUNT HOLDER" -- is defined in Subsection 2.6(a).
"ACCOUNTS" -- the Investment Account and the Custodian Account.
"AFFILIATE" -- as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") shall mean possession
directly or indirectly, of power to direct or cause the direction of management
or policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise). The term "Affiliate" shall not
include any Person who controls another Person solely by virtue of such Person's
position as a corporate officer or director of such other Person.
"AGREEMENT" -- is defined in the Preamble.
"APPLICABLE MARGIN" -- for any Eurodollar Rate Loan portion shall be
* .
"AUTHORIZED SIGNATORY" -- with respect to a corporation, any officer of
such corporation.
"AVAILABILITY PERIOD" -- the period commencing on the Closing Date and
ending on September 30, 1997.
"BAILEE" -- is defined in Subsection 2.6(b).
"BANK" -- is defined in the Preamble.
"BORROWER" -- is defined in the Preamble.
"BUSINESS DAY" -- a day when commercial banks in both San Francisco,
California and Chicago, Illinois and, in the case of setting the Reserve
Adjusted Eurodollar Rate, London, England, are open for business with respect to
transactions of the kind contemplated in this Agreement.
"CERCLA" -- is defined in Subsection 3.16(a).
A-1
<PAGE> 38
"CASH AND CASH EQUIVALENTS" -- liquid investments, consisting of cash
and cash equivalents and other investments in investment grade securities, that
are classified on the Borrower's consolidated balance sheet as current,
noncurrent, long-term or restricted.
"CASH EQUIVALENT BALANCES" -- the aggregate amount of Cash Equivalents,
as reported in the Financial Statements in accordance with GAAP.
"CLOSING DATE" -- October 23, 1996.
"CODE" -- the Internal Revenue Code of 1986, as amended.
"COLLATERAL BAILMENT AGREEMENT" -- the Collateral Bailment Agreement of
even date herewith by and between the Bank and Sumitomo Bank of New York Trust
Company.
"COMMITMENT FEE" -- is defined in Subsection 2.3(d)
"CONTROLLED GROUP" -- all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower, are treated as a single employer under
Section 414(b), 414(c) or 414(m) of the Code and Section 4001(a)(2) of ERISA.
"CURRENT RATIO" -- the ratio of total current assets to total current
liabilities.
"CUSTODIAN ACCOUNT" -- is defined in Subsection 2.6(b).
"CUSTODIAN AGREEMENT" -- Custodian Agreement of even date herewith by
and between the Borrower and Sumitomo Bank of New York Trust Company.
"DEFAULT RATE" -- is defined in Subsection 2.3(c).
"DISBURSEMENT" -- a disbursement of available proceeds of the Loan.
"DISPOSAL," "DISPOSE(D)" -- as specified in RCRA and in the regulations
promulgated thereunder.
"ELECTION NOTICE" -- is defined in Subsection 2.1(c).
"EPA" -- is defined in Subsection 3.16(b).
"ENVIRONMENTAL LAWS" -- is defined in Subsection 3.16(b).
"ERISA" -- is defined in Section 3.15.
A-2
<PAGE> 39
"EUROCURRENCY RESERVE PERCENTAGE" -- with respect to each Interest
Period, a percentage (expressed as a decimal) equal to the percentage (if any)
in effect two Business Days prior to the first day of such Interest Period, as
prescribed by the F.R.S. Board, for determining reserve requirements applicable
to "Eurocurrency liabilities" pursuant to Regulation D or any other then
applicable regulation of the F.R.S. Board which prescribes reserve requirements
applicable to "Eurocurrency liabilities," as presently defined in said
Regulation D. For purposes of this definition, Eurodollar Rate Loan Portions
hereunder shall be deemed to be "Eurocurrency liabilities" as defined in said
Regulation D.
"EURODOLLAR RATE LOAN PORTION -- any portion of the Loan, which the
Borrower has notified the Bank (in accordance with the provisions of Section
2.1) is to bear interest at the Reserve Adjusted Eurodollar Rate plus the
Applicable Margin for the applicable Interest Period.
"EURODOLLAR RATE" -- for any Eurodollar Rate Loan Portion, with respect
to the applicable Interest Period relating to such Eurodollar Rate Loan Portion,
the rate per annum (rounded up to the next whole multiple of 1/16 of 1%) equal
to the rate at which United States dollar deposits are offered to the Bank in
the London interbank Eurodollar market as of approximately 11:00 a.m., London,
England time, on the second Business Day prior to the first day of such Interest
Period for delivery in immediately available funds on the first day of such
Interest Period for the number of days in such Interest Period and in an amount
equal to the amount of the Eurodollar Rate Loan Portion.
"EVENT OF DEFAULT" -- is defined in Section 8.1.
"FINANCIAL STATEMENTS" -- (a) the audited consolidated balance sheet and
consolidated statements of operations, shareholders' equity and cash flows of
Sequana for the fiscal year then ended, together with the unqualified opinion of
the independent public accountants preparing such statements; and (b) the
quarterly unaudited consolidated balance sheet and unaudited consolidated
statements of operations, and cash flows for Sequana for the fiscal quarters
ended March, June, September and December, certified as to accuracy by the Chief
Financial Officer or director of finance of Sequana.
"FINANCING STATEMENT" -- a financing statement or statements on form
UCC-1, signed by the Borrower and describing the property in which the Bank has
a security interest under the Restricted Account and Security Agreement, all in
form and substance suitable for filing as a financing statement under Article 9
of the Uniform Commercial Code as enacted in California and/or New York.
"FUNDING FEE" -- is defined in Subsection 2.3(d).
"GAAP" -- generally accepted accounting principles.
"GENERAL TAX LIENS" -- is defined in Subsection 7.1(b).
A-3
<PAGE> 40
"HAZARDOUS SUBSTANCES" -- is defined in Subsection 3.16(b).
"INDEBTEDNESS" -- with respect to any Person, all:
(a) indebtedness, liabilities or other obligations of such Person
for borrowed money or for the deferred purchase price of property or
services (excluding all operating lease obligations and trade accounts
payable and accrued obligations incurred in the ordinary course of
business) as determined in accordance with generally accepted accounting
principles consistently applied and any other contingent liabilities of
such Person;
(b) indebtedness, liabilities or obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property,
assets or businesses;
(c) reimbursement and other obligations of such Person in respect
of letters of credit and bankers acceptance and all net obligations in
respect of interest rate swaps, caps, floors and collars, currency
swaps, and other similar financial products;
(d) indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by
such Person;
(e) obligations under leases which shall have been or should be,
in accordance with GAAP, recorded as capital leases; and
(f) indebtedness of another Person of the types referred to in
clauses (a) through (e) guaranteed directly or indirectly in any manner
by the Person for whom Indebtedness is being determined, or in effect
guaranteed directly or indirectly by such Person through an agreement to
purchase or acquire such indebtedness, to advance or supply funds for
the payment or purchase of such indebtedness or otherwise assure a
creditor against loss, or secured by any Lien upon or in property owned
by the Person for whom Indebtedness is being determined, whether or not
such Person has assumed or become liable for the payment of such
indebtedness of such other Person.
"INITIATION FEE" -- is defined in Subsection 2.3(d).
"INTELLECTUAL PROPERTY RIGHTS" -- is defined in Section 3.11.
"INTEREST DIFFERENTIAL" -- with respect to any prepayment of a
Eurodollar Rate Loan Portion on a day other than an Interest Payment Date
falling at the end of the applicable Interest Period, the sum of: (a) the per
annum interest rate payable with respect to such Eurodollar Rate Loan Portion as
the date of the prepayment minus (b) the Reserve Adjusted Eurodollar Rate plus
the Applicable Margin on, or as near as practicable to, the date of the
prepayment for a
A-4
<PAGE> 41
Eurodollar Rate Loan Portion commencing on such date and ending on the last day
of the applicable Interest Period. The determination of the Interest
Differential by the Bank shall be conclusive in the absence of manifest error.
"INTEREST PAYMENT DATE" -- (a) with respect to any Prime Rate Loan
Portion, the last Business Day of each calendar month; (b) with respect to any
Eurodollar Rate Loan Portion, the last day of each applicable Interest Period
and, if such Interest Period is longer than three (3) months, also on the last
day of each three (3) month period during such Interest Period (with the first
such three month period commencing on the first day of the applicable Interest
Period); and (c) for any Loan Portion, the date that the Loan Portion is due by
either the occurrence of Maturity Date or an Event of Default having occurred
and the maturity of the Loan having been accelerated pursuant to the terms of
the Loan Documents.
"INTEREST PERIOD" -- as to any Eurodollar Rate Loan Portion, the period
commencing on the date of the initial funding of such Eurodollar Rate Loan
Portion or the last day of the immediately preceding Interest Period for any
Eurodollar Rate Loan Portion that is to be continued as a Eurodollar Rate Loan
Portion and ending, with respect to such Eurodollar Rate Loan Portion, on the
numerically corresponding day (or if there is no numerically corresponding day,
on the last day), in the calendar month that is one, two, three, six or, if
available, twelve months thereafter, in each case as the Borrower may elect in
the Election Notice; provided however, that (a) no Interest Period with respect
to any Eurodollar Rate Loan Portion shall end later than the Maturity Date, (b)
if an Interest Period would end on a day that it is not a Business Day, such
Interest Period shall be extended to the next succeeding Business Day unless
such next succeeding day would fall in the next calendar month, in which case,
such Interest Period shall end on the immediately preceding Business Day, and
(c) interest shall accrue from and including the first day of an Interest Period
to but excluding the last Business Day of such Interest Period.
"INTEREST RESERVE" -- on any date of determination means an amount equal
to the interest that would accrue over the next three months on an amount equal
to the principal balance of the Loan outstanding on such date of determination.
"INVESTMENT ACCOUNT" -- is defined in Subsection 2.6(a).
"INVESTMENT ACCOUNT RE-ESTABLISHMENT NOTICE" -- is defined in
Section 9.15.
"INVESTMENT POLICY" -- is defined in Subsection 8.1(j) and a true and
correct copy of such Investment Policy is attached as Schedule 8.1(j).
"IRREVOCABLE INSTRUCTIONS AND POWER OF ATTORNEY" -- is defined in
Subsection 2.6(b).
"IRS" -- is defined in Subsection 3.15(a).
A-5
<PAGE> 42
"LIEN" -- any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement and any
lease in the nature of a security interest or lien).
"LOAN" -- is defined in Section 2.1.
"LOAN DOCUMENTS" -- this Agreement, the Note, the Restricted Account and
Security Agreement, the Collateral Bailment Agreement, the Irrevocable
Instructions and Power of Attorney, the Custodian Agreement, and all other
documents executed and delivered in connection herewith or therewith, including
all amendments, modifications and supplements of or all such documents.
"LOAN PORTION" -- as the circumstances or context warrants, the portion
of the Loan which is a Eurodollar Rate Loan Portion, or Prime Rate Loan Portion.
"MATURITY DATE" -- September 28, 2001.
"NET CASH LEVEL" -- the aggregate amount of the market value of Cash and
Cash Equivalents less restricted cash (but not including any amounts in the
Custodian Account which are restricted or pledged for the benefit of the Bank)
and amounts pledged pursuant to agreements between the Borrower and third
parties. As used in the preceding sentence, the term restricted cash shall not
apply to any general lien negative covenants applying to the general assets of
Borrower made by the Borrower to a third party and which are similar to the
negative covenants contained in Article VII hereof.
"NET WORTH" -- an amount equal to the Total Assets minus Total
Liabilities.
"NOTE" -- is defined in Section 2.1.
"PBGC" -- is defined in Subsection 3.15(a).
"PERMITTED LIENS" -- is defined in Section 7.1.
"PERMITTED PURCHASE MONEY LIENS" -- purchase money security interests in
personal property acquired after the date hereof to secure purchase money
Indebtedness, to the extent that the amount of money borrowed does not exceed
the value of the personal property purchased, and the security interest granted
does not extend beyond the personal property purchased.
"PERSON" -- an individual, a corporation, a partnership, a joint
venture, a trust or unincorporated organization, a joint stock company or other
similar organization, a government or any political subdivision thereof, a
court, or any other legal entity, whether acting in an individual, fiduciary or
other capacity.
A-6
<PAGE> 43
"PLAN(S)" -- is defined in Subsection 3.15(a) hereof.
"PRIME RATE" -- the interest rate which the Bank announces from time to
time as its floating prime rate in the United States.
"PRIME RATE LOAN PORTION" -- any portion of the Loan which bears
interest at the Prime Rate as provided in Section 2.1 or 2.7.
"RCRA" -- is defined in Subsection 3.16(a).
"R&D TRANSACTION" -- is defined in Subsection 7.2(c).
"REGULATORY CHANGE" -- any change after the date of this Agreement in
United States federal, state or local laws or regulations or the adoption or
making after such date of any interpretations, directives or requests applying
to a class of banks including the Bank of or under any United States federal,
state, or local laws or regulations (whether or not having the force of law) by
any court or governmental or monetary authority charged with the interpretation
or administration thereof.
"RELEASE" -- as specified in CERCLA.
"REPORTING PERIOD" -- a fiscal quarter of the Borrower.
"REQUIRED RESTRICTED ACCOUNT BALANCE" -- (a) on and after a Trigger
Event has occurred, the sum of the Borrower's then outstanding principal balance
of the Loan plus the Interest Reserve and (b) prior to the occurrence of a
Trigger Event, the sum of One Thousand Dollars ($1,000).
"RESERVE ADJUSTED EURODOLLAR RATE" -- with respect to any Eurodollar
Rate Loan Portion for any Interest Period, a rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) determined pursuant to the following
formula:
Reserve Adjusted Eurodollar Rate
Eurodollar Rate = -----------------------------------
1 - Eurocurrency Reserve Percentage
"RESTRICTED ACCOUNT AND SECURITY AGREEMENT" -- the Restricted Account
and Security Agreement of even date herewith by and between the Bank and the
Borrower.
"RESTRICTED ACCOUNT BALANCE" -- the sum of all Cash and Cash Equivalents
and any other investments on deposit in the Custodian Account, the amount of
such Cash Equivalents or investments to be calculated at the lower of cost or
market value.
A-7
<PAGE> 44
"SARA" -- is defined in Subsection 3.16(a).
"SEQUANA" -- is defined in the Preamble.
"SUBSIDIARY" -- any person of which the Borrower owns directly or
indirectly: (i) sufficient capital stock to enable it to elect at least a
majority of the board of directors or similar managing body of such person, or
(ii) capital stock with rights under the charter documents of such Person to
elect a director or similar managing official with the power to veto material
business decisions and organizational changes.
"TAXES" -- is defined in Subsection 2.5(a).
"TOTAL ASSETS" -- total assets as determined in accordance with
generally accepted accounting principles, consistently applied; provided,
however, that Total Assets shall be reduced by the amount (if any) of intangible
assets.
"TOTAL DEBT" -- the aggregate amount of the Borrower's Indebtedness.
"TRANSFER DATE" -- is defined in Section 9.15.
"TRIGGER EVENT" -- is defined in Section 5.10.
"UCC" -- the Uniform Commercial Code in effect from time to time in the
relevant jurisdiction.
A-8
<PAGE> 45
Schedule 5.6
INSURANCE
<TABLE>
<CAPTION>
COVERAGE PERIOD OF COVERAGE INSURANCE CO. POLICY NO.
-------- ------------------ ------------- ----------
<S> <C> <C> <C>
Products Liability and
Umbrella Liability
Excess Liability
Package (General Liability,
Property & Fidelity)
Non-owned & Hired Automobile
Directors & Officers Liability
Worker's Compensation
Foreign Package
Cargo
Fiduciary
</TABLE>
<PAGE> 46
NOTE
$7,000,000.00 San Francisco, California
October 23, 1996
FOR VALUE RECEIVED, Sequana Therapeutics, Inc., a California
corporation ("Borrower"), hereby promises to pay to the order of The Sumitomo
Bank, Limited, a Japanese banking corporation ("Bank"), without counterclaim,
offset or deduction, the principal sum of SEVEN MILLION DOLLARS ($7,000,000), in
accordance with the terms of the Loan Agreement (referred to below) and to pay
interest on the outstanding principal balance at the interest rates provided in
the Loan Agreement and elected by Borrower and calculated in accordance with the
terms of Loan Agreement. This Note is the Note referred to in the Loan
Agreement, of even date herewith, between Borrower and Bank, and is subject to
all of the terms and conditions of the Loan Agreement (which are incorporated
herein by reference), including the rights of prepayment and the rights of
acceleration of maturity. Terms used herein have the meanings assigned to those
terms in the Loan Agreement, unless otherwise defined herein.
Interest only shall be payable on each Interest Payment Date during the
period commencing with the initial Disbursement and continuing through and
including September 30, 1997. Thereafter, the unpaid principal balance hereunder
shall be paid in forty-eight (48) equal consecutive monthly installments of
principal (each installment being in an amount sufficient to amortize the
outstanding principal balance of the Loan over a period of forty-eight (48)
months), together with interest on the unpaid principal balance commencing from
the Closing Date, payable on the last Business Day of each calendar month
commencing with the first such payment due on October 31, 1997 and continuing
until the Maturity Date, on which date Borrower shall make a final payment in an
amount equal to all of the then unpaid principal of the Loan and all unpaid
interest thereon, provided, however, that repayment of any or all of the
outstanding principal balance hereunder and all accrued and unpaid interest
thereon may be accelerated by Bank as hereinafter provided upon the occurrence
of any Event of Default under the Loan Agreement. Any installment of interest
only or of principal and interest paid more than five (5) days late or any other
amount payable hereunder which is not paid when due will bear (and Borrower
shall pay) interest (to the extent permitted by law) from such due date until
such unpaid amount has been paid in full (whether before or after judgment) at a
rate per annum equal to the Default Rate.
Borrower hereby authorizes Bank to record on schedule(s) annexed to
this Note (a) the date and amount of each portion of the Loan which constitutes
a Eurodollar Rate Loan Portion or Prime Rate Loan Portion; (b) the term of the
Interest Period for the Eurodollar Rate Loan Portion; (c) the interest rate or
rates for each Eurodollar Rate Loan Portion or Prime Rate Loan Portion and the
effective date(s) of all changes in such rates; (d) the date and amount of each
interest only payment on each Eurodollar Rate Loan Portion or Prime Rate Loan
Portion; and (e) the date and amount of each principal and interest payment on
each Eurodollar Rate Loan Portion or Prime Rate Loan Portion and of each
prepayment of principal made by Borrower, and
1
EXHIBIT 2.1
<PAGE> 47
Borrower agrees that all such notations shall constitute prima facie evidence of
the matters noted. Bank's failure to record such information shall not reduce or
affect the obligations of Borrower hereunder or under the Loan Agreement.
Upon the occurrence of any Event of Default under the Loan Agreement,
Bank, at its option and without further notice, demand, or presentment for
payment to Borrower, may declare immediately due and payable the unpaid
principal balance and interest accrued thereon together with all other sums owed
by Borrower under this Note and the Loan Documents (including, but not limited
to reasonable attorneys' fees as provided below) in accordance with the terms of
the Loan Agreement, anything in this Note and the Loan Documents to the contrary
notwithstanding. Notwithstanding the foregoing, under certain circumstances as
provided in the Loan Agreement or under applicable law, the unpaid principal
balance and interest accrued thereon together with all other sums owed by
Borrower under this Note and the Loan Documents (including, but not limited to,
reasonable attorneys fees as provided below) shall automatically become due and
payable. Payment of such sums may be enforced and recovered in whole or in part
at any time by one or more of the remedies provided to Bank in this Note or the
Loan Documents. All amounts so accelerated under this Note or the Loan
Documents, or all such amounts that become due and payable on the Maturity Date
but remain unpaid, shall in each case (without need for further notice) bear
interest from the date of such acceleration or the Maturity Date, as applicable,
until the date such amounts are paid in full at a rate per annum equal to the
Default Rate.
Borrower shall make all payments hereunder in lawful money of the
United States and in immediately available funds to Bank's account by means of a
wire transfer addressed as follows: The Sumitomo Bank, Limited, Chicago Bank,
ABA 071001850, through the Federal Reserve Bank of Chicago, Reference: Sequana.
The computation of interest hereunder shall be on the basis of a 360 day year,
for actual days elapsed.
All agreements between Borrower and Bank, whether now existing or
hereafter arising, are hereby limited so that in no event shall the interest
charged hereunder or under the Loan Agreement or any other charges hereunder or
under the Loan Agreement which may at any time be deemed to be interest or
agreed to be paid to Bank exceed the maximum amount permissible under applicable
law. Bank shall be entitled to amortize, prorate and spread throughout the full
term of this Note all interest paid or payable so that the interest paid does
not exceed the maximum amount permitted by law. In the event that the total
liability for payments of interest and payments in the nature of interest,
including without limitation, all charges, fees or other sums which may at any
time be deemed to be interest, shall for any reason whatsoever, result in an
effective rate of interest that for any interest payment period exceeds the
amount which Bank may lawfully collect, then the interest rate shall
automatically be reduced to the maximum rate permitted by law and all sums in
excess of those lawfully collectible as interest for the period in question
shall, without further notice to any party hereto, be applied as a premium-free
reduction of the principal balance, provided, however, that Bank may, at any
time, and from time to time, elect, by notice in writing to Borrower, to waive,
reduce or limit the collection of any sums (or refund to Borrower any sums
collected) in excess of those lawfully collectible as interest rather than
accept such sums as prepayment of the principal balance.
2
<PAGE> 48
Borrower shall pay all reasonable fees, costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the preparation and negotiation
of this Note and the Loan Documents and in the enforcement or attempt to enforce
any of Borrower's obligations hereunder not performed when due, whether or not
any legal action is actually filed, litigated or prosecuted to judgment of
award. This Note shall be governed by, construed and interpreted in accordance
with the laws of the State of California.
Time is of the essence in the performance of the obligations evidenced
by this Note. In the event that an Event of Default occurs and is continuing
under the Loan Agreement, Bank shall have all of the rights and remedies
provided for in any of the Loan Documents or at law or in equity. The remedies
of Bank shall be cumulative and may be exercised from time to time. No failure
on the part of Bank or the holder of the Note to exercise, and no delay in
exercising, any right shall operate as a waiver thereof, nor will any single or
partial exercise of any right preclude any other or future exercise thereof or
the exercise of any other right. Borrower hereby waives diligence, presentment
for payment, demand, notice of demand, notice of non-payment or dishonor,
protest and notice of protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default or enforcement of the
payment of this Note, except such notices as are required under the terms of any
of the Loan Documents.
If this Note is destroyed, lost or stolen, Borrower shall deliver a new
note to Bank on the same terms and conditions as this Note, with all appropriate
schedules annexed thereto, in substitution of the prior Note. Bank shall furnish
to Borrower reasonable evidence that the Note was destroyed, lost or stolen, and
any security or indemnity that may be reasonably required by Borrower in
connection with the replacement of the Note.
Executed as of the day and date referred to above.
SEQUANA THERAPEUTICS, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
3
<PAGE> 49
IRREVOCABLE INSTRUCTIONS AND POWER OF ATTORNEY
October 23, 1996
Union Bank of California, N.A.
530 B Street
San Diego, California 92101
Attention: Ms. Barbara Davies
Re: Sequana Therapeutics, Inc.
Investment Management Account
No. 510001082-01 (the "Account")
Gentlemen and Ladies:
We refer you to the above-referenced agency and investment
management account held by Union Bank of California, N.A. ("Account Holder") in
the name of Sequana Therapeutics, Inc. ("Debtor"). Debtor acknowledges that
during the term of these Irrevocable Instructions the Account shall be
maintained as an account which is segregated from any other accounts which
Debtor maintains with Account Holder. Account Holder shall not be held
responsible for (i) any market decline in the value of the assets in the Account
or (ii) notifying Bank or Debtor of any such decline in the market value of the
assets in the Account or (iii) taking any action with regard to such assets in
the Account, except upon the specific written directions contemplated or stated
herein.
Please be advised that Debtor has entered into a Loan Agreement
dated as of October 23, 1996 (the "Loan Agreement") with The Sumitomo Bank,
Limited (the "Bank").
Account Holder acknowledges that as of the date hereof it has no
knowledge of any interest, assignment, security interest or lien on the Account
and the deposits therein other than the interest of Debtor. Account Holder
agrees that it will promptly notify the Bank in the event Account Holder
receives any notice that any person other than Bank has or asserts any security
interest or lien on the Account.
Debtor hereby irrevocably authorizes and directs Account Holder
upon Account Holder's receipt of a written demand and certificate in the form
annexed as Exhibit A ("Demand"), to make immediate payment of funds or delivery
of marketable securities on deposit in the Account in the amount and pursuant to
the directions set forth in such Demand to Sumitomo Bank of New York Trust
Company, as custodian of an account bearing Account No. 060000000055 ("Custodian
Account"), to be held by Sumitomo Bank of New York Trust Company as bailee
pursuant to the terms of a Collateral Bailment Agreement dated October 23, 1996
("Collateral Bailment Agreement") and a Restricted Account and Security
Agreement dated October 23, 1996 ("Restricted Account and Security Agreement"),
whether or not such action will cause investment income to be lost or fees to be
incurred in connection with the investment
EXHIBIT 2.6B
<PAGE> 50
Union Bank of California
Attention: Ms. Barbara Davies
Ocotber 23, 1996
Page 2
or reinvestment of such deposits. Any capitalized terms which are not defined
herein shall have the meaning ascribed to such capitalized terms in the Loan
Agreement, Collateral Bailment Agreement or Restricted Account and Security
Agreement. The parties acknowledge that the Account Holder is not a party to,
and has not been provided with a copy of, the Loan Agreement, Collateral
Bailment Agreement and Restricted Account and Security Agreement. Account Holder
agrees to honor written instructions to transfer funds or securities received in
the form annexed as Exhibit A, subject to the rights of third-party creditors to
the Account (if any), including but not limited to tax levies or restraining
notices served upon Account Holder with respect to the Account prior to Account
Holder's receipt of a Demand.
Debtor hereby irrevocably constitutes and appoints the Bank and
any officer or agent thereof, with full power to substitute for such officers
and agents, other officers and agents, as its true and lawful attorney-in-fact
with full irrevocable power and authority in the place and stead of Debtor
without notice to or assent thereof, and in the name of Debtor or in its own
name, from time to time, upon the occurrence of a Trigger Event as defined in
the Loan Agreement, to complete and deliver to Account Holder the Demand.
Contemporaneously with its delivery of the Demand to Account Holder, Bank shall
provide Debtor with a copy of the Demand.
These Instructions and this power of attorney are coupled with an
interest and are irrevocable until such time as written notice of termination
has been delivered to Account Holder by Bank.
Account Holder may rely exclusively upon the Demand. Account
Holder will have no right or duty to inquire as to whether the Bank is entitled
to issue the Demand or whether the signers thereof have proper authority to sign
and deliver the Demand. Debtor agrees that Account Holder is hereby instructed
to disregard any instructions provided by Debtor to Account Holder which are
contrary to or inconsistent with instructions provided pursuant to these
Irrevocable Instructions. Debtor agrees to indemnify and hold Account Holder
harmless from any and all losses, liabilities and expenses (including, without
limitation, reasonable attorneys' fees and the allocated costs of in-house
counsel, costs and expenses), claims, actions or demands arising out of,
relating to or in connection with Account Holder's compliance with these
Irrevocable Instructions (including, without limitation, any accounting
treatment or tax consequences which Debtor deems adverse), except to the extent
any such losses, liabilities, expenses, claims, actions or demands are the
result of gross negligence or willful misconduct of Account Holder. In the event
that Account Holder is sued or becomes involved in litigation as a result of
complying with these Irrevocable Instructions, Debtor agrees that Account Holder
shall be entitled to charge all the costs and fees it incurs in connection with
such litigation (including the allocated costs of in-house counsel) against the
assets in any Account Holder account of Debtor other than the Account and to
withdraw such sums as the costs and charges accrue.
<PAGE> 51
Union Bank of California
Attention: Ms. Barbara Davies
Ocotber 23, 1996
Page 3
Debtor hereby irrevocably directs Account Holder, upon receipt of
a Demand, to transfer to the Custodian Account cash or cash equivalents
(acceptable to the Bank in its sole discretion) in the amount set forth in the
Demand. The Bank may, in its discretion, deliver a Demand and/or further
instructions hereunder to Account Holder. If Account Holder receives a Demand,
it will make the transfer to the Custodian Account as provided above prior to
allowing Debtor to withdraw any funds from the Account. Debtor hereby
irrevocably directs Account Holder to make the foregoing transfer to the Bank in
the event of a Demand delivered by Bank.
Debtor hereby irrevocably directs Account Holder, and Account
Holder agrees to notify the Bank in the event that Debtor seeks to withdraw
funds from the Account (the "Withdrawal Notice"). Upon receipt of a Withdrawal
Notice, the Bank may, in its discretion, and regardless of whether a Trigger
Event has occurred, deliver a Demand and/or further instructions hereunder to
Account Holder in the event that the Net Cash Level (as such term is defined in
the Loan Agreement) in the Account after such withdrawal would be less then the
sum of $10,000,000 plus the amount of restricted cash and other amounts in the
Account which may be restricted pursuant to agreements between the Debtor and
other persons. Account Holder agrees that it will not allow Debtor to withdraw
funds from the Account until after five (5) business days have elapsed following
Account Holder's delivery of a Withdrawal Notice to Bank and the Bank has failed
to deliver a Demand to Account Holder. Debtor hereby irrevocably directs Account
Holder to provide a Withdrawal Notice to the Bank. Debtor irrevocably instructs
Account Holder to not permit a withdrawal of funds from the Account and to not
honor Debtor's withdrawal request unless and until after Account Holder has
complied with the foregoing provisions.
By accepting these Irrevocable Instructions, Account Holder
certifies to Bank that the person executing below on behalf of Account Holder is
duly authorized to execute and receive these Irrevocable Instructions on Account
Holder's behalf, and to bind Account Holder to perform under the terms hereof.
These Irrevocable Instructions constitute the binding obligation of Account
Holder, enforceable in accordance with their terms. The prevailing party in any
action to enforce these Irrevocable Instructions shall be entitled to reasonable
attorneys' fees (including the allocated costs of in-house counsel). The
provisions of the preceding sentence, and any award of attorneys fees to the
prevailing party, shall not affect any claim of Account Holder to
indemnification from Debtor pursuant to the indemnification provisions
hereinabove.
<PAGE> 52
Union Bank of California
Attention: Ms. Barbara Davies
Ocotber 23, 1996
Page 4
These Irrevocable Instructions may only be amended or changed by
a writing signed by all the parties below and shall expire only upon the written
agreement of all parties hereto.
Very truly yours,
ACKNOWLEDGED AND AGREED: SEQUANA THERAPEUTICS, INC.
UNION BANK OF CALIFORNIA, N.A.
By:_____________________________
By:____________________________ Name:___________________________
Name:__________________________ Its:____________________________
Its:___________________________
ACKNOWLEDGED AND AGREED: By:_____________________________
Name:___________________________
THE SUMITOMO BANK, LIMITED Its:____________________________
By:____________________________
Name:__________________________
Its:___________________________
By:____________________________
Name:__________________________
Its:___________________________
<PAGE> 53
THE SUMITOMO BANK, LIMITED
Pine Street Center
100 Pine Street, Suite 3300
San Francisco, CA 94111-5219
__________________, 1996
Union Bank of California, N.A.
530 B Street
San Diego, California 92101
Attention: Ms. Barbara Davies
Re: Sequana Therapeutics, Inc.
Account No. 510001082-01 (the "Account")
Gentlemen and Ladies:
This certificate and demand refers to a certain Loan Agreement
dated as of October 23, 1996 (the "Loan Agreement") between Sequana
Therapeutics, Inc. ("Borrower") and The Sumitomo Bank, Limited ("Sumitomo") and
the Irrevocable Instructions and Power of Attorney ("Irrevocable Instructions")
dated October 23, 1996 among Borrower, Sumitomo, and Union Bank of California,
N.A. ("Account Holder").
This is to certify that either a Trigger Event (as defined in the
Loan Agreement) has occurred or an event has occurred under the Irrevocable
Instructions which permits Sumitomo to deliver a Demand (as defined in the
Irrevocable Instructions) to Account Holder. Therefore, you are hereby directed
to (i) deliver marketable securities to:
Sumitomo Bank of New York Trust Company, As Custodian
Two World Financial Center, Tower B
225 Liberty Street, 35th Floor
New York, New York 10281
Attn: Trust Department
or (ii) transfer funds via wire through the Federal Reserve Bank of New York to:
Morgan Guaranty Trust Company of New York
Trust ABA No.: 021000238
Account Name: Sumitomo Bank Ltd. New York
Account No.: 63128256
For Credit To: Sumitomo Bank of New York Trust
Company, Trust No. 2
Account No.: 350765
Reference: Sequana Therapeutics, Inc.
EXHIBIT A TO IRREVOCABLE INSTRUCTIONS
<PAGE> 54
Union Bank of California
Attention: Ms. Barbara Davies
________________, 1996
Page 2
for deposit in the following account at Sumitomo Bank of New York Trust Company:
Account No. 060000000055 an aggregate amount equal to $_____________. The
undersigned represents that he or she is a duly appointed officer of Sumitomo.
THE SUMITOMO BANK, LIMITED
By:_______________________________
Name:_____________________________
Its:__________________________
By:_______________________________
Name:_____________________________
Its:__________________________
EXHIBIT A TO IRREVOCABLE INSTRUCTIONS
<PAGE> 55
Schedule 3.5
JUDGMENTS
[NONE]
<PAGE> 56
Schedule 3.11
PENDING LITIGATION AND CLAIMS
[NONE]
<PAGE> 57
Schedule 3.15
ERISA
1. 401K retirement plan for its employees.
2. 1995 Director Option Plan -- pursuant to which non-employee directors
are granted pursuant to an automatic non-discretionary grant mechanism.
3. 1994 Incentive Stock Plan pursuant to which a total of 613,125 options
have been issued and/or granted to employees. 200,000 shares
4. Employee Stock Purchase Plan which permits eligible employees to
purchase options through payroll deductions. 100,000 shares
<PAGE> 58
Schedule 3.16
ENVIRONMENTAL COMPLIANCE
[NONE]
<PAGE> 59
Schedule 3.20
SUBSIDIARY OR AFFILIATE
NemaPharm, Inc.
<PAGE> 60
Schedule 3.21
PENDING LITIGATION AND CLAIMS
[NONE]
<PAGE> 61
SCHEDULE 5.6
INSURANCE
<TABLE>
<CAPTION>
COVERAGE POLICY NO. PERIOD OF COVERAGE INSURANCE CO.
------- ---------- ------------------ ------------
<S> <C> <C> <C>
Umbrella Liability 7921-69-99 8/1/96-97 Federal Insurance Co.
Excess Liability 3533-89-92 8/1/96-97 Federal Insurance Co.
Package (General Liability,
Property & Fidelity)
Non-owned & 7323-11-82 8/1/96-97 Federal Insurance Co.
Hired Automobile
Directors & CUG-24591 8/1/96-97 Old Republic Ins. Co.
Officers Liability NDA-0131029 8/1/96-97 Reliance Ins. Co.
Worker's Compensation W96814456 8/1/96-97 CalComp Ins. Co.
Foreign Package
Cargo
Fiduciary
</TABLE>
<PAGE> 62
Schedule 7.1
Security Deposits
1. $30,000 security deposit under Lease of the Jackson Building in
Cambridge, Massachusetts dated as of July 15, 1996 between Forest City
Cambridge, Inc. and Borrower.
2. $108,000 security deposit (in form of Letter of Credit drawn on Union
Bank) under Expansion Lease of 11099 North Torrey Pines Road, La Jolla,
California, 92037 by and between Health Science Properties, Inc. and
Borrower.
3. $12,563 Security Deposit under lease of 11149 North Torrey Pines Road,
La Jolla, California, 92037, by and between Torrey Pines Science Center
Limited Partnership and Borrower.
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1994 Amended Incentive Stock Plan and 1995 Amended
Director Option Plan of Sequana Therapeutics, Inc. of our report dated February
13, 1997, with respect to the financial statements of Sequana Therapeutics,
Inc. included in its Annual Report (Form 10-K) for the year ended December 31,
1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,403
<SECURITIES> 43,317
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,540
<PP&E> 12,457
<DEPRECIATION> 4,172
<TOTAL-ASSETS> 66,093
<CURRENT-LIABILITIES> 9,720
<BONDS> 4,524
0
0
<COMMON> 90,622
<OTHER-SE> (1,458)
<TOTAL-LIABILITY-AND-EQUITY> 66,093
<SALES> 0
<TOTAL-REVENUES> 9,705
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,768
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 434
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,219)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> 0
</TABLE>
