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<SEC-DOCUMENT>0000891618-00-001634.txt : 20000323
<SEC-HEADER>0000891618-00-001634.hdr.sgml : 20000323
ACCESSION NUMBER: 0000891618-00-001634
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000322
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: INCYTE PHARMACEUTICALS INC
CENTRAL INDEX KEY: 0000879169
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731]
IRS NUMBER: 943136539
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-12400
FILM NUMBER: 575586
BUSINESS ADDRESS:
STREET 1: 3174 PORTER DR
CITY: PALO ALTO
STATE: CA
ZIP: 94304
BUSINESS PHONE: 6508550555
MAIL ADDRESS:
STREET 1: 3174 PORTER DRIVE
CITY: PALO ALTO
STATE: CA
ZIP: 94304
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE> 1
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-27488
INCYTE PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3136539
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
</TABLE>
<TABLE>
<S> <C>
3174 PORTER DRIVE, PALO ALTO, CALIFORNIA (650) 855-0555
94304
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING
AREA CODE)
</TABLE>
SECURITIES REGISTERED TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
SERIES A PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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 aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on February 29, 2000)
was approximately $8,742,060,000.
As of February 29, 2000, there were 31,724,420 shares of Common Stock,
$.001 per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2000 Annual Meeting of Stockholders to be held on
June 5, 2000.
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<PAGE> 2
ITEM 1. BUSINESS
When used in this Report, the words "expects," "anticipates," "estimates,"
"plans," and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include
statements as to the Company's and diaDexus' expected net losses, expected
expenditure levels and rate of growth of expenditures, expected cash flows, the
adequacy of capital resources, growth in operations, the ability to
commercialize products developed under collaborations and alliances, our ability
to complete the sequence of full-length genes in areas of therapeutic interest
and file patents on these potential drug targets, our ability to integrate
companies and operations that we have acquired or will acquire, our ability to
implement online delivery of our database and software products, the scheduling
and timing of current and future litigation, our strategy with regard to
protecting our proprietary technology, our ability to compete and respond to
rapid technological change and the performance and utility of our products and
services. Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. These
risks and uncertainties include, but are not limited to, those risks discussed
below, as well as the extent to which the pharmaceuticals and biotechnology
industries use genomic information in research and development, risks relating
to development of new products and services and their use by our potential
customers and collaborators, our ability to work with our collaborators to meet
the goals of our collaborators and alliances, our ability to retain and obtain
customers, the cost of accessing or acquiring technologies or intellectual
property, the effectiveness of our sequencing efforts, the impact of alternative
technological advances and competition, uncertainties associated with changes in
patent laws and developments in and expenses related to litigation and
interference proceedings; and the risks set forth below under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results." These forward-looking statements
speak only as of the date hereof. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any forward-
looking statements contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results," all references to "Incyte,"
"we," "us," "our" or the "Company" mean Incyte Pharmaceuticals, Inc. and its
subsidiaries, except where it is made clear that the term means only the parent
company.
Incyte, LifeSeq and PathoSeq are our registered trademarks. ZooSeq,
LifeTools, LifeArray, LifeProt, LifeExpress, GeneAlbum and GEM are our
trademarks. We also refer to trademarks of other corporations and organizations
in this document.
OVERVIEW
Incyte is a leading provider of genomic information-based products and
services. These products and services include database products, genomic data
management software tools, microarray-based gene expression services, genomic
reagents and related services. We focus on providing an integrated platform of
information technologies designed to assist pharmaceutical and biotechnology
companies and academic researchers in the understanding of disease and the
discovery and development of new drugs.
Our genomic databases integrate bioinformatics software with proprietary
and, when appropriate, publicly available genomic information. In building the
databases, we utilize high-throughput, computer-aided gene sequencing and
analysis technologies to identify and characterize the expressed genes of the
human genome, as well as certain animal, plant and microbial genomes. By
searching our proprietary genomic databases, customers can integrate and analyze
genomic information from multiple sources in order to discover genes that may
represent the basis for new biological targets, therapeutic proteins, or gene
therapy, antisense or diagnostic products. The pharmaceutical and biotechnology
industries use our genomic products and services to accelerate the discovery and
development of new diagnostic and therapeutic products. Our products and
services can be applied to gene and target discovery, functional genomics
studies, preclinical pharmacology and toxicology studies, and can aid in
understanding and analyzing the results of clinical development studies.
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We currently provide access to our genomic databases through collaborations
with pharmaceutical and biotechnology companies worldwide. As of December 31,
1999, more than twenty companies had entered into multi-year agreements to
obtain access to our databases on a non-exclusive basis. These companies include
the following:
<TABLE>
<S> <C>
Abbott Laboratories Johnson & Johnson
AstraZeneca PLC Millennium Pharmaceuticals, Inc.
Aventis S.A. Monsanto Company
Bristol-Myers Squibb Company Novartis AG
Eli Lilly and Company Pfizer Inc.
F. Hoffmann-La Roche Ltd. Pharmacia & Upjohn, Inc.
Genentech, Inc. Schering AG
Glaxo Wellcome plc Schering-Plough, Ltd.
</TABLE>
Revenues from these companies have primarily consisted of database access
fees. Our LifeSeq Gold human gene sequence database agreements also provide for
future milestone payments and royalties from the sale of products derived from
proprietary information contained in one or more database modules.
Our portfolio of products and services includes:
- LifeSeq Gold human gene sequence and expression database;
- PathoSeq microbial genomic database;
- ZooSeq animal model gene sequence and expression database;
- LifeExpress gene expression and protein expression database;
- SNP database that identifies common DNA sequence variants between
individuals;
- LifeTools suite of bioinformatics software;
- LifeArray gene expression data management and analysis software;
- LifeProt protein expression data management and analysis software; and
- contract sequencing and other services.
The databases are available using the Oracle database architecture and
operate on Sun Microsystems, Compaq and SGI workstations. As part of our
strategy for expanding our customer base, we are developing the infrastructure
to enable the online delivery of our database and software products.
BACKGROUND
Genes, found in all living cells, are composed of DNA, which in turn is
composed of two strands of complementary nucleotides referred to as base pairs
or bases. Nucleotides may be one of four different molecules -- adenine,
guanine, cytosine, or thymine -- which are strung together in specific patterns
to create genes. Genes provide the necessary information to create proteins, the
molecules that carry out all functions within a cell. Many human diseases are
associated with the inadequate or inappropriate presence, production or
performance of proteins. As such, pharmaceutical and biotechnology companies
often seek to develop drugs that will bind to a targeted protein involved in
disease in order to regulate, inhibit or stimulate its biological activity.
Other proteins, known as therapeutic proteins, have direct biological activity
and may be capable of treating disease. Insulin and human growth hormone are
examples of therapeutic proteins. Understanding the role genes play in disease,
and the protein targets or therapeutic proteins that they encode, has thus
become a significant area of interest and research within the pharmaceutical and
biotechnology industries.
Sequencing
One frequently employed method for determining gene function involves the
grouping of genes into "related" families based on similarities, or homologies,
in DNA sequence. DNA sequencing is a process that
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identifies the order of the bases in a segment of DNA. Once a gene's sequence is
known, its function may be inferred by comparing its sequence with the sequences
of other human genes of known function, because genes with homologous sequences
may have related functions. Comparing gene sequences across species has also
become a useful tool for understanding gene function, as frequently it is easier
to first assess gene function in other organisms.
Gene Expression
Another method used to determine gene function focuses on the analysis of
gene activity, referred to as expression, within a cell. When a gene is active,
its DNA is copied into messenger RNA or "mRNA." The population of mRNA within a
cell can be isolated and converted into complementary DNA or "cDNA," thereby
creating a cDNA library that represents the population of mRNAs present in a
cell type at a particular time. In a process called "gene expression profiling,"
high-throughput cDNA sequencing, computer analysis and microarray technologies
can be used to identify which genes are active or inactive and, if active, at
what levels. Expression profiles provide a more detailed picture of cellular
genetics than conventional laboratory techniques by indicating which genes, both
known and novel, are specifically correlated to discrete biological events in
normal and disease-state cells.
Microarray Technology
Microarray technology can be used to analyze the expression patterns or
sequence variations in a large number of genes simultaneously. A microarray
consists of fragments of a single strand DNA's double strand attached to a
surface, usually a glass, plastic or silicon slide, in a grid-like formation.
When cDNA that has been prepared from mRNA samples from normal and diseased
cells is applied to the microarray, complementary strands attach to the DNA
fragments on the microarray. Microarray technology allows the fabrication of
very small grids containing probes for thousands of different genes. Microarrays
can be used in drug discovery and development, to evaluate the behavior of a
large number of related genes in a diseased tissue or in response to treatment
with a new drug or in diagnostic testing to quickly detect the presence of a
large number of disease markers.
Bioinformatics
Due to improvements in sequencing technology, genomic information from both
public and private sources is increasing at a dramatic rate. As a result,
bioinformatics, or the use of computers and sophisticated algorithms to store,
analyze and interpret large volumes of biological data, is essential in order to
capture value from this growing pool of data. To date, the main focus of
bioinformatic and genomic tools has been drug discovery. The Company believes
these tools, and those under development, will also assist researchers with the
preclinical and clinical development process. For example, with the help of new
technology and bioinformatic analyses scientists may be able to correlate
genetic and physiologic response in preclinical animal models, examine gene
expression profiles in drug-treated animals to assess the pharmacological
activity and toxicity of new drugs, and stratify clinical trial patients
according to their gene expression profiles.
Single Nucleotide Polymorphism ("SNP") Discovery
Due to genetic variation, individuals may respond differently to disease or
to treatment with the same drug. Few, if any, FDA-approved drugs are capable of
successfully treating every individual diagnosed with a targeted disease. The
differences in patients' responses to a drug are believed to result in part from
differences in the sequence of nucleotides within genes. The most common form of
sequence variation is known as a single nucleotide polymorphism or "SNP." A SNP
is defined as a single base difference within the same DNA region between two
individuals. Some SNPs are "silent" and not associated with a disease or a
patient's ability to respond to a particular therapy, and some SNPs occur at a
frequency that is too low to justify large-scale patient screening. Thus,
researchers need to do more than identify SNPs; they must identify the most
frequently occurring SNPs and identify those that correlate with a patient's
disease prognosis or ability to respond to a drug. Through our acquisition of
Hexagen in September 1998, we are developing fluorescent single-strand
confirmation polymorphism (fSSCP) technology, a high-throughput SNP discovery
technology.
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fSSCP is particularly useful for identifying SNPs in genes not expressed or more
rarely expressed. This gel-based system detects SNPs in multiple samples
simultaneously by observing changes in the tertiary structure of single stranded
DNA fragments due to base pair changes. Incyte is contributing technologies in
the areas of electrophoresis, fluorescence chemistries, sequencing and
bioinformatics in order to continue to develop and improve the accuracy and
efficiency of this technology.
Gene Mapping
Mapping refers to the determination of the physical location of a gene in
the genome and the relative position of that gene to other genes along a
chromosome. Physiological processes and associated diseases can be extremely
complex and involve many genes. A gene can activate one or more different genes
forming a cascade of genetically controlled events or a "pathway." When the
genes involved in such a pathway are located within neighboring regions of DNA,
mapping can allow the location of one member of the pathway to be used to
identify the other members. In addition, genetically inherited diseases that
have been passed from generation to generation may be associated with visible
chromosome alterations, such as deletions of large segments of the chromosome or
insertions within the chromosome. These physical chromosome abnormalities allow
researchers to identify the DNA regions and genes that have a critical role in
causing disease.
Proteomics
Proteomics is a relatively new field of study that involves the separation,
identification, and characterization of proteins present in a biological sample.
By comparing disease and control samples, it is possible to identify
disease-specific proteins. These may have potential as targets for drug
development or as molecular markers of disease. The power of proteomics lies in
the ability to directly measure a gene product, determine subcellular
localization and detect post-translational modifications.
PRODUCTS AND SERVICES
Our current products and services include an integrated platform of genomic
databases, data management software tools, microarray-based gene expression
databases and services, and related reagents and services.
Genomic Databases. We provide our database collaborators with non-exclusive
database access. Database collaborators receive periodic data updates as well as
software upgrades and additional search and analysis tools when they become
available. The fees and the period of access are negotiated independently with
each company. Fees generally consist of database access fees, option fees, and
non-exclusive or exclusive license fees corresponding to patent rights on
proprietary sequences. We may also receive future milestone and royalty payments
from database collaborators from the development and sale of their products
derived from our technology and database information. Researchers can browse not
only Incyte-generated data, but also public domain information. We currently
offer the following database modules:
- LifeSeq Gold Database. The LifeSeq Gold human sequence and expression
database integrates the information from our LifeSeq public-domain and
proprietary gene sequences and expression database; LifeSeq FL,
full-length gene sequence database; and the sequence information from our
GeneAlbum database and reagent set. LifeSeq Gold uses a novel method to
assemble cDNA sequence fragments (ESTs) into genes, providing increased
sensitivity for distinguishing between closely related sequences,
including splice variants. Researchers can easily move from one module to
another through the HTML-based graphical interface. The sequence database
contains our computer-edited gene sequence files and is used by
researchers to identify related or homologous genes. For example, a
scientist may wish to identify new genes homologous to a gene identified
through their own research and believed to be linked to a disease. The
database contains biological information about each sequence in our
sequence database, including tissue source, homologies, and annotations
regarding characteristics of the gene sequence. Also, the database
contains a gene expression profile for every tissue in the database
combined with proprietary bioinformatics software to allow collaborators
to browse data and compare differences in gene expression across cells,
tissues, and different disease states. Thus, the database can
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be used to assist researchers in correlating the presence of specific
genes to discrete biological events in normal and disease-state cells. We
continually add sequences and expression data from normal and diseased
tissues to the LifeSeq Gold database.
- PathoSeq Database. The PathoSeq database currently contains proprietary
and public domain genomic data for more than 40 medically relevant
bacterial and fungal microorganisms. With drug-resistant strains of
bacteria and other microorganisms posing an increasing threat to world
health, pharmaceutical and biotechnology companies are searching for
genes unique to these pathogens that will aid in the development of new
drugs to treat infectious disease. Our proprietary bioinformatics process
edits all sequence data to remove artifacts and contamination, assemble
sequences, display the relative position of the DNA coding regions, and
identify genes either common among multiple microorganisms or unique to
one microbial genome. We believe PathoSeq can help researchers understand
the biology of microorganisms, study the mechanisms of drug resistance,
identify genes that may make effective drug targets, and, ultimately,
develop new therapeutics to treat and prevent infectious disease.
- ZooSeq Database. The ZooSeq database was developed to aid pharmaceutical
and biotechnology companies in designing and evaluating preclinical drug
studies in animal models, a crucial step in the drug development process.
The database currently contains gene sequence and expression data for the
rat, mouse, and monkey -- animals commonly used in preclinical drug
toxicology and efficacy studies. By correlating a drug's effects on an
animal with the animal's genetic makeup, and then cross-referencing these
data with our human LifeSeq database, a researcher may better predict the
drug's efficacy and side effects before moving to human clinical trials.
- LifeExpress Database. The LifeExpress database is a comprehensive,
nonexclusive database of gene expression and protein expression on
samples focusing on major therapeutic areas and pharmacology/toxicology.
The protein expression modules of the LifeExpress database are developed
in cooperation with our collaborator Oxford GlycoSciences. The two
subcategories of LifeExpress are TargetExpress and LeadExpress. Aimed at
facilitating the discovery and validation of high value targets,
TargetExpress provides further annotation and detailed expression
information on known and unknown gene products. LeadExpress focuses on
using genomic and proteomic technologies to further annotate chemical
structures of common drug classes.
- IsSNPs. Our in silico SNP program identifies common SNPs by mining
LifeSeq Gold and genomic sequence data. We have identified approximately
46,000 isSNPs and expect to identify a total of 100,000 isSNPs from
LifeSeq Gold (over 60,000 from expressed regions) throughout the coming
year.
Contract Sequencing. Contract sequencing services generally include
generating sequence and bioinformatics data for customers using our core
strengths in library construction, high-throughput cDNA sequencing and
bioinformatics.
Software. We have developed an enterprise-wide genomic information
management system capable of updating, reprocessing and integrating genetic data
from multiple sources and from different organisms. This system allows the
integration of our proprietary, subscriber-specific and public domain data, and
is capable of comparing information from humans, animals, microbes, fungi and
plants. The system incorporates the architecture necessary to integrate our
software tools data visualization tools, data mining programs and project
management capabilities, and is capable of being integrated with additional
technologies developed to more efficiently manage and analyze genomic data.
- LifeTools, a suite of specialized bioinformatic software programs and
project management tools, consists of sequence analysis and data
management tools for handling complex genomic information from multiple
sources. LifeTools reads and edits raw sequence data, including data
imported from public databases, and annotates and clusters sequence
fragments based on sequence similarity. LifeTools includes a fast,
scalable database search engine with intranet-based graphical tools for
interactive queries and analyses. The LifeTools relational database
management system stores and distributes sequence assembly, homology,
tissue expression information and biological data. Our
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database management architecture is based on open system standards,
providing interconnectivity between disparate systems and applications,
and enterprise-wide access to data and functions.
- LifeArray software manages and analyzes data resulting from microarray
hybridization experiments. It includes a searchable database that
accommodates experiment results from a variety of microarray platforms.
LifeArray provides an integrated data warehouse and analysis environment,
which allows the customer to bring data from multiple microarray
platforms into one integrated environment. LifeArray enables the user to
visualize differential expression between biological samples and can
track all details of microarrays, genes, biological samples, donor
information, and experimental results in one integrated environment with
a Java-based interface. It is an enterprise-wide system that can support
as many simultaneous users as required, and grow to suit changing
microarray management needs.
- LifeProt software provides tools to query, display, and analyze the
protein expression data resulting from two-dimensional gel experiments.
Using the program's query capabilities, customers can quickly locate
relevant sample data sets from among many stored in a central database.
This database tracks experiment conditions, tissue, treatment, and donor
information, as well as the sample data. The LifeProt software is an
enterprise-wide system that uses a Java-based interface and is available
across a company to scientists using a variety of different computers and
operating systems.
Microarray-Based Services. We offer microarray-based gene expression
services to the pharmaceutical, biotechnology, and agricultural industries and
academic researchers. These services can be used to simultaneously evaluate the
gene expression profile of a large number of genes. Our GEM microarray
technology allows probes for up to 10,000 genes per microarray. Microarrays can
be used to identify the genes involved in a complex disease pathway, examine a
drug-treated tissue to understand how the drug affected the expression of
important genes, and study several new drug candidates to determine if one has a
more favorable effect on gene expression than the others. Experiments can use
either prefabricated arrays or custom arrays. Prefabricated arrays contain
either public domain genes or genes chosen from our databases. We currently
offer 18 prefabricated microarrays, including an array containing the genes
found in a microbial pathogen Staphlycoccus aureus, an array containing the
genes found in the rat liver and kidney, and a series of arrays that contain
Incyte proprietary genes. Custom arrays can contain genes provided by the
customer or chosen by the customer from our proprietary databases.
DNA Reagents and Other Services. We offer a variety of DNA reagents and
other services designed to assist its collaborators in using information from
its databases in the customer's internal lab-based experiments. The cloned DNA
fragments from which the information in our databases is derived represent
valuable resources for researchers, enabling them to perform bench-style
experiments to supplement the information obtained from searching our databases.
We retain copies of all isolated clones corresponding to the sequences in the
database. Our collaborators may request clones corresponding to a sequence of
interest on a one-by-one basis or through the LifeSeq GeneAlbum component of
LifeSeq Gold. GeneAlbum is a subscription-based service that provides database
collaborators with large numbers of sequence verified DNA clones. In addition,
we produce a broad line of genomic research products, such as DNA clones and
insert libraries, and offers technical support services, including
high-throughput DNA screening, custom robotic services, contract DNA
preparation, contract mapping and fluorescent in situ hybridization, to assist
researchers in the identification and isolation of novel genes.
DATABASE PRODUCTION
We engage in the high-throughput automated sequencing of genes derived from
tissue samples followed by the computer-aided analysis of each gene sequence to
identify homologies to genes of known function in order to predict the
biological function of newly identified sequences. The derivation of information
in our databases involves the following steps:
- Tissue Access. We obtain tissue samples representing most major organs in
the human body from various academic and commercial sources. Where
possible, we obtain information as to the medical history and pathology
of the tissue. The genetic material is isolated from the tissue and
prepared for
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analysis. The results of this analysis, as well as the corresponding
pathology and medical history information, are incorporated into the
databases.
- High-Throughput cDNA Sequencing. We utilize specialized teams in an
integrated approach to our high-throughput sequencing and analysis
effort. Gene sequencing is performed using multiple work shifts to
increase daily throughput. One team develops and prepares cDNA libraries
from biological sources of interest, a second team prepares the cDNAs
using robotic workstations to perform key steps that result in purified
cDNAs for sequencing, and a third team operates the automated DNA
sequencers.
- Bioinformatics. Sequence information generated from our high-throughput
sequencing operations is uploaded to a network of servers. Our
proprietary bioinformatic software then assembles and edits the sequence
information. The sequence of each cDNA is compared via automated,
computerized algorithms to the sequences of known genes in our databases
and public domain databases to identify whether the cDNA codes for a
known protein or is homologous to a known gene. Each sequence is
annotated as to its cell or tissue source, its relative abundance and
whether it is homologous to a known gene with known function. The
bioinformatics staff monitors this computerized analysis and may perform
additional analyses on sequence information. The finished data are then
added to our proprietary sequence databases.
COLLABORATORS
As of December 31, 1999, we had database collaboration agreements with more
than 20 companies. Each collaborator has agreed to pay annual fees to receive
non-exclusive access to one or more of our databases. One of these companies
contributed 12% of total revenues in 1998. No customer contributed 10% or more
of total revenues in 1999 or 1997. During 1999, our database collaborators
included the following companies:
<TABLE>
<S> <C>
Abbott Laboratories Johnson & Johnson
AstraZeneca PLC Millennium Pharmaceuticals, Inc.
Aventis S.A. Monsanto Company
Bristol-Myers Squibb Company Novartis AG
Eli Lilly and Company Pfizer Inc.
F. Hoffmann-La Roche Ltd. Pharmacia & Upjohn, Inc.
Genentech, Inc. Schering AG
Glaxo Wellcome plc Schering-Plough, Ltd.
</TABLE>
Some of our database agreements contain minimum annual update requirements,
which if not met could result in our breach of the respective agreement. We
cannot assure you that any of our database collaboration agreements will not be
terminated early in accordance with their terms. Loss of revenues from any
individual database agreement, if terminated or not renewed, could have an
adverse impact on our results of operations, although is not anticipated to have
a material adverse impact on our business or financial condition.
DEVELOPMENT PROGRAMS
Since our inception, we have made substantial investments in research and
technology development. During the years ended December 31, 1999, 1998, and 1997
we spent approximately $146.8 million, $97.2 million, and $72.5 million,
respectively, on research and development activities. This investment in
research and development includes an active program to enter into relationships
with other technology-driven companies and, when appropriate, acquire licenses
to technologies for evaluation or use in the production and analysis process.
Not all of these technologies or relationships survive the evaluation process.
We have entered into a number of research and development relationships with
companies and research institutions.
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In January 1998, we announced a relationship with Oxford GlycoSciences plc
("OGS") to investigate the use of proteomics, the large-scale, high-throughput
analysis of protein expression, in the development of new information-based
products. As part of the relationship, we made an equity investment in OGS. We
and OGS entered into a collaborative agreement under which the two parties are
developing data, software and related services, focusing on protein expression
and sequence information from a variety of human tissues. As part of the
collaborative agreement, we reimbursed OGS $5.0 million in 1999 for services
rendered and agreed to reimburse OGS for up to an additional $5.0 million in
2000 if revenues are not sufficient to offset OGS' expenses for services to be
rendered.
In August 1998, we initiated a series of programs in human genome
sequencing, accelerated human genome mapping, bioinformatics and SNP discovery.
The information resulting from these efforts will be used to supplement existing
databases and to generate new databases and services. We are initiating SNP
programs focused on specific candidate genes, gene families, disease pathways,
therapeutic areas or drug targets that could be useful to individual
pharmaceutical partners. These programs may include the identification of genes
associated with a particular disease and an in depth study of the population
frequency and disease correlation of SNPs within a selected DNA region. The SNP
discovery efforts were assisted by our acquisition of Hexagen in September 1998.
We are developing various platforms that can be used for the high
throughput screening of patient samples in order to correlate SNPs with
patients' responses to drugs. These platforms may be used to offer genotyping
and patient profiling services to pharmaceutical companies to help identify
statistically significant and medically relevant associations between SNPs in
specific genes and drug response or disease susceptibility. We expect that this
service will be used to assist in the evaluation of new drugs in clinical trials
and to assess clinical trial design.
DIADEXUS JOINT VENTURE
In September 1997, we established a 50-50 joint venture company, diaDexus,
LLC, with SmithKline Beecham Corporation. diaDexus is applying genomic and
bioinformatic technologies to the discovery and commercialization of novel
molecular diagnostic products. We provide diaDexus with non-exclusive access to
our human and microbial databases (LifeSeq Gold and PathoSeq) for diagnostic
applications. diaDexus also has exclusive rights to develop diagnostic tests
based on novel molecular targets and genetic alterations identified as part of
SmithKline Beecham's drug discovery efforts. SmithKline Beecham and Incyte have
also each assigned various additional technologies and intellectual property
rights in the diagnostic field and initially contributed a combined total of $25
million in funding to diaDexus. In July 1999, we and SmithKline Beecham each
invested an additional $2.5 million in the form of convertible notes that mature
in April 2000. The notes will automatically convert into equity if certain
funding requirements are met.
diaDexus is focusing initially on the generation of unique diagnostic
markers for so-called "homebrew" tests -- scientifically validated tests which
are awaiting formal regulatory approval -- for reference laboratory testing and
for license to diagnostic kit manufacturers. Ultimately, diaDexus may develop
its own capacity to manufacture kits for sale to clinical testing laboratories.
The initial product range will focus on tests for disease detection. New tests
for improved diagnosis, staging and patient stratification in infectious disease
and oncology will be accorded particular emphasis.
PATENTS AND PROPRIETARY TECHNOLOGY
Our database business and competitive position are in part dependent upon
our ability to protect our proprietary database information and software
technology. We rely on patent, trade secret and copyright law, as well as
nondisclosure and other contractual arrangements to protect our proprietary
information.
Our ability to license proprietary genes and SNPs may be dependent upon our
ability to obtain patents, protect trade secrets and operate without infringing
upon the proprietary rights of others. Other pharmaceutical, biotechnology and
biopharmaceutical companies, as well as academic and other institutions, have
filed applications for, may have been issued patents or may obtain additional
patents and proprietary rights, relating to products or processes competitive to
our products or processes. Patent applications filed by competitors may
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<PAGE> 10
claim some of the same gene sequences or partial gene sequences as those claimed
in patent applications that we file. We are aware that some entities have made
or have announced their intention to make gene sequences publicly available.
Publication of sequence information may adversely affect our ability to obtain
patent protection for sequences that have been made publicly available.
Our current policy is to file patent applications on what we believe to be
novel full-length and partial gene sequences obtained through our
high-throughput computer-aided gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences and
have filed patent applications in the U.S. and applications under the Patent
Cooperation Treaty ("PCT"), designating countries in Europe as well as Canada
and Japan, claiming full-length gene sequences associated with cells and tissues
that are the subject of our high-throughput gene sequencing program. To date, we
hold approximately 400 U.S. patents with respect to full-length gene sequences
and one issued U.S. patent claiming multiple partial gene sequences. Currently,
we have no registered copyrights for our database-related software.
In 1996, the United States Patent and Trademark Office issued guidelines
limiting the number of partial gene sequences that can be examined in a single
patent application. Many of our patent applications containing multiple partial
sequences contain more sequences than the maximum number allowed under the new
guidelines. We are reviewing our options, and due to the resources needed to
comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
We have begun to file patent applications for patentable SNPs identified
with our LifeSeq Gold database, through our human genome sequencing program, and
through the use of our fSSCP discovery technology. These patents will claim
rights to SNPs for diagnostic and genotyping purposes. As information relating
to particular SNPs is developed, we plan to seek additional rights in those SNPs
that are associated with specific diseases, functions or drug responses. The
scope of patent protection for gene sequences, including SNPs, is highly
uncertain, involves complex legal and factual questions and has recently been
the subject of much controversy. No clear policy has emerged with respect to the
breadth of claims allowable for SNPs. There is significant uncertainty as to
what, if any, claims will be allowed on SNPs discovered through high throughput
discovery programs.
As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and other genomic-related
businesses, the risk increases that our potential products, and the processes
used to develop these products, may be subject to claims that they infringe the
patents of others. Further, we are aware of several issued patents in the field
of microarray or gridding technology, which can be utilized in the generation of
gene expression information. Some of these patents are the subject of
litigation. Therefore, our operations may require us to obtain licenses under
any of these patents or proprietary rights, and these licenses may not be made
available on terms acceptable to us. Litigation may be necessary to defend
against or assert claims of infringement, to enforce patents issued to us, to
protect trade secrets or know-how owned by us, or to determine the scope and
validity of the proprietary rights of others. We believe that some of our patent
applications cover genes that may also be claimed in patent applications filed
by other parties. Interference proceedings may be necessary to establish which
party was the first to invent a particular sequence for the purpose of patent
protection. Several interferences involving our patent applications covering
full length genes have been declared. Litigation or interference proceedings,
regardless of the outcome, could result in substantial costs to us, and divert
our efforts, and may have a material adverse effect on our business, operating
results and financial condition. In addition, there can be no assurance that
such proceedings or litigation would be resolved in our favor.
In January and September 1998, Affymetrix, Inc. filed lawsuits in the
United States District Court for the District of Delaware alleging infringement
of three U.S. patents by Incyte and its Synteni, Inc. subsidiary. Incyte
believes that it and Synteni have meritorious defenses and intends to defend
these suits vigorously. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Results -- We Are
Involved in Patent Litigation, Which, If Not Resolved Favorably, Could Harm Our
Business."
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<PAGE> 11
COMPETITION
There is a finite number of genes in the human genome, and competitors may
seek to identify, sequence and determine in the shortest time possible the
biological function of a large number of genes in order to obtain a proprietary
position with respect to the largest number of new genes discovered. A number of
companies, institutions, and government-financed entities are engaged in gene
sequencing, gene discovery, gene expression analysis, positional cloning and
other genomic service businesses. Many of these companies, institutions and
entities have greater financial and human resources than we do. In addition, we
are aware that other companies have developed databases containing gene
sequence, gene expression, genetic variation or other genomic information and
are marketing, or have announced their intention to market, their data to
pharmaceutical companies. We expect that additional competitors may attempt to
establish databases containing this information in the future.
In addition, competitors may discover and establish patent positions with
respect to the gene sequences and polymorphisms in our databases. Further, some
entities engaged in or with stated intentions to engage in gene sequencing have
made or have stated their intention to make the results of their sequencing
efforts publicly available. These patent positions, or the public availability
of gene sequences comprising substantial portions of the human genome or on
microbial or plant genes, could:
- decrease the potential value of our databases to our subscribers; and
- adversely affect our ability to realize royalties or other revenue from
commercialization of products based upon such genetic information.
The gene sequencing machines that are utilized in our high-throughput
computer-aided gene sequencing operations are commercially available and are
currently being utilized by several competitors. Also, some of our competitors
or potential competitors are in the process of developing, and may successfully
develop, proprietary sequencing technologies that may be more advanced than the
technology we use. In addition, we are aware that a number of companies are
pursuing alternative methods for generating gene expression information,
including some that have developed and are developing microarray technologies.
At least one other company currently offers microarray-based services that might
be competitive with those we offer. These advanced sequencing or gene expression
technologies, if developed, may not be commercially available for our purchase
or license on reasonable terms, if at all.
A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than we do, and their products may achieve
greater market acceptance than our products.
Our SNP discovery platform represents a modification of a process that is
in the public domain. Other companies could make similar or superior
improvements in this process.
We believe that the following are important aspects of our competitive
position:
- the features and ease of use of our database software;
- our experience in high-throughput gene sequencing;
- the cumulative size of our databases;
- the quality of the data, including the annotations in our databases;
- our computing infrastructure; and
- and our experience with bioinformatics and database software.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render our
services and potential products noncompetitive. In addition, significant levels
of research in
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biotechnology and medicine occur in universities and other non-profit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results. These entities
also compete with us in recruiting talented scientists. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results -- We Experience Intense
Competition and Rapid Technological Change and If We Do Not Compete Effectively
Our Revenues May Decline."
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by us or our licensees. At the
present time, we do not intend to develop any pharmaceutical products ourselves.
Our agreements with our LifeSeq Gold database subscribers provide for the
payment to us of royalties on any pharmaceutical products developed by those
subscribers derived from proprietary information obtained from our genomic
databases. Thus, the receipt and timing of regulatory approvals for the
marketing of such products may have a significant effect on our future revenues.
Pharmaceutical products developed by licensees will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures by the United States Food and
Drug Administration in the United States 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, including
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be granted
on a timely basis, if at all. Any such delay in obtaining or failure to obtain
such approvals could adversely affect our ability to earn milestone payments,
royalties or other license-based fees. Additional governmental regulations that
might arise from future legislation or administrative action cannot be
predicted, and such regulations could delay or otherwise affect adversely
regulatory approval of potential pharmaceutical products. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results -- Our Revenues Are Derived
Primarily from the Pharmaceutical and Biotechnology Industries and May Fluctuate
Substantially Due to Reductions and Delays in Research and Development
Expenditures."
HUMAN RESOURCES
As of December 31, 1999, we had 1,108 full-time equivalent employees (195
of whom were contract or part-time employees), including 399 in sequencing,
microarray, SNP and reagent production, 294 in bioinformatics, 239 in research
and technology development, and 176 in marketing, sales and administrative
positions. None of our employees is covered by collective bargaining agreements,
and management considers relations with our employees to be good. Our future
success will depend in part on the continued service of our key scientific,
software, bioinformatics and management personnel and its ability to identify,
hire and retain additional personnel, including personnel in the customer
service, marketing and sales areas. There is intense competition for qualified
personnel in the areas of our activities, especially with respect to experienced
bioinformatics and software personnel, and there can be no assurance that we
will be able to continue to attract and retain such personnel necessary for the
development of our business. Failure to attract and retain key personnel could
have a material adverse effect on our business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors that May Affect Results -- We May
Have Difficulty Managing Our Growth, Which May Impact Our Ability to Optimize
Our Resources" and "-- We Depend on Key Employees in a Competitive Market for
Skilled Personnel and the Loss of the Services of Any of Our Key Employees Would
Materially Affect Our Business."
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ITEM 2. PROPERTIES
Incyte's headquarters are in Palo Alto, California, where its main research
laboratories, sequencing facility, bioinformatics and administrative facilities
are located. Incyte also operates facilities in Fremont, California; St. Louis,
Missouri; and Cambridge, England. As of December 31, 1999, Incyte had multiple
sublease and lease agreements covering approximately 442,000 square feet that
expire on various dates ranging from March 2000 to March 2011. The Company
believes that its current facilities are adequate to support its current and
anticipated near-term operations and believes that it can obtain additional
space it may need in the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
Affymetrix
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the " '934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees and
interest. Affymetrix further requests that any such damages be trebled based on
its allegation of willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware, subsequently transferred to
the United States District Court for the Northern District of California in
November 1998, alleging infringement of the U.S. patent number 5,800,992 (the
" '992 Patent") and U.S. patent number 5,744,305 (the " '305 Patent") by both
Synteni and Incyte. The complaint alleges that the '305 Patent has been
infringed by the making, using, selling, importing, distributing or offering to
sell in the United States high density arrays by Synteni and Incyte, that the
'992 Patent has been infringed by the use of Synteni's and Incyte's GEM(TM)
microarray technology to conduct gene expression monitoring using two-color
labeling, and that such infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. As a result of the assignment of the case to
a new judge, all scheduled trial and pretrial dates have been vacated. The court
is expected to set a new schedule in late April 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California.
Incyte and Synteni believe they have meritorious defenses and intend to
defend the suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and
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technical personnel. Further, there can be no assurance that any license that
may be required as a result of this suit or the outcome thereof would be made
available on commercially acceptable terms, if at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.001 ("Common Stock"), is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "INCY." The following
table sets forth, for the periods indicated, the range of high and low sales
prices for the Common Stock on Nasdaq as reported in its consolidated
transaction reporting system.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1998
First Quarter................................... $50 3/8 $36
Second Quarter.................................. 47 1/ 31 1/
Third Quarter................................... 42 18 1/
Fourth Quarter.................................. 39 1/ 20 15/1
1999
First Quarter................................... 37 3/ 20 1/1
Second Quarter.................................. 26 7/1 17 3/
Third Quarter................................... 41 3/ 21 5/3
Fourth Quarter.................................. 63 1/ 16 9/1
</TABLE>
As of December 31, 1999, the Common Stock was held by 506 stockholders of
record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future.
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<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in Item 8 of
this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues................................ $156,962 $134,811 $ 89,996 $ 41,895 $ 12,299
Costs and expenses:
Research and development.............. 146,833 97,192 72,452 41,337 19,272
Selling, general and administrative... 37,235 25,438 13,928 6,957 3,952
Charge for purchase of in-process
research and development........... -- 10,978 -- 3,165 --
Acquisition-related charges........... -- 1,171 -- -- --
-------- -------- -------- -------- --------
Total costs and expenses...... 184,068 134,779 86,380 51,459 23,224
Income (loss) from operations........... (27,106) 32 3,616 (9,564) (10,925)
Interest and other income, net.......... 5,169 7,266 4,140 2,288 988
Losses from joint venture............... (5,631) (1,474) (300) -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes....... (27,568) 5,824 7,456 (7,276) (9,937)
Provision (benefit) for income taxes.... (800) 2,352 548 -- --
-------- -------- -------- -------- --------
Net income (loss)....................... $(26,768) $ 3,472 $ 6,908 $ (7,276) $ (9,937)
======== ======== ======== ======== ========
Basic net income (loss) per share....... $ (0.95) $ 0.13 $ 0.28 $ (0.32) $ (0.53)
======== ======== ======== ======== ========
Number of shares used in computation of
basic net income (loss) per share..... 28,138 26,921 24,300 22,398 18,819
======== ======== ======== ======== ========
Diluted net income (loss) per share..... $ (0.95) $ 0.12 $ 0.26 $ (0.32) $ (0.53)
======== ======== ======== ======== ========
Number of shares used in computation of
diluted net income (loss) per share... 28,138 28,899 26,498 22,398 18,819
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(1)
Cash, cash equivalents, and securities
available-for-sale.................... $ 66,937 $111,233 $113,095 $ 40,238 $ 41,218
Working capital......................... 58,043 81,437 90,700 21,351 39,015
Total assets............................ 221,934 230,290 199,089 69,173 58,892
Non-current portion of capital lease
obligations and notes payable......... 194 796 801 37 147
Accumulated deficit..................... (55,169) (28,401) (30,129) (37,037) (29,761)
Stockholders' equity.................... 170,282 179,567 145,702 44,834 47,606
</TABLE>
- ---------------
(1) Financial data for the years ended December 31, 1995 and 1996, have been
restated to reflect the combined results and financial position of the
Company and Genome Systems, Inc. All periods through December 31, 1997 have
been restated to reflect combined results and financial position of the
Company and Synteni, Inc. See Note 9 of Notes to Consolidated Financial
Statements.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
related Notes included elsewhere in this Report.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. These statements, which include statements as to the Company's and
diaDexus' expected net losses, expected expenditure levels, expected cash flows,
the adequacy of capital resources, growth in operations and Year 2000 related
actions, are subject to risks and uncertainties that could cause actual results
to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as well as the
extent of utilization of genomic information by the biotechnology and
pharmaceutical industries; risks relating to the development of new products and
their use by potential collaborators of the Company; the impact of technological
advances and competition; the ability of the Company to obtain and retain
customers; competition from other entities; early termination of a database
collaboration agreement or failure to renew an agreement upon expiration; the
cost of accessing or acquiring technologies developed by other companies;
uncertainty as to the scope of coverage, enforceability or commercial protection
from patents that issue on gene sequences and other genetic information;
developments in and expenses relating to litigation; the results and viability
of joint ventures and businesses in which the Company has purchased equity; and
the matters discussed in "Factors That May Affect Results." These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
OVERVIEW
Incyte Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") designs, develops and markets genomic
information-based products and services. These products and services include
database products, genomic data management software tools, microarray-based gene
expression services, genomic reagents, and related services. The Company's
genomic databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
products and services used by pharmaceutical and biotechnology companies and
academic researchers in the understanding of disease and the discovery and
development of new drugs.
Revenues recognized by the Company consist primarily of non-exclusive
database access fees related to database agreements. Revenues also include the
sales of genomic screening products and services, fees for microarray-based gene
expression services, fees for contract sequencing services, and sales of genomic
data management software tools. The Company's database agreements provide for
future milestone payments and royalties from the sale of products derived from
proprietary information obtained through the databases. There can be no
assurance that any database subscriber will ever generate products from
information contained within the databases and thus that the Company will ever
receive additional milestone payments or royalties. The Company's ability to
maintain and increase revenues will be dependent upon its ability to obtain
additional database subscribers, retain existing subscribers, and to expand its
product and service offerings and expand its customer base for microarray
services. The loss of revenues from any individual database agreement, if
terminated or not renewed, could have an adverse impact on the Company's results
of operations, although it is not anticipated to have a material adverse impact
on the Company's business or financial conditions.
The Company intends to invest in its sequencing, bioinformatics, expression
database development and SNP discovery programs in 2000 and as a result expects
to report a net loss at least through 2000. If the costs of these programs are
greater than anticipated, or if these programs take longer to complete, or if
losses are incurred from strategic investments, the Company may incur losses in
future periods, as well.
The Company has made and intends to continue to make strategic equity
investments in, and acquisitions of, technologies and businesses that are
complementary to the businesses of the Company. As a result, the
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<PAGE> 17
Company may record losses or expenses related to the Company's proportionate
ownership interest in such long-term equity investments, record charges for the
acquisition of in-process technologies, or record charges for the recognition of
the impairment in the value of the securities underlying such investments.
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held SNP discovery company based in Cambridge, England.
The Company issued 976,130 shares of its common stock and $5.0 million in cash
in exchange for all of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if fully vested and exercised,
would amount to 125,909 shares of its common stock. The intrinsic value of the
stock options was included in the purchase price of Hexagen. The transaction was
accounted for as a purchase with a portion of the purchase price, estimated to
be approximately $11.0 million, expensed in the third quarter of 1998 as a
charge for the purchase of in-process research and development. The remainder of
the purchase price, approximately $17.6 million, was allocated to goodwill
($16.3 million), developed technology ($0.7 million), and Hexagen's assembled
work force ($0.6 million), which are being amortized over 8, 5 and 3 years,
respectively. The Company evaluates its intangible assets for impairment on a
quarterly basis.
The Company allocated Hexagen's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology research
and development projects in process at the date of acquisition. Hexagen's
in-process research and development program consisted of the development of its
fSSCP technology for SNP discovery. In 1999, the Company completed the
development of the fSSCP technology. There have been no significant changes in
the assumptions used to value the assets of Hexagen.
In January 1998, the Company completed the acquisition of Synteni, Inc.
("Synteni"), a privately-held microarray-based gene expression company. The
transaction has been accounted for as a pooling of interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies.
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatics technologies in the discovery and commercialization
of molecular diagnostics. The Company and SB each hold a 50 percent equity
interest in diaDexus. The investment is accounted for under the equity method,
and the Company records its share of diaDexus' earnings and losses in its
statement of operations.
In January 1998, the Company announced a relationship relating to the joint
development of proteomics data and related software with Oxford GlycoSciences
plc ("OGS"). As part of this relationship, the Company made a $5.0 million
initial equity investment and a follow-on investment in April 1998 of
approximately $0.8 million as part of the OGS initial public offering of its
ordinary shares. As part of the collaborative agreement, the Company reimbursed
OGS $5.0 million in 1999 for services rendered and will reimburse OGS up to $5.0
million in 2000 if revenues are not sufficient to offset OGS' expenses for
services rendered. The market prices of the securities of the companies in which
the Company invests are highly volatile and therefore subject to declines in
market value. The Company will continue to evaluate its long-term equity
investments for impairment on a quarterly basis.
In an effort to broaden its business, the Company is investing in a number
of new areas, including molecular diagnostics, genome sequencing, SNP discovery,
proteomics, and microarray services. Given that many of these address new
markets, or involve untested technologies, it is not known if any of them will
generate revenues or if the revenues will be sufficient to provide an adequate
return on the investment. Depending on the investment required and the timing of
such investments, expenses or losses related to these investments could
adversely affect operating results.
The Company has incurred and could continue to incur substantial expenses
in its defense of the lawsuits filed in January and September 1998 by
Affymetrix, Inc. ("Affymetrix") alleging patent infringement by Synteni and
Incyte. Affymetrix seeks a preliminary injunction enjoining Incyte and Synteni
from using certain microarray technology in a manner alleged to infringe an
Affymetrix patent and a permanent injunction enjoining Incyte and Synteni from
further infringement of certain Affymetrix patents. In addition, Affymetrix
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<PAGE> 18
seeks damages, costs, attorneys' fees and interest. Affymetrix further requests
that any such damages be trebled on its allegation of willful infringement by
Incyte and Synteni. Incyte and Synteni believe they have meritorious defenses
and intend to defend these suits vigorously. However, there can be no assurance
that Incyte and Synteni will be successful in the defense of these suits. At
this time, the Company cannot reasonably estimate the possible range of any loss
related to these suits due to uncertainty regarding the ultimate outcome.
Regardless of the outcome, this litigation has resulted and is expected to
continue to result in substantial expenses and diversion of the efforts of
management and technical personnel. Any future litigation could result in
similar expenses and diversion of efforts. Further, there can be no assurance
that any license that may be required as a result of these suits or the outcome
thereof would be made available on commercially acceptable terms, if at all.
RESULTS OF OPERATIONS
The Company recorded a net loss for the year ended December 31, 1999 of
$26.8 million and net income for the years ended December 31, 1998 and 1997 of
$3.5 million and $6.9 million, respectively. On a per share basis, basic and
diluted net loss was $0.95 for the year ended December 31, 1999. Basic and
diluted net income per share was $0.13 and $0.12 for the year ended December 31,
1998, respectively and $0.28 and $0.26 for the year ended December 31, 1997,
respectively. Excluding acquisition related charges, the Company recorded net
income of $15.5 million, and basic and diluted net income per share of $0.58 and
$0.54, respectively, for the year ended December 31, 1998. The net income per
share in 1997 reflects the dilutive effect of approximately 2.7 million shares
issued in an August 1997 follow-on public offering. The net income per share for
1998 and 1997 reflects the issuance of approximately 2.3 million shares in
January 1998 in connection with the Company's business combination with Synteni.
All share and per share data have been adjusted retroactively for a two-for-one
stock split effected in the form of a stock dividend paid on November 7, 1997 to
holders of record on October 17, 1997.
Revenues. Revenues for the years ended December 31, 1999, 1998, and 1997
were $157.0 million, $134.8 million, and $90.0 million, respectively. Revenues
resulted primarily from database access fees and, to a much lesser extent, from
microarray-based gene expression services, genomic screening products and
services, fees for contract sequencing, and sales of genomic data management
software tools and maintenance. The increase in revenues from year to year was
predominantly driven by expanded database agreements with existing customers,
new database customers and increased revenues from microarray-related products
and services.
Expenses. Total costs and expenses for the years ended December 31, 1999,
1998, and 1997 were $184.1 million, $134.8 million, and $86.4 million,
respectively. Total costs and expenses for the year ended December 31, 1998
included a one-time charge of $11.0 million for the purchase of in-process
research and development relating to the acquisition of Hexagen, and acquisition
related expenses of $1.2 million related to the combination with Synteni. Total
costs and expenses are expected to increase in the foreseeable future due to the
continued investment in new products and services.
Research and development expenses for the years ended December 31, 1999,
1998, and 1997 were $146.8 million, $97.2 million, and $72.5 million,
respectively. The increase from 1999 over 1998 resulted primarily from the
Company's genomic sequencing, genetic mapping, and SNP discovery initiatives
that were initiated in the second half of 1998, the Company's collaboration with
OGS in proteomics, the increase in microarray production, and the costs related
to intellectual property protection. The increase in research and development
expenses in 1998 over 1997 resulted primarily from an increase in bioinformatics
and software development efforts and to a lesser extent microarray production
capacity, and from costs related to genomic sequencing, genetic mapping, SNP
discovery efforts, technology development initiatives, and intellectual property
protection. The Company expects research and development spending to increase as
the Company continues to pursue the development of new database products and
services, including expression databases, expansion of existing database
products, increases in sequencing, bioinformatics, expression database
development and SNP discovery operations, and investments in new technologies.
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Selling, general and administrative expenses for the years ended December
31, 1999, 1998, and 1997 were $37.2 million, $25.4 million, and $13.9 million,
respectively. The increase in selling, general and administrative expenses in
1999 over 1998 resulted primarily from the growth in sales and marketing
activities and the increased personnel to support the growing complexity of the
Company's operations. The increase in selling, general and administrative
expenses in 1998 over 1997 resulted primarily from the growth in sales and
marketing activities and to a lesser extent the expansion of the Company's
United Kingdom operations and increased personnel to support the growing
complexity of the Company's operations. The Company's 1999 and 1998 operations
were also impacted by legal expenses related to the patent infringement lawsuits
filed by Affymetrix of approximately $6.5 million and $2.9 million,
respectively. The Company expects that total selling, general and administrative
expenses will continue to increase, primarily due to continued growth in
marketing, sales and customer support and expenses to support the growing
complexity of the Company's operations.
Interest and Other Income, Net. Interest and other income, net, for the
years ended December 31, 1999, 1998, and 1997 were $5.2 million, $7.3 million,
and $4.1 million, respectively. The decrease in 1999 from 1998 was primarily due
to decreased interest income as a result of lower cash, cash equivalent and
marketable securities balances. The increase in 1998 over 1997 was primarily due
to increased interest income from higher average combined cash, cash equivalent
and marketable securities balances and an increase in realized gains on the sale
of marketable securities.
Losses from Joint Venture. Losses from joint venture were $5.6 million,
$1.5 million and $0.3 million for the years ended December 31, 1999, 1998 and
1997, respectively. The loss represents the Company's share of diaDexus' losses
from operations. The loss in 1998 was net of $2.5 million of amortization of the
excess of the Company's share of diaDexus' net assets over its basis.
Income Taxes. The Company had an effective income tax benefit rate of 3.0%
in 1999. The benefit was primarily due to the carryback of the current year net
operating loss. The effective tax rate for 1998 was 14.0%, excluding the charge
for the purchase of in-process research and development, and for 1997 was 7.3%,
which represents the provision of federal and state alternative minimum taxes
after utilization of net operating loss carryforwards. The increase from 1997 to
1998 in the effective tax rate resulted primarily from the Company's expectation
that it would fully utilize all federal net operating loss carryforwards
available to benefit the income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $66.9 million in cash, cash
equivalents and marketable securities, compared to $111.2 million as of December
31, 1998. The Company has classified all of its marketable securities as
short-term, as the Company may choose not to hold its marketable securities
until maturity in order to take advantage of favorable market conditions.
Available cash is invested in accordance with the Company's investment policy's
primary objectives of liquidity, safety of principal and diversity of
investments.
Net cash used in operating activities was $21.4 million for the year ended
December 31, 1999, compared to cash provided of $36.2 million and $18.0 million
for the years ended December 31, 1998 and 1997. The change in cash flows from
operations in 1999 compared to 1998 was primarily due to the Company's
investments in genomic sequencing, mapping, bioinformatics and SNP discovery
resulting in a net loss in 1999 as compared to net income in 1998, and the
increase in accounts receivable and prepaid expenses, partially offset by
increases in accrued liabilities. The increase in net cash provided by operating
activities in 1998 compared to 1997 was primarily due to the increase in net
income before non-cash charges and the decrease in accounts receivable,
partially offset by the increase in prepaid and other assets and the decrease in
deferred revenues.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted predominantly of capital
expenditures and net purchases of long-term investments. Capital expenditures
for the years ended December 31, 1999, 1998, and 1997 were $34.8 million, $30.7
million, and $27.2 million, respectively. Capital expenditures increased in 1999
and 1998 primarily due to investments in
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computer and laboratory equipment as well as leasehold improvements related to
the expansion of the Company's facilities. Long-term investments in companies
with which the Company has research and development agreements were $4.2 million
for the year ended December 31, 1999 compared to $7.1 million and $8.5 million
for the years ended December 31, 1998 and 1997, respectively. In 1999 the
Company liquidated its investment in two such companies, resulting in proceeds
of $4.3 million and a net realized gain of $0.2 million. In 1998, the Company
paid $4.0 million, net of cash received, in connection with the purchase of
Hexagen and in 1997 transferred $6.0 million to restricted cash for disbursement
to diaDexus in accordance with the diaDexus joint venture agreement. In the
future, net cash used by investing activities may fluctuate significantly from
period to period due to the timing of strategic equity investments, capital
expenditures and maturity/sales and purchases of marketable securities.
Net cash provided by financing activities was $12.5 million, $4.0 million,
and $94.8 million for the years ended December 31, 1999, 1998, and 1997,
respectively. Net cash provided by financing activities in 1997 was primarily
due to proceeds from follow-on public stock offerings in August 1997, while net
cash provided by financing activities in 1999 and 1998 was due to the issuance
of common stock under the Company's stock option and employee stock purchase
plans.
Subsequent to December 31, 1999, the Company raised additional funds in two
financing transactions. In February 2000, the Company issued $200.0 million
aggregate principal amount of 5.5% convertible subordinated notes due 2007 in a
private placement, resulting in net proceeds of approximately $196.8 million.
Beginning May 15, 2000, the notes are convertible at the option of the note
holders into the Company's common stock at an initial conversion price of
$134.839 per share, subject to adjustment. Also in February 2000, the Company
issued 2,000,000 shares of its common stock in a private placement, for an
aggregate purchase price of $422.0 million. Net proceeds from the sale of those
shares were $398.3 million.
The Company expects its cash requirements to increase in 2000 as it:
invests in its sequencing, bioinformatics, expression database development, and
SNP discovery programs; invests in data-processing-related computer hardware to
support its existing and new database products and to enable the on-line
delivery of those products; continues to seek access to technologies through
investments, research and development alliances, license agreements and/or
acquisitions; makes strategic investments; and continues to make improvements in
existing facilities.
Based upon its current plans, the Company believes that its existing
resources will be adequate to satisfy its capital needs for at least the next
twelve months. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for its
databases and other products and services; expenditures in connection with
alliances, license agreements and acquisitions of and investments in
complementary technologies and businesses; competing technological and market
developments; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; the purchase of additional
capital equipment, including capital equipment necessary to ensure the Company's
sequencing and microarray operations remain competitive; capital expenditures
required to expand the Company's facilities; and costs associated with the
integration of new operations assumed through mergers and acquisitions. Changes
in the Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources.
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002, but not later than July 1, 2002. During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency. This conversion to the euro had no
material impact on the Company's results of operations, financial
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position or cash flows. The Company will continue to evaluate the potential
impact of the euro on its computer and financial systems, business processes,
market risk, and price competition.
FACTORS THAT MAY AFFECT RESULTS
WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY AND WE EXPECT TO INCUR LOSSES
IN THE FUTURE, WHICH MAY PREVENT US FROM RETURNING TO PROFITABILITY
We had net losses from inception in 1991 through 1996, reported net income
in 1997 and 1998, and again incurred a net loss in 1999. Because of those
losses, we had an accumulated deficit of $55.2 million as of December 31, 1999.
We intend to make significant investments in sequencing, bioinformatics,
expression database development and single nucleotide polymorphism, or SNP,
discovery over the next year. As a result,we expect to report a net loss for the
year ending December 31, 2000. We may report net losses in future periods as
well. We expect that our expenditures may continue to increase in 2000 due in
part to our continued investment in new product and technology development,
including the continuation of our genomic sequencing, bioinformatics, expression
database development, SNP-discovery programs, obligations under existing and
future research and development alliances, and our increasing investment in
marketing, sales and customer service. Our profitability depends on our ability
to increase our revenues:
TO GENERATE SIGNIFICANT REVENUES, WE MUST OBTAIN ADDITIONAL DATABASE
COLLABORATORS AND RETAIN EXISTING COLLABORATORS. While we had over 20 database
agreements as of December 31, 1999, we may be unable to enter into any
additional agreements. Also, our database collaborators may choose not to renew
their agreements upon expiration. In 1999, for the first time one of our LifeSeq
Gold database collaborators did not renew its subscription. Our database
revenues are also affected by the extent to which existing collaborators expand
their agreements with us to include our new database products and to the extent
that existing collaborators reduce the number of products or services for which
they subscribe. Some of our database agreements require us to meet performance
obligations. A database collaborator can terminate its agreement before the end
of its scheduled term if we breach the agreement and fail to cure the breach
within a specified period.
OUR REVENUES AND PROFITABILITY WILL ALSO DEPEND ON OUR ABILITY TO GENERATE
PROFITS FROM EXPRESSION DATABASES AND MICROARRAY SERVICES. We acquired Synteni,
Inc. in January 1998 to provide microarray services and to generate information
for expression databases. The contribution of our microarray operations to our
operating results will depend on whether we can continue to obtain high-volume
customers for microarray services and expression databases, whether we can
continue to increase our microarray production capacity in a timely manner and
with consistent volumes and quality, and the costs associated with increasing
our microarray production capacity.
WE DO NOT EXPECT MILESTONE OR ROYALTY PAYMENTS TO SUBSTANTIALLY CONTRIBUTE
TO REVENUES FOR SEVERAL YEARS. Part of our strategy is to license to database
collaborators our know how and patent rights associated with the gene sequences
and related information in our proprietary databases, for use in the discovery
and development of potential pharmaceutical, diagnostic or other products. Any
potential product that is the subject of such a license will require several
years of further development, clinical testing and regulatory approval before
commercialization.
OUR OPERATING RESULTS ARE UNPREDICTABLE AND MAY ADVERSELY IMPACT OUR STOCK PRICE
Our operating results are unpredictable and may fluctuate significantly
from period to period due to a variety of factors, including:
- changes in the demand for our products and services;
- the introduction of competitive databases or services, including public
domain databases;
- the pricing of access to our databases;
- the nature, pricing and timing of other products and services provided to
our collaborators;
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- changes in the research and development budgets of our collaborators and
potential collaborators;
- depreciation expense from capital expenditures;
- acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses such as
Synteni and Hexagen;
- losses and expenses related to our investments in joint ventures and
businesses, including our proportionate share of operating losses of our
diaDexus, LLC, joint venture with SmithKline Beecham Corporation;
- payments of milestones, license fees or research payments under the terms
of our increasing number of external alliances; and
- expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights (including the lawsuits filed by
Affymetrix, Inc. described below).
In particular, revenues from our database business are unpredictable
because:
- the timing of our database installations is determined by our
collaborators;
- the sales cycle for our database products is lengthy; and
- the time required to complete custom orders can vary significantly.
We expect our expression databases to represent an increasing amount of our
revenues. Also, revenues may be affected by developments in the Affymetrix
litigation, which may cause potential customers to postpone or change their
decision to use our microarray services.
We are investing in a number of new areas to try to broaden our business.
These areas include sequencing, bioinformatics, gene expression databases, SNP
discovery, molecular diagnostics, proteomics, or the large scale,
high-throughput analysis of protein expression, and the online delivery of our
database and software products. Because many of these address new markets or
involve untested technologies, they may not generate any revenues or provide an
adequate return on our investment. In these cases, we may have to recognize
expenses or losses.
We have significant fixed expenses, due in part to our need to continue to
invest in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would adversely affect
our operating results for that period. Forecasting operating and integration
expenses for acquired businesses may be particularly difficult, especially where
the acquired business focuses on technologies that do not have an established
market.
We believe that period-to-period comparisons of our financial results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount.
WE EXPERIENCE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE AND IF WE
DO NOT COMPETE EFFECTIVELY OUR REVENUES MAY DECLINE
GENOMIC BUSINESSES ARE INTENSELY COMPETITIVE. The human genome contains a
finite number of genes. Our competitors may seek to identify, sequence and
determine the biological function of numerous genes in order to obtain a
proprietary position with respect to new genes. A number of companies, other
institutions and government-financed entities are engaged in gene sequencing,
gene discovery, gene expression analysis, positional cloning, the study of
genetic variation, and other genomic service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do.
Some of our competitors have developed databases containing gene sequence,
gene expression, genetic variation or other genomic information and are
marketing or plan to market their data to pharmaceutical companies. Additional
competitors may attempt to establish databases containing this information in
the future. We expect that competition in our industry will continue to
intensify. Several large pharmaceutical
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companies have formed a consortium to create a SNPs database and to make all of
the information publicly available. The formation of this consortium could delay
or reduce the potential revenues related to our SNP-related business.
PATENT POSITIONS OR PUBLIC DISCLOSURES MAY REDUCE THE VALUE OF OUR
DATABASES. Competitors may discover and establish patent positions with respect
to gene sequences in our databases. Further, certain entities engaged in gene
sequencing have made the results of their sequencing efforts publicly available.
In January 2000, the Celera Genomics Group of PE Corporation announced that it
has DNA sequence in its database that covers 90% of the human genome and plans
to complete the sequencing of the human genome by the summer of 2000. Celera has
announced that it has filed a provisional patent application on newly discovered
partial genes and stated its intention to file full applications on medically
important discoveries. The Human Genome Project, which is coordinated by the
U.S. Department of Energy and the National Institutes of Health, has announced
that a consortium of laboratories associated with the Project predicts that they
will produce at least 90% of the human genome sequence in a "working draft form"
by the spring of 2000 and that they intend to make the information publicly
available. The public availability of gene sequences or resulting patent
positions covering substantial portions of the human genome or microbial or
plant genomes could reduce the potential value of our databases to our
collaborators. It could also impair our ability to realize royalties or other
revenue from any commercialized products based on this genetic information.
COMPETITORS MAY DEVELOP SUPERIOR TECHNOLOGY. The gene sequencing machines
used in our computer-aided sequencing operations are commercially available and
are being used by at least one competitor. In addition, some of our competitors
and potential competitors are developing proprietary sequencing technologies
that may be more advanced than ours. PE Corporation began commercial shipments
of a new gel-based sequencing machine, of which a large number have been
provided to Celera Genomics Group. We may be unable to obtain access to
sufficient quantities of these machines on acceptable terms.
In addition, a number of companies are pursuing alternative methods for
generating gene expression information, including microarray technologies. These
advanced sequencing or gene expression technologies may not be commercially
available for us to purchase or license on reasonable terms, if at all. At least
one other company currently offers microarray-based services that might be
competitive with ours.
Our SNP discovery platform represents a modification of a process that is
in the public domain. We are seeking patent protection for these improvements,
but have not yet received any patents. Other companies could make similar or
superior improvements to this process without infringing our rights, and we may
not have access to those improvements. The discovery of SNPs is a competitive
area. Other companies may develop or obtain access to different SNP discovery
platforms, to which we may not have access, that may make our technology
obsolete.
We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data.
WE MUST CONTINUE TO INVEST IN NEW TECHNOLOGIES. The genomics industry is
characterized by extensive research efforts, resulting in rapid technological
progress. To remain competitive, we must continue to expand our databases,
improve our software, and invest in new technologies. New developments are
expected to continue, and discoveries by others may render our services and
potential products noncompetitive.
WE ARE INVOLVED IN PATENT LITIGATION, WHICH IF NOT RESOLVED FAVORABLY COULD HARM
OUR BUSINESS
In January 1998, Affymetrix filed a lawsuit in federal court alleging
infringement of U.S. patent number 5,445,934 by both Synteni and Incyte. The
complaint alleges that the '934 patent has been infringed by Synteni's and
Incyte's making, using, selling, importing, distributing or offering to sell
high density arrays in the United States and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 patent and seeks damages, costs, attorneys'
fees and interest. Affymetrix also requests triple damages based on allegedly
willful infringement.
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In September 1998, Affymetrix filed an additional lawsuit alleging
infringement of U.S. patent numbers 5,744,305 and 5,800,992 by Synteni and
Incyte. The complaint alleges that the '305 patent has been infringed by
Synteni's and Incyte's making, using, selling, importing, distributing or
offering to sell high density arrays in the United States. It also alleges that
the '992 patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling and that this infringement was willful. Affymetrix had sought a
preliminary injunction enjoining Synteni and Incyte from using GEM microarray
technology to conduct this kind of gene expression monitoring, and a permanent
injunction enjoining Synteni and Incyte from further infringing the '305 and
'992 patents.
The lawsuits were initially filed in the United States District Court for
the District of Delaware. In November 1998, the court granted Incyte's motion to
transfer the suits to the United States District Court for the Northern District
of California. Affymetrix's request for a preliminary injunction was denied in
April 1999. As a result of the assignment of the case to a new judge, all
scheduled trial and pretrial dates have been vacated. The court is expected to
set a new schedule in late April 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office declared interferences between pending patent
applications licensed exclusively to us and the Affymetrix '305 and '992
patents. An interference proceeding is invoked by the Patent and Trademark
Office when more than one patent applicant claims the same invention. The Board
of Patent Appeals and Interferences evaluates all relevant facts, including
those bearing on first to invent, validity, enablement and scope of claims, and
then makes a determination as to who, if anyone, is entitled to the patent on
the disputed invention. In September 1999, the Board of Patent Appeals and
Interferences determined that Incyte had not met its prima facie case, and ruled
that patents licensed by Incyte and Synteni from Stanford University were not
entitled to priority over corresponding claims in the two Affymetrix patents. We
are seeking de novo review of the board decisions in the United States district
court for the Northern District of California.
We believe we have meritorious defenses and intend to defend these suits
vigorously. However, our defense may be unsuccessful. At this time, we cannot
reasonably estimate the possible range of any loss resulting from these suits
due to uncertainty about the ultimate outcome. We have spent and expect to
continue to spend a significant amount of money and management time on this
litigation. Also, if we are required to license any technology as a result of
these suits, we do not know whether we will be able to do so on commercially
acceptable terms, if at all.
WE SPEND A SUBSTANTIAL AMOUNT OF MONEY ON NEW AND UNCERTAIN BUSINESSES AND
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE INSUFFICIENT TO COVER OUR COSTS,
WHICH COULD IMPACT OUR PROFITABILITY
There is no precedent for our microarray-based gene expression database or
service businesses or the use of SNP-based genetic variation information. The
usefulness of the information generated by these businesses is unproven. Our
collaborators and potential collaborators may determine that our databases,
software tools and microarray-related services are not useful or cost-effective.
Due to the nature and price of some of the products and services we offer, only
a limited number of companies are potential collaborators for those products and
services. If we do not develop these new products and services in time to meet
market demand or if there is insufficient demand for these products and
services, we may not be able to cover our costs of developing these products and
services or earn a sufficient return on our investment.
Additional factors that may affect demand for our products and services
include:
- the extent to which pharmaceutical and biotechnology companies conduct
these activities in-house or through industry consortia;
- the emergence of competitors offering similar services at competitive
prices;
- the extent to which the information in our databases is made public or is
covered by others' patents;
- our ability to establish and enforce proprietary rights to our products;
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- regulatory developments or changes in public perceptions relating to the
use of genetic information and the diagnosis and treatment of disease
based on genetic information; and
- technological innovations that are more advanced than the technologies
that we have developed or that are available to us.
Many of these factors are beyond our control.
OUR NEW PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND DRUG
RESPONSE MAY NEVER GENERATE SIGNIFICANT REVENUES OR PROFITABLE OPERATIONS
We recently began to focus part of our business on developing databases and
other products and services to assist pharmaceutical companies in a new and
unproven area: the identification and correlation of genetic variation to
disease and drug response. We will incur significant costs over the next several
years in expanding our research and development in this area. These activities
may never generate significant revenues or profitable operations.
This new aspect of our business will focus on SNPs, one type of genetic
variation. The role of SNPs in disease and drug response is not fully
understood, and relatively few, if any, therapeutic or diagnostic products based
on SNPs have been developed and commercialized. Among other things, demand in
this area may be adversely affected by ethical and social concerns about the
confidentiality of patient-specific genetic information and about the use of
genetic testing for diagnostic purposes.
Except for a few anecdotal examples, there is no proof that SNPs have any
correlation to diseases or a patient's response to a particular drug or class of
drug. Identifying statistically significant correlations is time-consuming and
could involve the collection and screening of a large number of patient samples.
We do not know if the SNPs we have discovered to date are suitable for these
correlation studies. Nor do we currently have access to the patient samples
needed or technology allowing us to rapidly and cost-effectively identify
pre-determined SNPs in large numbers of patients.
Most SNPs may occur too infrequently to warrant their use in analyzing
patients' genetic variation. We may have trouble identifying SNPs that both
correlate with diseases or drug responses and occur frequently enough to justify
their use by pharmaceutical companies.
Our success will also depend upon our ability to develop, use and enhance
new and relatively unproven technologies. Our strategy of using high-throughput
mutation detection processes and sequencing to identify SNPs and genes rapidly
is unproven. Among other things, we will need to continue to improve the
throughput of our SNP-discovery technology. We may not be able to achieve these
necessary improvements, and other factors may impair our ability to develop our
SNP-related products and services in time to be competitively available.
OUR STRATEGIC INVESTMENTS MAY RESULT IN LOSSES AND OTHER ADVERSE EFFECTS
We make strategic investments in joint ventures or businesses that
complement our business. These investments, such as our investment in diaDexus,
may:
- often be made in securities lacking a public trading market or subject to
trading restrictions, either of which increases our risk and reduces the
liquidity of our investment;
- require us to record losses and expenses related to our ownership
interest;
- require us to record charges related to the acquisition of in-process
technologies or for the impairment in the value of the securities
underlying our investment; and
- require us to invest greater amounts than anticipated or to devote
substantial management time to the management of research and development
relationships and joint ventures.
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The market values of many of these investments fluctuate significantly. We
evaluate our long-term equity investments for impairment of their values on a
quarterly basis. Impairment could result in future charges to our earnings.
These losses and expenses may exceed the amounts that we anticipated.
OUR SALES CYCLE IS LENGTHY AND THERE IS NO GUARANTEE THAT A SUBSCRIPTION OR
SERVICES AGREEMENT WILL RESULT
Our ability to obtain new subscribers for our databases, software tools and
microarray and other services depends upon prospective subscribers' perceptions
that our products and services can help accelerate drug discovery efforts. Our
database sales cycle is typically lengthy because we need to educate our
potential subscribers and sell the benefits of our tools and services to a
variety of constituencies within potential subscriber companies. In addition,
each database subscription and microarray services agreement involves the
negotiation of unique terms. We may expend substantial funds and management
effort with no assurance that a subscription or services agreement will result.
Actual and proposed consolidations of pharmaceutical companies have affected the
timing and progress of our sales efforts. We expect that future proposed
consolidations will have similar effects.
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF OUR
PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY IMPACT OUR BUSINESS AND OPERATING RESULTS
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY RESULT
IN UNAUTHORIZED USE AND A LOSS OF REVENUE. Our business and competitive position
depend upon our ability to protect our proprietary database information and
software technology, but our strategy of obtaining proprietary rights in as many
genes and SNPs as possible is unproven. Despite our efforts to protect this
information and technology, unauthorized parties may attempt to obtain and use
information that we regard as proprietary. Although our database subscription
agreements require our subscribers to control access to our databases, policing
unauthorized use of our databases and software may be difficult.
We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin working
for us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.
Our means of protecting our proprietary rights may not be adequate and our
competitors may:
- independently develop substantially equivalent proprietary information
and techniques;
- otherwise gain access to our proprietary information; or
- design around patents issued to us or our other intellectual property.
OUR PATENT APPLICATIONS MAY CONFLICT WITH OTHERS. Our current policy is to
file patent applications on what we believe to be novel full-length and partial
gene sequences obtained through our gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences. We
have also applied for patents in the U.S. and other countries claiming
full-length gene sequences associated with cells and tissues involved in our
gene sequencing program. We hold a number of issued U.S. patents on full-length
genes and one issued U.S. patent claiming multiple partial gene sequences. A
number of entities make certain gene sequences publicly available, which may
adversely affect our ability to obtain patents on those genes.
We believe that some of our patent applications claim genes that may also
be claimed in patent applications filed by others. In some or all of these
applications, a determination of priority of inventorship may need to be decided
in an interference before the United States Patent and Trademark Office.
ENFORCEMENT OF GENE PATENTS IS UNCERTAIN AND GENE PATENTS MAY BE FOUND
UNENFORCEABLE, RESULTING IN A LOSS OF COMPETITIVE BENEFIT. One of our strategies
is to obtain proprietary rights in as many genes (including partial gene
sequences) and SNPs as possible. While the USPTO has issued patents covering
full-length genes, partial gene sequences and SNPs, we do not know whether or
how courts may enforce those patents, if that
26
<PAGE> 27
becomes necessary. If a court finds these types of inventions to be
unpatentable, or interprets them narrowly, the benefits of our strategy may not
materialize.
WE MAY DECIDE TO ABANDON PATENT APPLICATIONS, WHICH COULD DIMINISH THE
VALUE OF OUR PATENT PORTFOLIO AND POSSIBLY OUR FUTURE REVENUES. The USPTO has
had a substantial backlog of biotechnology patent applications, particularly
those claiming gene sequences. In 1996, the USPTO issued guidelines limiting the
number of partial gene sequences that can be examined within a single patent
application. Many of our patent applications contain more partial sequences than
the maximum number allowed under these guidelines. Due to the resources needed
to comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
Because filing large numbers of patent applications and maintaining issued
patents can be very costly, we may choose not to pursue every application. If we
do not pursue patent protection for all of our full-length and partial gene
sequences, the value of our intellectual property portfolio could be diminished.
Because of the possible delay in obtaining allowance of some of our patent
applications, and the secrecy of patent applications, we do not know if other
applications having priority over ours have been filed.
WE MAY NEED TO REFILE SOME OF OUR PATENT APPLICATIONS AND THE PERIOD OF
PATENT PROTECTION HAS BEEN SHORTENED, WHICH MAY AFFECT OUR POTENTIAL REVENUES
AND PROFITS. The value of our patents depends in part on their duration. The
U.S. patent laws were amended in 1995 to change the term of patent protection
from 17 years from patent issuance to 20 years from the earliest effective
filing date of the application. Because the average time from filing to issuance
of biotechnology applications is at least one year and may be more than three
years depending on the subject matter, a 20-year patent term from the filing
date may result in substantially shorter patent protection, which may adversely
affect our rights under any patents that we obtain. We may need to refile
applications claiming large numbers of gene sequences and, in these situations,
the patent term will be measured from the date of the earliest priority
application. This would shorten our period of patent exclusivity.
INTERNATIONAL PATENT PROTECTION IS PARTICULARLY UNCERTAIN, AND OPPOSITION
PROCEEDINGS IN FOREIGN COUNTRIES MAY BE COSTLY AND DIVERT MANAGEMENT
RESOURCES. Biotechnology patent law outside the United States is even more
uncertain than in the United States and is currently undergoing review and
revision in many countries. Further, the laws of some foreign countries may not
protect our intellectual property rights to the same extent as U.S. laws. We may
participate in opposition proceedings to determine the validity of our or our
competitors' foreign patents, which could result in substantial costs and
diversion of our efforts.
WE MAY BE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS THAT COULD BE
COSTLY AND DISRUPT OUR BUSINESS
The technology that we use to develop our products, and those that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses.
As is typical in the genomics, biotechnology and software industries, we
have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. We believe that we are not infringing the
patent rights of any such third party. Except for Affymetrix, no third party has
filed a patent lawsuit against us.
We may, however, be involved in future lawsuits alleging patent
infringement or other intellectual property rights violations. In addition,
litigation may be necessary to:
- assert claims of infringement;
- enforce our patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
27
<PAGE> 28
We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation can be very costly and can divert management's
efforts. An adverse determination may subject us to significant liabilities or
require us to seek licenses to other parties' patents or proprietary rights. We
may also be restricted or prevented from manufacturing or selling our products.
Further, we may not be able to obtain the necessary licenses on acceptable
terms, if at all.
WE MAY ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS, WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND THE GOODWILL OF OUR CUSTOMERS
Our databases also require software support and will need to incorporate
features determined by database collaborators. If we experience delays or
difficulties in implementing our database software or collaborator-requested
features, we may be unable to service our collaborators.
PAST ACQUISITIONS HAVE AND ANY FUTURE ACQUISITIONS THAT WE MAY MAKE COULD
ADVERSELY AFFECT OUR OPERATIONS OR FINANCIAL RESULTS
As part of our business strategy, we may acquire other assets, technologies
and businesses. We acquired Synteni in January 1998 and Hexagen in September
1998.
These and any future acquisitions involve risks such as the following:
- we may be exposed to unknown liabilities of acquired companies;
- our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
- we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and
diverting management's time and attention;
- we may be unable to integrate or complete the development and application
of acquired technology;
- we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies;
- our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired
businesses;
- we may be unable to retain key employees of the acquired businesses;
- we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
- our stockholders may be diluted if we pay for the acquisition with equity
securities.
In addition, if we acquire additional businesses that are not located near
our Palo Alto, California headquarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY IMPACT OUR ABILITY TO
OPTIMIZE OUR RESOURCES
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth has placed, and may
continue to place, a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems and to hire, train and manage our employees.
In addition, we must continue to invest in customer support resources as
the number of database collaborators and their requests for support increase.
Our database collaborators typically have worldwide operations and may require
support at multiple U.S. and foreign sites. To provide this support, we may need
to open offices in addition to our Palo Alto, California headquarters and our
offices in Fremont, California,
28
<PAGE> 29
St. Louis, Missouri and Cambridge, England, which could result in additional
burdens on our systems and resources.
WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL AND THE
LOSS OF THE SERVICES OF ANY OF OUR KEY EMPLOYEES WOULD MATERIALLY AFFECT OUR
BUSINESS
We are highly dependent on the principal members of our management,
operations and scientific staff, including Roy A. Whitfield, our Chief Executive
Officer, and Randal W. Scott, our President and Chief Scientific Officer. The
loss of either of these persons' services may have a material adverse effect on
our business. We have not entered into any employment agreement with either of
these persons and do not maintain a key person life insurance policy on the life
of any employee.
Our future success also will depend in part on the continued service of our
executive management team, key scientific, software, bioinformatics and
management personnel and our ability to identify, hire and retain additional
personnel, including customer service, marketing and sales staff. We experience
intense competition for qualified personnel. We may not be able to continue to
attract and retain personnel necessary for the development of our business.
OUR INABILITY TO OBTAIN NECESSARY EQUIPMENT, SUPPLIES AND DATA FROM THIRD
PARTIES MAY ADVERSELY IMPACT OUR RESULTS
WE RELY ON A SMALL NUMBER OF SUPPLIERS OF GENE SEQUENCING MACHINES AND
REAGENTS REQUIRED FOR GENE SEQUENCING. Although we are evaluating alternative
gene sequencing machines, they may not be available in sufficient quantities or
at acceptable costs. In addition, if a third party claims that our use of these
machines infringes their patent rights, our use of these machines could become
more costly or could be prevented. If we are unable to obtain additional
machines or an adequate supply of reagents or other materials at commercially
reasonable rates, our ability to identify genes and SNPs would be adversely
affected.
WE RELY ON OUTSIDE SOURCES FOR TISSUE SAMPLES FROM WHICH WE ISOLATE GENETIC
MATERIAL USED IN OUR OPERATIONS. Our business could be adversely affected if we
lose access to some of these sources, or if they charged us higher access fees
or imposed tighter restrictions on our use of the information generated from the
samples.
WE CANNOT CONTROL THE PERFORMANCE OF COLLABORATORS. We may enter into
research and development relationships with corporate and academic collaborators
and others. The success of these relationships depends upon third parties'
performance of their responsibilities. Our ability to develop these
relationships is uncertain, and any established relationships may prove
unsuccessful. Our collaborators may also be pursuing alternative technologies or
developing alternative products on their own or in collaboration with others,
including our competitors.
WE RELY ON THIRD-PARTY DATA SOURCES. We rely on scientific and other data
supplied by others, including our academic collaborators and sources of tissue
samples. This data could contain errors or other defects, which could corrupt
our databases. In addition, we cannot guarantee that our data sources acquired
this information in compliance with legal requirements. If either of these
happen and become known, our business prospects could be adversely affected.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO COSTLY
ENVIRONMENTAL LIABILITY
Our research and development involves the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of these materials comply with
legally prescribed standards, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of an
accident, we could be held liable for damages, and this liability could exceed
our resources.
29
<PAGE> 30
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environmental laws and regulations.
OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY
INDUSTRIES AND MAY FLUCTUATE SUBSTANTIALLY DUE TO REDUCTIONS AND DELAYS IN
RESEARCH AND DEVELOPMENT EXPENDITURES
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries as well as to the academic community. Accordingly, our
success will depend in large part upon the success of the companies within these
industries and their demand for our products and services. Our operating results
may fluctuate substantially due to reductions and delays in research and
development expenditures by companies in these industries or by the academic
community. These reductions and delays may result from factors such as:
- changes in economic conditions;
- consolidation in the pharmaceutical industry;
- changes in the regulatory environment affecting health care and health
care providers;
- pricing pressures;
- market-driven pressures on companies to consolidate and reduce costs; and
- other factors affecting research and development spending.
These factors are not within our control.
OUR BUSINESS COULD BE INTERRUPTED BY NATURAL DISASTERS
We conduct our sequencing and a significant portion of our other activities
at our facilities in Palo Alto, California, and conduct our microarray-related
activities at our facilities in Fremont, California. Both locations are in a
seismically active area. Although we maintain business interruption insurance,
we do not have or plan to obtain earthquake insurance. A major catastrophe (such
as an earthquake or other natural disaster) could result in a prolonged
interruption of our business.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH
FLOW
We have substantial amounts of outstanding indebtedness, primarily the $200
million of convertible subordinated notes issued in February 2000. As a result
of this indebtedness, our principal and interest payment obligations have
increased substantially. There is the possibility that we may be unable to
generate cash sufficient to pay the principal of, interest on and other amounts
due in respect of our indebtedness when due.
30
<PAGE> 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
investments in short-term marketable securities and its note payable. The
Company's investment policy calls for investment in short term, low risk
instruments. As of December 31, 1999, investments in marketable securities were
$37.5 million. At December 31, 1999, the Company had a fixed rate note payable
balance of $0.5 million. Due to the nature of these investments and note, if
market interest rates were to increase immediately and uniformly by 10% from
levels as of December 31, 1999, the decline in the fair value of the portfolio
would not be material.
The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments and long-term
investments, entered into to further its business and strategic objectives.
These investments are in small capitalization stocks in the pharmaceutical/
biotechnology industry sector, in companies with which the Company has research
and development or licensing agreements. The Company typically does not attempt
to reduce or eliminate its market exposure on these securities. As of December
31, 1999, long-term investments, excluding diaDexus, were $14.2 million.
The Company typically does not hedge its foreign currency exposure.
Management does not believe that the Company's exposure to foreign currency rate
fluctuations is material.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF INCYTE PHARMACEUTICALS,
INC.
Report of Ernst & Young LLP, Independent Auditors......... 33
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... 34
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... 35
Consolidated Statements of Comprehensive Income (Loss) for
the years ended December 31, 1999, 1998 and 1997....... 36
Consolidated Statement of Stockholders' Equity for the
three year period ended December 31,
1999................................................... 37
Consolidated Statements of Cash Flow for the years ended
December 31, 1999, 1998 and 1997....................... 38
Notes to the Consolidated Financial Statements............ 39
Schedule II -- Valuation and Qualifying Accounts.......... 53
FINANCIAL STATEMENTS OF DIADEXUS, LLC, A DEVELOPMENT STAGE
COMPANY
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ 54
Balance Sheet at December 31, 1999 and 1998............... 55
Statement of Operations for the years ended December 31,
1999 and 1998 and for the period from inception
(September 1997) through December 31, 1999............. 56
Statement of Changes In Members' Equity For the Period
From Inception (September 1997) through December 31,
1999................................................... 57
Statement of Cash Flows for the years ended December 31,
1999 and 1998 and for the period from inception
(September 1997) through December 31, 1999............. 58
Notes to Financial Statements............................. 59
</TABLE>
32
<PAGE> 33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Incyte
Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the financial statements of diaDexus, LLC, a joint
venture, which statements reflect total assets of $11,297,000 and $20,215,000 as
of December 31, 1999 and 1998 respectively, and net losses of $11,286,000,
$7,928,000, and $548,000 for the years ended December 31, 1999 and 1998 and the
period from inception (September 1997) through December 31, 1997. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the losses from joint venture recorded
under the equity method and other data included for diaDexus, LLC, is based
solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the Untied States. 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Incyte Pharmaceuticals, Inc. at December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 24, 2000
33
<PAGE> 34
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PAR VALUE)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 32,220 $ 50,048
Marketable securities -- available-for-sale............... 34,717 61,185
Accounts receivable, net.................................. 26,608 14,318
Prepaid expenses and other current assets................. 15,956 5,813
-------- --------
Total current assets.............................. 109,501 131,364
Property and equipment, net................................. 67,293 54,429
Long-term investments....................................... 19,275 20,653
Goodwill and other intangible assets, net................... 14,564 16,955
Deposits and other assets................................... 11,301 6,889
-------- --------
Total assets...................................... $221,934 $230,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,501 $ 8,244
Accrued compensation...................................... 6,731 4,786
Accrued and other current liabilities..................... 11,767 7,843
Deferred revenue.......................................... 26,459 29,054
-------- --------
Total current liabilities......................... 51,458 49,927
Non-current portion of capital lease obligations and note
payable................................................... 194 796
-------- --------
Total liabilities................................. 51,652 50,723
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding at December 31,
1999 and 1998.......................................... -- --
Common stock, $0.001 par value; 75,000,000 shares
authorized; 28,889,936 and 27,829,850 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 29 28
Additional paid-in capital................................ 222,805 209,192
Deferred compensation..................................... (806) (1,209)
Receivable from stockholders.............................. (20) (33)
Accumulated other comprehensive income (loss)............. 3,443 (10)
Accumulated deficit....................................... (55,169) (28,401)
-------- --------
Total stockholders' equity........................ 170,282 179,567
-------- --------
Total liabilities and stockholders' equity........ $221,934 $230,290
======== ========
</TABLE>
See accompanying notes
34
<PAGE> 35
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenues.................................................... $156,962 $134,811 $89,996
Costs and expenses:
Research and development.................................. 146,833 97,192 72,452
Selling, general and administrative....................... 37,235 25,438 13,928
Charge for the purchase of in-process research and
development............................................ -- 10,978 --
Acquisition-related charges............................... -- 1,171 --
-------- -------- -------
Total costs and expenses.......................... 184,068 134,779 86,380
-------- -------- -------
Income (loss) from operations............................... (27,106) 32 3,616
Interest and other income................................... 5,485 7,416 4,326
Interest and other expense.................................. (316) (150) (186)
Losses from joint venture................................... (5,631) (1,474) (300)
-------- -------- -------
Income (loss) before income taxes........................... (27,568) 5,824 7,456
Provision (benefit) for income taxes........................ (800) 2,352 548
-------- -------- -------
Net income (loss)........................................... $(26,768) $ 3,472 $ 6,908
======== ======== =======
Basic net income (loss) per share........................... $ (0.95) $ 0.13 $ 0.28
======== ======== =======
Shares used in computing basic net income (loss) per
share..................................................... 28,138 26,921 24,300
======== ======== =======
Diluted net income (loss) per share......................... $ (0.95) $ 0.12 $ 0.26
======== ======== =======
Shares used in computing diluted net income (loss) per
share..................................................... 28,138 28,899 26,498
======== ======== =======
</TABLE>
See accompanying notes
35
<PAGE> 36
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE NET INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Net income (loss)........................................... $(26,768) $3,472 $6,908
Other comprehensive income (loss)
Unrealized gains on marketable securities................. 3,618 338 127
Foreign currency translation adjustment................... (165) (404) 2
-------- ------ ------
Other comprehensive income (loss)........................... 3,453 (66) 129
-------- ------ ------
Comprehensive income (loss)................................. $(23,315) $3,406 $7,037
======== ====== ======
</TABLE>
See accompanying notes
36
<PAGE> 37
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RECEIVABLE OTHER TOTAL
COMMON PAID-IN DEFERRED FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL COMPENSATION STOCKHOLDER INCOME DEFICIT EQUITY
------ ---------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997...... $22 $ 81,922 $ -- $ -- $ (73) $(37,037) $ 44,834
Issuance of 2,755,426 shares of
Common Stock, net of expenses
and underwriters' fees of
$5,065......................... 3 87,239 -- -- -- -- 87,242
Issuance of 462,434 shares of
Common Stock, net of expenses
of $41......................... 1 3,559 -- -- -- -- 3,560
Issuance of 431,879 shares of
Common Stock upon exercise of
stock options and 14,934 shares
upon exercise of warrant....... -- 3,029 -- -- -- -- 3,029
Net change in unrealized gains
(losses) on marketable
securities..................... -- -- -- -- 127 -- 127
Change in cumulative translation
adjustment..................... -- -- -- -- 2 -- 2
Net income....................... -- -- -- -- -- 6,908 6,908
--- -------- ------- ---- ------ -------- --------
Balances at December 31, 1997.... 26 175,749 -- -- 56 (30,129) 145,702
Adjustment to conform fiscal year
of pooled entity -- Synteni
(including issuance of 337,271
shares of Common Stock)........ -- 3,732 (1,658) (49) -- (1,744) 281
Issuance of 423,030 shares of
Common Stock upon exercise of
stock options; 38,944 shares of
Common Stock shares issued
under ESPP..................... 1 4,748 -- -- -- -- 4,749
Issuance of 976,130 shares of
Common Stock in purchase of
Hexagen Limited................ 1 23,438 -- -- -- -- 23,439
Tax benefit from employee stock
transactions................... -- 1,525 -- -- -- -- 1,525
Amortization of deferred
compensation................... -- -- 449 -- -- -- 449
Repayment of receivable from
stockholder.................... -- -- -- 16 -- -- 16
Net change in unrealized gains
(losses) on marketable
securities..................... -- -- -- -- 338 -- 338
Change in cumulative translation
adjustment..................... -- -- -- -- (404) -- (404)
Net income....................... -- -- -- -- -- 3,472 3,472
--- -------- ------- ---- ------ -------- --------
Balances at December 31, 1998.... 28 209,192 (1,209) (33) (10) (28,401) 179,567
Issuance of 980,848 shares of
Common Stock upon exercise of
stock options; 79,377 shares of
Common Stock issued under the
ESPP........................... 1 13,613 -- -- -- -- 13,614
Amortization of deferred
compensation................... -- -- 403 -- -- -- 403
Repayment of receivable from
stockholder.................... -- -- -- 13 -- -- 13
Net change in unrealized gains
(losses) on marketable
securities..................... -- -- -- -- 3,618 -- 3,618
Change in cumulative translation
adjustment..................... -- -- -- -- (165) -- (165)
Net loss......................... -- -- -- -- -- (26,768) (26,768)
--- -------- ------- ---- ------ -------- --------
Balances at December 31, 1999.... $29 $222,805 $ (806) $(20) $3,443 $(55,169) $170,282
=== ======== ======= ==== ====== ======== ========
</TABLE>
See accompanying notes
37
<PAGE> 38
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(26,768) $ 3,472 $ 6,908
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 24,688 17,827 10,633
Gain on sale of long-term investments................... (241) -- --
Non-cash portion of the charge for the purchase of
in-process research and development.................... -- 10,978 --
Losses from joint venture............................... 5,631 1,474 300
Adjustment to conform fiscal year of pooled entity...... -- 278 --
Changes in certain assets and liabilities:
Accounts receivable................................... (12,290) 5,885 (18,451)
Prepaid expenses and other assets..................... (14,555) (5,280) (3,495)
Accounts payable...................................... (1,743) 1,773 1,028
Accrued and other current liabilities................. 6,427 1,826 14,404
Deferred revenue...................................... (2,595) (2,000) 6,660
-------- -------- --------
Net cash provided by (used in) operating activities......... (21,446) 36,233 17,987
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (34,758) (30,710) (27,225)
Purchase of long-term investments......................... (4,181) (7,145) (8,537)
Proceeds from the sale of long-term investments........... 4,321 -- --
Purchase of Hexagen (net of cash received)................ -- (3,977) --
Transfer to restricted cash............................... -- -- (6,000)
Proceeds from sale of assets leased back under operating
leases.................................................. -- -- 1,696
Purchases of marketable securities........................ (22,998) (98,512) (53,464)
Sales of marketable securities............................ 38,932 88,081 8,515
Maturities of marketable securities....................... 10,000 6,900 18,225
-------- -------- --------
Net cash used in investing activities....................... (8,684) (45,363) (66,790)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 13,614 4,749 93,831
Proceeds from capital leases and notes payable............ -- -- 1,000
Principal payments on capital lease obligations and note
payable................................................. (1,160) (781) (46)
Proceeds from repayment of receivable from stockholders... 13 16 --
-------- -------- --------
Net cash provided by financing activities................... 12,467 3,984 94,785
-------- -------- --------
Effect of exchange rate on cash and cash equivalents........ (165) (404) --
Net increase (decrease) in cash and cash equivalents........ (17,828) (5,550) 45,982
Cash and cash equivalents at beginning of period............ 50,048 55,598 9,616
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 32,220 $ 50,048 $ 55,598
======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid............................................. $ 316 $ 138 $ 16
======== ======== ========
Taxes paid................................................ $ 224 $ 705 $ 252
======== ======== ========
CASH FLOW FOR ACQUISITION OF HEXAGEN
Tangible assets acquired (excluding $1,023 cash
received)............................................... $ 3,025
Purchased in-process research and development............. 10,978
Goodwill and other intangible assets acquired............. 17,553
Acquisition costs incurred................................ (1,029)
Liabilities assumed....................................... (3,112)
Common stock issued....................................... (23,438)
--------
Cash paid for acquisition (net of $1,023 cash received)... $ 3,977
========
</TABLE>
See accompanying notes
38
<PAGE> 39
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business. Incyte Pharmaceuticals, Inc. (the "Company") was
incorporated in Delaware in April 1991. The Company designs, develops, and
markets genomic information-based tools including database products, genomic
data management software tools, microarray-based gene expression services and
genomic reagents and related services. The Company's genomic databases integrate
bioinformatics software with proprietary and, when appropriate, publicly
available genetic information to create information-based tools used by
pharmaceutical and biotechnology companies and academic researchers in the
understanding of disease and drug discovery and development.
Principles of Consolidation. The consolidated financial statements include
the accounts of Incyte Pharmaceuticals, Inc., and its wholly owned subsidiaries.
All material intercompany accounts, transactions, and profits have been
eliminated in consolidation.
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), which was accounted for as a purchase. The Company issued 976,130
shares of the its common stock and $5.0 million in cash in exchange for all of
Hexagen's outstanding capital stock. In addition, the Company assumed Hexagen's
outstanding stock options, which if fully vested and exercised, would amount to
125,909 shares of common stock. The consolidated financial statements discussed
herein reflect the inclusion of the results of Hexagen from the date of
acquisition, September 21, 1998.
In January 1998, the Company issued 2,340,237 shares of common stock in
exchange for all of the capital stock of Synteni, Inc. ("Synteni"). The merger
has been accounted for as a pooling of interests and, accordingly, the Company's
financial statements and financial data for all periods prior to the acquisition
were retroactively restated to include the accounts and operations of Synteni
since inception. Synteni's fiscal year ended on September 30. Synteni's results
of operations for the period from October 1, 1997 to December 31, 1997 were
recorded directly in accumulated deficit in 1998.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation. The financial statements of subsidiaries
outside the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet date. The resultant translation
adjustments are included in the accumulated other comprehensive income (loss), a
separate component of stockholders' equity. Income and expense items are
translated at average monthly rates of exchange.
Concentrations of Credit Risk. Cash, cash equivalents, and short-term
investments, trade receivables, and long term strategic investments are
financial instruments which potentially subject the Company to concentrations of
credit risk. The estimated fair value of financial instruments approximates the
carrying value based on available market information. The Company primarily
invests its excess available funds in notes and bills issued by the U.S.
government and its agencies and corporate debt securities and, by policy, limits
the amount of credit exposure to any one issuer and to any one type of
investment, other than securities issued or guaranteed by the U.S. Government.
The Company's customers are pharmaceutical, biotechnology and agricultural
companies which are typically located in the United States and Europe. The
Company has not experienced any significant credit losses to date and does not
require collateral on receivables. The Company's long-term investments represent
equity investments in a number of companies whose businesses may be
complementary to the Company's business. The Company evaluates the long-term
investments quarterly for impairment, and to date has not incurred a material
impairment related to these investments. (See Long-Term Investments)
39
<PAGE> 40
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents. Cash and cash equivalents are held in U.S. and
U.K. banks or in custodial accounts with U.S. and U.K. banks. Cash equivalents
are defined as all liquid investments with maturity from date of purchase of 90
days or less that are readily convertible into cash and have insignificant
interest rate risk. All other investments are reported as marketable
securities -- available-for-sale.
Marketable Securities-Available-for-Sale. All marketable securities are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretions of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other than
temporary for available-for-sale securities are included in interest and other
income/expense. The cost of securities sold is based on the specific
identification method.
The following is a summary of the Company's investment portfolio, excluding
the Company's investment in diaDexus and including cash equivalents of
$2,803,000 and $26,203,000 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
NET
UNREALIZED ESTIMATED
AMORTIZED GAINS FAIR
COST (LOSSES) VALUE
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
DECEMBER 31, 1999
U.S. Treasury notes and other U.S. government and agency
securities................................................ $35,043 $ (326) $34,717
Corporate debt securities................................... 2,800 3 2,803
Long term equity investments................................ 9,848 4,333 14,181
------- ------ -------
$47,691 $4,010 $51,701
======= ====== =======
DECEMBER 31, 1998
U.S. Treasury notes and other U.S. government and agency
securities................................................ $72,635 $ 210 $72,845
Corporate debt securities................................... 14,543 -- 14,543
Long term equity investments................................ 12,245 182 12,427
------- ------ -------
$99,423 $ 392 $99,815
======= ====== =======
</TABLE>
At December 31, 1999 and 1998, all of the Company's investments are
classified as short-term, as the Company has classified its investments as
available for sale and may not hold its investments until maturity in order to
take advantage of market conditions. At December 31, 1999, marketable securities
with a market value of $32,596,000 and an amortized cost of $32,846,000 had
maturities under a year and marketable securities with a market value of
$4,924,000 and an amortized cost of $4,997,000 had maturities over a year, but
less than two years. Unrealized losses were not material and have therefore been
netted against unrealized gains. Net realized gains of $272,000 and $380,000
from sales of marketable securities were included in Interest and Other Income
in 1999 and 1998, respectively, and net realized losses of $25,000 losses from
sales of marketable debt securities were included in Interest and Other Expense
in 1997.
Accounts Receivable. Accounts receivable at December 31, 1999 and 1998
included an allowance for doubtful accounts of $234,000 and $434,000,
respectively.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is recorded using the
straight-line method over the estimated useful lives of the
40
<PAGE> 41
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respective assets (generally two to five years). Leasehold improvements are
amortized over the shorter of the estimated useful life of the assets or lease
term. Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Office equipment............................................ $ 4,630 $ 3,577
Laboratory equipment........................................ 25,297 25,665
Computer equipment.......................................... 52,565 35,209
Leasehold improvements...................................... 37,941 26,026
-------- --------
120,433 90,477
Less accumulated depreciation and amortization.............. (53,140) (36,048)
-------- --------
$ 67,293 $ 54,429
======== ========
</TABLE>
Depreciation expense, including depreciation expense of assets under
capital leases, was $16,711,000, $13,420,000, and $8,758,000, for 1999, 1998,
and 1997, respectively. Amortization of leasehold improvements was $5,138,000,
$3,343,000, and $2,260,000 for 1999, 1998, and 1997, respectively.
Certain laboratory and computer equipment used by the Company could be
subject to technological obsolescence in the event that significant advancement
is made in competing or developing equipment technologies. Management
continually reviews the estimated useful lives of technologically sensitive
equipment and believes that those estimates appropriately reflect the current
useful life of its assets. In the event that a currently unknown significantly
advanced technology became commercially available, the Company would re-evaluate
the value and estimated useful lives of its existing equipment, possibly having
a material impact on the financial statements.
Long-Term Investments. The Company has made equity investments in a number
of companies whose businesses may be complementary to the Company's business.
The Company accounts for its investment in diaDexus ($5,094,000 and $8,226,000
at December 31, 1999 and 1998, respectively) under the equity method of
accounting (see Joint Venture and Note 10 ). All other investments in which the
shares are freely tradable or become freely tradable within one year of the
balance sheet date are accounted for in accordance with Statement of Financial
Accounting Standard ("SFAS") 115, with unrealized gains and losses being
reported in accumulated other comprehensive income (loss) as a separate
component of stockholders' equity. In all other cases, the cost method of
accounting is used. The Company holds less than 10% of each long-term
investment, other than diaDexus, and does not exert significant influence over
these investments.
Joint Venture. In September 1997, the Company formed a joint venture,
diaDexus, LLC with SmithKline Beecham Corporation ("SB"), which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company and SB each hold a 50 percent equity interest
in diaDexus and the Company accounts for the investment under the equity method.
See Note 10.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets
were generated in the acquisition of Hexagen. Goodwill is being amortized on a
straight line basis over 8 years and the other intangible assets of developed
technology and assembled workforce are being amortized on a straight line basis
over 5 and 3 years, respectively. Goodwill and other intangible assets are
evaluated quarterly for impairment.
Software Costs. In accordance with the provisions of the Financial
Accounting Standards Board Statement No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," the Company has
capitalized software development costs incurred in developing certain products
once technological feasibility of the products has been determined. At December
31, 1999 and 1998 the Company had capitalized software, net of amortization, of
$8,542,000 and $6,315,000, respectively, and
41
<PAGE> 42
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recorded amortization of capitalized software of $3,418,000, $1,379,000, and
$391,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
Accumulated Other Comprehensive Income. Accumulated Other Comprehensive
Income consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ -----
(IN THOUSANDS)
<S> <C> <C>
Unrealized gains on marketable securities................... $4,010 $ 392
Cumulative Translation Adjustment........................... (567) (402)
------ -----
$3,443 $ (10)
====== =====
</TABLE>
Revenue Recognition. Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. For
database collaboration agreements revenues are recognized evenly over the term
of each agreement. Revenue is deferred for fees received before earned. Revenues
from custom orders, such as contract sequencing, and reagents are recognized
upon completion and delivery. Revenues from genomic screening services are
recognized upon completion. Revenue from gene expression microarray services
includes; technology access fees, which are generally recognized ratably over
the access term and usage fees which are recognized at the completion of key
stages in the performance of the service, in proportion to costs incurred.
Generally, software revenue is allocated between license fees and maintenance
fees, in accordance with SOP 97-2, with the license revenue being recognized
upon installation, and maintenance fees recognized evenly over the maintenance
term.
Stock-Based Compensation. The Company accounts for stock option grants to
employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company currently grants stock options for a fixed number of
shares to employees and directors with an exercise price equal to the fair value
of the shares at the date of grant, and therefore records no compensation
expense. Prior to the merger with Incyte, Synteni recorded deferred compensation
of $1,658,000 for options issued to employees with an exercise price below the
fair market value of the underlying stock. The amount is being amortized over
the vesting period of the options issued.
Advertising Costs. All costs associated with advertising products are
expensed in the year incurred. Advertising expense for the years ended December
31, 1999, 1998, and 1997 was $1,051,000, $1,092,000, and $772,000, respectively.
New Pronouncements. In June 1998, the FASB issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. ("SFAS 133"). SFAS
133 established standards for accounting and reporting derivative instruments
and hedging activities. In June 1999, The FASB issued Statement No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 ("SFAS 137"). This statement defers the
effective date of SFAS 133 until June 15, 2000. Application of SFAS 133 will
have no impact on the consolidated financial position or results of operations
as currently reported.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on accounting
for non-refundable up-front fees. The Company is currently evaluating SAB 101 as
to whether it would have any material impact on the Company. Should the Company
determine that a change in its accounting policy is necessary, such a change
will be made effective January 1, 2000 and would result in a charge to results
of operations for the cumulative effect of the change. This amount, if
recognized, would be recorded as deferred revenue and recognized as revenue in
future periods. Prior financial statements would not be restated.
42
<PAGE> 43
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. DATABASE AND MICROARRAY AGREEMENTS
As of December 31, 1999, the Company had entered into database
collaboration agreements with over twenty pharmaceutical, biotechnology and
agricultural companies. Over 83% of revenues in 1999 were derived from such
collaborations. Each collaborator has agreed to pay, during the term of the
agreement, annual fees to receive non-exclusive access to selected modules of
the Company's databases. In addition, if a customer develops certain products
utilizing the Company's technology and proprietary database information,
milestone and royalty payments could potentially be received by the Company.
The Company has also entered into microarray production agreements with
pharmaceutical, biotechnology and agricultural companies. The agreements range
from small volume pilot agreements to large volume production agreements.
No collaborators individually contributed more than 10% of the Company's
total revenues in 1999 or 1997. One of the collaborators contributed 12% of the
Company's total revenues in 1998.
NOTE 3. COMMITMENTS
At December 31, 1999, the Company had signed noncancelable operating leases
on multiple facilities, including facilities in Palo Alto and Fremont,
California, St. Louis, Missouri and Cambridge, England. The leases expire on
various dates ranging from March 2000 to March 2011. Rent expense for the years
ended December 31, 1999, 1998, and 1997, was approximately $8,674,000,
$5,218,000, and $3,490,000, respectively.
The Company had laboratory and office equipment with a cost of
approximately $2,308,000 and $2,334,000 at December 31, 1999 and 1998,
respectively, and related accumulated amortization of approximately $716,000 and
$177,000 at December 31, 1999 and 1998, respectively, under capital leases.
These leases are secured by the equipment leased thereunder.
At December 31, 1999, future noncancelable minimum payments under the
operating and capital leases and note payable were as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
OPERATING AND
LEASES NOTE PAYABLE
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Year ended December 31,
2000................................................... $ 15,364 $ 720
2001................................................... 14,789 207
2002................................................... 11,741 --
2003................................................... 9,585 --
2004................................................... 8,001 --
Thereafter............................................. 47,001 --
-------- -----
Total minimum lease payments................................ $106,481 927
========
Less amount representing interest........................... (126)
-----
Present value of minimum lease payments..................... 801
Less current portion........................................ (607)
-----
Non-current portion......................................... $ 194
=====
</TABLE>
In July 1997, Synteni obtained $1,000,000 in debt financing secured by its
property and equipment. The loan is repayable in 48 equal monthly installments
commencing on September 1, 1997 and carries an annual interest rate of 9%. In
connection with the financing, Synteni issued a warrant to purchase 2,569 shares
of Incyte equivalent common stock, exercisable for a period of seven years from
the date of issue at an exercise
43
<PAGE> 44
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
price of $7.79 per share. Using the Black-Scholes model to determine the fair
market value of the warrant, management has determined that such fair value is
nominal.
The Company has entered into a number of research and development alliances
with companies and research institutions. These agreements provide for the
funding of research activities by the Company and the possible payment of
milestones, license fees, and, in some cases, royalties. As part of a
collaborative agreement with Oxford GlycoSciences plc ("OGS") relating to the
joint development of a proteomics database, the Company reimbursed OGS $5.0
million for services rendered in 1999 and has agreed to reimburse OGS up to
another $5.0 million in 2000 if revenues are not sufficient to offset OGS'
services rendered. The Company's commitments under any other of these agreements
do not represent a significant expenditure in relation to the Company's total
research and development expense.
NOTE 4. STOCKHOLDERS' EQUITY
Common Stock. At December 31, 1999, the Company had reserved a total of
6,036,364 shares of its Common Stock for issuance upon exercise of outstanding
stock options and purchases under the Employee Stock Purchase Plan described
below. In October 1997, the Company's Board of Directors authorized a two-
for-one stock split effected in the form of a stock dividend paid on November 7,
1997 to holders of record on October 17, 1997. All share and per share data have
been adjusted retroactively to reflect the split.
On May 21, 1997, the Company's stockholders approved an increase in the
number of shares authorized for issuance from 20,000,000 to 75,000,000.
Preferred Stock. The Company is authorized to issue 5,000,000 shares of
preferred stock, none of which was outstanding at December 31, 1999 or 1998. The
Board of Directors may determine the rights, preferences and privileges of any
preferred stock issued in the future.
Sales of Stock. In August 1997, the Company completed a follow-on public
stock offering and issued 2,755,426 shares of common stock, including 355,426
shares covered by the exercise of the underwriters' over-allotment option, at
$33.50 per share. Net proceeds from this offering were approximately $87.2
million after deducting the underwriting discount and offering expenses.
Stock Compensation Plans. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its stock compensation plans.
Accordingly, no compensation cost, excluding options issued by Synteni prior to
the merger, has been recognized for its fixed stock option plans. Had
compensation cost for the Company's three stock-based compensation plans been
determined consistent with SFAS 123, the Company's pro forma net loss in 1999,
1998 and 1997 would have been approximately $40.0 million, $7.4 million, and
$0.5 million, respectively. The Company's pro forma basic and diluted net loss
per share in 1999, 1998, and 1997 would have been $1.42, $0.27, and $0.02 per
share, respectively. The weighted average fair value of the options granted
during 1999, 1998, and 1997 are estimated at $13.41, $16.59, and $14.66 per
share, respectively, on the date of grant, using the Black-Scholes
multiple-option pricing model with the following assumptions: dividend yield 0%,
0% and 0%, volatility of 66%, 57%, and 56%, risk-free interest rate with an
average of 5.43%, 5.06%, and 6.05%, and an average expected life of 3.32, 3.79,
and 3.37 years, for 1999, 1998, and 1997, respectively. The average fair value
of the employees' purchase rights under the Employee Stock Purchase Plan during
1999, 1998 and 1997 is estimated at $8.14, $12.15 and $11.86, respectively, on
the date of grant, using the Black-Scholes multiple-option pricing model with
the following assumptions: dividend yield 0%, 0% and 0%, volatility of 66%, 57%
and 56%, risk free interest rate of 5.14%, 4.75% and 5.64%, and an expected life
of 6 months, respectively.
As SFAS 123 is only applicable to options granted after December 31, 1994,
the pro forma effect was not fully reflected until 1998. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price
44
<PAGE> 45
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
volatility and option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, because
changes in the subjective input assumptions can materially affect the fair value
estimate, and because the Company has a relatively limited history with option
behavior, in management's opinion the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock options.
Summaries of stock option activity for the Company's three fixed stock
option plans as of December 31, 1999, 1998 and 1997, and related information for
the years ended December 31 are included in the plan descriptions below.
1991 Stock Plan. In November 1991, the Board of Directors adopted the 1991
Stock Plan (the "Stock Plan"), which was amended and restated in 1992, 1995,
1996 and 1997 for issuance of common stock to employees, consultants, and
scientific advisors. Options issued under the plan shall, at the discretion of
the compensation committee of the Board of Directors, be either incentive stock
options or nonstatutory stock options. The exercise prices of incentive stock
options granted under the plan are not less than the fair market value on the
date of the grant, as determined by the Board of Directors. The exercise prices
of nonstatutory stock options granted under the plan cannot be less than 85% of
the fair market value on the date of the grant, as determined by the Board of
Directors. Options generally vest over four years, pursuant to a formula
determined by the Company's Board of Directors, and expire after ten years. On
June 8, 1999, the Company's stockholders approved an increase in the number of
shares of Common Stock reserved for issuance under the plan from 6,300,000 to
7,400,000.
1996 Synteni Stock Plan. In December 1996, Synteni's board of directors
approved and adopted the 1996 Equity Incentive Plan ("Synteni Plan"). Under the
Synteni Plan, Synteni could grant incentive stock options, nonstatutory stock
options, stock bonuses or restricted stock purchase rights to purchase the
aggregate equivalent of 436,100 shares of Incyte Common Stock. Incentive stock
options could be granted to employees and nonstatutory options and rights to
purchase restricted stock may be granted to employees, directors or consultants
at exercise prices of no less than 100% and 85%, respectively, of the fair value
of the common stock on the grant date, as determined by the board of directors.
Options could be granted with different vesting terms from time to time and
options expire no more than 10 years after the date of grant. All outstanding
options at the time of the merger with Incyte were converted to options to
purchase Incyte Common Stock, and the Synteni Plan was terminated.
45
<PAGE> 46
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity under the combined plans was as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO
OUTSTANDING OPTIONS
---------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
---------- --------- --------
<S> <C> <C> <C>
Balance at January 1, 1997................................ 478,808 2,938,086 $11.63
Additional authorization................................ 800,000 -- --
Shares authorized under Synteni Plan.................... 436,100 -- --
Options granted......................................... (1,159,508) 1,159,508 25.56
Options exercised....................................... -- (408,171) 7.27
Options canceled........................................ 109,398 (109,398) 19.27
---------- ---------
Balance at December 31, 1997.............................. 664,798 3,580,025 16.46
Additional authorization................................ 1,500,000 -- --
Options granted......................................... (1,002,834) 1,002,834 28.70
Options exercised....................................... -- (421,010) 8.52
Options canceled........................................ 207,763 (207,763) 30.73
Termination of Synteni Plan............................. (88,280) -- --
---------- ---------
Balance at December 31, 1998.............................. 1,281,447 3,954,086 19.66
Additional authorization................................ 1,100,000 -- --
Options granted......................................... (2,571,044) 2,571,044 27.52
Options exercised....................................... -- (980,848) 12.71
Options canceled........................................ 669,704 (669,704) 27.52
---------- ---------
Balance at December 31, 1999.............................. 480,107 4,874,578 $24.15
========== =========
</TABLE>
Included in the above table, in the 1998 activity, were stock options
issued by Synteni to purchase 89,587 Incyte equivalent common shares at a
weighted average exercise price of $1.49, in the period from October 1, 1997 to
December 31, 1997. The Company recorded $1,658,000 of deferred compensation
related to these options, which is being amortized over the vesting period of
the options.
Options to purchase a total of 1,862,676; 2,447,539; and 2,145,403 shares
at December 31, 1999, 1998, and 1997, respectively, were exercisable. Of the
options exercisable, 1,713,646; 1,851,549; and 1,197,542 shares were vested at
December 31, 1999, 1998, and 1997, respectively.
Non-Employee Directors' Stock Option Plan. In August 1993, the Board of
Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The maximum number of shares issuable under the
Directors' Plan is 400,000.
The Directors' Plan provides immediate issuance of options to purchase an
initial 40,000 shares of Common Stock to each new non-employee director joining
the Board. The initial options are exercisable in five equal annual
installments. Additionally, members who continue to serve on the Board will
receive annual option grants for 10,000 shares exercisable in full on the first
anniversary of the date of the grant. All options are exercisable at the fair
market value of the stock on the date of grant. Through December 31, 1999, the
Company had granted options under the Directors' Plan to purchase 307,500 shares
of Common Stock at weighted average exercise prices of $11.25 (287,500 and
267,500 shares of Common Stock at a weighted average exercise price of $11.18
and $8.71 at December 31, 1998 and 1997, respectively); 287,500 shares are
vested and exercisable at December 31, 1999 (241,500 and 171,500 shares were
vested and exercisable at
46
<PAGE> 47
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997, respectively). To date, no options under the
Director's Plan have been exercised or canceled. The Directors' Plan was amended
in March 1998 by the Board of Directors to eliminate the grant referred to above
to each new non-employee director and to reduce the annual grants from 10,000
shares to 5,000 shares.
The following table summarizes information about stock options outstanding
at December 31, 1999, for the 1991 Stock Plan, the 1996 Synteni Stock Plan, and
the 1993 Non-employee Directors' Stock Option Plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 - 7.25 722,279 4.89 $ 3.92 695,850 $ 3.99
7.38 - 17.69 678,395 6.90 12.57 496,395 10.84
18.00 - 20.94 684,028 7.44 20.17 433,062 20.21
21.00 - 27.75 582,565 9.04 24.62 92,781 25.12
28.00 - 30.13 918,683 9.22 29.34 25,605 28.13
30.44 - 30.44 663,369 9.94 30.44 416 30.44
31.00 - 36.63 737,008 8.30 35.12 312,454 35.13
40.25 - 45.25 136,699 8.04 43.25 65,270 43.13
45.44 - 47.00 59,052 8.19 46.12 28,343 46.16
--------- ---------
5,182,078 7.98 23.38 2,150,176 16.31
========= =========
</TABLE>
Employee Stock Purchase Plan. On May 21, 1997, the Company's stockholders
adopted the 1997 Employee Stock Purchase Plan ("ESPP"). The Company has
authorized 400,000 shares of Common Stock for issuance under the ESPP. Each
regular full-time and part-time employee is eligible to participate after six
months of employment. The Company issued 79,377 and 38,944 shares under the ESPP
in 1999 and 1998, respectively. As of December 31, 1999, 281,679 shares remain
available for issuance under the ESPP. As of December 31, 1999 and 1998,
$221,000 and $162,000, respectively, has been deducted from employees' payroll
for the purchase of shares under the ESPP.
Stockholders Rights Plan. On September 25, 1998, the Board of Directors
adopted a Stockholder Rights Plan (the "Rights Plan"), pursuant to which one
preferred stock purchase right (a "Right") was distributed for each outstanding
share of Common Stock held of record on October 13, 1998. One Right will also
attach to each share of Common Stock issued by the Company subsequent to such
date and prior to the distribution date defined below. Each Right represents a
right to purchase, under certain circumstances, a fractional share of the
Company's Series A Participating Preferred Stock at an exercise price of
$200.00, subject to adjustment. In general, the Rights will become exercisable
and trade independently from the Common Stock on a distribution date that will
occur on the earlier of (i) the public announcement of the acquisition by a
person or group of 15% or more of the Common Stock or (ii) ten days after
commencement of a tender or exchange offer for the Common Stock that would
result in the acquisition of 15% or more of the Common Stock. Upon the
occurrence of certain other events related to changes in ownership of the Common
Stock, each holder of a Right would be entitled to purchase shares of Common
Stock, or an acquiring corporation's common stock, having a market value of
twice the exercise price. Under certain conditions, the Rights may be redeemed
at $0.01 per Right by the Board of Directors. The Rights expire on September 25,
2008.
47
<PAGE> 48
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ------ ----
<S> <C> <C> <C>
Current
Federal................................................... $(832) $2,012 $533
Foreign................................................... (92) 165 15
State..................................................... 124 175 --
----- ------ ----
Total provision (benefit) for income taxes........ $(800) $2,352 $548
===== ====== ====
</TABLE>
Income (loss) before provision for income taxes consisted of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
U.S......................................................... $(27,869) $5,536 $7,393
Foreign..................................................... 301 288 63
-------- ------ ------
$(27,568) $5,824 $7,456
======== ====== ======
</TABLE>
The provision (benefit) for income taxes differs from the federal statutory
rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Provision (benefit) at U.S. federal statutory rate.......... $(9,649) $ 2,038 $ 2,610
State taxes, net of federal benefit......................... 81 112 --
Use of net operating loss carryforwards..................... -- (4,208) (3,373)
Unbenefitted net operating losses........................... 8,604 -- 1,225
Acquired purchased in-process R&D........................... -- 3,842 --
Non-deductible acquisition costs............................ -- 410 --
Other....................................................... 164 158 86
------- ------- -------
Provision (benefit) for income tax.......................... $ (800) $ 2,352 $ 548
======= ======= =======
</TABLE>
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $ 18,700 $ 6,200
Research credits.......................................... 9,700 6,900
Capitalized research and development...................... 7,700 6,100
Accruals and reserves..................................... 2,800 2,600
Other, net................................................ 4,500 1,200
-------- --------
Total deferred tax assets......................... 43,400 23,000
Valuation allowance for deferred tax assets................. (43,400) (23,000)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets increased by approximately
$20,400,000, $4,800,000, and $3,300,000 during the years ended December 31,
1999, 1998, and 1997, respectively. Approximately
48
<PAGE> 49
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$13,100,000 of the valuation allowance for deferred tax assets relates to
benefits from stock option deductions which, when recognized, will be allocated
directly to contributed capital.
The Company's management believes the uncertainty regarding the timing of
the realization of net deferred tax assets requires a valuation allowance.
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $52,900,000. The Company also had federal
research and development tax credit carryforwards of approximately $6,600,000.
The net operating loss carryforwards will expire at various dates, beginning in
2009, through 2019 if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions.
NOTE 6. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss)......................................... $(26,768) $ 3,472 $ 6,908
======== ======= =======
Denominator:
Denominator for basic net income (loss) per
share -- weighted-average shares outstanding........... 28,138 26,921 24,300
Dilutive potential common shares -- stock options......... -- 1,978 2,198
-------- ------- -------
Denominator for diluted net income (loss) per share....... 28,138 28,899 26,498
======== ======= =======
Basic net income (loss) per share........................... $ (0.95) $ 0.13 $ 0.28
======== ======= =======
Diluted net income (loss) per share......................... $ (0.95) $ 0.12 $ 0.26
======== ======= =======
</TABLE>
Options and warrants to purchase 5,182,078 and 654,000 shares of common
stock were outstanding at December 31, 1999 and 1998, respectively, but were not
included in the computation of diluted net income (loss) per share, as their
effect was anti-dilutive. There were no such anti-dilutive securities in 1997.
NOTE 7. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan covering all domestic
employees. Employees may contribute a portion of their compensation, which is
then matched by the Company, subject to certain limitations. Defined
contribution expense for the Company was $1,259,000, $709,000, and $520,000, in
1999, 1998, and 1997, respectively.
NOTE 8. SEGMENT REPORTING
The Company's operations are treated as one operating segment, in
accordance with SFAS 131, the design, development, and marketing of genomic
information-based tools, as it only reports profit and loss information on an
aggregate basis to chief operating decision makers of the Company. For the year
ended December 31, 1999, the Company recorded revenue from customers throughout
the United States and in Canada, Austria, Belgium, France, Germany, Israel,
Netherlands, Switzerland, and the United Kingdom. Export revenue for the years
ended December 31, 1999, 1998, and 1997, was $43,679,000, $33,584,000, and
$25,694,000, respectively.
49
<PAGE> 50
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. BUSINESS COMBINATIONS
Acquisitions accounted for under the purchase method of accounting
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held SNP discovery company based in Cambridge, England.
The Company issued 976,130 shares of its common stock and $5.0 million in cash
in exchange for all of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if fully vested and exercised,
would amount to 125,909 shares of its common stock. The transaction was
accounted for as a purchase with a portion of the purchase price, estimated to
be approximately $11.0 million, expensed in the third quarter of 1998 as a
charge for the purchase of in-process research and development. The remaining
portion of the purchase price, approximately $17.6 million, was allocated to
goodwill ($16.3 million), developed technology ($0.7 million), and Hexagen's
assembled work force ($0.6 million), which are being amortized over 8, 5 and 3
years, respectively.
The Company allocated Hexagen's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology research
and development projects in process at the date of acquisition. Hexagen's
in-process research and development program consisted of the development of its
fSSCP technology for SNP discovery. In 1999, the Company completed the
development of the fSSCP technology. There have been no significant changes in
the assumptions used to value the assets of Hexagen.
The estimates used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on the financial condition and results of operations of
the Company. The results of operations of Hexagen have been included in the
consolidated results of the Company from the date of acquisition in September
1998.
Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility and
risks related to the impact of potential changes in future target markets.
The table below presents the pro forma results of operations and earnings
per share for Hexagen and the Company. The transaction is assumed to be
completed on January 1, 1998 for the period ended December 31, 1998 and January
1, 1997 for the period ended December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Revenues.................................................... $134,811 $89,996
======== =======
Net income.................................................. $ 7,323 $ 271
======== =======
Pro forma basic net income per share........................ $ 0.27 $ 0.01
======== =======
Pro forma diluted net income per share...................... $ 0.25 $ 0.01
======== =======
Pro forma shares for basic net income per share............. 27,340 25,276
======== =======
Pro forma shares for diluted net income per share........... 29,459 27,588
======== =======
</TABLE>
Acquisitions accounted for under the pooling of interests method of accounting
In January 1998, the Company issued 2,340,237 shares of common stock in
exchange for all of the capital stock of Synteni, a privately held
microarray-based genomics company in Fremont, California. Synteni is developing
and commercializing technology for generating microarrays and related software
and services. The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements and financial data have been
restated to include the accounts and operations of Synteni since inception.
50
<PAGE> 51
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below presents the separate results of operations for Incyte, and
Synteni prior to the merger. Incyte's results include Synteni from January 1998.
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Revenues:
Incyte.................................................... $134,811 $88,351
Synteni................................................... -- 1,645
-------- -------
$134,811 $89,996
======== =======
Net income (loss):
Incyte.................................................... $ 4,532 $10,408
Synteni................................................... -- (3,500)
Acquisition-related charges............................... (1,060) --
-------- -------
$ 3,472 $ 6,908
======== =======
</TABLE>
NOTE 10. JOINT VENTURE
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company holds a 50 percent equity interest in
diaDexus and accounts for the investment under the equity method. In July 1999,
the Company and SB each invested an additional $2.5 million in diaDexus through
convertible notes that mature in April 2000. The notes bear interest at 5.6%,
and are subordinate to all other claims. The notes, principal plus accrued
interest, will automatically convert into diaDexus Series C Preferred Stock upon
the closing of the sale of Series C Preferred Stock of diaDexus that results in
aggregate proceeds to diaDexus of at least $10 million, including the $5 million
that would result from the conversion of the loans from SB and the Company.
diaDexus purchased $1.9 million of contract sequencing and microarray
services from the Company in the year ended December 31, 1999 and did not have
similar purchases prior to 1999. At December 31, 1999, the Company had $0.1
million of receivables outstanding from diaDexus related to these services.
The following is summary of diaDexus' financial information as of December
31, 1999, 1998 and 1997, for the years ended December 31, 1999 and 1998, and the
period from inception (September 1997) through December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current assets........................................ $ 8,786 $16,866 $ 6,625
Total assets.......................................... 11,297 20,215 10,212
Current liabilities................................... 5,957 3,565 2,658
Total liabilities..................................... 6,044 3,681 2,760
Net loss.............................................. 11,286 7,928 548
</TABLE>
NOTE 11. LITIGATION
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the "'934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees
51
<PAGE> 52
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and interest. Affymetrix further requests that any such damages be trebled based
on its allegation of willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware, subsequently transferred to
the United States District Court for the Northern District of California in
November 1998, alleging infringement of the U.S. patent number 5,800,992 (the
"992 Patent") and U.S. patent number 5,744,305 (the "'305 Patent") by both
Synteni and Incyte. The complaint alleges that the '305 Patent has been
infringed by the making, using, selling, importing, distributing or offering to
sell in the United States high density arrays by Synteni and Incyte, that the
'992 Patent has been infringed by the use of Synteni's and Incyte's
GEM(TM)microarray technology to conduct gene expression monitoring using two-
color labeling, and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '305 and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. As a result of the assignment of the case to
a new judge, all scheduled trial and pretrial dates have been vacated. The court
is expected to set a new schedule in late April 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California. Incyte and Synteni believe they have
meritorious defenses and intend to defend the suits vigorously. However, there
can be no assurance that Incyte and Synteni will be successful in the defense of
these suits. At this time, the Company cannot reasonably estimate the possible
range of any loss resulting from these suits due to uncertainty regarding the
ultimate outcome. Regardless of the outcome, this litigation has resulted and is
expected to continue to result in substantial expenses and diversion of the
efforts of management and technical personnel. Further, there can be no
assurance that any license that may be required as a result of this suit or the
outcome thereof would be made available on commercially acceptable terms, if at
all.
NOTE 12. SUBSEQUENT EVENTS
In February 2000, in a private placement, the Company issued $200 million
of convertible subordinated notes, which resulted in net proceeds of
approximately $196.8 million. The notes bear interest at 5.5%, payable
semi-annually on March 1 and September 1, and are due February 1, 2007. The
notes are subordinate to all other indebtedness. The notes can be converted at
the option of the holder at a price of $134.84 per share. The Company may redeem
the notes at any time before February 7, 2003, only if the Company's stock
exceeds 150% of the conversion price for 20 trading days in a period of 30
consecutive trading days. On or after February 7, 2003 the Company may redeem
the notes at specific prices. Holders may require the Company to repurchase the
notes upon a change in control, as defined.
In February 2000, in a private placement, the Company issued 2,000,000 of
its common stock at a price of $211 per share, resulting in net proceeds of
$398.3 million.
52
<PAGE> 53
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts -- 1997............... $ -- $260 $ (35) $225
Allowance for doubtful accounts -- 1998............... 225 213 (4) 434
Allowance for doubtful accounts -- 1999............... 434 -- (200) 234
</TABLE>
53
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
diaDexus, LLC
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in members' equity and of cash flows present fairly,
in all material respects, the financial position of diaDexus, LLC (a development
stage company) at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998, for the
period from inception (September 1997) through December 31, 1997 and for the
period from inception (September 1997) through December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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 audit. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
January 17, 2000
54
<PAGE> 55
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,358,000 $16,454,000
Prepaid expenses and other current assets................. 428,000 412,000
----------- -----------
Total current assets.............................. 8,786,000 16,866,000
Property and equipment, net................................. 2,442,000 3,280,000
Deposits.................................................... 69,000 69,000
----------- -----------
$11,297,000 $20,215,000
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Due to Members............................................ $ 5,456,000 $ 2,690,000
Accounts payable.......................................... 42,000 239,000
Accrued liabilities....................................... 459,000 636,000
----------- -----------
Total current liabilities......................... 5,957,000 3,565,000
Deferred rent............................................... 87,000 116,000
----------- -----------
Total liabilities................................. 6,044,000 3,681,000
----------- -----------
Commitments (Note 8)
Members' equity:
Series A preferred capital; 4,400,000 units authorized,
issued and outstanding................................. 5,119,000 10,762,000
Series B preferred capital; 4,400,000 units authorized,
issued and outstanding................................. 119,000 5,762,000
Common capital; 2,200,000 units authorized; no units
issued and outstanding................................. -- --
Additional paid-in capital................................ 15,000 10,000
----------- -----------
Total Members' equity............................. 5,253,000 16,534,000
----------- -----------
$11,297,000 $20,215,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE> 56
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(SEPTEMBER
YEAR ENDED DECEMBER 31, 1997) THROUGH
--------------------------- DECEMBER 31,
1998 1999 1999
----------- ------------ ---------------
<S> <C> <C> <C>
License revenue................................... $ -- $ 100,000 $ 100,000
Operating expenses:
Research and development........................ 6,761,000 9,461,000 16,623,000
General and administrative...................... 1,882,000 2,345,000 4,506,000
----------- ------------ ------------
Loss from operations.............................. (8,643,000) (11,706,000) (21,029,000)
Interest and other income, net.................... 715,000 540,000 1,387,000
Interest expense.................................. -- (120,000) (120,000)
----------- ------------ ------------
Net loss.......................................... $(7,928,000) $(11,286,000) $(19,762,000)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE> 57
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN MEMBERS EQUITY
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 1997
THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED CAPITAL PREFERRED CAPITAL ADDITIONAL MEMBER
----------------------- ----------------------- PAID-IN CONTRIBUTIONS
UNITS AMOUNT UNITS AMOUNT CAPITAL RECEIVABLE TOTAL
--------- ----------- --------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance, at inception, of Series
A preferred units at $3.41 per
unit............................ 4,400,000 $15,000,000 -- $ -- $ -- $(11,000,000) $ 4,000,000
Issuance, at inception, of Series
B preferred units at $2.27 per
unit............................ -- -- 4,400,000 10,000,000 -- (6,000,000) 4,000,000
Net loss.......................... -- (274,000) -- (274,000) -- -- (548,000)
--------- ----------- --------- ----------- ------- ------------ ------------
Balance at December 31, 1997...... 4,400,000 14,726,000 4,400,000 9,726,000 -- (17,000,000) 7,452,000
Proceeds received from Members.... -- -- -- -- -- 17,000,000 17,000,000
Stock-based compensation.......... -- -- -- -- 10,000 -- 10,000
Net loss.......................... -- (3,964,000) -- (3,964,000) -- -- (7,928,000)
--------- ----------- --------- ----------- ------- ------------ ------------
Balance at December 31, 1998...... 4,400,000 10,762,000 4,400,000 5,762,000 10,000 -- 16,534,000
Stock-based compensation.......... -- -- -- -- 5,000 -- 5,000
Net loss.......................... -- (5,643,000) -- (5,643,000) -- -- (11,286,000)
--------- ----------- --------- ----------- ------- ------------ ------------
Balance at December 31, 1999...... 4,400,000 $ 5,119,000 4,400,000 $ 119,000 $15,000 $ -- $ 5,253,000
========= =========== ========= =========== ======= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
57
<PAGE> 58
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(SEPTEMBER 1997)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------- DECEMBER 31,
1998 1999 1999
----------- ------------ ----------------
<S> <C> <C> <C>
CASH FLOW USED IN OPERATING ACTIVITIES:
Net loss.......................................... $(7,928,000) $(11,286,000) $(19,762,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation................................... 1,657,000 1,072,000 2,731,000
Loss on disposal of property and equipment..... 23,000 3,000 26,000
Stock-based compensation....................... 10,000 5,000 15,000
Changes in assets and liabilities:
Prepaid expenses and other current assets.... (319,000) (24,000) (428,000)
Accounts payable............................. 239,000 (197,000) 42,000
Accrued liabilities.......................... 244,000 (177,000) 274,000
Due to Members............................... 132,000 (2,234,000) (1,917,000)
Deposits..................................... 2,000 -- (2,000)
Deferred rent................................ 14,000 (29,000) 87,000
----------- ------------ ------------
Net cash used in operating activities..... (5,926,000) (12,867,000) (18,934,000)
----------- ------------ ------------
CASH FLOW USED IN INVESTING ACTIVITIES:
Purchase of property and equipment................ (1,160,000) (238,000) (1,670,000)
Proceeds from sale of equipment................... -- 9,000 9,000
----------- ------------ ------------
Net cash used in investing activities..... (1,160,000) (229,000) (1,661,000)
----------- ------------ ------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of Series A Preferred
Units.......................................... -- -- 13,953,000
Proceeds from issuance of Series B Preferred
Units.......................................... -- -- 10,000,000
Proceeds from Member contributions receivable..... 17,000,000 -- --
Proceeds from bridge loan payable to Members...... -- 5,000,000 5,000,000
----------- ------------ ------------
Net cash provided by financing
activities.............................. 17,000,000 5,000,000 28,953,000
----------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents....................................... 9,914,000 (8,096,000) 8,358,000
Cash and cash equivalents at beginning of period.... 6,540,000 16,454,000 --
----------- ------------ ------------
Cash and cash equivalents at end of period.......... $16,454,000 $ 8,358,000 $ 8,358,000
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Capital contribution of property and equipment.... $ -- $ -- $ 1,047,000
=========== ============ ============
Construction in-progress funded by a Member....... $ 106,000 $ -- $ 2,305,000
=========== ============ ============
Deposit funded by a Member........................ $ -- $ -- $ 67,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
58
<PAGE> 59
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
diaDexus, LLC (the "Company") was formed in Delaware as a limited liability
company ("LLC") in September 1997 for the purpose of discovery and
commercialization of novel molecular diagnostic products. The Company's founders
and members ("Members") are SmithKline Beecham Corporation ("SmithKline
Beecham") and Incyte Pharmaceuticals, Inc. ("Incyte"). The Company is in the
development stage at December 31, 1999, devoting substantially all of its
efforts to recruiting personnel, financial planning, establishing its
facilities, defining its research and product development strategies and
conducting research and development.
In connection with forming the Company, SmithKline Beecham and Incyte
entered into several agreements during September 1997, including an Operating
Agreement (the "Operating Agreement") and a Master Strategic Relationship
Agreement (the "Master Agreement"). The Operating Agreement serves as the
Company's by-laws while the Master Agreement documents certain specific matters
regarding the operation of the Company. During September 1997, the Company
issued 4,400,000 Series A Preferred Units to SmithKline Beecham in exchange for
an initial capital contribution of $4.0 million in cash and assets and a
contractual commitment for additional cash contributions of $11.0 million, which
was received in two installments on April 15 and July 15, 1998. Concurrently,
the Company issued 4,400,000 of Series B Preferred Units to Incyte in exchange
for an initial capital contribution of $4.0 million in cash and a contractual
commitment for additional cash contributions of $6.0 million, which was received
in two installments on April 15 and July 15, 1998.
In addition to the above contributions, SmithKline Beecham has granted the
Company various exclusive and non-exclusive rights to develop certain diagnostic
tests using genes identified by SmithKline Beecham, including genes identified
by SmithKline Beecham from the Human Genome Sciences, Inc. collaboration.
SmithKline Beecham has also granted the Company an exclusive license for a
number of diagnostic tests which are in late stage clinical validation. Incyte
has provided the Company with non-exclusive access to certain of its gene
sequence and expression databases for various exclusive and non-exclusive rights
to diagnostic applications. The Company will pay royalties to Incyte and Human
Genome Sciences, Inc. on the sale of certain products developed using their
respective proprietary databases. Both SmithKline Beecham and Incyte have also
non-exclusively licensed various additional technologies useful in the
diagnostic field to the Company. Noncash assets received as capital
contributions have been recorded in amounts equal to the Members' net book
value, which was zero for all the property and rights described above.
The Operating Agreement specifies that the LLC would merge into a C
corporation at the earliest of (i) the eighteen month anniversary of the
Company's formation (March 1999); (ii) any time after January 1, 1999, if the
Company's cash balance falls below $2.0 million, or (iii) the mutual agreement
of SmithKline Beecham and Incyte. Pursuant to an agreement in principle, the
Members agreed during 1999 to defer merging the LLC into a C corporation until
such time as a proposed Preferred Stock financing is completed (see Note 2).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents at
December 31, 1999 consist of a money market investment totaling $8,174,000, the
carrying amount of which approximates fair value.
59
<PAGE> 60
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
The Company maintains its cash and cash equivalents in a money market fund with
a high-credit quality financial institution.
PROPERTY AND EQUIPMENT
Property and equipment are stated at the Company's cost, less accumulated
depreciation. Assets contributed by the Members are recorded at amounts equal to
the Members' net book value. Depreciation is computed using the straight-line
method over the estimated remaining useful lives of the assets, which is
generally one to three years. Leasehold improvements are depreciated over the
shorter of their useful lives or the term of the lease.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
EQUITY-BASED COMPENSATION
The Company has adopted the pro forma disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As permitted, the Company continues to recognize
equity-based compensation to employees under the intrinsic value method of
accounting as prescribed by Accounting Principles Board Opinion No. 25. The pro
forma effect of applying SFAS 123 is described in Note 7 to the financial
statements.
Stock compensation expense for options granted to consultants has been
determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. The fair value of options granted to
consultants is periodically remeasured as the underlying options vest.
INCOME TAXES
No provision or benefit for federal and state income taxes is reported in
the financial statements as the Company has elected to be taxed as a
partnership. The federal and state income tax effects of the Company's results
of operations are recorded by the Members in their respective income tax
returns.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
2. NEED FOR ADDITIONAL FINANCING
These financial statements are prepared on a going concern basis that
contemplates the realization of assets and discharge of liabilities in the
normal course of business. From inception, the Company has suffered recurring
losses from operations totaling $19,762,000 and currently does not have
financing sufficient for continued operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management is
currently pursuing several financing alternatives, including a private placement
of Preferred Stock. There can be no assurance, however, that such a financing
will be successfully completed on
60
<PAGE> 61
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
terms acceptable to the Company. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
3. RELATED PARTY TRANSACTIONS
Under an Intercompany Services Agreement, SmithKline Beecham and Incyte
have agreed to provide the Company with certain services, including legal,
financial and research and development. Charges for these services are either
based on actual costs incurred by each Member or, if available, rates charges to
other customers for similar services. During 1998, the Company incurred related
charges of $86,000 and $72,000 from SmithKline Beecham and Incyte, respectively,
all of which has been included in research and development expense. During 1999,
the Company incurred additional charges of $0 and $1,928,000 from Smithkline
Beecham and Incyte, respectively, all of which has been included in research and
development expense.
Additionally, SmithKline Beecham has agreed to pay, on the Company's
behalf, certain costs associated with the build-out of the Company's leased
facility. Such amounts were included in leasehold improvements and laboratory
equipment at December 31, 1999 and 1998.
In September 1998, the Company entered into a service agreement with
SmithKline Beecham and SmithKline Beecham plc. Under the agreement, SmithKline
Beecham plc will employ an individual to monitor journals and databases for
information on genes and proteins which may be of interest to the Company's
research efforts. The term of the agreement is one year, unless otherwise
modified by the Company and SmithKline Beecham plc. In consideration for such
services, the Company paid a total of $200,000, all of which was included in
research and development expense.
In March 1998, the Company entered into a collaboration and license
agreement with Incyte and a third party (see Note 4). The agreement was
terminated on January 6, 2000.
At December 31, 1999 and 1998, due to Members consisted of $2,631,000 and
$2,618,000, respectively, due to SmithKline Beecham and $2,825,000 and $72,000,
respectively, due to Incyte.
BRIDGE LOANS
In July 1999, the Company issued two convertible notes for $2,500,000, one
to SmithKline Beecham and the other to Incyte. Interest accrues at 5.6% per
annum and the principal and interest is due and payable in April 2000 (the
"Repayment Date"). Should the Company complete the sale and issuance of shares
of its Preferred Stock prior to the Repayment Date in one or more closings
generating aggregate proceeds of at least $5,000,000, the principal amount of
the notes and interest accrued thereon shall automatically convert into shares
of the Company's Preferred Stock. The convertible notes will convert at the same
price per share and on the same terms and conditions at which such shares of
Preferred are sold to the other investors.
4. COLLABORATION AND LICENSE AGREEMENTS
In November 1999, the Company entered into a collaboration and license
agreement with another company (the "Collaborator") whereby the Company will
engage in a research program (the "Program") for two years to develop and
commercialize certain in vitro cardiovascular diagnostic products. Under this
collaboration, diaDexus will identify and select targets with potential
cardiovascular diagnostic utility. The Collaborator will manufacture and deliver
the antibodies required by the Program. The royalty fee structure is dependent
upon various factors, including which entity bears the costs of developing the
antibody and the format of the product. Through December 31, 1999, the Company
has not recorded any amounts relating to this agreement.
61
<PAGE> 62
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In February 1999, the Company entered into a royalty-bearing license
agreement with a clinical reference laboratory company whereby the Company
granted the licensee the right and license to make, use, have made, and import
materials or components for the sole purpose of developing tests performed on
human serum for the diagnosis and/or prognosis of prostate cancer. The Company
received a $100,000 non-refundable license fee, which was recognized as license
revenue and is fully creditable against future royalties. Through December 31,
1999, the Company has not recorded any royalty revenue related to this license
agreement.
In September 1998, the Company entered into a worldwide, exclusive,
royalty-bearing license agreement whereby the Company was granted the right to
develop, manufacture and sell certain products relating to diagnosis of cervical
disease. The Company paid a non-refundable fee of $250,000 upon signing the
agreement for access to related technology for a six month evaluation period.
The Company amortized the initial fee over a six-month evaluation period. In
March 1999, the Company paid an amended first milestone fee of $250,000, which
was included in research and development expense in 1999. The Company had the
option to terminate the agreement without penalty through the earlier of the
successful completion of the predetermined development plan or September 30,
2000. In July 1999, the Company and licensee mutually agreed to terminate the
agreement. The Company was relieved of any obligation or liability to make any
further payments to the licensee subsequent to a final payment of $50,000 which
was expensed in August 1999.
In March 1998, the Company entered into a collaboration and license
agreement with Incyte and a third party (collectively, the "Licensor"). The
agreement provides the Company access to certain information and databases
relating to prostate disease for an initial option period which expires on the
later of March 18, 1999 or six months following the completion of certain
research activities, as defined. The Company may then, at its option, enter into
either an exclusive or a non-exclusive license arrangement with the Licensor.
Future consideration for entering into an exclusive license arrangement is
$1,000,000 or $500,000 for a non-exclusive license. Additionally, should it
choose to obtain either license, the Company will owe the Licensor $100,000 upon
approval for sale in certain countries of each product developed as a result of
the collaboration and license agreement. The $100,000 payments are creditable
against future royalties on sales of the related products. On January 6, 2000,
the Company, Incyte and the Licensor agreed to terminate the collaboration and
license agreement.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Leasehold improvements.................................... $ 2,632,000 $ 2,111,000
Laboratory equipment...................................... 1,434,000 1,313,000
Computer equipment and software........................... 639,000 599,000
Furniture and fixtures.................................... 449,000 428,000
Construction-in-progress.................................. -- 477,000
----------- -----------
5,154,000 4,928,000
Less accumulated depreciation............................. (2,712,000) (1,648,000)
----------- -----------
$ 2,442,000 $ 3,280,000
=========== ===========
</TABLE>
62
<PAGE> 63
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. MEMBERS' EQUITY
In accordance with the terms of the Operating Agreement, the rights and
preference of the Members, as well as the allocation and distribution of net
income or losses, are as follows:
PREFERRED UNITS
At December 31, 1999 and 1998, the Company had authorized and outstanding
8,800,000 Preferred Units ("Preferred Units"), of which 4,400,000 are designated
Series A and 4,400,000 are designated as Series B. Each Preferred Unit is
entitled to one vote on all matters, other than the election of the Board of
Directors, including Member distributions. The holders of Series A and B
Preferred Units are each entitled, upon approval of the majority of the units
within each series, to elect two of the five Directors constituting the Board.
The fifth Board member is the Company's Chief Executive Officer who was elected
by the A/B Members, voting as a class (by vote of the holders of a majority of
the Series A and Series B Preferred Units).
In the event the Company makes a distribution, each Preferred Unit has a
distribution preference of $11.36 per unit (defined as the "Original Purchase
Price"), plus a 15% per annum compounded rate of return (the "Preference
Amount") on such Original Purchase Price.
If and when the Company merges into a C corporation, each Preferred Unit
will automatically convert into one share of Preferred Stock. Each member will
also receive 100 shares of Common Stock upon such conversion.
COMMON UNITS
At December 31, 1999, the Company had authorized 2,200,000 Common Units for
issuance in connection with a unit option plan. Common Units have no voting
rights and, after payment of the Preference Amount to the Preferred Unit
holders, distributions (if any) are allocated ratably among holders of both the
Common and Preferred Units. As of December 31, 1999, no units had been issued
under the Company's option plan.
ALLOCATION OF NET LOSSES AND NET INCOME
Net losses of the Company are allocated (i) to the members of the Preferred
and Common Units in proportion to their relative number of units to the extent
that this would not cause such holders to have a capital deficit; (ii) to the
extent any holder's capital account would equal zero the loss is allocated to
all other holders in proportion to their relative ownership of units until such
allocation would cause those holders to have a capital account balance of zero;
(iii) thereafter, the remaining loss would be allocated to all holders in
proportion to their relative number of units.
Net income of the Company is allocated (i) to the holders of Preferred
Units proportionately based on their capital account deficit until all capital
accounts are zero; (ii) to the holders of Preferred Units whose capital account
is less than any declared but unpaid dividend in proportion to their respective
unpaid dividends; (iii) to the holders of Preferred Units whose capital account
is less than any unpaid Preference Amount in proportion to such amounts; (iv) to
each Common Unit that has a capital account less than any distributed amount in
proportion to such amounts; and (v) thereafter, to all holders in proportion to
their relative number of units.
DIVIDENDS
The holders of the Preferred Units are entitled to receive a non-cumulative
dividend, if and when declared by the Board, at a rate of 8% per annum of the
undistributed Preference Amount attributable to each Preferred Unit, prorated
for any partial year, commencing on the first date each Preferred Unit is issued
and
63
<PAGE> 64
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
outstanding. Dividends shall be paid from available cash after approval of at
least 75% of the Preferred Unit holders.
LIQUIDATION
In the event of any liquidation of the Company, distributions, if any, will
be made to all unit holders in proportion to the positive balance in their
respective capital accounts, after giving cumulative effect to all
contributions, distributions and allocations for all periods and payment of
costs for winding up of the business, payment of debts, and establishment of
appropriate reserves.
7. EMPLOYEE BENEFIT PLANS
In January 1998, the Company's Board of Directors adopted the 1997
Incentive Plan (the "1997 Plan") under which 1,200,000 shares of the Company's
Common Units ("Units") were reserved for issuance to employees and consultants
of the Company. During 1999, the Company increased the number of Units reserved
for future issuance by 1,000,000. Options granted under the 1997 Plan are for
terms not to exceed ten years. If the option is granted to an individual who, at
the time of grant, owns a membership interest in the Company representing more
than 10% of the voting power of all classes of membership interest of the
Company or any parent or subsidiary, the exercise price of the stock option must
be at least 110% of the estimated fair value of the Units at the date of grant.
Exercise prices of options granted to all other persons must be at least 85% of
the estimated fair value of the Units at the date of grant. Options under the
1997 Plan generally vest over four to five years. The 1997 Plan expires in 2008.
Information regarding the Company's option activity is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS OPTIONS EXERCISE
AVAILABLE OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
Options authorized................................ 1,200,000 -- $ --
Granted........................................... (760,500) 760,500 0.36
Canceled.......................................... 44,250 (44,250) 0.35
---------- ---------
Balance at December 31, 1998...................... 483,750 716,250 0.36
Options authorized................................ 1,000,000 -- --
Granted........................................... (1,055,083) 1,055,083 0.75
Canceled.......................................... 433,738 (433,738) 0.47
---------- ---------
Balance at December 31, 1999...................... 862,405 1,337,595 0.63
========== =========
</TABLE>
The following table summarizes information about options outstanding and
exercisable under the 1997 Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE REMAINING REMAINING
PRICE NUMBER CONTRACTUAL CONTRACTUAL
PER UNIT OUTSTANDING LIFE (YEARS) NUMBER LIFE (YEARS)
- -------- ----------- ------------ ------- ------------
<S> <C> <C> <C> <C>
0$.35.. 387,354 8.14 277,322 8.13
0$.75.. 950,241 9.04 158,754 8.15
--------- -------
1,337,595 8.78 436,076 8.13
========= =======
</TABLE>
64
<PAGE> 65
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Had compensation cost for the Company's option plan been determined based
on the fair value at the grant date as prescribed in SFAS 123, the Company's net
loss for 1999 and 1998 would have increased by $27,000 and $15,000,
respectively. The fair value of each option grant is estimated on the date of
grant using the minimum value method with the following assumptions used for
grants during December 31, 1999 and 1998: dividend yield of zero percent,
risk-free interest rates of 5.9% and 5.4%, respectively, and a weighted average
expected option term of 4 and 5 years, respectively. The calculation of
compensation expense recorded for options to consultants also includes
volatility of 70% for both 1999 and 1998.
The Company maintains a 401(k) plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k)
plan, participating employees may defer a portion of their pretax earnings not
to exceed certain statutorily specified amounts ($10,000 for calendar year
1999). The Company, at its discretion, may make contributions for the benefit of
eligible employees. The Company has made no contributions under the 401(k) plan.
8. COMMITMENTS
The Company leases its office facilities under a noncancelable operating
lease agreement which expires in September 2002 and contains renewal provisions.
Future minimum lease payments under the noncancelable lease at December 31, 1999
are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
2000................................................... $ 799,000
2001................................................... 818,000
2002................................................... 624,000
----------
Total minimum lease payments...................... $2,241,000
==========
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 was $838,000
and $825,000, respectively.
In 1998, the Company entered into a noncancelable sublease agreement
relating to a portion of its leased office facilities. The sublease agreement
expired in August 1999, at which time the existing sublessee and the Company
entered into a month-to-month lease. Rental income for the years ended December
31, 1999 and 1998 was $202,000 and $117,000, respectively.
At December 31, 1999, the Company is committed to pay Incyte $2,392,000 for
certain sequencing and microarray services and products through September 2001.
65
<PAGE> 66
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 2000 Annual Meeting of Stockholders to be held on June
5, 2000 (the "Proxy Statement").
The executive officers of the Company are as follows:
Roy A. Whitfield, age 46, co-founded the Company and has been Chief
Executive Officer since June 1993 and a Director since June 1991. Mr. Whitfield
served as President of the Company from June 1991 until January 1997 and as
Treasurer of the Company between April 1991 and October 1995. Previously, Mr.
Whitfield served as the President of Ideon Corporation, which was a
majority-owned subsidiary of Invitron Corporation, a biotechnology company, from
October 1989 until April 1991. From 1984 to 1989, he held senior operating and
business development positions with Technicon Instruments Corporation, a medical
instrumentation company, and its predecessor company, CooperBiomedical, Inc., a
biotechnology and medical diagnostics company. Prior to his work at Technicon,
Mr. Whitfield spent seven years with the Boston Consulting Group's international
consulting practice. Mr. Whitfield received a B.S. with first class honors in
Mathematics from Oxford University, and an M.B.A. with distinction from Stanford
University. Mr. Whitfield is a director of Aurora Biosciences Corporation.
Randal W. Scott, Ph.D., age 42, co-founded the Company and has been
President since January 1997. He has served as Chief Scientific Officer of the
Company since March 1995, a Director since June 1991. He also served as
Executive Vice President of the Company from March 1995 until January 1997 and
Vice President, Research and Development of the Company from April 1991 until
February 1995 and as Secretary from April 1991 to June 1998. Dr. Scott was one
of Invitron's founding scientists and was employed by Invitron from March 1985
to June 1991. In 1987, Dr. Scott started the Protein Biochemistry Department at
Invitron's California Research Division and later became Senior Director of
Research in November 1988. Dr. Scott was responsible for developing Invitron's
proprietary products and discovery programs and is an inventor of several of the
Company's patents. Prior to joining Invitron, he was a Senior Scientist at
Unigene Laboratories, a biotechnology company. Dr. Scott received his Ph.D. in
Biochemistry from the University of Kansas.
Michael D. Lack, age 48, has been the Chief Operating Officer of the
Company since July 1999. Prior to joining the Company, he was the President and
Chief Executive Officer of Silicon Valley Networks. Previously, Mr. Lack served
as Chief Executive Officer with several software startup companies, including
Aqueduct Software and Presidio Systems, Inc. He also held various senior
positions with Cadence Design Systems, Inc., including Senior Vice President of
Product Operations, Division President of Integrated Circuit Design, and
Division President of Systems. Mr. Lack received his B.S. in Physics from the
University of California, Los Angeles.
John M. Vuko, age 49, joined the Company as the Chief Financial Officer in
December 1999. Previously, Mr. Vuko was the Senior Vice President and Chief
Financial Officer of Achievement Radio Holdings Inc. Prior to his work at
Achievement Radio Holdings, Mr. Vuko served as Senior Vice President and Chief
Financial Officer of Ross Stores, Inc., and held various positions with the
Cooper family of companies, including Corporate Development Executive, Vice
President, Treasurer, and Controller. Mr. Vuko received his B.A. in Accounting
from San Francisco State University.
James R. Neal, age 44, has been the Executive Vice President of Sales and
Marketing since July 1999. Mr. Neal served as General Manager of the Solaris
Group, a division of Monsanto Company. From 1982, he also held various positions
with Monsanto, including Manager of New Product Introduction, Director of Brand
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<PAGE> 67
Marketing and Residential Products, and Vice President of Global Business
Development. Mr. Neal received his B.S. in Biology and his M.S. in Genetics and
Plant Breeding from the University of Manitoba, Canada as well as an Executive
M.B.A. from Washington University, St. Louis.
E. Lee Bendekgey, age 42, has been General Counsel of the Company since
January 1998 and served as the Interim Chief Financial Officer from June 1999
until December 1999. Mr. Bendekgey became the Secretary of the Company in June
1998 and Executive Vice President in June 1999. Prior to joining the Company,
Mr. Bendekgey was the Director of Strategic Relations at Silicon Graphics, Inc.
He held various positions with SGI from March 1993, including Director of Legal
Services, Products and Technology; Senior Counsel, Product Divisions; Group
Counsel, Computer Systems Group; and Division Counsel, MIPS Technologies, Inc.
From 1982 to 1993, Mr. Bendekgey held associate and partner positions with
Graham & James, a law firm in San Francisco, where he specialized in
intellectual property protection and licensing. Mr. Bendekgey received his B.A.
magna cum laude in Political Science and French from Kalamazoo College and his
J.D. from Stanford University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors -- Compensation of
Directors," "Executive Compensation," and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" 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
information under the captions "Election of Directors -- Compensation of
Directors," "Executive Compensation," and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of
Incyte Pharmaceuticals, Inc. and the Index to Financial Statements of
diaDexus, LLC, a Limited Liability Company, under Item 8 of Part II
hereof.
(2) Financial Statement Schedules
The following financial statement schedule of Incyte Pharmaceuticals,
Inc. is filed as part of this Form 10-K included in Item 8 of Part II:
Schedule II -- Valuation and Qualifying Accounts for each of the three
years in the period ended December 31, 1999.
All other financial statement schedules have been omitted because they are
not applicable or not required or because the information is included elsewhere
in the Consolidated Financial Statements or the Notes thereto.
67
<PAGE> 68
(3) Exhibits
See Item 14(c) below. Each management contract or compensatory plan or
arrangement required to be filed has been identified.
(b) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the fiscal quarter ended
December 31, 1999.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3(i)(a) Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-31307)).
3(i)(b) Certificate of Designation of Series A Participating
Preferred Stock, (incorporated by reference to the Company's
Annual Report on 10-K for the year ended December 31, 1998).
3(ii) Bylaws of the Company, as amended (incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement on
Form S-3 (File No. 333-31307)).
4.1 Form of Common Stock Certificate (incorporated by reference
to the exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-68138)).
4.2 Rights Agreement dated as of September 25, 1998 between the
Company and Chase Mellon Shareholder Services, L.L.C., which
includes as Exhibit B, the rights certificate (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A (filed on September 30, 1998).
4.3 Indenture dated as of February 4, 2000 between the Company
and State Street Bank and Trust Company of California, N.A.,
as trustee.
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended
and restated (the "Plan") (incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on
Form S-8 (File No. 333-83291)).
10.2# Form of Incentive Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number
to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number
to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.4# Amended and Restated 1993 Directors' Stock Option Plan of
Incyte Pharmaceuticals, Inc. (incorporated by reference to
the exhibit of the same number to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5# Form of Indemnity Agreement between the Company and its
directors and officers (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1
(File No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the Company
and Matadero Creek (incorporated by reference to Exhibit
10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
</TABLE>
<TABLE>
<CAPTION>
10.9 Stock Purchase Agreement dated as of June 22, 1994 between the Company and Pfizer Inc
(incorporated by reference to Exhibit B to the Company's Current Report on Form 8-K dated
June 23, 1994).
<S> <C>
10.10 Registration Rights Agreement dated as of June 22, 1994 between the Company and Pfizer
Inc (incorporated by reference to Exhibit C to the Company's Current Report on Form 8-K
dated June 23, 1994).
10.11 Stock Purchase Agreement dated as of November 30, 1994 between the Company and The Upjohn
Company (incorporated by reference to Exhibit B to the Company's Current Report on Form
8-K dated November 30, 1994, as amended by Form 8-K/A filed with the Commission on March
27, 1995).
</TABLE>
68
<PAGE> 69
<TABLE>
<CAPTION>
10.12 Registration Rights Agreement dated as of November 30, 1994 between the Company and The
Upjohn Company (incorporated by reference to Exhibit C to the Company's Current Report on
Form 8-K dated November 30, 1994).
<S> <C>
10.13 Registration Rights Agreement dated as of February 4, 2000 among the Company and Deutsche
Bank Securities Inc. and Warburg Dillon Read LLC.
10.14 Lease Agreement dated June 19, 1997 between the Company and The Board of Trustees of the
Leland Stanford Junior University.
10.15# 1997 Employee Stock Purchase Plan of Incyte Pharmaceuticals, Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File No.
333-31409)).
10.16# 1998 Amendment to the 1997 Employee Stock Purchase Plan of Incyte Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 99 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.17+ Master Strategic Relationship Agreement dated as of September 2, 1997 between SmithKline
Beecham Corporation, Incyte Pharmaceuticals, Inc. and diaDexus, LLC (incorporated by
reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1997).
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated by reference to Exhibit
10.19 to the Company's Registration Statement on Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan 1996, as amended (incorporated
by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File
No. 333-67691)).
10.20 Stock Purchase Agreement dated as February 24, 2000 between the Company and the investors
named therein.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (see page 70 of this Form 10-K).
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been granted with respect to certain portions of
these agreements.
# Indicates management contract or compensatory plan or arrangement.
69
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INCYTE PHARMACEUTICALS, INC.
Date: March 17, 2000 By /s/ ROY A. WHITFIELD
------------------------------------
Roy A. Whitfield
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roy A. Whitfield, Randal W. Scott, and John M.
Vuko, and each of them, his true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <C> <S>
/s/ ROY A. WHITFIELD Chief Executive Officer March 17, 2000
- -------------------------------------------------------- (Principal Executive Officer)
Roy A. Whitfield and Director
/s/ JOHN M. VUKO Chief Financial Officer March 17, 2000
- -------------------------------------------------------- (Principal Financial Officer)
John M. Vuko
/s/ TIMOTHY G. HENN Vice President, Finance and March 17, 2000
- -------------------------------------------------------- Corporate Controller
Timothy G. Henn (Principal Accounting
Officer)
/s/ JEFFREY J. COLLINSON Chairman of the Board March 17, 2000
- --------------------------------------------------------
Jeffrey J. Collinson
/s/ BARRY M. BLOOM Director March 17, 2000
- --------------------------------------------------------
Barry M. Bloom
/s/ FREDERICK B. CRAVES Director March 17, 2000
- --------------------------------------------------------
Frederick B. Craves
/s/ JON S. SAXE Director March 17, 2000
- --------------------------------------------------------
Jon S. Saxe
/s/ RANDAL W. SCOTT President March 17, 2000
- --------------------------------------------------------
Randal W. Scott
</TABLE>
70
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3(i)(a) Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-31307)).
3(i)(b) Certificate of Designation of Series A Participating
Preferred Stock, (incorporated by reference to the Company's
Annual Report on 10-K for the year ended December 31, 1998).
3(ii) Bylaws of the Company, as amended (incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement on
Form S-3 (File No. 333-31307)).
4.1 Form of Common Stock Certificate (incorporated by reference
to the exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-68138)).
4.2 Rights Agreement dated as of September 25, 1998 between the
Company and Chase Mellon Shareholder Services, L.L.C., which
includes as Exhibit B, the rights certificate (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A (filed on September 30, 1998).
4.3 Indenture dated as of February 4, 2000 between the Company
and State Street Bank and Trust Company of California, N.A.,
as trustee.
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended
and restated (the "Plan") (incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on
Form S-8 (File No. 333-83291)).
10.2# Form of Incentive Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number
to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number
to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.4# Amended and Restated 1993 Directors' Stock Option Plan of
Incyte Pharmaceuticals, Inc. (incorporated by reference to
the exhibit of the same number to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5# Form of Indemnity Agreement between the Company and its
directors and officers (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1
(File No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the Company
and Matadero Creek (incorporated by reference to Exhibit
10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.9 Stock Purchase Agreement dated as of June 22, 1994 between
the Company and Pfizer Inc (incorporated by reference to
Exhibit B to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.10 Registration Rights Agreement dated as of June 22, 1994
between the Company and Pfizer Inc (incorporated by
reference to Exhibit C to the Company's Current Report on
Form 8-K dated June 23, 1994).
10.11 Stock Purchase Agreement dated as of November 30, 1994
between the Company and The Upjohn Company (incorporated by
reference to Exhibit B to the Company's Current Report on
Form 8-K dated November 30, 1994, as amended by Form 8-K/A
filed with the Commission on March 27, 1995).
10.12 Registration Rights Agreement dated as of November 30, 1994
between the Company and The Upjohn Company (incorporated by
reference to Exhibit C to the Company's Current Report on
Form 8-K dated November 30, 1994).
10.13 Registration Rights Agreement dated as of February 4, 2000
among the Company and Deutsche Bank Securities Inc. and
Warburg Dillon Read LLC.
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.14 Lease Agreement dated June 19, 1997 between the Company and
The Board of Trustees of the Leland Stanford Junior
University.
10.15# 1997 Employee Stock Purchase Plan of Incyte Pharmaceuticals,
Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (File No.
333-31409)).
10.16# 1998 Amendment to the 1997 Employee Stock Purchase Plan of
Incyte Pharmaceuticals, Inc. (incorporated by reference to
Exhibit 99 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.17+ Master Strategic Relationship Agreement dated as of
September 2, 1997 between SmithKline Beecham Corporation,
Incyte Pharmaceuticals, Inc. and diaDexus, LLC (incorporated
by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September 30,
1997).
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated
by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan
1996, as amended (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-8 (File
333-67691)).
10.20 Stock Purchase Agreement dated as February 24, 2000 between
the Company and the investors named therein.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.1 Power of Attorney (see page 70 of this Form 10-K).
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been granted with respect to certain portions of
these agreements.
# Indicates management contract or compensatory plan or arrangement.
Copies of above exhibits not contained herein are available to any
stockholder upon written request to: Investor Relations, Incyte Pharmaceuticals,
Inc., 3174 Porter Drive, Palo Alto, CA 94034.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.3
<SEQUENCE>2
<DESCRIPTION>INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
<TEXT>
<PAGE> 1
EXHIBIT 4.3
================================================================================
INCYTE PHARMACEUTICALS, INC.
5.5% Convertible Subordinated Notes
Due 2007
------------------------
INDENTURE
Dated as of February 4, 2000
------------------------
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.,
AS TRUSTEE
================================================================================
<PAGE> 2
TABLE OF CONTENTS(1)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE.......................................................................1
Section 1.1 Definitions......................................................................................1
Section 1.2 Other Definitions................................................................................6
Section 1.3 Incorporation by Reference of Trust Indenture Act................................................7
Section 1.4 Rules of Construction............................................................................7
ARTICLE 2. THE SECURITIES...................................................................................................8
Section 2.1 Designation, Form and Dating.....................................................................8
Section 2.2 Execution and Authentication....................................................................10
Section 2.3 Registrar, Paying Agent and Conversion Agent....................................................11
Section 2.4 Paying Agent to Hold Money in Trust.............................................................12
Section 2.5 Securityholder Lists............................................................................13
Section 2.6 Transfer and Exchange...........................................................................13
Section 2.7 Replacement Securities..........................................................................25
Section 2.8 Outstanding Securities..........................................................................25
Section 2.9 Treasury Securities.............................................................................26
Section 2.10 Temporary Securities...........................................................................26
Section 2.11 Cancellation...................................................................................26
Section 2.12 CUSIP Numbers..................................................................................27
ARTICLE 3. REDEMPTION AND REPURCHASE.......................................................................................27
Section 3.1 Right of Provisional Redemption.................................................................27
Section 3.2 Right of Optional Redemption....................................................................27
Section 3.3 Election to Redeem; Notice to Trustee...........................................................27
Section 3.4 Selection of Securities To Be Redeemed..........................................................28
Section 3.5 Notice of Redemption............................................................................28
Section 3.6 Deposit of Redemption Price.....................................................................29
Section 3.7 Securities Payable on Redemption Date...........................................................29
Section 3.8 Securities Redeemed in Part.....................................................................30
Section 3.9 Conversion Arrangement on Call for Redemption...................................................30
Section 3.10 Repurchase of Securities at Option of the Holder upon Change in Control........................31
Section 3.11 Conditions and Procedures Relating to the Company's Election to
Pay the Repurchase Price in Common Stock.......................................................33
Section 3.12 Notice; Method of Exercising Repurchase Right..................................................34
Section 3.13 Effect of Repurchase Notice....................................................................36
Section 3.14 Deposit of Repurchase Price....................................................................37
Section 3.15 Securities Repurchased in Part.................................................................37
</TABLE>
- ---------------------
(1) This Table of Contents shall not, for any purpose, be deemed to be part
of this Indenture.
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 3.16 Compliance with Securities Laws upon Repurchase of Securities..................................37
Section 3.17 Repayment to the Company.......................................................................38
ARTICLE 4. CONVERSION......................................................................................................38
Section 4.1 Conversion Privilege............................................................................38
Section 4.2 Conversion Procedure............................................................................39
Section 4.3 Adjustments Below Par Value.....................................................................40
Section 4.4 Taxes on Conversion.............................................................................40
Section 4.5 Company to Provide Stock........................................................................40
Section 4.6 Adjustment of Conversion Price..................................................................41
Section 4.7 No Adjustment...................................................................................44
Section 4.8 Equivalent Adjustments..........................................................................45
Section 4.9 Adjustment for Tax Purposes.....................................................................45
Section 4.10 Notice of Adjustment...........................................................................45
Section 4.11 Notice of Certain Transactions.................................................................45
Section 4.12 Effect of Reclassification, Consolidation, Merger or Sale on Conversion Privilege..............46
Section 4.13 Trustee's Disclaimer...........................................................................47
Section 4.14 Voluntary Reduction............................................................................47
ARTICLE 5. SUBORDINATION...................................................................................................48
Section 5.1 Securities Subordinated to Senior Indebtedness..................................................48
Section 5.2 Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution,
Liquidation, Reorganization, Etc., of the Company...............................................48
Section 5.3 Securityholders To Be Subrogated to Right of Holders of Senior Indebtedness.....................49
Section 5.4 Obligations of the Company Unconditional........................................................50
Section 5.5 Company Not To Make Payment with Respect to Securities in Certain Circumstances.................50
Section 5.6 Notice to Trustee...............................................................................51
Section 5.7 Application by Trustee of Monies Deposited with It..............................................52
Section 5.8 Subordination Rights Not Impaired by Acts or Omissions of
Company or Holders of Senior Indebtedness.......................................................52
Section 5.9 Trustee To Effectuate Subordination.............................................................52
Section 5.10 Right of Trustee To Hold Senior Indebtedness...................................................53
Section 5.11 Article 5 Not To Prevent Events of Default.....................................................53
Section 5.12 No Fiduciary Duty Created to Holders of Senior Indebtedness....................................53
Section 5.13 Article Applicable to Paying Agents............................................................53
Section 5.14 Certain Conversion Deemed Payment..............................................................53
ARTICLE 6. COVENANTS.......................................................................................................54
Section 6.1 Payment of Securities...........................................................................54
Section 6.2 SEC Reports; 144A Information...................................................................54
Section 6.3 Liquidation.....................................................................................55
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 6.4 Compliance Certificates.........................................................................55
Section 6.5 Notice of Defaults..............................................................................56
Section 6.6 Payment of Taxes and Other Claims...............................................................56
Section 6.7 Corporate Existence.............................................................................56
Section 6.8 Maintenance of Properties.......................................................................56
Section 6.9 Further Instruments and Acts....................................................................56
Section 6.10 Maintenance of Office or Agency................................................................57
Section 6.11 Resale of Certain Securities; Reporting Issuer.................................................57
Section 6.12 Registration Rights............................................................................57
Section 6.13 Additional Interest............................................................................58
Section 6.14 Stay, Extension and Usury Laws.................................................................58
ARTICLE 7. SUCCESSOR CORPORATION...........................................................................................59
Section 7.1 When Company May Merge, Etc.....................................................................59
Section 7.2 Successor Corporation Substituted...............................................................59
ARTICLE 8. DEFAULT AND REMEDIES............................................................................................60
Section 8.1 Events of Default...............................................................................60
Section 8.2 Acceleration....................................................................................61
Section 8.3 Other Remedies..................................................................................62
Section 8.4 Waiver of Defaults and Events of Default........................................................62
Section 8.5 Control by Majority.............................................................................62
Section 8.6 Limitation on Suits.............................................................................62
Section 8.7 Rights of Holders to Receive Payment............................................................63
Section 8.8 Collection Suit by Trustee......................................................................63
Section 8.9 Trustee May File Proofs of Claim................................................................63
Section 8.10 Priorities.....................................................................................64
Section 8.11 Undertaking for Costs..........................................................................64
Section 8.12 Restoration of Rights and Remedies.............................................................64
Section 8.13 Rights and Remedies Cumulative.................................................................65
Section 8.14 Delay or Omission Not Waiver...................................................................65
ARTICLE 9. TRUSTEE.........................................................................................................65
Section 9.1 Duties of Trustee...............................................................................65
Section 9.2 Rights of Trustee...............................................................................66
Section 9.3 Individual Rights of Trustee....................................................................67
Section 9.4 Trustee's Disclaimer............................................................................67
Section 9.5 Notice of Default or Events of Default..........................................................67
Section 9.6 Reports by Trustee to Holders...................................................................67
Section 9.7 Compensation and Indemnity......................................................................67
Section 9.8 Replacement of Trustee..........................................................................68
Section 9.9 Successor Trustee by Merger, Etc................................................................69
Section 9.10 Eligibility; Disqualification..................................................................69
Section 9.11 Preferential Collection of Claims Against Company..............................................69
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
ARTICLE 10. SATISFACTION AND DISCHARGE OF INDENTURE........................................................................69
Section 10.1 Termination of Company's Obligations...........................................................69
Section 10.2 Application of Trust Money.....................................................................70
Section 10.3 Repayment to Company...........................................................................70
Section 10.4 Reinstatement..................................................................................71
ARTICLE 11. AMENDMENTS, SUPPLEMENTS AND WAIVERS............................................................................71
Section 11.1 Without Consent of Holders.....................................................................71
Section 11.2 With Consent of Holders........................................................................71
Section 11.3 Compliance with Trust Indenture Act............................................................73
Section 11.4 Revocation and Effect of Consents..............................................................73
Section 11.5 Notation on or Exchange of Securities..........................................................73
Section 11.6 Trustee To Sign Amendments, Etc................................................................73
ARTICLE 12. MISCELLANEOUS..................................................................................................73
Section 12.1 Trust Indenture Act Controls...................................................................73
Section 12.2 Notices........................................................................................74
Section 12.3 Communications by Holders with Other Holders...................................................74
Section 12.4 Certificate and Opinion as to Conditions Precedent.............................................74
Section 12.5 Record Date for Vote or Consent of Securityholders.............................................75
Section 12.6 Rules by Trustee, Paying Agent, Registrar......................................................75
Section 12.7 Legal Holidays.................................................................................75
Section 12.8 Governing Law..................................................................................76
Section 12.9 No Adverse Interpretation of Other Agreements..................................................76
Section 12.10 No Recourse Against Others....................................................................76
Section 12.11 Successors....................................................................................76
Section 12.12 Multiple Counterparts.........................................................................76
Section 12.13 Separability..................................................................................76
Section 12.14 Table of Contents, Headings, Etc..............................................................76
Exhibit A..................................................................................................A-1
Exhibit B-1...............................................................................................B1-1
Exhibit B-2...............................................................................................B2-1
Exhibit B-3...............................................................................................B3-1
Exhibit B-4...............................................................................................B4-1
Exhibit B-5...............................................................................................B5-1
Exhibit B-6...............................................................................................B6-1
</TABLE>
iv
<PAGE> 6
INDENTURE dated as of February 4, 2000 between Incyte Pharmaceuticals,
Inc., a Delaware corporation (the "Company"), and State Street Bank and Trust
Company of California, N.A., a national banking association, as Trustee (the
"Trustee").
Both parties agree as follows for the benefit of the other and for the
equal and ratable benefit of the registered holders of the Company's 5.5%
Convertible Subordinated Notes Due 2007.
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS. The terms defined in this Section 1.1 (except as herein
otherwise expressly provided or unless the context otherwise requires) for all
purposes of this Indenture and of any indenture supplemental hereto shall have
the respective meanings specified in this Section 1.1.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Agent" means any Registrar, Paying Agent or Conversion Agent.
"Applicable Procedures" means any procedures required to be followed by
the Depositary, Euroclear or Clearstream Banking including, but not limited to,
the "Operating Procedures of the Euroclear System" and "Terms and Conditions
Governing Use of Euroclear" and the "Management Regulations" and "Instructions
to Participants" of Clearstream Banking.
"Associate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act, as such Rule is in
effect on the date of this Indenture.
"Board of Directors" means the Board of Directors of the Company or any
authorized committee of the Board of Directors, except that for the purposes of
Section 3.8 "Board of Directors" shall mean the entire Board of Directors of the
Company.
"Business Day" means a day that is not a Legal Holiday.
"Cash" or "cash" means such coin or currency of the United States as at
any time of payment is legal tender for the payment of public and private debts.
"Certificated Note" means a Security issued to a purchaser in definitive
form in the form of Note attached hereto as Exhibit A that contains the
Certificated Note Restricted Securities Legend, if applicable, but that does not
contain the Global Note Legend, the Global Note Insert or the Global Note
Transfer Schedule.
1
<PAGE> 7
"Common Stock" means any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
and which is not subject to redemption by the Company. Subject to the provisions
of Section 4.12, however, shares issuable on conversion of Securities shall
include only shares of Common Stock, $0.001 par value per share (which is the
class designated as Common Stock of the Company at the date of this Indenture),
or shares of any class or classes resulting from any reclassification or
reclassifications thereof and which have no preference in respect of dividends
or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which are not subject to redemption
by the Company; provided that if at any time there shall be more than one such
resulting class, the shares of each such class then so issuable shall be
substantially in the proportion to which the total number of shares of such
class resulting from all such reclassifications bears to the total number of
shares of all such classes resulting from all such reclassifications.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to this Indenture and thereafter means the
successor.
"Consolidated Net Worth" means, with respect to any Person, the
consolidated stockholders' equity (excluding any capital stock that by its terms
is, or upon the happening of an event or passage of time would be, required to
be redeemed prior to the maturity of the Securities or is redeemable at the
option of the holder thereof at any time prior to such maturity or is
convertible or exchangeable for debt securities at any time prior to such
maturity at the option of the holder thereof) of such Person and its
consolidated subsidiaries, as determined in accordance with generally accepted
accounting principles.
"Corporate Trust Office" of the Trustee means the office of the Trustee
at which this Indenture is administered, which office initially is located at
633 West 5th Street, 12th Floor, Los Angeles, CA 90071, attention: Corporate
Trust Department, (Incyte Pharmaceuticals, Inc. 5.5% Convertible Subordinated
Notes Due 2007).
"Default" or "default" means any event which is, or after notice or
passage of time, or both, would be, an Event of Default.
"Depositary" means, with respect to the Securities issuable or issued in
whole or in part in global form, the person specified in Section 2.6(g) as the
Depositary with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provisions of this
Indenture, and thereafter, "Depositary" shall mean or include such successor.
"Global Notes" means, individually and collectively, the Regulation S
Global Note and the Rule 144A Global Note.
"Holder" or "Securityholder" means the person in which name a Security
is registered on the Registrar's books.
"Indenture" means this Indenture as amended or supplemented from time to
time.
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<PAGE> 8
"Initial Purchasers" means Deutsche Bank Securities Inc. and Warburg
Dillon Read LLC, as Initial Purchasers under the Purchase Agreement.
"Institutional Accredited Investor" means an institutional "accredited
investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act.
"Instrument" means any agreement, indenture, instrument or other
document under which any obligation is evidenced, assumed, guaranteed or
secured.
"Investment" means, with respect to any Person, directly or indirectly,
any advance, loan or other extension of credit or capital contribution to, or
any purchase, acquisition or ownership by such Person of any capital stock,
bonds, notes, debentures or other securities issued or owned by any other
Person.
"Market Capitalization" means an amount determined by multiplying the
number of shares of Common Stock outstanding on the applicable date by the
current market price of the Common Stock (determined as provided in Section
4.6(e)) as of such date.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers of
the Company; provided, however, that for purposes of Section 6.4 "Officers'
Certificate" means a certificate signed by the principal executive officer,
principal financial officer or principal accounting officer of the Company.
"Opinion of Counsel" means a written opinion from legal counsel to the
Trustee. The counsel may be an employee of or counsel to the Company or the
Trustee.
"Payment Default" means any default in the payment of principal of (or
premium, if any) or interest on Senior Indebtedness.
"Payment in full" or "paid in full" means payment in full in cash.
"Person" or "person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or other agency or political subdivision thereof.
"PORTAL Market" means the Private Offerings, Resales and Trading through
Automated Linkages Market operated by the National Association of Securities
Dealers, Inc. or any successor thereto.
"Principal" or "principal" of a debt security, including the Securities,
means the principal of the security plus, when appropriate, the premium, if any
(including the Make-Whole Payment, if any), on the security.
"Purchase Agreement" means the Purchase Agreement dated February 1, 2000
among the Company, Deutsche Bank Securities Inc. and Warburg Dillon Read LLC.
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<PAGE> 9
"Purchase Option" means the option to purchase up to $50,000,000 in
aggregate principal amount of Securities granted by the Company to the Initial
Purchasers pursuant to the Purchase Agreement.
"QIB" means a "Qualified Institutional Buyer" as that term is defined in
Rule 144A.
"Redemption Date" or "redemption date," when used with respect to any
Security to be redeemed, means the date fixed for such redemption pursuant to
this Indenture, as set forth in the form of Security annexed as Exhibit A
hereto.
"Redemption Price" or "redemption price," when used with respect to any
Security to be redeemed, means the price fixed for such redemption pursuant to
this Indenture, as set forth in the form of Security annexed as Exhibit A
hereto.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of February 4, 2000 between the Company and the Initial Purchasers and
certain permitted assigns.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Regulation S Global Note" means a permanent global note in the form of
the Note attached hereto as Exhibit A that contains the Global Note Legend, the
Global Note Insert and the Global Note Transfer Schedule as each is set forth in
Exhibit A hereto, and that is deposited with and is registered in the name of
the Depositary, representing a series of Notes sold in reliance on Regulation S.
"Reorganization Securities" means securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment of the
Company (a) which are equity securities that do not provide for any mandatory
payments to holders thereof, including by way of dividends or mandatory
redemption; or (b) the payment of which is subordinated, at least to the extent
provided in Article 5 with respect to the Securities, to the payment of all
Senior Indebtedness which may at the time be outstanding.
"Representative" means the indenture trustee or other trustee, agent or
representative for any class of Senior Indebtedness.
"Restricted Security" means each Security, other than a Regulation S
Global Note, until the earliest to occur of (a) the date on which such Note has
been effectively registered under the Securities Act and disposed of in
accordance with a shelf registration statement pursuant to the Registration
Rights Agreement and (b) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Securities Act. Each Restricted Security
shall bear the appropriate legend set forth in Section 2.6(g).
"Rule 144" means Rule 144 as promulgated under the Securities Act.
"Rule 144A" means Rule 144A as promulgated under the Securities Act.
"Rule 144A Global Note" means a permanent global note in the form of the
Note attached hereto as Exhibit A that contains the Global Note Insert, the
Global Note Legend, the
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<PAGE> 10
Global Note Transfer Schedule and the Global Note Restricted Securities Legend
(if applicable), as each such legend or schedule is set forth in Exhibit A
hereto, and that is deposited with and registered in the name of the Depositary,
representing a series of Notes sold in reliance on Rule 144A.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Securities" means the 5.5% Convertible Subordinated Notes Due 2007 or
any of them (each a "Security"), as amended or supplemented from time to time,
that are issued under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Senior Agent" means, on any date, the Representative of the class of
Senior Indebtedness having the highest principal amount (including all revolving
credit, letter of credit and other working capital commitments) then
outstanding.
"Senior Indebtedness" means the following, whether outstanding upon
issuance of the Notes or thereafter incurred or created: (a) the principal of
and premium, if any, and interest on, and fees, costs, enforcement expenses,
collateral protection expenses and other reimbursements or indemnity obligations
in respect of all indebtedness or obligations of the Company to any Person,
including but not limited to banks and other lending institutions, for money
borrowed that is evidenced by a note, bond, debenture, loan agreement, or
similar instrument or agreement (including purchase money obligations with
original maturities in excess of one year and noncontingent reimbursement
obligations in respect of amounts paid under letters of credit); (b) commitment
or standby fees due and payable to lending institutions with respect to credit
facilities available to the Company; (c) all noncontingent obligations of the
Company (i) for the reimbursement of any obligor on any letter of credit,
banker's acceptance, or similar credit transaction, (ii) under interest rate
swaps, caps, collars, options, and similar arrangements, and (iii) under any
foreign exchange contract, currency swap agreement, futures contract, currency
option contract, or other foreign currency hedge; (d) all obligations of the
Company for the payment of money relating to capitalized lease obligations; (e)
any liabilities of others described in the preceding clauses that the Company
has guaranteed or which are otherwise its legal liability; and (f) renewals,
extensions, refundings, refinancings, restructurings, amendments, and
modifications of any such indebtedness or guarantee; other than any indebtedness
or other obligation of the Company that by its terms or the terms of the
instrument creating or evidencing it is stated to be not superior in right of
payment to the Notes.
"Subsidiary" means any corporation, association or other business entity
of which at least a majority of the total capital stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by the Company or one or more of other Subsidiaries or a combination
thereof.
"TIA" means the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 and as in effect on the date of this Indenture,
except as provided in Section 11.3
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<PAGE> 11
hereof, and except to the extent any amendment to the Trust Indenture Act
expressly provides for application of the Trust Indenture Act as in effect on
another date.
"Transfer Restricted Security" means securities that bear or are
required to bear the Legend set forth in Section 2.6(g) hereof.
"Trustee" means State Street Bank and Trust Company of California, N.A.
until a successor replaces it in accordance with the provisions of this
Indenture and thereafter means the successor.
"Trust Officer" means any officer in the Corporate Trust Office of the
Trustee or any other officer customarily performing functions similar to those
performed by any of the above-designated officers who shall, in any case, be
responsible for the administration of this Indenture or have familiarity with
it, and also means, with respect to a particular corporate matter, any other
officer of the Trustee to whom corporate trust matters are referred because of
his knowledge of and familiarity with the particular subject.
"U.S. Person" has the meaning specified in Regulation S.
SECTION 1.2 OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined
Term in Section
- ---- ----------
<S> <C>
"Additional Interest".......................................................................... 6.12
"Affiliate Legend"............................................................................. 2.6(g)(iii)
"Agent Members"................................................................................ 2.1(b)
"Bankruptcy Law"............................................................................... 8.1
"Beneficial Owner"............................................................................. 3.10
"Certificated Note Restricted Securities Legend"............................................... 2.6(g)
"Change in Control"............................................................................ 3.10
"Clearstream".................................................................................. 2.1(a)
"Closing Price"................................................................................ 4.6
"Company Benefit Plan.......................................................................... 4.6(c)
"Company Notice"............................................................................... 3.12
"Company Order"................................................................................ 2.2
"Conversion Agent"............................................................................. 2.3
"Conversion Price"............................................................................. 4.6
"Conversion Shares"............................................................................ 4.6(c)
"Custodian".................................................................................... 8.1
"Distribution Date"............................................................................ 4.6(c)
"Euroclear".................................................................................... 2.1(a)
"Event of Default"............................................................................. 8.1
"Exchange Act"................................................................................. 3.10
"Global Note Restricted Securities Legend...................................................... 2.6(g)
"Legal Holiday"................................................................................ 12.7
"Make-Whole Payment"........................................................................... 3.1
</TABLE>
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<PAGE> 12
<TABLE>
<CAPTION>
Defined
Term in Section
- ---- ----------
<S> <C>
"Optional Redemption".......................................................................... 3.2
"Paying Agent"................................................................................. 2.3
"Payment Blockage Period"...................................................................... 5.5
"Payment of the Securities".................................................................... 5.5
"Provisional Redemption"....................................................................... 3.1
"Provisional Redemption Date".................................................................. 3.1
"Publicly Traded Securities"................................................................... 3.10
"Redemption Notice Date"....................................................................... 3.1
"Registrar".................................................................................... 2.3
"Registration Default"......................................................................... 6.12
"Repurchase Date".............................................................................. 3.10
"Repurchase Price"............................................................................. 3.10
"Repurchase Notice"............................................................................ 3.12(b)
"Restricted Stock Legend"...................................................................... 2.6(g)(ii)
"Rights"....................................................................................... 4.6(c)
"Securities Act"............................................................................... 2.1
"Shelf Registration Statement"................................................................. 6.12(a)
"Trading Days"................................................................................. 4.6(e)
"Trigger Event"................................................................................ 4.6(f)
"U.S. Government Obligations".................................................................. 10.1
"Voting Shares"................................................................................ 3.10
</TABLE>
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
This Indenture is hereby made subject to, and shall be governed by, the
provisions of the TIA required to be part of and to govern indentures qualified
under the TIA. The following TIA terms used in this Indenture have the following
meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or any other
obligor on the Securities.
All other terms used in this Indenture that are defined in the TIA,
defined by a TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them therein.
SECTION 1.4 RULES OF CONSTRUCTION.
Unless the context otherwise requires:
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<PAGE> 13
(1) a term has the meaning assigned to it;
(2)an accounting term not otherwise defined has the meaning assigned to
it in accordance with generally accepted accounting principles in effect on the
date hereof, and any other reference in this Indenture to "generally accepted
accounting principles" refers to generally accepted accounting principles in
effect on the date hereof;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
(6) "herein," "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE 2.
THE SECURITIES
SECTION 2.1 DESIGNATION, FORM AND DATING.
The Securities shall be designated as the "5.5% Convertible Subordinated
Notes Due 2007." Other than as provided in Section 2.1(a) hereof, the Securities
and the Trustee's certificate of authentication to be borne by the Securities
shall be substantially in the form of Exhibit A attached hereto, which is
incorporated in and made part of this Indenture. The Company and the Trustee, by
their execution and delivery of this Indenture, expressly agree to the terms and
provisions of the Securities and to be bound thereby. In addition to such
legends as may be required pursuant to Section 2.6(g) hereof, any of the
Securities may have imprinted thereon such legends or endorsements as the
officers executing the same may approve (execution thereof to be conclusive
evidence of such approval) and as are not inconsistent with the provisions of
this Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Securities may be listed or any trading system in which
the Securities may be admitted, or to conform to usage. Each Security shall be
dated the date of its authentication.
(a) Global Notes. Securities offered and sold to QIBs in reliance on
Rule 144A shall be issued initially in the form of Rule 144A Global Notes in the
form of the Note attached hereto as Exhibit A, with the Global Securities
Legend, the Global Note Insert and the Global Note Transfer Schedule as each is
set forth in Exhibit A hereto. Such Rule 144A Global Notes shall be deposited on
behalf of the purchasers of the Securities represented thereby with the
Depositary at its New York office, and registered in the name of the Depositary
or a nominee of the Depositary, duly executed by the Company and authenticated
by the Trustee as hereinafter provided. The aggregate principal amount of the
Rule 144A Global Notes may from time to time be increased or decreased by
adjustments made on the records of the Trustee and the Depositary or its nominee
as hereinafter provided. Payment of principal of and interest and premium, if
any
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<PAGE> 14
(including the Make-Whole Payment, if any), on any Security in global form shall
be made to the holder of such Security.
Securities offered and sold in reliance on Regulation S shall be issued
initially in the form of Regulation S Global Notes in the form of the Note
attached hereto as Exhibit A with the Global Note Legend, the Global Note Insert
and the Global Note Transfer Schedule as each is set forth in Exhibit A hereto.
Such Regulation S Global Notes shall be deposited on behalf of the purchaser of
the Securities represented thereby with the Depositary or a custodian of the
Depositary and registered in the name of the Depositary or the nominee of the
Depositary for the accounts of designated agents holding on behalf of the
Euroclear System ("Euroclear") or Clearstream Banking ("Clearstream"), duly
executed by the Company and authenticated by the Trustee as hereinafter
provided. The aggregate principal amount of the Regulation S Global Notes may
from time to time be increased or decreased by adjustments made on the records
of the Trustee and the Depositary or its nominee, as the case may be, in
connection with transfers of interest as hereinafter provided.
Each Global Note shall represent such of the outstanding Securities as
shall be specified therein and each shall provide that it shall represent the
aggregate amount of outstanding Securities from time to time endorsed thereon
and that the aggregate amount of outstanding Securities represented thereby may
from time to time be reduced or increased, as appropriate, to reflect exchanges
and redemptions. Any endorsement of a Global Note to reflect the amount of any
increase or decrease in the amount of outstanding Securities represented thereby
shall be made by the Trustee or the Securities Custodian, at the direction of
the Trustee, in accordance with instructions given by the Holder thereof.
The provisions of the "Operating Procedures of the Euroclear System" and
"Terms and Conditions Governing Use of Euroclear" and the "Management
Regulations" and "Instructions to Participants" of Clearstream shall be
applicable to interests in the Regulation S Global Notes that are held by the
Agent Members through Euroclear or Clearstream.
Except as set forth in Section 2.6 hereof, the Global Notes may be
transferred, in whole and not in part, only to another nominee of the Depositary
or to a successor of the Depositary or its nominee. The Trustee and the Company
shall treat the Holder of any Global Note as the owner of such Security for the
purpose of receiving payment of the principal of, premium, if any (including the
Make-Whole Payment, if any), and interest on such Global Note and for all other
purposes whatsoever.
In addition to such legends as may be required pursuant to Section
2.6(g) hereof, any Security in global form may be endorsed with or have
incorporated in the text thereof such legends or recitals or changes not
inconsistent with the provisions of this Indenture as may be required by the
Depositary or by the National Association of Securities Dealers, Inc. in order
for the Securities to be tradeable on the PORTAL Market or as may be required
for the Securities to be tradeable on any other market developed for trading of
securities pursuant to Rule 144A or required to comply with any applicable law
or any regulation thereunder or with the rules and regulations of any securities
exchange upon which the Securities may be listed or traded or to conform with
any usage with respect thereto, or to indicate any special limitations or
restrictions to which any particular Securities are subject.
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<PAGE> 15
(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to Rule
144A Global Notes and the Regulation S Global Notes deposited with or on behalf
of the Depositary.
The Company shall execute and the Trustee shall, in accordance with this
Section 2.1(b), authenticate and deliver the Global Notes that (i) shall be
registered in the name of the Depositary or the nominee of the Depositary and
(ii) shall be delivered by the Trustee to the Depositary or pursuant to the
Depositary's instructions or held by the Trustee as custodian for the
Depositary.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights either under this Indenture with respect to any Global Note held
on their behalf by the Depositary or by the Trustee as custodian for the
Depositary or under such Global Note, and the Depositary may be treated by the
Company, the Trustee and any agent of the Company or the Trustee as the absolute
owner of such Global Note for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Trustee or any agent of
the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the Depositary and its Agent Members, the operation of customary practices of
such Depositary governing the exercise of the rights of an owner of a beneficial
interest in any Global Note.
(c) Certificated Securities. Except as provided in Section 2.10, owners
of beneficial interest in Global Notes will not be entitled to receive physical
delivery of Certificated Notes. Purchasers of Securities who are not QIBs and
did not purchase Securities sold in reliance on Regulation S under the
Securities Act will receive Certificated Notes bearing the Certificated Note
Restricted Securities Legend as set forth in Section 2.6(g) hereof. Certificated
Notes will bear the Certificated Note Restricted Securities Legend set forth in
Section 2.6(g) hereof unless removed in accordance with Section 2.6(g) hereof
and may not be exchanged for a Global Note, or interest therein, at any time.
Pursuant to Section 2.6(g) hereof, the Certificated Securities and
shares of Common Stock issuable upon conversion thereof shall be required, in
certain circumstances described in Section 2.6(g), to bear legends restricting
their transfer. By its acceptance of any Security or share of Common Stock
bearing the aforesaid legend, each Holder acknowledges the restrictions on
transfer set forth on such Security or share of Common Stock and agrees that it
will transfer such Security or share of Common Stock only as provided thereon.
SECTION 2.2 EXECUTION AND AUTHENTICATION.
Two Officers of the Company shall sign the Certificated Securities for
the Company by manual or facsimile signature. If an Officer whose signature is
on a Security no longer holds that office at the time the Trustee authenticates
the Security, the Security shall be valid nevertheless. A Security shall not be
valid until an authorized signatory of the Trustee manually signs the
certificate of authentication on the Security. The signature shall be conclusive
evidence that the Security has been authenticated under this Indenture.
The Trustee shall authenticate and make available for delivery
Securities for original issue in the aggregate principal amount of up to
$150,000,000, upon a written order or orders of
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<PAGE> 16
the Company signed by two Officers or by an Officer and an Assistant Treasurer
or Assistant Secretary of the Company (a "Company Order"). The Company Order
shall specify the amount of Securities to be authenticated and the date on which
the original issue of Securities is to be authenticated. Upon the exercise of
the Purchase Option by the Initial Purchasers, additional Securities in the
aggregate principal amount of up to $50,000,000 shall be executed by the Company
in the aforementioned manner and delivered to the Trustee for authentication,
and shall thereupon be authenticated and delivered by the Trustee upon Company
Order. The aggregate principal amount of Securities outstanding under this
Indenture at any time may not exceed $200,000,000, except as provided in Section
2.7.
The Trustee shall act as the initial authenticating agent. Thereafter,
the Trustee may appoint an authenticating agent acceptable to the Company to
authenticate Securities. An authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company or
an Affiliate of the Company.
The Securities shall be issuable only in registered form without coupons
only in denominations of $1,000 and any integral multiple thereof.
SECTION 2.3 REGISTRAR, PAYING AGENT AND CONVERSION AGENT.
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange (the "Registrar"), an
office or agency where Securities may be presented for payment (the "Paying
Agent"), an office or agency where Securities may be presented for conversion
(the "Conversion Agent") and an office or agency where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may have one or more co-Registrars, one or more additional
Paying Agents and one or more additional Conversion Agents. The term "Registrar"
includes any co-Registrar, the term "Paying Agent" includes any additional
Paying Agent and the term "Conversion Agent" includes any additional Conversion
Agent.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall notify
the Trustee of the name and address of any Agent not a party to this Indenture.
If the Company fails to maintain a Registrar, Paying Agent, Conversion Agent or
agent for service of notices and demands, or fails to give the foregoing notice,
the Trustee shall act as such. The Company or any Affiliate of the Company may
act as Paying Agent (except for the purposes of Section 6.3 and Article 10),
Registrar or Conversion Agent.
The Company initially appoints the Trustee as Registrar, Paying Agent,
Conversion Agent and agent for service of notices and demands in connection with
the Securities.
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST.
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<PAGE> 17
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of and premium, if any (including
the Make-Whole Payment, if any), or interest (together with any Additional
Interest in respect thereof) on any of the Securities, segregate and hold in
trust for the benefit of the Persons entitled thereto a sum sufficient to pay
the principal of, premium, if any (including the Make-Whole Payment, if any), or
interest on any of the Securities (together with any Additional Interest in
respect thereof) so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and will promptly notify the Trustee
of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will,
prior to each due date of the principal of and premium, if any (including the
Make-Whole Payment, if any), or interest (together with any Additional Interest
in respect thereof) on any Securities, deposit with a Paying Agent a sum
sufficient to pay such amount, such sum to be held in trust for the benefit of
the Persons entitled to such principal, premium, if any, or interest, and
(unless such Paying Agent is the Trustee) the Company will promptly notify the
Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section 2.4,
that such Paying Agent will, subject to Section 5.7:
(1) hold all sums held by it for the payment of the principal of,
premium, if any (including the Make-Whole Payment, if any), or interest on
Securities in trust for the benefit of the Persons entitled thereto until such
sums shall be paid to such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Securities) in the making of any payment of principal, premium,
if any (including the Make-Whole Payment, if any), or interest; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company in trust for the payment of the principal of, and premium, if any
(including the Make-Whole Payment, if any), or interest (together with any
Additional Interest in respect thereof) on any Security and remaining unclaimed
for two years after such principal and premium, if any (including the Make-Whole
Payment, if any), or interest has become due and payable shall be paid to the
Company on written request of the Company, or (if then held by the Company)
shall be discharged from such trust; and the Holder of such Security shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in the Borough of Manhattan, The City of New York, notice that such
money remains unclaimed and that, after a date specified therein, which shall
not
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<PAGE> 18
be less than 30 days from the date of such publication, any unclaimed balance of
such money then remaining will be repaid to the Company.
SECTION 2.5 SECURITYHOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee on or before each semi-annual interest payment date and at such
other times as the Trustee may request in writing a list in such form and as of
such date as the Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.6 TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Notes. The transfer and exchange of
Global Notes or beneficial interests therein shall be effected through the
Depositary, in accordance with this Indenture and the Applicable Procedures,
which shall include restrictions on transfer comparable to those set forth
herein to the extent required by the Securities Act. Beneficial interests in a
Global Note may be transferred to Persons who take delivery thereof in the form
of a beneficial interest in the same Global Note in accordance with the transfer
restrictions set forth in the legend in subsection (g) of this Section 2.6.
Transfers of beneficial interests in the Global Notes to Persons required to
take delivery thereof in the form of an interest in another Global Note shall be
permitted as follows:
(i) Rule 144A Global Note to Regulation S Global Note. If, at any
time, an owner of a beneficial interest in a Rule 144A Global Note deposited
with the Depositary (or the Trustee as custodian for the Depositary) wishes to
transfer its interest in such Rule 144A Global Note to a Person who is required
or permitted to take delivery thereof in the form of an interest in a Regulation
S Global Note, such owner shall, subject to the Applicable Procedures, exchange
or cause the exchange of such interest for an equivalent beneficial interest in
a Regulation S Global Note as provided in this Section 2.6(a)(i). Upon receipt
by the Trustee of (1) instructions given in accordance with the Applicable
Procedures from an Agent Member directing the Trustee to credit or cause to be
credited a beneficial interest in the Regulation S Global Note in an amount
equal to the beneficial interest in the Rule 144A Global Note to be exchanged,
(2) a written order given in accordance with the Applicable Procedures
containing information regarding the participant account of the Depositary and
the Euroclear or Clearstream account to be credited with such increase, and (3)
a certificate in the form of Exhibit B-2 hereto given by the owner of such
beneficial interest stating that the transfer of such interest has been made in
compliance with the transfer restrictions applicable to the Global Notes and
pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S, then
the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to
be reduced the aggregate principal amount at maturity of the applicable Rule
144A Global Note and to increase or cause to be increased the aggregate
principal amount at maturity of the applicable Regulation S Global Note by the
principal amount at maturity of the beneficial interest in the Rule 144A Global
Note to be exchanged, to credit or cause to be credited to the account
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of the Person specified in such instructions a beneficial interest in the
Regulation S Global Note equal to the reduction in the aggregate principal
amount at maturity of the Rule 144A Global Note, and to debit, or cause to be
debited, from the account of the Person making such exchange or transfer the
beneficial interest in the Rule 144A Global Note that is being exchanged or
transferred.
(ii) Regulation S Global Note to Rule 144A Global Note. If, at any
time, an owner of a beneficial interest in a Regulation S Global Note deposited
with the Depositary or with the Trustee as custodian for the Depositary wishes
to transfer its interest in such Regulation S Global Note to a Person who is
required or permitted to take delivery thereof in the form of an interest in a
Rule 144A Global Note, such owner shall, subject to the Applicable Procedures,
exchange or cause the exchange of such interest for an equivalent beneficial
interest in a Rule 144A Global Note as provided in this Section 2.6(a)(ii). Upon
receipt by the Trustee of (1) instructions from Euroclear or Clearstream, if
applicable, and the Depositary, directing the Trustee, as Registrar, to credit
or cause to be credited a beneficial interest in the Rule 144A Global Note equal
to the beneficial interest in the Regulation S Global Note to be exchanged, such
instructions to contain information regarding the participant account with the
Depositary to be credited with such increase, (2) a written order given in
accordance with the Applicable Procedures containing information regarding the
participant account of the Depositary and (3) a certificate in the form of
Exhibit B-3 attached hereto given by the owner of such beneficial interest
stating (A) if the transfer is pursuant to Rule 144A, that the Person
transferring such interest in a Regulation S Global Note reasonably believes
that the Person acquiring such interest in a Rule 144A Global Note is a QIB and
is obtaining such beneficial interest in a transaction meeting the requirements
of Rule 144A and any applicable blue sky or securities laws of any state of the
United States, (B) that the transfer complies with the requirements of Rule 144
under the Securities Act and any applicable blue sky or securities laws of any
state of the United States or (C) if the transfer is pursuant to any other
exemption from the registration requirements of the Securities Act, that the
transfer of such interest has been made in compliance with the transfer
restrictions applicable to the Global Notes and pursuant to and in accordance
with the requirements of the exemption claimed, such statement to be supported
by an Opinion of Counsel from the transferee or the transferor in form
reasonably acceptable to the Company and to the Registrar, then the Trustee, as
Registrar, shall instruct the Depositary to reduce or cause to be reduced the
aggregate principal amount at maturity of such Regulation S Global Note and to
increase or cause to be increased the aggregate principal amount at maturity of
the applicable Rule 144A Global Note by the principal amount at maturity of the
beneficial interest in the Regulation S Global Note to be exchanged, and the
Trustee, as Registrar, shall instruct the Depositary, concurrently with such
reduction, to credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the applicable Rule 144A
Global Note equal to the reduction in the aggregate principal amount at maturity
of such Regulation S Global Note and to debit or cause to be debited from the
account of the Person making such transfer the beneficial interest in the
Regulation S Global Note that is being transferred.
(b) Transfer and Exchange of Certificated Notes. When Certificated Notes
are presented by a Holder to the Registrar with a request: to register the
transfer of the Certificated Notes; or to exchange such Certificated Notes for
an equal principal amount of Certificated Notes of other authorized
denominations, the Registrar shall register the transfer or make the exchange as
requested; provided, however, that the Certificated Notes presented or
surrendered for register of transfer or exchange: (i) shall be duly endorsed or
accompanied by a written instruction of transfer in form satisfactory to the
Registrar duly executed by such Holder or by
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his attorney, duly authorized in writing; and (ii) in the case of a Certificated
Note that is a Restricted Security, such request shall be accompanied by a
Purchaser Letter, in substantially the form of Exhibit B-1 hereto, together with
the following additional information and documents, as applicable: (A) if such
Restricted Security is being delivered to the Registrar by a Holder for
registration in the name of such Holder, without transfer, or such Restricted
Security is being transferred to the Company, a certification to that effect
from such Holder (in substantially the form of Exhibit B-4 hereto); (B) if such
Restricted Security is being transferred to a QIB in accordance with Rule 144A
under the Securities Act or pursuant to an exemption from registration in
accordance with Rule 144 under the Securities Act or pursuant to an effective
registration statement under the Securities Act, a certification to that effect
from such Holder (in substantially the form of Exhibit B-4 hereto); or (C) if
such Restricted Security is being transferred in reliance on any other exemption
from the registration requirements of the Securities Act, a certification to
that effect from such Holder (in substantially the form of Exhibit B-4 hereto)
and an Opinion of Counsel from such Holder or the transferee reasonably
acceptable to the Company and to the Registrar to the effect that such transfer
is in compliance with the Securities Act.
(c) Transfer of a Beneficial Interest in a Rule 144A Global Note or
Regulation S Global Note for a Certificated Note.
(i) Any Person having a beneficial interest in a Global Note may
upon request, subject to the Applicable Procedures, exchange such beneficial
interest for a Certificated Note. Upon receipt by the Trustee of written
instructions or such other form of instructions as is customary for the
Depositary (or Euroclear or Clearstream, if applicable), from the Depositary or
its nominee on behalf of any Person having a beneficial interest in a Global
Note, and, in the case of a Restricted Security, a Purchaser Letter, in
substantially the form of Exhibit B-1 hereto, together with the following
additional information and documents, as applicable (all of which may be
submitted by facsimile): (A) if such beneficial interest is being transferred to
the Person designated by the Depositary as being the beneficial owner, a
certification to that effect from such Person (in substantially the form of
Exhibit B-5 hereto); (B) if such beneficial interest is being transferred to a
QIB in accordance with Rule 144A under the Securities Act or pursuant to an
exemption from registration in accordance with Rule 144 under the Securities Act
or pursuant to an effective registration statement under the Securities Act, a
certification to that effect from the transferor (in substantially the form of
Exhibit B-5 hereto); or (C) if such beneficial interest is being transferred in
reliance on any other exemption from the registration requirements of the
Securities Act, a certification to that effect from the transferor (in
substantially the form of Exhibit B-5 hereto) and an Opinion of Counsel from the
transferee or the transferor reasonably acceptable to the Company and to the
Registrar to the effect that such transfer is in compliance with the Securities
Act, in which case the Trustee or the Custodian, at the direction of the
Trustee, shall, in accordance with the standing instructions and procedures
existing between the Depositary and the Custodian, cause the aggregate principal
amount of the applicable Global Notes, to be reduced accordingly and, following
such reduction, the Company shall execute and, the Trustee shall authenticate
and deliver to the transferee a Certificated Note in the appropriate principal
amount.
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(ii) Certificated Notes issued in exchange for a beneficial interest
in a Global Note, as applicable, pursuant to this Section 2.6(c) shall be
registered in such names and in such authorized denominations as the Depositary,
pursuant to instructions from its direct or indirect participants or otherwise,
shall instruct the Trustee. Upon execution and authentication, the Trustee shall
deliver such Certificated Notes to the Persons in whose names such Notes are so
registered. Following any such issuance of Certificated Notes, the Trustee, as
Registrar, shall instruct the Depositary to reduce or cause to be reduced the
aggregate principal amount at maturity of the applicable Global Note to reflect
the transfer and an endorsement shall be made on such Security in global form by
the Trustee to reflect such reduction or increase.
(d) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provision of this Indenture (other than the provisions
set forth in subsection (f) of this Section 2.6), a Global Note may not be
transferred as a whole except by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor Depositary or
a nominee of such successor Depositary.
(e) Transfer and Exchange of a Certificated Note for a Beneficial
Interest in a Global Note. A Certificated Note may not be transferred or
exchanged for a beneficial interest in a Global Note.
(f) Authentication of Certificated Notes in Absence of Depositary. If at
any time:
(i) the Depositary for the Securities notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the Global Notes
and a successor Depositary for the Global Notes is not appointed by the Company
within 90 days after delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Trustee in
writing that it elects to cause the issuance of Certificated Notes under this
Indenture, then the Company shall execute, and the Trustee shall, upon receipt
of an authentication order in accordance with Section 2.2 hereof, authenticate
and deliver, Certificated Notes in an aggregate principal amount equal to the
principal amount of the Global Notes in exchange for such Global Notes.
(g) Legends.
(i) Every Security issued by the Company either upon original
issuance or upon registration of transfer or exchange prior to the earlier of
(i) the sale of such Security pursuant to an effective registration statement
under the Securities Act and (ii) the expiration of two years after the date of
original issuance of such Security shall be deemed a Restricted Security. Every
Restricted Security shall be subject to the restrictions on transfer provided in
the legend required to be borne by each Restricted Security pursuant to this
Section 2.6, unless such restrictions on transfer shall be waived by the written
consent of the Company, and the holder of each Restricted Security, by such
Securityholder's acceptance thereof, agrees to be bound by such restrictions on
transfer. Whenever any Restricted Security is presented or surrendered for
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registration of transfer or for exchange for a Security registered in a name
other than that of the Holder, (i) the notice of assignment set forth in Exhibit
A must be properly completed, dated the date of such surrender and signed by the
Holder of such Restricted Security, and (ii) the Holder of such Restricted
Security shall deliver, prior to such transfer, any other documents required by
the Trustee or the Company pursuant to such notice of assignment, including (A)
in the case of any proposed transfer by a Holder to an Institutional Accredited
Investor, a letter signed by such Institutional Accredited Investor
substantially in the form of Exhibit B-1 relating to certain representations and
agreements regarding restrictions on transfer of such Restricted Security and
(B) in the case of any proposed transfer by a holder to a Person in reliance of
Resolution S, a letter signed by the transferee substantially in the form of
Exhibit B-6 relating to certain representations and agreements regarding
restrictions on transfer of such Restricted Security. The Trustee shall not be
required to accept for such registration of transfer or exchange any Restricted
Security if such conditions in the two preceding sentences have not been
satisfied. Notwithstanding the preceding three sentences, any transfer of an
interest in any Security in global form by a QIB to a QIB through the facilities
of The Depository Trust Company or any other United States securities clearance
and settlement organization may be effected without delivery of any additional
notices or documents to the Trustee or the Company, provided that such transfer
does not require a change in the name (other than to another nominee of The
Depository Trust Company or such other securities clearance and settlement
organization) in which such Security is then registered. The restrictions
imposed by this Section 2.6 upon the transferability of any particular
Restricted Security shall cease and terminate upon the earlier of (i) the sale
of such Restricted Security pursuant to an effective registration statement
under the Securities Act and (ii) the expiration of two years after the date of
original issuance of such Security. The Company shall promptly inform the
Trustee in writing of the effective date of any registration statement
registering the Securities under the Securities Act. Any Security as to which
such restrictions on transfer have expired in accordance with their terms or
have been otherwise terminated may, upon surrender of such Security for exchange
to the Trustee in accordance with the provisions of this Section 2.6, be
exchanged for a new Security, of like tenor and aggregate principal amount,
which shall not bear the restrictive legend required by this Section 2.6. The
Trustee shall not be liable for any action taken or omitted to be taken by it in
good faith in accordance with this paragraph.
As used in this Section 2.6(g), the term "transfer" encompasses any
sale, pledge, transfer or other disposition of any Restricted Security.
Until the earlier of (i) the sale of such Restricted Security pursuant
to an effective registration statement under the Securities Act and (ii) the
expiration of two years after the date of original issuance of such Restricted
Security,
(A) any Global Note evidencing such Restricted Security (and all Global
Notes issued in exchange or substitution therefor) shall bear a legend in
substantially the following form (the "Global Note Restricted Securities
Legend"), unless otherwise agreed by the Company (with written notice thereof to
the Trustee):
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY
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THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X)
PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD UNDER RULE 144(k) (OR ANY
SUCCESSOR THERETO) UNDER THE SECURITIES ACT WHICH IS APPLICABLE TO THIS SECURITY
OR (Y) BY ANY HOLDER THAT WAS AN "AFFILIATE" (WITHIN THE MEANING OF RULE 144
UNDER THE SECURITIES ACT) OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE, OTHER THAN (1) TO THE
COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A, PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) IN AN OFFSHORE TRANSACTION
(AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH
REGULATION S UNDER THE SECURITIES ACT, (4) TO AN INSTITUTION THAT IS AN
"ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT ("INSTITUTIONAL ACCREDITED INVESTOR") THAT IS ACQUIRING THIS
SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND THAT, PRIOR TO
SUCH TRANSFER, DELIVERS TO THE COMPANY AND THE TRUSTEE A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS
ON TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE FORM OF WHICH LETTER MAY BE
OBTAINED FROM THE TRUSTEE), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT
OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT,
IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS
AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED
INSTITUTIONAL BUYER OR (2) AN INSTITUTIONAL ACCREDITED INVESTOR AND THAT IT IS
HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3)
NOT A U.S. PERSON AND IS OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN
ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2) OF RULE 902 UNDER)
REGULATION S UNDER THE SECURITIES ACT. IN ANY CASE THE HOLDER HEREOF WILL NOT,
DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THIS
SECURITY OR ANY COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY EXCEPT AS
PERMITTED BY THE SECURITIES ACT.; and
(B) any Certificated Note evidencing such Restricted Security (and
all securities issued in exchange or substitution therefor, other than Common
Stock, if any, issued upon conversion thereof that shall bear the legend set
forth in Section 2.6(g)(ii), if applicable) shall bear a legend in substantially
the following form (the "Certificated Note Restricted Securities Legend"),
unless otherwise agreed by the Company (with written notice thereof to the
Trustee):
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THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE EXPIRATION OF THE
HOLDING PERIOD UNDER RULE 144(k) (OR ANY SUCCESSOR THERETO) UNDER THE SECURITIES
ACT WHICH IS APPLICABLE TO THIS SECURITY OR (Y) BY ANY HOLDER THAT WAS AN
"AFFILIATE" (WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT) OF THE
COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER,
IN EITHER CASE, OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A, PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A (AS INDICTED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN OFFSHORE TRANSACTION (AS
DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH REGULATION
S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON
THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (4) TO AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2),
(3) or (7) UNDER THE SECURITIES ACT ("INSTITUTIONAL ACCREDITED INVESTOR") (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT
PURPOSES AND NOT FOR DISTRIBUTION, AND THAT, PRIOR TO SUCH TRANSFER, DELIVERS TO
THE COMPANY AND THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS
AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE SECURITY
EVIDENCED HEREBY (THE FORM OF WHICH LETTER MAY BE OBTAINED FROM THE TRUSTEE),
(5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED
BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX
CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS
SECURITY) OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, IN EACH CASE ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF
ANY STATE OF THE UNITED STATES. PRIOR TO A TRANSFER OF THIS SECURITY (OTHER THAN
A TRANSFER PURSUANT TO CLAUSE (6) ABOVE), THE HOLDER OF THIS SECURITY MUST,
PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES
AND OTHER INFORMATION AND, IN THE CASE OF A TRANSFER PURSUANT TO CLAUSE (5)
ABOVE, A LEGAL OPINION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY
TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE
HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE
BENEFIT OF THE COMPANY THAT
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IT IS (1) A QUALIFIED INSTITUTIONAL BUYER OR (2) AN INSTITUTIONAL ACCREDITED
INVESTOR AND THAT HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION OR (3) NOT A U.S. PERSON AND IS OUTSIDE THE UNITED STATES WITHIN
THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2) OF
RULE 902) UNDER REGULATION S UNDER THE SECURITIES ACT. IN ANY CASE THE HOLDER
HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH
REGARD TO THIS SECURITY OR ANY COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
SECURITY EXCEPT AS PERMITTED BY THE SECURITIES ACT.
The Depositary shall be a clearing agency registered under the Exchange
Act. The Company initially appoints The Depository Trust Company to act as
Depositary with respect to the Securities in global form. Initially, the Global
Note shall be issued to the Depositary, registered in the name of Cede & Co., as
the nominee of the Depositary, and deposited with the custodian for Cede & Co.
If a definitive Security is issued in exchange for any portion of a
Security in global form after the close of business at the office or agency
where such exchange occurs on any record date and before the opening of business
at such office or agency on the next succeeding interest payment date, interest
will not be payable on such interest payment date in respect of such Security,
but will be payable on such interest payment date only to the person to whom
interest in respect of such portion of such Security in global form is payable
in accordance with the provisions of this Indenture.
(ii) Until two years after the original issuance date of any
Security, any stock certificate representing Common Stock issued upon conversion
of such Security shall bear a legend in substantially the following form (the
"Restricted Stock Legend"), unless otherwise agreed by the Company (with written
notice thereof to the Trustee):
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE EXPIRATION OF THE
HOLDING PERIOD UNDER RULE 144(k) (OR ANY SUCCESSOR THERETO) UNDER THE SECURITIES
ACT WHICH IS APPLICABLE TO THIS SECURITY OR (Y) BY ANY HOLDER THAT WAS AN
"AFFILIATE" (WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT) OF THE
COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER,
IN EITHER CASE, OTHER THAN (1) TO THE COMPANY, (2) IN AN OFFSHORE TRANSACTION
(AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH
REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE
TRANSFEROR ON THE CERTIFICATE OF TRANSFER APPLICABLE TO THIS SECURITY, THE FORM
OF WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRANSFER AGENT), (3) TO AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT ("INSTITUTIONAL
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ACCREDITED INVESTOR") (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE
CERTIFICATE OF TRANSFER APPLICABLE TO THIS SECURITY, THE FORM OF WHICH MAY BE
OBTAINED FROM THE COMPANY OR THE TRANSFER AGENT) THAT IS ACQUIRING THIS SECURITY
FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND THAT PRIOR TO SUCH
TRANSFER, DELIVERS TO THE COMPANY AND THE TRANSFER AGENT A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS
ON TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE FORM OF WHICH LETTER MAY BE
OBTAINED FROM THE COMPANY OR THE TRANSFER AGENT), (4) PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE)
UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON
THE CERTIFICATE OF TRANSFER APPLICABLE TO THIS SECURITY, THE FORM OF WHICH MAY
BE OBTAINED FROM THE COMPANY OR THE TRANSFER AGENT) OR (5) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES, PRIOR TO A TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER PURSUANT TO
CLAUSE (5) ABOVE), THE HOLDER OF THIS SECURITY MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO THE COMPANY AND THE TRANSFER AGENT SUCH CERTIFICATES AND OTHER
INFORMATION AND, IN THE CASE OF A TRANSFER PURSUANT TO CLAUSE (4) ABOVE, A LEGAL
OPINION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF
THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY
THAT IT IS (1) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING
THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (2) NOT A U.S.
PERSON AND IS OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT
SATISFYING THE REQUIREMENTS OF PARAGRAPH (k)(2) OF RULE 902 UNDER) REGULATION S
UNDER THE SECURITIES ACT. IN ANY CASE THE HOLDER HEREOF WILL NOT, DIRECTLY OR
INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THIS SECURITY
EXCEPT AS PERMITTED BY THE SECURITIES ACT.
(iii) Any certificate evidencing a Security that has been
transferred to an Affiliate of the Company within two years after the original
issuance date of the Security, as evidenced by a notation on the Assignment Form
for such transfer or in the representation letter delivered in respect thereof,
shall, until two years after the last date on which the Company or any Affiliate
of the Company was an owner of such Security, bear a legend in substantially the
following form (the "Affiliate Legend"), unless otherwise agreed by the Company
(with written notice thereof to the Trustee);
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY
NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR
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TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER AGREES (1) THAT IT
WILL NOT RESELL OR OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY OR THE
COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH SECURITY EXCEPT (A) TO INCYTE
PHARMACEUTICALS, INC. OR ANY SUBSIDIARY THEREOF, (B) IN A TRANSACTION REGISTERED
UNDER THE SECURITIES ACT OR (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) AND (2) THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS TRANSFERRED
A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFER IS
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO STATE STREET
BANK AND TRUST COMPANY OF CALIFORNIA, N.A., AS TRUSTEE (OR A SUCCESSOR TRUSTEE,
IF APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE
COMPANY MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION
S UNDER THE SECURITIES ACT.
Any stock certificate representing Common Stock issued upon conversion of a
Security that has been transferred to an Affiliate of the Company within two
years after the original issuance date of the Security, as evidenced by a
notation on the Assignment Form for such transfer or in the representation
letter delivered in respect thereof, shall also bear a legend in substantially
the form indicated above, unless otherwise agreed by the Company (with written
notice thereof to the Trustee).
(iv) Upon any sale or transfer of a Restricted Security (including
any Restricted Security represented by a Global Note) pursuant to Rule 144 under
the Securities Act or pursuant to an effective registration statement under the
Securities Act:
(A) in the case of any Restricted Security that is a
Certificated Note, the Registrar shall permit the Holder thereof to exchange
such Restricted Security for a Certificated Note that does not bear the legend
set forth in (i) above and rescind any restriction on the transfer of such
Restricted Security upon receipt of a certification from the transferring Holder
substantially in the form of Exhibit B-5 hereto; and
(B) in the case of any Restricted Security represented by a
Global Note, such Restricted Security shall not be required to bear the legend
set forth in (i) above, but shall continue to be subject to the provisions of
Section 2.6(a) and (d) hereof; provided, however, that with respect to any
request for an exchange of a Restricted Security that is represented by a Global
Note for a Certificated Note that does not bear the legend set forth in (i)
above, which request is made in reliance upon Rule 144, the Holder thereof shall
certify in writing to the Registrar that such request is being made pursuant to
Rule 144 (such certification to be substantially in the form of Exhibit B-5
hereto).
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(v) Upon any sale or transfer of a Restricted Security (including any
Restricted Security represented by a Global Note) in reliance on any exemption
from the registration requirements of the Securities Act (other than exemptions
pursuant to Rule 144A or Rule 144 under the Securities Act) in which the Holder
or the transferee provides an Opinion of Counsel to the Company and the
Registrar in form and substance reasonably acceptable to the Company and the
Registrar (which Opinion of Counsel shall also state that the transfer
restrictions contained in the legend are no longer applicable):
(A) in the case of any Restricted Security that is a Certificated
Note, the Registrar shall permit the Holder thereof to exchange such Restricted
Security for a Certificated Note that does not bear the legend set forth in (i)
above and rescind any restriction on the transfer of such Restricted Security;
and
(B) in the case of any Restricted Security represented by a
Global Note, such Restricted Security shall not be required to bear the legend
set forth in (i) above, but shall continue to be subject to the provisions of
Section 2.6(a) and (d) hereof.
(h) Notwithstanding any provision of Section 2.5 to the contrary, in the
event Rule 144(k) as promulgated under the Securities Act (or any successor
rule) is amended to shorten the two-year period under Rule 144(k) (or the
corresponding period under any successor rule), then in that event, from and
after receipt by the Trustee of the Officers' Certificate and Opinion of Counsel
provided for in this Section 2.6(h), (1) the references in the first and sixth
sentences of the first paragraph of Section 2.6(g)(i) to "two years" shall be
deemed for all purposes hereof to be references to such shorter period, (2) the
references in the first sentence each of Sections 2.6(g)(ii) and (iii) and the
last sentence of Section 2.6(g)(iii) to "two years" shall be deemed for all
purposes hereof to be references to such shorter period, (3) the reference in
the last sentence of Section 6.2 to "two years" shall be deemed for all purposes
hereof to be a reference to such shorter period, and (4) all corresponding
references in the Securities and the restrictive legends thereon (including the
restrictive legends on any Common Stock issuable upon conversion of the
Securities) shall be deemed for all purposes hereof to be references to such
shorter period, provided that such changes shall not become effective if they
are otherwise prohibited by, or would otherwise cause a violation of, the
then-applicable federal securities laws. As soon as practicable after the
Company has knowledge of the effectiveness of any such amendment to shorten the
two-year period under Rule 144(k) (or the corresponding period under any
successor rule, unless such changes would otherwise be prohibited by, or would
otherwise cause a violation of, the then-applicable federal securities law, the
Company shall provide to the Trustee an Officers' Certificate and Opinion of
Counsel informing the Trustee of the effectiveness of such amendment and the
effectiveness of the foregoing changes to Sections 2.6(g) and 6.2. This Section
2.6(h) shall apply to successive amendments to Rule 144(k) (or any successor
rule) shortening the holding period thereunder.
(i) Cancellation and/or Adjustment of Global Notes. At such time as all
beneficial interests in Global Notes have been exchanged for Certificated Notes,
redeemed, repurchased or cancelled, all Global Notes shall be returned to or
retained and cancelled by the Trustee in accordance with Section 2.11 hereof. At
any time prior to such cancellation, if any beneficial interest in a Global Note
is exchanged for Certificated Notes, redeemed, repurchased or cancelled, the
principal amount of Securities represented by such Global Note shall be reduced
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accordingly and an endorsement shall be made on such Global Note, by the Trustee
or the Custodian, at the direction of the Trustee, to reflect such reduction.
(j) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Trustee shall authenticate Certificated Notes and Global
Notes at the Registrar's request.
(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company may require payment of a
sum sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith (other than any such transfer taxes or similar
governmental charge payable upon exchange or transfer pursuant to Sections 3.9,
4.10, 4.15 and 9.5 hereto).
(iii) The Registrar shall not be required to register the transfer
of or exchange any Security selected for redemption in whole or in part, except
the unredeemed portion of any Security being redeemed in part.
(iv) All Certificated Notes and Global Notes issued upon any
registration of transfer or exchange of Certificated Notes or Global Notes shall
be the valid obligations of the Company, evidencing the same debt, and entitled
to the same benefits under this Indenture, as the Certificated Notes or Global
Notes surrendered upon such registration of transfer or exchange.
(v) The Company shall not be required:
(A) to issue, to register the transfer of or to exchange
Securities during a period beginning at the opening of business 15 days before
the day of any selection of Securities for redemption under Section 3.2 hereof
and ending at the close of business on the day of selection; or
(B) to register the transfer of or to exchange any Security so
selected for redemption in whole or in part, except the unredeemed portion of
any Security being redeemed in part; or
(C) to register the transfer of or to exchange a Security
between a record date and the next succeeding interest payment date.
(vi) Prior to due presentment for the registration of a transfer of any
Security, the Trustee, any Agent and the Company may deem and treat the Person
in whose name any Security is registered as the absolute owner of such Security
for the purpose of receiving payment of principal of and interest on such
Securities, and neither the Trustee, any Agent nor the Company shall be affected
by notice to the contrary.
(vii) The Trustee shall authenticate Certificated Notes and Global Notes
in accordance with the provisions of Section 2.2 hereof.
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SECTION 2.7 REPLACEMENT SECURITIES.
If any mutilated Security is surrendered to the Company or the Trustee,
or the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the
Company and the Trustee such Security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute, and upon its written request the Trustee shall
authenticate and deliver, in exchange for any such mutilated Security or in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor and
principal amount, bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, or is about to be redeemed by the
Company pursuant to Article 3, the Company in its discretion may, instead of
issuing a new Security, pay or redeem such Security, as the case may be.
Upon the issuance of any new Securities under this Section 2.7, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) in connection
therewith.
Every new Security issued pursuant to this Section 2.7 in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section 2.7 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.8 OUTSTANDING SECURITIES.
Securities outstanding at any time are all Securities authenticated by
the Trustee, except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.8 as not outstanding.
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on a redemption date, repurchase date or maturity date money
sufficient to pay the principal of, premium, if any (including the Make-Whole
Payment, if any), and accrued interest on Securities payable on that date, then
on and after that date such Securities cease to be outstanding and interest on
them ceases to accrue.
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Subject to the restrictions contained in Section 2.9, a Security does
not cease to be outstanding because the Company or an Affiliate of the Company
holds the Security.
SECTION 2.9 TREASURY SECURITIES.
In determining whether the Holders of the required principal amount of
Securities have concurred in any notice, direction, waiver or consent,
Securities owned by the Company or any other obligor on the Securities or by any
Affiliate of the Company or of such other obligor shall be disregarded, except
that for purposes of determining whether the Trustee shall be protected in
relying on any such notice, direction, waiver or consent, only Securities which
the Trustee knows are so owned shall be so disregarded. Securities so owned
which have been pledged in good faith shall not be disregarded if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to the Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or of such
other obligor.
SECTION 2.10 TEMPORARY SECURITIES.
Until definitive Securities are ready for delivery, the Company may
prepare and execute, and, upon the order of the Company, the Trustee shall
authenticate and deliver temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities but may have variations that
the Company with the consent of the Trustee considers appropriate for temporary
Securities. Every such temporary Security shall be executed by the Company and
authenticated by the Trustee upon the same conditions and in substantially the
same manner, and with the same effect, as the definitive Securities. Without
unreasonable delay the Company will execute and deliver to the Trustee
definitive Securities and thereupon any or all temporary Securities may be
surrendered in exchange therefor, at each office or agency maintained by the
Company pursuant to Section 5.2 and the Trustee shall authenticate and deliver
in exchange for such temporary Securities an equal aggregate principal amount at
maturity of definitive Securities. Such exchange shall be made by the Company at
its own expense and without any charge therefor. Until so exchanged, the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities authenticated and delivered
hereunder.
SECTION 2.11 CANCELLATION.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar, the Paying Agent and the Conversion Agent shall
forward to the Trustee any Securities surrendered to them for transfer,
exchange, payment or conversion. The Trustee and no one else shall cancel all
Securities surrendered for transfer, exchange, payment (including redemption or
repurchase), conversion or cancellation and shall destroy cancelled Securities
and thereupon deliver a certificate of cancellation to the Company. The Company
may not issue new Securities to replace Securities it has paid or delivered to
the Trustee for cancellation or which have been converted.
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SECTION 2.12 CUSIP NUMBERS.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided, that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers. The Company will promptly notify
the Trustee of any change in the "CUSIP" numbers.
ARTICLE 3.
REDEMPTION AND REPURCHASE
SECTION 3.1 RIGHT OF PROVISIONAL REDEMPTION.
The Securities may be redeemed by the Company (a "Provisional
Redemption"), in whole or in part, at any time prior to February 7, 2003, upon
notice as set forth in Section 3.5 at a redemption price equal to $1,000 per
Security to be redeemed plus accrued and unpaid interest, if any (including
Additional Interest, if any), to the date of redemption (the "Provisional
Redemption Date") if (i) the closing price of the Common Stock shall have
exceeded 150% of the conversion price then in effect for at least 20 Trading
Days in any consecutive 30-Trading Day period ending on the Trading Day prior to
the date of mailing of the notice of redemption pursuant to Section 3.5 (the
"Redemption Notice Date") and (ii) the Shelf Registration Statement is effective
and available for use and is expected to remain effective and available for use
for the 30 days immediately following the Provisional Redemption Date. Upon any
such Provisional Redemption, the Company shall make an additional payment in
cash (the "Make-Whole Payment") with respect to the Securities called for
redemption to Holders on the Redemption Notice Date in an amount equal to $165
per $1,000 Security, less the amount of any interest actually paid on such
Security prior to the Redemption Notice Date. The Company shall make the
Make-Whole Payment on all Securities called for Provisional Redemption,
including any Securities converted into Common Stock pursuant to the terms
hereof after the Redemption Notice Date and prior to the third business day
prior to the Provisional Redemption Date.
SECTION 3.2 RIGHT OF OPTIONAL REDEMPTION.
The Company may, at its option, redeem (an "Optional Redemption") all or
from time to time any part of the Securities on any date on or after February 7,
2003 and prior to maturity, upon notice as set forth in Section 3.5, and at the
redemption prices set forth in paragraph 6 of the form of Security attached
hereto as Exhibit A, together with accrued interest to the date of redemption.
SECTION 3.3 ELECTION TO REDEEM; NOTICE TO TRUSTEE.
If the Company elects to redeem Securities pursuant to paragraph 5 or 6
of the Securities, it shall notify the Trustee at least 60 days prior to the
redemption date as fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee) of the redemption date and the principal amount of
Securities to be redeemed. If fewer than all of the Securities are to be
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redeemed, the record date relating to such redemption shall be selected by the
Company and given to the Trustee, which record date shall not be less than 10
days after the date of notice to the Trustee.
SECTION 3.4 SELECTION OF SECURITIES TO BE REDEEMED.
If less than all of the Securities are to be redeemed, the Trustee
shall, not more than 60 days prior to the redemption date, select the Securities
to be redeemed by lot, pro rata or by another method the Trustee considers fair
and appropriate; provided that such method is not prohibited by any stock
exchange or market on which the Securities are then listed. The Trustee shall
make the selection from the Securities outstanding and not previously called for
redemption. Securities in denominations of $1,000 may only be redeemed in whole.
The Trustee may select for redemption portions (equal to $1,000 or any multiple
thereof) of the principal of Securities that have denominations larger than
$1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption.
SECTION 3.5 NOTICE OF REDEMPTION.
At least 20 days but not more than 60 days before a redemption date, the
Company shall mail or cause to be mailed a notice of redemption by first-class
mail to each Holder of Securities to be redeemed at such Holder's address as it
appears on the Registrar's books.
The notice shall identify the Securities to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the then current conversion price;
(4) whether such redemption is a Provisional Redemption or an Optional
Redemption;
(5) if such redemption is a Provisional Redemption, the Make-Whole
Amount;
(6) the name and address of the Paying Agent and the Conversion Agent;
(7) that Securities called for redemption must be presented and
surrendered to the Paying Agent to collect the redemption price;
(8) that the Securities called for redemption may be converted at any
time before the close of business on the third business day immediately
preceding the redemption date;
(9) that Holders who wish to convert Securities must satisfy the
requirements in paragraph 9 of the Securities;
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(10) that, unless the Company defaults in making the redemption payment,
interest on Securities called for redemption ceases to accrue on and after the
redemption date and the only remaining right of the Holder is to receive payment
of the redemption price upon presentation and surrender to the Paying Agent of
the Securities;
(11) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the redemption
date, upon presentation and surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion thereof will be
issued; and
(12) the CUSIP number of the Securities called for redemption.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.
SECTION 3.6 DEPOSIT OF REDEMPTION PRICE.
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust) (i) an amount of money sufficient to pay the
Redemption Price of, and (except if the Redemption Date shall be an interest
payment date) accrued interest on, all the Securities which are to be redeemed
on that date other than any Securities called for redemption on that date which
have been converted prior to the date of such deposit and (ii) with respect to
Securities called for Provisional Redemption pursuant to Section 3.1, an amount
or money sufficient to pay the Make-Whole Payment for al the Securities (or
portions thereof) called for redemption (including those surrendered for
conversion into Common Stock after the Redemption Notice Date and prior to the
provisional Redemption Date); provided that if such payment is made on the
Redemption Date, it must be received by the Trustee or Paying Agent, as the case
may be, by 10:00 a.m. New York City time on such date.
If any Security called for redemption is converted, any money deposited
with the Trustee or with any Paying Agent or segregated and held in trust for
the redemption of such Security shall (subject to any right of the Holder of
such Security or any predecessor security to receive interest) be paid to the
Company as soon as practicable upon written request by the Company or, if then
held by the Company, shall be released from such trust; provided that, with
respect to a Provisional Redemption, any money so deposited for payment of the
Make-Whole Payment shall remain segregated and held in trust for payment of the
Make-Whole Payment which shall be made on all Securities called for Provisional
Redemption, including Securities converted into Common Stock after the
Redemption Notice Date and prior to the third Business Day prior to the
Provisional Redemption Date.
SECTION 3.7 SECURITIES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and with respect to Securities called for
Provisional Redemption, the Make-Whole Payment, and from and after such date
(unless the Company shall default in the payment of the
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Redemption Price and accrued interest or the Make-Whole Payment, if any) such
Securities shall cease to bear or accrue any interest. Upon surrender of any
such Security for redemption in accordance with said notice, such Security shall
be paid by the Company at the Redemption Price, together with accrued interest
to (but not including) the Redemption Date and, with respect to Securities
called for Provisional Redemption (including Securities converted into Common
Stock pursuant to the terms hereof after the Redemption Notice Date and prior to
the third business day prior to the Provisional Redemption Date), the Make-Whole
Payment; provided, however, that installments of interest whose stated maturity
is on or prior to the Redemption Date shall be payable to the Holders of such
Securities registered as such at the close of business on the relevant Record
Dates according to their terms; and provided further that, with respect to a
Provisional Redemption, the holder of any securities converted into Common Stock
pursuant to the terms of this Indenture after the Redemption Notice Date and
prior to the third Business Day prior to the Provisional Redemption Date shall
have the right to the Make-Whole Payment, if any, with respect to such
Securities regardless of the conversion of such Securities.
If the Company shall fail to deposit the Redemption Price (and
Make-Whole Payment, if any) with the Trustee and any security called for
redemption shall not be so paid upon surrender thereof for redemption, the
principal and premium, if any (including the Make-Whole Payment, if any), shall,
until paid, bear and accrue interest from the Redemption Date at the rate borne
by the Security.
SECTION 3.8 SECURITIES REDEEMED IN PART.
Any Security which is to be redeemed only in part shall be surrendered
at an office or agency of the Company designated for that purpose (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or his attorney-in-fact duly authorized in writing), and
the Company shall execute, and the Trustee shall authenticate and deliver to the
Holder of such Security without service charge, a new Security or Securities, of
any authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the unredeemed portion of the principal
amount of the Security so surrendered.
SECTION 3.9 CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION.
In connection with any redemption of Securities, the Company may arrange
for the purchase and conversion of any Securities by an agreement with one or
more investment bankers or other purchasers to purchase such Securities by
paying to the Trustee in trust for the Holders, on or before the Redemption
Date, an amount not less than the applicable Redemption Price of such
Securities, together with interest accrued to the Redemption Date, and, in
connection with a Provisional Redemption, the Make-Whole Payment.
Notwithstanding anything to the contrary contained in this Article 3, the
obligation of the Company to pay the Redemption Price of such Securities,
together with interest accrued to, but excluding, the Redemption Date and, in
connection with a Provisional Redemption, the Make-Whole Payment, shall be
deemed to be satisfied and discharged to the extent such amount is so paid by
such purchasers. If such an agreement is entered into, a copy of which shall be
filed with the Trustee prior to the Redemption Date, any Securities not duly
surrendered for conversion by the Holders thereof, may, at
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the option of the Company, be deemed, to the fullest extent permitted by law,
acquired by such purchasers from such Holders and (notwithstanding anything to
the contrary contained in Article 4) surrendered by such purchasers for
conversion, all as of immediately prior to the close of business on the
Redemption Date (and the right to convert any such Securities shall be deemed to
have been extended through such time), subject to payment of the above amount as
aforesaid (including the Make-Whole Payment, if any, with respect to all
Securities called for Provisional Redemption). At the direction of the Company,
the Trustee shall hold and dispose of any such amount paid to it in the same
manner as it would monies deposited with it by the Company for the redemption of
Securities. Without the Trustee's prior written consent, no arrangement between
the Company and such purchasers for the purchase and conversion of any
Securities shall increase or otherwise affect any of the powers, duties,
responsibilities or obligations of the Trustee as set forth in this Indenture,
and the Company agrees to indemnify the Trustee from, and hold it harmless
against, any loss, liability or expense arising out of or in connection with any
such arrangement for the purchase and conversion of any Securities between the
Company and such purchasers to which the Trustee has not consented in writing,
including the costs and expenses incurred by the Trustee in the defense of any
claim or liability arising out of or in connection with the exercise or
performance of any of its powers, duties, responsibilities or obligations under
this Indenture. Nothing in the preceding sentence shall be deemed to limit the
rights and protections afforded to the Trustee in Article 9 hereof, including,
but not limited to, the right to the indemnification pursuant to Section 9.7.
SECTION 3.10 REPURCHASE OF SECURITIES AT OPTION OF THE HOLDER UPON CHANGE IN
CONTROL.
If at any time that Securities remain outstanding there shall have
occurred a Change in Control (as hereinafter defined), Securities shall be
repurchased by the Company at the option of the Holder thereof, at a purchase
price (the "Repurchase Price") equal to the principal amount thereof plus
accrued interest up to and including the Repurchase Date (as hereinafter
defined), on the date (the "Repurchase Date") fixed by the Company that is not
less than 45 days nor more than 60 days after the date of the Company Notice (as
hereinafter defined), subject to satisfaction by or on behalf of the Holder of
the requirements set forth in Section 3.12(b).
At the option of the Company, the Repurchase Price may be paid in cash
or, subject to the fulfillment by the Company of the conditions set forth in
Section 3.11, by delivery of shares of Common Stock in accordance with Section
3.11. Whenever in this Indenture there is a reference to the principal of any
Security as of any time, such reference shall be deemed to include reference to
the Repurchase Price payable in respect of such Security to the extent that such
Repurchase Price is, was or would be so payable at such time, and express
mention of the Repurchase Price in any provision of this Indenture shall not be
construed as excluding the Repurchase Price in those provisions of this
Indenture when such express mention is not made.
Any rights of Holders, contractual or otherwise, arising under or
pursuant to any offer to repurchase Securities made by the Company under this
Section 3.10 shall be subordinated in right of payment to all Senior
Indebtedness to the same extent as the Securities are subordinated to Senior
Indebtedness under the provisions of Article 5 and such offer to repurchase
shall provide that, if at the time the Securities are required to be repurchased
pursuant to such offer, payment of the Securities is not permitted pursuant to
the provisions of Article 5, the Company shall use its best efforts to obtain
all necessary waivers from, or to repay in full, the holders of
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Senior Indebtedness in order to permit such repurchase. Notwithstanding the
foregoing, any failure by the Company to comply with this Section 3.10 to offer
to repurchase, or to repurchase, the Securities shall be a default in the
performance by the Company hereunder.
A "Change in Control" shall be deemed to have occurred at such time
after the original issuance of the Securities as any of the following occur:
(1) a "person" or "group" (within the meaning of Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act, except that a person shall be deemed to be
the "beneficial owner" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total voting power of
all outstanding Voting Shares;
(2) the Company shall consolidate with or merge into any other Person or
sell, convey, transfer or lease all or substantially all of its properties and
assets to any Person other than a Subsidiary, or any other Person shall
consolidate with or merge into the Company (other than, in the case of this
clause 3.10(2), pursuant to any consolidation or merger where Persons who are
shareholders of the Company immediately prior thereto become the Beneficial
Owners of shares of capital stock of the surviving company entitling such
Persons to exercise more than 50% of the total voting power of all classes of
such surviving company's capital stock entitled to vote generally in the
election of directors).
(3) a change in the Board of Directors of the Company in which the
individuals who constituted the Board of Directors of the Company at the
beginning of the two-year period immediately preceding such change (together
with any other director whose election by the Board of Directors of the Company
or whose nomination for election by the stockholders of the Company was approved
by a vote of at least a majority of the directors then in office either who were
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the directors then in office.
provided, however, that a Change in Control shall not be deemed to have occurred
if either (a) the closing price per share of the Common Stock for any five
Trading Days within the period of 10 consecutive Trading Days ending immediately
after the later of the Change in Control or the public announcement of the
Change in Control (in the case of a Change in Control under clause (1) above) or
ending immediately before the Change in Control (in the case of a Change in
Control under clauses (2) and (3) above) shall equal or exceed 105% of the
Conversion Price in effect on each such Trading Day, or (b)(i) at least 90% of
the consideration (excluding cash payments for fractional shares) in the
transaction or transactions constituting the Change in Control consists of
shares of common stock traded on a national securities exchange or quoted on the
Nasdaq National Market (or which will be so traded or quoted when issued or
exchanged in connection with such Change in Control) (such securities being
referred to as "Publicly Traded Securities") and as a result of such transaction
or transactions the Securities become convertible solely into such Publicly
Traded Securities and (ii) the consideration in the transaction or transactions
constituting the Change in Control consists of cash, Publicly Traded Securities
or a combination of cash and Publicly Traded Securities with an aggregate fair
market value (which,
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in the case of Publicly Traded Securities, shall be equal to the average closing
price of such Publicly Traded Securities during the 10 consecutive Trading Days
commencing with the sixth trading day following consummation of the transaction
or transactions constituting the Change in Control) is at least 105% of the
conversion price in effect on the date immediately preceding the date of
consummation of such Change in Control.
"Beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the SEC under the Exchange Act, as in effect on the date of
execution of the Indenture, except that a person shall be deemed to be the
"beneficial owner" of all securities that such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of time.
"Voting Shares" means all outstanding shares of any class or classes
(however designated) of capital stock of the Company entitled to vote generally
in the election of the Board of Directors of the Company.
SECTION 3.11 CONDITIONS AND PROCEDURES RELATING TO THE COMPANY'S ELECTION TO PAY
THE REPURCHASE PRICE IN COMMON STOCK.
(a) The Company may elect to pay the Repurchase Price by delivery of
shares of Common Stock pursuant to Section 3.10 so long as the following
conditions precedent are satisfied:
(i) The shares of Common Stock deliverable in payment of the
Repurchase Price shall have a fair market value as of the Repurchase Date of not
less than the Repurchase Price. For purposes of Section 3.10 and this Section
3.11, the fair market value of shares of Common Stock shall be determined by the
Company and shall be equal to 95% of the average of the Closing Prices of the
Common stock for the five consecutive Trading Days immediately preceding and
including the third Trading Day prior to the Repurchase Date:
(ii) The shares of Common Stock to be issued upon repurchase of
Notes pursuant to Section 3.10 shall not require registration under any federal
securities law before such shares may be freely transferable without being
subject to any transfer restrictions under the Securities Act upon repurchase
pursuant to this Article 3 or, if such registration is required, such
registration shall be completed and shall become effective prior to the
Repurchase Date, and (B) shall not require registration with or approval of any
governmental authority under any state law or any other federal law before such
shares may be validly issued or delivered upon repurchase pursuant to this
Article 3, or if such registration is required or such approval must be
obtained, such registration shall be completed or such approval shall be
obtained prior to the Repurchase Date;
(iii) The shares of Common Stock to be issued upon repurchase of
Notes pursuant to this Article 3 are, or shall have been, approved for listing
on the Nasdaq National Market or the New York Stock Exchange or listed on
another national securities exchange, in any case, prior to the Repurchase Date;
and
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(iv) All shares of Common Stock which may be issued upon repurchase
of Notes pursuant to this Article 3 will be issued out of the Company's
authorized but unissued Common Stock and, will upon issue, be duly and validly
issued and fully paid and non-assessable and free of any preemptive or similar
rights.
If all of the conditions are set forth in this Section 3.11(a) are not
satisfied in accordance with the terms hereof, the Repurchase Price shall be
paid by the Company only in cash.
(b) Any issuance of shares of Common Stock in respect of the Repurchase
Price shall be deemed to have been effected immediately prior to the close of
business on the Repurchase Date and the Person or Persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such repurchase shall be deemed to have become on the Repurchase Date the
holder or holders of record of the shares represented thereby; provided,
however, that any surrender for repurchase on a date when the stock transfer
books of the Company shall be closed shall constitute the Person or Persons in
whose name or names the certificate or certificates for such shares are to be
issued as the record holder or holders thereof for all purposes at the opening
of business on the next succeeding day on which such stock transfer books are
open. No payment or adjustment shall be made for dividends or distributions on
any Common Stock issued upon repurchase of any Note pursuant to this Article 3
declared prior to the Repurchase Date.
(c) No fractions of shares shall be issued upon repurchase of Notes
pursuant to this Article 3. If more than one Note shall be repurchased from the
same Holder and the Repurchase Price shall be payable in shares of Common Stock,
the number of full shares which shall be issuable upon such repurchase shall be
computed on the basis of the aggregate principal amount of the Notes so
repurchased. Instead of any fractional share of Common Stock which would
otherwise be issuable on the repurchase of any Note or Notes pursuant to this
Article 3, the Company will deliver to the applicable Holder its check for the
current market value of such fractional share. The current market value of a
fraction of a share is determined by multiplying the Closing Price of a full
share on the Trading Day immediately preceding the Repurchase Date by the
fraction, and rounding the result to the nearest cent.
(d) Any issuance and delivery of certificates for shares of Common Stock
on repurchase of Notes pursuant to this Article 3 shall be made without charge
to the Holder of Notes being repurchased for such certificates or for any tax or
duty in respect of the issuance or delivery of such certificates or the Notes
represented thereby; provided, however, that the Company shall not be required
to pay any tax or duty which may be payable in respect of (i) income of the
Holder or (ii) any transfer involved in the issuance or delivery of certificates
for shares of Common Stock in a name other than that of the Holder of the Notes
being repurchased, and no such issuance or delivery shall be made unless and
until the Person requesting such issuance or delivery has paid to the Company
the amount of any such tax or duty or has established, to the satisfaction of
the Company, that such tax or duty has been paid.
SECTION 3.12 NOTICE; METHOD OF EXERCISING REPURCHASE RIGHT.
Within 30 days after the occurrence of a Change in Control, the Company
shall mail a written notice (the "Company Notice") by first-class mail to the
Trustee and to each Holder (and
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to beneficial owners as required by applicable law) and shall cause a copy of
such notice to be published in a daily newspaper of national circulation. The
notice shall include the form of a Repurchase Notice (as defined below) to be
completed by the Holder and shall state:
(1) the date of such Change in Control and, briefly, the events causing
such Change in Control;
(2) the date by which the Repurchase Notice pursuant to this Section
3.12 must be given;
(3) the Repurchase Date;
(4) the Repurchase Price;
(5) whether the Repurchase Price will be paid in the form of cash or
Common Stock as provided in this Indenture and that such determination is
irrevocable;
(6) briefly, the conversion rights of the Securities including, without
limitation, the current Conversion Price and any adjustments thereto;
(7) the name and address of the Paying Agent and the Conversion Agent;
(8) whether the lenders under the Company's Senior Indebtedness will
permit the payment of the Repurchase Price;
(9) that Securities as to which a Repurchase Notice has been given may
be converted into Common Stock only to the extent that the Repurchase Notice has
been withdrawn in accordance with the terms of this Indenture;
(10) the procedures that the Holder must follow to exercise rights under
Section 3.10;
(11) the procedures for withdrawing a Repurchase Notice, including a
form of notice of withdrawal;
(12) that the Holder must satisfy the requirements set forth in the
Securities in order to convert the Securities; and
(13) the CUSIP number of the Securities as to which a Repurchase Notice
has been given.
(b) A Holder may exercise its rights specified in Section 3.10 upon
delivery of a written notice of the exercise of such rights (a "Repurchase
Notice") to the Paying Agent at any time prior to the close of business on the
third Business Day prior to the Repurchase Date, stating:
(1) the certificate number of each Security that the Holder will deliver
to be repurchased,
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(2) the portion of the principal amount of each Security that the Holder
will deliver to be repurchased, which portion must be $1,000 or an integral
multiple thereof; and
(3) that such Security shall be repurchased pursuant to the terms and
conditions specified in this Indenture.
The delivery of such Security to the Paying Agent prior to, on or after
the Repurchase Date (together with all necessary endorsements) at the office of
the Paying Agent shall be a condition to the receipt by the Holder of the
Repurchase Price therefor; provided, however, that such Repurchase Price shall
be so paid pursuant to Section 3.10 only if the Security so delivered to the
Paying Agent shall conform in all respects to the description thereof set forth
in the related Repurchase Notice.
The Company shall repurchase from the Holder thereof, pursuant to
Section 3.10, a portion of a Security if the principal amount of such portion is
$1,000 or an integral multiple of $1,000. Provisions of this Indenture that
apply to the repurchase of all of a Security pursuant to Sections 3.10 through
3.17 also apply to the repurchase of such portion of such Security.
Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent the Repurchase Notice contemplated by this Section 3.12(b)
shall have the right to withdraw such Repurchase Notice in whole or in a portion
thereof that is $1,000 or an integral multiple thereof at any time prior to the
close of business on the Business Day prior to the Repurchase Date by delivery
of a written notice of withdrawal to the Paying Agent in accordance with Section
3.13.
The Paying Agent shall promptly notify the Company of the receipt by it
of any Repurchase Notice or written withdrawal thereof.
SECTION 3.13 EFFECT OF REPURCHASE NOTICE.
Upon receipt by the Paying Agent of the Repurchase Notice specified in
Section 3.12(b), the Holder of the Security in respect of which such Repurchase
Notice was given shall (unless such Repurchase Notice is withdrawn as specified
below) thereafter be entitled to receive solely the Repurchase Price with
respect to such Security. Such Repurchase Price shall be paid to such Holder
promptly following the later of (i) the Repurchase Date with respect to such
Security (provided the conditions in Section 3.12(b) have been satisfied) and
(ii) the time of delivery of such Security to the Paying Agent by the Holder
thereof in the manner required by Section 3.12(b). Securities in respect of
which a Repurchase Notice has been given by the Holder thereof may not be
converted into shares of Common Stock on or after the date of the delivery of
such Repurchase Notice unless such Repurchase Notice has first been validly
withdrawn.
A Repurchase Notice may be withdrawn by means of a written notice of
withdrawal delivered by the Holder to the office of the Paying Agent at any time
prior to the close of business on the Business Day prior to the Repurchase Date
to which it relates, specifying:
(1) the certificate number of each Security in respect of which such
notice of withdrawal is being submitted;
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(2) the principal amount of the Security or portion thereof with respect
to which such notice of withdrawal is being submitted; and
(3) the principal amount, if any, of such Security that remains subject
to the original Repurchase Notice and that has been or will be delivered for
repurchase by the Company.
SECTION 3.14 DEPOSIT OF REPURCHASE PRICE.
On or before the Repurchase Date, the Company shall deposit with the
Trustee or with the Paying Agent (or, if the Company is acting as the Paying
Agent, shall segregate and hold in trust as provided in Section 2.4) an amount
of money or a number of shares of Common Stock, as provided herein, sufficient
to pay the aggregate Repurchase Price of all the Securities or portions thereof
that are to be repurchased as of such Repurchase Date. The manner in which the
deposit required by this Section 3.14 is made by the Company shall be at the
option of the Company, provided that such deposit shall be made in a manner such
that the Trustee or the Paying Agent shall have immediately available funds on
the Repurchase Date; provided further, that if such payment is made on the
Repurchase Date it must be received by the Trustee or Paying Agent, as the case
may be, by 10:00 a.m., New York City time, on such date.
If the Paying Agent holds, in accordance with the terms hereof, money or
shares of Common Stock, as provided herein, sufficient to pay the Repurchase
Price of any Security tendered for repurchase on the Business Day prior to the
Repurchase Date, then, on and after the Repurchase Date, such Security will
cease to be outstanding and interest on such Security will cease to accrue and
will be deemed paid, whether or not such Security is delivered to the Paying
Agent, and all other rights of the Holder in respect thereof shall terminate
(other than the right to receive the Repurchase Price upon delivery of such
Security).
SECTION 3.15 SECURITIES REPURCHASED IN PART.
Any Security that is to be repurchased only in part shall be surrendered
at the office of the Paying Agent (with, if the Company or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder thereof
or such Holder's attorney duly authorized in writing), and the Company shall
execute and the Trustee shall authenticate and deliver to the Holder of such
Security, without service charge, a new Security or Securities, or such
authorized denomination or denominations as may be requested by such Holder, in
aggregate principal amount equal to, and in exchange for, the portion of the
principal amount of the Security so surrendered that is not repurchased.
SECTION 3.16 COMPLIANCE WITH SECURITIES LAWS UPON REPURCHASE OF SECURITIES.
In connection with any offer to repurchase or repurchase of Securities
under Section 3.10 hereof (provided that such offer or repurchase constitutes an
"issuer tender offer" for purposes of Rule 13e-4 (which term, as used herein,
includes any successor provision thereto) at the time of such offer or
repurchase), the Company shall (i) comply with Rule 13e-4 and Rule 14e-1 under
the Exchange Act, (ii) file the related Schedule 13E-4 (or any successor
schedule, form or report) under the Exchange Act, and (iii) otherwise comply
with all federal and state securities laws so
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as to permit the rights of the Holders and obligations of the Company under
Sections 3.10 through 3.17 to be exercised in the time and in the manner
specified therein.
SECTION 3.17 REPAYMENT TO THE COMPANY.
Subject to the provisions of Section 5.7, to the extent that the
aggregate amount of cash or the number of shares of Common Stock, as provided
herein, deposited by the Company pursuant to Section 3.14 exceeds the aggregate
Repurchase Price of the Securities or portions thereof to be repurchased, then,
promptly after the Business Day following the Repurchase Date, the Trustee or
the Paying Agent, as the case may be, shall return any such excess to the
Company.
ARTICLE 4.
CONVERSION
SECTION 4.1 CONVERSION PRIVILEGE.
At any time after 90 days following the latest date of original issuance
of the Securities and prior to the close of business on February 1, 2007, a
Holder of a Security may convert such Security into Common Stock, at the
conversion price then in effect, together with those rights specified in Section
4.15 hereof; provided that, if such Security is called for redemption pursuant
to Article 3, such conversion right shall terminate at the close of business on
the third business day before the redemption date for such Security (unless the
Company shall default in making the redemption payment then due, in which case
the conversion right shall terminate on the date such default is cured and such
Security is redeemed). The number of shares of Common Stock issuable upon
conversion of a Security shall be determined by dividing the principal amount of
the Security or portion thereof surrendered for conversion by the conversion
price in effect on the conversion date. The initial conversion price is set
forth in paragraph 9 of the Securities and is subject to adjustment as provided
in this Article 4.
A Holder may convert a portion of a Security equal to $1,000 or any
integral multiple thereof. Provisions of this Indenture that apply to conversion
of all of a Security also apply to conversion of a portion of a Security.
A Security in respect of which a Holder has delivered a Repurchase
Notice pursuant to Section 3.12(b) exercising the option of such Holder to
require the Company to repurchase such Security may be converted only if such
Repurchase Notice is withdrawn by a written notice of withdrawal delivered to
the Paying Agent prior to the close of business on the Repurchase Date in
accordance with Section 3.13.
A Holder of Securities is not entitled to any rights of a holder of
Common Stock until such Holder has converted his Securities into Common Stock
and, upon such conversion, only to the extent such Securities are deemed to have
been converted into Common Stock pursuant to this Article 4.
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SECTION 4.2 CONVERSION PROCEDURE.
To convert a Security, a Holder must (i) complete and manually sign the
conversion notice on the back of the Security and deliver such notice to the
Conversion Agent, (ii) surrender the Security to the Conversion Agent, (iii)
furnish appropriate endorsements and transfer documents if required by the
Registrar or the Conversion Agent and (iv) pay any transfer or other tax, if
required by Section 4.4. The date on which the Holder satisfies all of the
foregoing requirements is the conversion date. As soon as practicable after the
conversion date, the Company shall deliver to the Holder through the Conversion
Agent a certificate for the number of whole shares of Common Stock issuable upon
the conversion and cash in lieu of any fractional shares pursuant to Section
4.3.
The person in whose name the certificate is registered shall be deemed
to be a stockholder of record on the conversion date; provided, however, that no
surrender of a Security on any date when the stock transfer books of the Company
shall be closed shall be effective to constitute the person or persons entitled
to receive the shares of Common Stock upon such conversion as the record holder
or holders of such shares of Common Stock on such date, but such surrender shall
be effective to constitute the person or persons entitled to receive such shares
of Common Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding day on which such stock transfer books
are open; provided, further, that such conversion shall be at the Conversion
Price in effect on the date that such Security shall have been surrendered for
conversion, as if the stock transfer books of the Company had not been closed.
Upon conversion of a Security, such person shall no longer be a Holder of such
Security.
No payment or adjustment will be made for accrued interest on a
converted Security or for dividends or distributions on shares of Common Stock
issued upon conversion of a Security, but if any Holder surrenders a Security
for conversion between the record date for the payment of an installment of
interest and the next interest payment date, then, notwithstanding such
conversion, the interest payable on such interest payment date shall be paid to
the Holder of such Security on such record date. In such event, such Security,
when surrendered for conversion, must be accompanied by delivery of a check or
draft payable to the Conversion Agent in an amount equal to the interest payable
on such interest payment date on the portion so converted. If such payment does
not accompany such Security, the Security shall not be converted; provided,
however, that no such check or draft shall be required if such Security has been
called for redemption between such record date and the date three business days
after such interest payment date, or if such Security is surrendered for
conversion on the interest payment date. If the Company defaults in the payment
of interest payable on the interest payment date, the Conversion Agent shall
repay such funds to the Holder.
If a Holder converts more than one Security at the same time, the number
of shares of Common Stock issuable upon the conversion shall be based on the
aggregate principal amount of Securities converted.
Upon surrender of a Security that is converted in part, the Company
shall execute, and the Trustee shall authenticate and deliver to the Holder, a
new Security equal in principal amount to the unconverted portion of the
Security surrendered.
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SECTION 4.3 ADJUSTMENTS BELOW PAR VALUE.
Before taking any action which would cause an adjustment decreasing the
Conversion Price so that the shares of Common Stock issuable upon conversion of
the Securities would be issued for less than the par value of such Common Stock,
the Company will take all corporate action which may be necessary in order that
the Company may validly and legally issue fully paid and nonassessable shares of
such Common Stock at such adjusted Conversion Price.
SECTION 4.4 TAXES ON CONVERSION.
If a Holder converts a Security, the Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon such conversion. However, the Holder shall pay any such tax which is
due because the Holder requests the shares to be issued in a name other than the
Holder's name. The Conversion Agent may refuse to deliver the certificates
representing the Common Stock being issued in a name other than the Holder's
name until the Conversion Agent receives a sum sufficient to pay any tax which
will be due because the shares are to be issued in a name other than the
Holder's name. Nothing herein shall preclude any tax withholding required by law
or regulations.
SECTION 4.5 COMPANY TO PROVIDE STOCK.
The Company shall, prior to issuance of any Securities hereunder, and
from time to time as may be necessary, reserve, out of its authorized but
unissued Common Stock a sufficient number of shares of Common Stock to permit
the conversion of all outstanding Securities for shares of Common Stock. The
shares of Common Stock or other securities issued upon conversion of the
Securities shall bear any legend required in accordance with Section 2.6(g)
hereof.
No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of Securities. If more than one Security
shall be surrendered for conversion at one time by the same holder, the number
of full shares which shall be issuable upon conversion shall be computed on the
basis of the aggregate principal amount of the Securities (or specified portions
thereof to the extent permitted hereby) so surrendered. If any fractional share
of stock would be issuable upon the conversion of any Security or Securities,
the Company shall make an adjustment thereof in cash at the current market value
thereof. For these purposes, the current market value of a share of Common Stock
shall be the Closing Price on the first day (which is not a Legal Holiday)
immediately preceding the day on which the Securities (or specified portions
thereof) are deemed to have been converted.
The Company covenants that all shares of Common Stock delivered upon
conversion of the Securities shall be newly issued shares or treasury shares,
shall be duly authorized, validly issued, fully paid and non-assessable and
shall be free from preemptive rights and free of any lien or adverse claim.
The Company will endeavor promptly to comply with all federal and state
securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of Securities, if any, and will list or cause to have quoted such
shares of Common Stock on each national securities exchange or in the
over-the-counter market or such other market on which the Common Stock is then
listed or quoted.
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SECTION 4.6 ADJUSTMENT OF CONVERSION PRICE.
The conversion price (the "Conversion Price") shall be that price set
forth in paragraph 9 of the form of Security attached hereto as Exhibit A and
shall be adjusted from time to time by the Company as follows:
(a) In case the Company shall (i) pay a dividend or other distribution
in shares of Common Stock to holders of Common Stock, (ii) subdivide its
outstanding Common Stock into a greater number of shares, (iii) combine its
outstanding Common Stock into a smaller number of shares, or (iv) reclassify its
outstanding Common Stock, the Conversion Price in effect immediately prior
thereto shall be adjusted so that the Holder of any Security thereafter
surrendered for conversion shall be entitled to receive the number of shares of
Common Stock which it would have owned or have been entitled to receive had such
Security been converted immediately prior to the happening of such event. An
adjustment made pursuant to this subsection (a) shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of
subdivision or combination.
(b) In case the Company shall issue rights, warrants or options to all
or substantially all holders of its Common Stock entitling them (for a period
commencing no earlier than the record date described below and expiring not more
than 45 days after such record date) to subscribe for or purchase shares of
Common Stock (or securities convertible into Common Stock) at a price per share
less than the current market price per share of Common Stock (as determined in
accordance with subsection (e) below) at the record date for the determination
of stockholders entitled to receive such rights, warrants or options, the
Conversion Price in effect immediately prior thereto shall be adjusted so that
the Conversion Price shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to such record date by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
on such record date, plus the number of shares which the aggregate subscription
or purchase price for the total number of shares of Common Stock offered by the
rights, warrants or options so issued (or the aggregate conversion price of the
convertible securities offered by such rights, warrants or options) would
purchase at such current market price, and of which the denominator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of additional shares of Common Stock offered by such rights, warrants or options
(or into which the convertible securities so offered by such rights, warrants or
options are convertible). Such adjustment shall be made successively whenever
any such rights, warrants or options are issued, and shall become effective
immediately after such record date. If at the end of the period during which
such rights, warrants or options are exercisable not all rights, warrants or
options shall have been exercised, the adjusted Conversion Price shall be
immediately readjusted to what it would have been upon application of the
foregoing adjustment substituting the number of additional shares of Common
Stock actually issued (or the number of shares of Common Stock issuable upon
conversion of convertible securities actually issued) for the total number of
shares of Common Stock offered (or the convertible securities offered).
(c) In case the Company shall distribute to all or substantially all
holders of its Common Stock any shares of capital stock of the Company (other
than Common Stock) or evidences of its indebtedness, cash, other securities or
other assets, or shall distribute to all or
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substantially all holders of its Common Stock rights, warrants or options to
subscribe for or purchase any of its securities (excluding (i) those rights and
warrants referred to in subsection (b) above; (ii) those dividends,
distributions, subdivisions and combinations referred to in subsection(a) above;
and (iii) dividends and distributions paid in cash from retained earnings in an
aggregate amount that, combined together with (A) all other such cash
distributions made within the preceding 12 months in respect of which no
adjustment has been made under this Section 4.6 and (B) the fair market value of
consideration payable in respect of any repurchases (including by way of tender
offers) by the Company or any of its Subsidiaries or Affiliates, or any employee
benefit plan for the benefit of employees of the Company or any of its
Subsidiaries or Affiliates (a "Company Benefit Plan"), of Common Stock concluded
within the preceding 12 months, in each case in respect of which no adjustment
has been made under this Section 4.6, does not exceed 12.5% of Market
Capitalization as of the record date for such distribution), then in each such
case the Conversion Price shall be adjusted so that the same shall equal the
price determined by multiplying the Conversion Price in effect immediately prior
to the date of such distribution or purchase by a fraction of which the
numerator shall be the current market price per share (as defined in subsection
(e) below) of the Common Stock on the record date mentioned below less the fair
market value on such record date (as determined by the Board of Directors of the
Company, whose determination shall be conclusive evidence of such fair market
value) of the portion of the capital stock or evidences of indebtedness,
securities or assets so distributed or of such rights, warrants or options, in
each case as applicable to one share of Common Stock, and of which the
denominator shall be the current market price per share (as defined in
subsection (e) below) of the Common Stock on such record date. Such adjustment
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such distribution. Notwithstanding the
foregoing, in the event that the Company shall distribute (AA) rights, warrants
or options (other than those referred to in subsection (b) above) ("Rights") pro
rata to holders of Common Stock, the Company may, in lieu of making any
adjustment pursuant to this Section 4.6, or (BB) rights issued pursuant to the
Company's Rights Agreement, dated September 25, 1998, pro rata to holders of
Common Stock the Company shall, make proper provision so that each holder of a
Security who converts such Security (or any portion thereof) after the record
date for such distribution and prior to the expiration or redemption of the
Rights shall be entitled to receive upon such conversion, in addition to the
Conversion Shares, a number of Rights to be determined as follows: (x) if such
conversion occurs on or prior to the date for the distribution to the holders of
Rights of separate certificates evidencing such Rights (the "Distribution
Date"), the same number of Rights to which a holder of a number of shares of
Common Stock equal to the number of Conversion Shares is entitled at the time of
such conversion in accordance with the terms and provisions of and applicable to
the Rights; and (y) if such conversion occurs after the Distribution Date, the
same number of Rights to which a holder of the number of shares of Common Stock
into which the principal amount of the Security so converted was convertible
immediately prior to the Distribution Date would have been entitled on the
Distribution Date in accordance with the terms and provisions of, and applicable
to, the Rights. If the Company implements a new stockholder rights plan, the
Company agrees that such rights plan will provide that upon conversion of the
Notes, the Holders of the Common Stock issued upon
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conversion shall receive the rights issued under such plan, whether or not
such rights have separated from the Common Stock at the time of such conversion.
If the rights under such new plan have become separated from the Common Stock
prior to the conversion of a Security, the Holders of the Common Stock issued
upon conversion shall receive the Rights that they would have received if the
Security had been converted immediately prior to the separation of the Rights.
(d) In case the Company or any of its Subsidiaries or any Company
Benefit Plan shall repurchase (including by way of tender offer) shares of
Common Stock, and the fair market value of the sum of (i) the aggregate
consideration paid for such Common Stock, (ii) the aggregate fair market value
of cash dividends and distributions of the type described in clause (iii) of the
preceding paragraph (c) paid within the twelve (12) months preceding the date of
purchase of such shares of Common Stock in respect of which no adjustment
pursuant to this Section 4.6 previously has been made, and (iii) the aggregate
fair market value of any amounts previously paid for the repurchase of Common
Stock of a type described in this paragraph (d) within the twelve (12) months
preceding the date of purchase of such shares of Common Stock in respect of
which no adjustment pursuant to this Section 4.6 previously has been made,
exceeds 12.5% of Market Capitalization on the date of, and after giving effect
to, such repurchase, then the Conversion Price shall be adjusted so that the
same shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of such distribution or purchase by a
fraction of which the numerator shall be the current market price per share (as
defined in subsection (e) below) of the Common Stock on the date of such
repurchase, less the amount of cash so distributed (through dividend,
distribution or repurchase of shares) applicable to one share of Common Stock
and of which the denominator shall be the current market price per share (as
defined in subsection (e) below) of the Common Stock on the date of such
repurchase. Such adjustment shall become effective immediately after the date of
such repurchase.
(e) For the purpose of any computation under subsections (b), (c) and
(d) above, the current market price per share of Common Stock on any date shall
be deemed to be the average of the Closing Prices for 20 consecutive Trading
Days commencing 30 Trading Days before the record date with respect to any
distribution, issuance or other event requiring such computation. The Closing
Price for each day shall be (i) the last sale price, or the closing bid price if
no sale occurred, of such class of stock on the principal securities exchange on
which such class of stock is listed, if the Common Stock is listed or admitted
for trading on any national securities exchange, (ii) the last reported sale
price of Common Stock on The Nasdaq Stock Market, or any similar system of
automated dissemination of quotations of securities prices then in common use,
if so quoted, or (iii) if not quoted as described in clause (i), the mean
between the high bid and low asked quotations for Common Stock as reported by
the National Quotation Bureau Incorporated if at least two securities dealers
have inserted both bid and asked quotations for such class of stock on at least
5 of the 10 preceding days. If the Common Stock is quoted on a national
securities or central market system, in lieu of a market or quotation system
described above, the Closing Price shall be determined in the manner set forth
in clause (iii) of the preceding sentence if bid and asked quotations are
reported but actual transactions are not, and in the manner set forth in clause
(ii) of the preceding sentence if actual transactions are reported. If none of
the conditions set forth above is met, the Closing Price of Common Stock on any
day or the average of such last reported sale prices for any period shall be the
fair market value of such class of stock as determined by a member firm of the
New York Stock Exchange, Inc. selected by the Company. As used herein the term
"Trading Days" with respect to Common Stock means (i) if the Common Stock is
listed or admitted for trading on any national securities exchange,
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days on which such national securities exchange is open for business or (ii) if
the Common Stock is quoted on The Nasdaq Stock Market or any similar system of
automated dissemination of quotations of securities prices, days on which trades
may be made on such system.
(f) Rights, warrants or options distributed by the Company to all
holders of Common Stock entitling the holders thereof to subscribe for or
purchase shares of the Company's capital stock (either initially or under
certain circumstances), which rights, warrants or options, until the occurrence
of a specified event or events ("Trigger Event"):
(1) are deemed to be transferred with such shares of Common Stock,
(2) are not exercisable, and
(3) are also issued in respect of future issuances of Common Stock,
shall not be deemed distributed for purposes of this Section 4.6 until the
occurrence of the earliest Trigger Event. In addition, in the event of any
distribution of rights, warrants or options, or any Trigger Event with respect
thereto, that shall have resulted in an adjustment to the Conversion Price under
this Section 4.6, (1) in the case of any such rights, warrants or options which
shall all have been redeemed or repurchased without exercise by any holders
thereof, the Conversion Price shall be readjusted upon such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder of Common Stock with respect to such
rights, warrants or options (assuming such holder had retained such rights,
warrants or options), made to all holders of Common Stock as of the date of such
redemption or repurchase, and (2) in the case of any such rights, warrants or
options all of which shall have expired without exercise by any holder thereof,
the Conversion Price shall be readjusted as if such issuance had not occurred.
(g) In any case in which this Section 4.6 shall require that an
adjustment be made immediately following a record date established for purposes
of Section 4.6, the Company may elect to defer (but only until five Business
Days following the filing by the Company with the Trustee of the certificate
described in Section 4.10 below) issuing to the holder of any Security converted
after such record date the shares of Common Stock and other capital stock of the
Company issuable upon such conversion over and above the shares of Common Stock
and other capital stock of the Company issuable upon such conversion only on the
basis of the Conversion Price prior to adjustment; and, in lieu of the shares
the issuance of which is so deferred, the Company shall issue or cause its
transfer agents to issue due bills or other appropriate evidence of the right to
receive such shares.
SECTION 4.7 NO ADJUSTMENT.
No adjustment in the Conversion Price shall be required unless the
adjustment would require an increase or decrease of at least 1% in the
Conversion Price as last adjusted; provided, however, that any adjustments which
by reason of this Section 4.7 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
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under this Article 4 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
No adjustment need be made for rights to purchase Common Stock or
issuances of Common Stock pursuant to a Company plan for reinvestment of
dividends or interest.
No adjustment need be made for a change in the par value or a change to
no par value of the Common Stock.
To the extent that the Securities become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
SECTION 4.8 EQUIVALENT ADJUSTMENTS.
In the event that, as a result of an adjustment made pursuant to Section
4.6 above, the holder of any Security thereafter surrendered for conversion
shall become entitled to receive any shares of capital stock of the Company
other than shares of its Common Stock, thereafter the Conversion Price of such
other shares so receivable upon conversion of any Securities shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in this
Article 4.
SECTION 4.9 ADJUSTMENT FOR TAX PURPOSES.
The Company shall be entitled to make such reductions in the Conversion
Price, in addition to those required by Section 4.6, as it in its discretion
shall determine to be advisable in order that any stock dividends, subdivision
of shares, distribution of rights to purchase stock or securities, or a
distribution or securities convertible into or exchangeable for stock hereafter
made by the Company to its stockholders shall not be taxable.
SECTION 4.10 NOTICE OF ADJUSTMENT.
Whenever the Conversion Price is adjusted, or Securityholders become
entitled to other Securities or due bills, the Company shall promptly mail to
Securityholders a notice of the adjustment and file with the Trustee an
Officers' Certificate briefly stating the facts requiring the adjustment and the
manner of computing it. The certificate shall be conclusive evidence of the
correctness of such adjustment and the Trustee may conclusively assume that,
unless and until such certificate is received by it, no such adjustment is
required.
SECTION 4.11 NOTICE OF CERTAIN TRANSACTIONS.
In case:
(a) the Company shall declare a dividend (or any other distribution) on
its Common Stock (other than in cash out of retained earnings); or
(b) the Company shall authorize the granting to the holders of its
Common Stock of rights, warrants or options to subscribe for or purchase any
share of any class or any other rights, warrants or options; or
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(c) of any reclassification of the Common Stock of the Company (other
than a subdivision or combination of its outstanding Common Stock, or a change
in par value, or from par value to no par value, or from no par value to par
value), or of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of the
sale or transfer of all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
the Company shall cause to be filed with the Trustee and to be mailed to each
holder of Securities at its address appearing on the list, provided for in
Section 2.5 of this Indenture, as promptly as possible but in any event at least
fifteen days prior to the applicable date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution or rights, warrants or options, or, if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution or rights are to be determined, or (y)
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective or occur,
and the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of such
dividend, distribution, reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up.
SECTION 4.12 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE ON
CONVERSION PRIVILEGE.
If any of the following shall occur, namely: (i) any reclassification or
change of outstanding shares of Common Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination); (ii) any consolidation, combination or
merger to which the Company is a party other than a merger in which the Company
is the continuing corporation and which does not result in any reclassification
of, or change (other than a change in name, or par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination) in, outstanding shares of Common Stock; or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Company, then the Company, or such successor or purchasing corporation, as the
case may be, shall, as a condition precedent to such reclassification, change,
consolidation, merger, sale or conveyance, execute and deliver to the Trustee a
supplemental indenture providing that the Holder of each Security then
outstanding shall have the right to convert such Security into the kind and
amount of shares of stock and other securities and property (including cash)
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock deliverable upon
conversion of such Security immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such supplemental indenture shall
provide for adjustments of the Conversion Price which shall be as nearly
equivalent as may be practicable to the adjustments of the Conversion Price
provided for in this Article 4. The foregoing, however, shall not in any way
affect the right a holder of a Security may otherwise have, pursuant to clause
(ii) of the last
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sentence of subsection (c) of Section 4.6, to receive Rights upon conversion of
a Security. If, in the case of any such consolidation, merger, sale or
conveyance, the stock or other securities and property (including cash)
receivable thereupon by a holder of Common Stock includes shares of stock or
other securities and property of a corporation other than the successor or
purchasing corporation, as the case may be, in such consolidation, merger, sale
or conveyance, then such supplemental indenture shall also be executed by such
other corporation and shall contain such additional provisions to protect the
interests of the Holders of the Securities as the Board of Directors of the
Company shall reasonably consider necessary by reason of the foregoing. The
provision of this Section 4.12 shall similarly apply to successive
consolidations, mergers, sales or conveyances. Notwithstanding the foregoing, a
distribution by the Company to all or substantially all holders of its Common
Stock for which an adjustment to the Conversion Price or provision for
conversion of the Securities may be made pursuant to Section 4.6 hereof shall
not be deemed to be a sale or conveyance of all or substantially all of the
property or business of the Company for purposes of this Section 4.12.
In the event the Company shall execute a supplemental indenture pursuant
to this Section 4.12, the Company shall promptly file with the Trustee an
Officers' Certificate briefly stating the reasons therefor, the kind or amount
of shares of stock or securities or property (including cash) receivable by
Holders of the Securities upon the conversion of their Securities after any such
reclassification, change, consolidation, merger, sale or conveyance, any
adjustment to be made with respect thereto and that all conditions precedent
have been complied with.
SECTION 4.13 TRUSTEE'S DISCLAIMER.
The Trustee has no duty to determine when an adjustment under this
Article 4 should be made, how it should be made or what such adjustment should
be made, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying upon, the Officers' Certificate
with respect thereto which the Company is obligated to file with the Trustee
pursuant to Section 4.10. The Trustee makes no representation as to the validity
or value of any securities or assets issued upon conversion of Securities, and
the Trustee shall not be responsible for the Company's failure to comply with
any provisions of this Article 4.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 4.12, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 4.12.
SECTION 4.14 VOLUNTARY REDUCTION.
The Company from time to time may reduce the Conversion Price by any
amount for any period of time if the period is at least 20 days or such longer
period as may be required by law and if the reduction is irrevocable during the
period; provided, that in no event may the Conversion Price be less than the par
value of a share of Common Stock.
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ARTICLE 5.
SUBORDINATION
SECTION 5.1 SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
The Company covenants and agrees, and each holder of Securities by his
acceptance thereof likewise covenants and agrees, that all Securities are
subject to the provisions of this Article 5; and each Person holding any
Security, whether upon original issue or upon transfer or assignment thereof,
accepts and agrees to be bound by such provisions and acknowledges that such
provisions are for the benefit of, and shall be enforceable directly by, the
holders of Senior Indebtedness.
Each holder of Securities authorizes and directs the Trustee on such
holder's behalf to take such action as may be necessary or appropriate, in the
sole discretion of the Trustee, to acknowledge or effectuate the subordination
between the holders of Securities and the holders of Senior Indebtedness as
provided in this Article and appoints the Trustee as such holder's
attorney-in-fact for any and all such purposes.
The payment of the principal of, premium, if any (including the
Make-Whole Payment, if any), and interest on and any other payment due pursuant
to this Indenture or any Securities issued hereunder (including, without
limitation, the payment or deposit of the redemption price or repurchase price
pursuant to Article 3 and any deposit pursuant to Section 6.3) shall, to the
extent and in the manner hereinafter set forth, be subordinated and subject in
right of payment to the prior payment in full of all Senior Indebtedness,
whether outstanding at the date of this Indenture or thereafter created,
incurred, assumed or guaranteed.
SECTION 5.2 SECURITIES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR INDEBTEDNESS
ON DISSOLUTION, LIQUIDATION, REORGANIZATION, ETC., OF THE COMPANY.
Upon any payment or distribution of the assets of the Company of any
kind or character, whether in cash, property or securities (including any
collateral at any time securing the Securities), to creditors upon any
dissolution, winding-up, total or partial liquidation, or reorganization of the
Company (whether voluntary or involuntary, or in bankruptcy, insolvency,
reorganization, liquidation, or receivership proceedings, or upon an assignment
for the benefit of creditors, or any marshalling of the assets and liabilities
of the Company, or otherwise), then in such event:
(a) all Senior Indebtedness (including principal thereof and interest
thereon) shall first be paid in full before any Payment of the Securities (as
defined in Section 5.5) is made;
(b) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (including any collateral at
any time securing the Securities) (other than Reorganization Securities), to
which the Holders or the Trustee on behalf of the Holders would be entitled
except for the provisions of this Article 5, including any such payment or
distribution which may be payable or deliverable by reason of the payment of
another debt of the Company being subordinated to the payment of the Securities,
shall be paid
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or delivered by any debtor, Custodian or other person making such payment or
distribution, directly to the holders of the Senior Indebtedness or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior
Indebtedness may have been issued, ratably according to the aggregate amounts
remaining unpaid on account of the principal of and interest on the Senior
Indebtedness held or represented by each, for application to payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full after giving effect to any concurrent payment or
distribution, or provision therefor, to the holders of such Senior Indebtedness;
and
(c) in the event that, notwithstanding the foregoing provisions of this
Section 5.2, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (other than Reorganization
Securities), shall be received by the Trustee or the Holders before all Senior
Indebtedness is paid in full, such payment or distribution (subject to the
provisions of Sections 5.6 and 5.7) shall be held in trust for the benefit of,
and shall be immediately paid or delivered by the Trustee or such Holders, as
the case may be, to the holders of Senior Indebtedness remaining unpaid, or
their Representative or Representatives, ratably according to the aggregate
amounts remaining unpaid on account of the principal of and interest on the
Senior Indebtedness held or represented by each, for application to the payment
of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all
Senior Indebtedness in full after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of such Senior
Indebtedness.
The Company shall give prompt notice to the Trustee of any dissolution,
winding-up, liquidation or reorganization of the Company.
Upon any distribution of assets of the Company referred to in this
Article 5, the Trustee, subject to the provisions of Sections 9.1 and 9.2, and
the Holders shall be entitled to rely upon any order or decree by any court of
competent jurisdiction in which such dissolution, winding-up, liquidation or
reorganization proceeding is pending, or a certificate of the liquidating
trustee or agent or other person making any distribution to the Trustee or to
the Holders, for the purpose of ascertaining the persons entitled to participate
in such distribution, the holders of the Senior Indebtedness and other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article 5; provided that the foregoing shall apply only if such court,
trustee, liquidating trustee or other person has been fully apprised of the
provisions of this Article.
SECTION 5.3 SECURITYHOLDERS TO BE SUBROGATED TO RIGHT OF HOLDERS OF SENIOR
INDEBTEDNESS.
Subject to the prior payment in full of all Senior Indebtedness, the
Holders shall be subrogated (equally and ratably with the holders of all
indebtedness of the Company which by its express terms is subordinated to
indebtedness of the Company to substantially the same extent as the Securities
are subordinated and is entitled to like rights of subrogation) to the rights of
the holders of Senior Indebtedness to receive payments or distributions of
assets of the Company applicable to the Senior Indebtedness until the principal
of and interest on the Securities shall be paid in full, and for purposes of
such subrogation, no payments or distributions to the holders of Senior
Indebtedness of assets, whether in cash, property or securities, distributable
to the holders
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of Senior Indebtedness under the provisions hereof to which the Holders would be
entitled except for the provisions of this Article 5, and no payment pursuant to
the provisions of this Article 5 to the holders of Senior Indebtedness by the
Holders shall, as among the Company, its creditors other than the holders of
Senior Indebtedness, and the Holders, be deemed to be a payment by the Company
to or on account of Senior Indebtedness, it being understood that the provisions
of this Article 5 are, and are intended, solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
SECTION 5.4 OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
Nothing contained in this Article 5 or elsewhere in this Indenture or in
any Security is intended to or shall impair the obligation of the Company, which
is absolute and unconditional, to pay to the Holders the principal of and
interest on the Securities, as and when the same shall become due and payable in
accordance with the terms of the Securities, or to affect the relative rights of
the Holders and other creditors of the Company other than the holders of Senior
Indebtedness, nor shall anything herein or therein prevent the Trustee or any
Holder from exercising all remedies otherwise permitted by applicable law upon
the happening of an Event of Default under this Indenture, subject to the
provisions of Article 8, and the rights, if any, under this Article 5 of the
holders of Senior Indebtedness in respect of assets, whether in cash, property
or securities, of the Company received upon the exercise of any such remedy.
SECTION 5.5 COMPANY NOT TO MAKE PAYMENT WITH RESPECT TO SECURITIES IN CERTAIN
CIRCUMSTANCES.
Upon the occurrence of a Payment Default, unless and until the amount of
such Senior Indebtedness then due shall have been paid in full, or such default
shall have been cured or waived or shall have ceased to exist, the Company shall
not pay principal of, premium, if any (including the Make-Whole Payment, if
any), or interest on the Securities or any other amount due pursuant to this
Indenture or any Securities or make any deposit pursuant to Article 3 or Section
6.3 or 10.1 and shall not repurchase, redeem or otherwise retire any Securities
(collectively, "a Payment of the Securities").
Unless Section 5.2 shall be applicable, upon (1) the occurrence of a
default on Senior Indebtedness (other than a Payment Default) that occurs and is
continuing that permits the holders of such Senior Indebtedness (or their
Representative or Representatives) to accelerate its maturity and (2) receipt by
the Company and the Trustee from the Senior Agent of written notice of such
occurrence and the imposition of a Payment Blockage Period hereunder, then the
Company shall not make any Payment of the Securities for a period (the "Payment
Blockage Period") commencing on the earlier of the date of receipt by the
Company or the Trustee of such notice from the Senior Agent and ending on the
earlier of (subject to any blockage of payments that may then be in effect under
subsection (a) of this Section) (x) the date 179 days after such date, (y) the
date such default shall have been cured or waived in writing or shall have
ceased to exist or such Senior Indebtedness shall have been discharged, or (z)
the date such Payment Blockage Period shall have been terminated by written
notice to the Company or the Trustee from the Senior Agent, after which, in case
of clause (x), (y) or (z), as the case may be, the Company shall resume making
any and all required payments. Notwithstanding any other provision of this
Agreement, only one Payment Blockage Period may be commenced within any
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consecutive 365-day period, and no event of default with respect to any Senior
Indebtedness which existed or was continuing on the date of the commencement of
any Payment Blockage Period with respect to such Senior Indebtedness shall be,
or can be made, the basis for the commencement of a second Payment Blockage
Period whether or not within a period of 365 consecutive days unless such event
of default shall have been cured or waived for a period of not less than 90
consecutive days. In no event will a Payment Blockage Period extend beyond 179
days.
In the event that, notwithstanding the foregoing provisions of this
Section 5.5, any Payment of the Securities shall be made by or on behalf of the
Company and received by the Trustee, any Holder or any Paying Agent (or, if the
Company is acting as its own Paying Agent, money for any such payment shall be
segregated and held in trust), which payment was prohibited by this Section 5.5,
then, unless and until the amount of Senior Indebtedness then due, as to which a
default shall have occurred, shall have been paid in full, or such default shall
have been cured or waived, such payment (subject, in each case, to the
provisions of Sections 5.6 and 5.7) shall be held in trust for the benefit of,
and shall be immediately paid over to, the holders of Senior Indebtedness or
their Representative or Representatives, ratably according to the aggregate
amounts remaining unpaid on account of the principal of and interest on the
Senior Indebtedness held or represented by each, for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness in accordance with its terms, after giving effect to any
concurrent payment or distribution to or for the benefit of the holders of
Senior Indebtedness. The Company shall give prompt written notice to the Trustee
of any default under any Senior Indebtedness or under any agreement pursuant to
which Senior Indebtedness may have been issued.
SECTION 5.6 NOTICE TO TRUSTEE.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article 5 or any other provision of this Indenture, the Trustee shall not at any
time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee, unless and until the
Trustee shall have received notice thereof from the Company or from the holder
or holders of Senior Indebtedness or from their Representative or
Representatives; and, prior to the receipt of any such notice, the Trustee,
subject to the provisions of Sections 9.1 and 9.2, shall be entitled to assume
conclusively that no such facts exist.
The Trustee shall be entitled to rely on the delivery to it of a written
notice by a person representing himself to be a holder of Senior Indebtedness
(or a Representative of such holder) to establish that such notice has been
given by a holder of Senior Indebtedness or a Representative of any such holder.
In the event that the Trustee determines in good faith that further evidence is
required with respect to the right of any person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to this
Article 5, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such person, the extent to which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
each person under this
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Article 5, and if such evidence is not furnished, the Trustee may defer any
payment to such person pending judicial determination as to the right of such
person to receive such payment.
SECTION 5.7 APPLICATION BY TRUSTEE OF MONIES DEPOSITED WITH IT.
Money or U.S. Government Obligations deposited in trust with the Trustee
pursuant to Sections 6.3 and 10.1 and not in violation of this Article 5 shall
be for the sole benefit of Securityholders and shall thereafter not be subject
to the subordination provisions of this Article 5. Otherwise, any deposit of
monies by the Company with the Trustee or any Paying Agent (whether or not in
trust) for the payment of the principal of or interest on any Securities shall
be subject to the provisions of Sections 5.1, 5.2, 5.3 and 5.5; except that, if
two Business Days prior to the date on which by the terms of this Indenture any
such monies may become payable for any purpose (including, without limitation,
the payment of either the principal of or interest on any Security), the Trustee
shall not have received with respect to such monies the notice provided for in
Section 5.6, then the Trustee or any Paying Agent shall have full power and
authority to receive such monies and to apply such monies to the purpose for
which they were received, and shall not be affected by any notice to the
contrary which may be received by it on or after such date. This Section 5.7
shall be construed solely for the benefit of the Trustee and the Paying Agent
and shall not otherwise affect the rights that holders of Senior Indebtedness
may have to recover any such payments from the Holders in accordance with the
provisions of this Article 5.
SECTION 5.8 SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF COMPANY OR
HOLDERS OF SENIOR INDEBTEDNESS.
No right of any present or future holders of any Senior Indebtedness to
enforce subordination, as herein provided, shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof which any such holder may have or
be otherwise charged with. The holders of any Senior Indebtedness may extend,
renew, modify or amend the terms of such Senior Indebtedness or any security
therefor and release, sell or exchange such security and otherwise deal freely
with the Company, all without affecting the liabilities and obligations of the
parties to this Indenture or the Holders. No amendment of this Article 5 or any
defined terms used herein or any other Sections referred to in this Article 5
which adversely affects the rights hereunder of holders of Senior Indebtedness,
shall be effective unless the holders of such Senior Indebtedness (required
pursuant to the terms of such Senior Indebtedness to give such consent) have
consented thereto.
SECTION 5.9 TRUSTEE TO EFFECTUATE SUBORDINATION.
Each holder of a Security by his acceptance thereof authorizes and
directs the Trustee in his behalf to take such action as may be necessary or
appropriate to acknowledge and effectuate the subordination provided in this
Article 5 and appoints the Trustee his attorney-in-fact for any and all such
purposes.
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SECTION 5.10 RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS.
The Trustee, in its individual capacity, shall be entitled to all of the
rights set forth in this Article 5 in respect of any Senior Indebtedness at any
time held by it to the same extent as any other holder of Senior Indebtedness,
and nothing in this Indenture shall be construed to deprive the Trustee of any
of its rights as such holder.
SECTION 5.11 ARTICLE 5 NOT TO PREVENT EVENTS OF DEFAULT.
The failure to make a Payment of the Securities by reason of any
provision in this Article 5 shall not be construed as preventing the occurrence
of an Event of Default under Section 8.1.
SECTION 5.12 NO FIDUCIARY DUTY CREATED TO HOLDERS OF SENIOR INDEBTEDNESS.
Notwithstanding any other provision in this Article 5, the Trustee shall
not be determined to owe any fiduciary duty to the holders of Senior
Indebtedness by virtue of the provisions of this Article 5.
SECTION 5.13 ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article 5 shall in such case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully for all intents and purposes as if such Paying Agent were named
in this Article 5 in addition to or in place of the Trustee; provided, however,
that Sections 5.6, 5.10 and 5.12 shall not apply to the Company if it acts as
Paying Agent.
SECTION 5.14 CERTAIN CONVERSION DEEMED PAYMENT.
For the purposes of this Article only, (1) the issuance and delivery of
junior securities upon conversion of Securities in accordance with Article 4
shall not be deemed to constitute a payment or distribution on account of the
principal of or premium or interest on Securities or on account of the purchase
or other acquisition of Securities, and (2) the payment, issuance or delivery of
cash, property or securities (other than junior securities) upon conversion of a
Security shall be deemed to constitute payment on account of principal of such
Security. For the purposes of this Section, the term "junior securities" means
(a) shares of any stock of any class of the Company and (b) securities of the
Company which are subordinated in right of payment to all Senior Indebtedness
which may be outstanding at the time of issuance or delivery of such securities
to substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article. Nothing contained in this
Article or elsewhere in this Indenture or in the Securities is intended to or
shall impair, as among the Company, its creditors other than holders of Senior
Indebtedness and the Holders of the Securities, the right, which is absolute and
unconditional, of the Holder of any Security to convert such Security in
accordance with Article 4.
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ARTICLE 6.
COVENANTS
SECTION 6.1 PAYMENT OF SECURITIES.
The Company covenants and agrees that it will duly and punctually pay or
cause to be paid the principal amount at maturity, Redemption Price (and, if
applicable, Make-Whole Payment), Repurchase Price and interest, in respect of
each of the Securities at the places, at the respective times and in the manner
provided herein and in the Securities. Each installment of interest on the
Securities may be paid by mailing checks for the interest payable to or upon the
written order of the holders of Securities entitled thereto as they shall appear
on the registry books of the Company; provided that with respect to any holder
of Securities with an aggregate principal amount equal to or in excess of $5
million, at the request of such holder in writing the Company shall pay interest
on such holder's Securities by wire transfer in immediately available funds.
SECTION 6.2 SEC REPORTS; 144A INFORMATION.
The Company shall file all reports and other information and documents
which it is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act, and within 15 days after it files them with the SEC, the Company
shall file copies of all such reports, information and other documents with the
Trustee. The Company will cause any quarterly and annual reports which it mails
to its stockholders to be mailed to the Holders of the Securities.
In the event the Company is at any time no longer subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will prepare, for the first three quarters of each fiscal year, quarterly
financial statements substantially equivalent to the financial statements
required to be included in a report on Form 10-Q under the Exchange Act. The
Company will also prepare, on an annual basis, complete audited consolidated
financial statements including, but not limited to, a balance sheet, a statement
of income and retained earnings, a statement of cash flows and all appropriate
notes. All such financial statements will be prepared in accordance with
generally accepted accounting principles consistently applied, except for
changes with which the Company's independent accountants concur, and except that
quarterly statements may be subject to year-end adjustments. The Company will
cause a copy of such financial statements to be filed with the Trustee and
mailed to the Holders of the Securities within 50 days after the close for each
of the first three quarters of each fiscal year and within 95 days after the
close of each fiscal year. The Company will also comply with the other
provisions of TIA 314(a).
At any time when the Company is not subject to Section 13 or 15(d) of
the Exchange Act, upon the request of a holder or beneficial owner of a
Security, the Company will promptly furnish or cause to be furnished Rule 144A
Information (as defined below) to such holder, to such beneficial owner or to a
prospective purchaser designated by such Securityholder or beneficial owner, as
the case may be, in order to permit compliance by such Securityholder or
beneficial owner with Rule 144A under the Securities Act in connection with the
resale of such Note by such Securityholder or beneficial owner; provided,
however, the Company shall not be
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required to furnish such information in connection with any request made on or
after the date which is two years from the later of (i) the date such Note (or
any predecessor Note) was acquired from the Company or (ii) the date such Note
(or any predecessor Note) was last acquired from an "affiliate" of the Company
within the meaning of Rule 144 under the Securities Act. "Rule 144A Information"
shall be such information as is specified pursuant to Rule 144A(d)(4) under the
Securities Act (or any successor provision thereto).
SECTION 6.3 LIQUIDATION.
Subject to the provisions of Article 5, insofar as they may be
applicable hereto, the Board of Directors or the stockholders of the Company may
not adopt a plan of liquidation which plan provides for, contemplates, or the
effectuation of which is preceded by (a) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company otherwise
than substantially as an entirety (Article 7 of this Indenture being the Article
which governs any such sale, lease, conveyance or other disposition
substantially as an entirety), and (b) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and of
the remaining assets of the Company to the holders of the capital stock of the
Company, unless the Company shall in connection with the adoption of such plan
make provision for, or agree that prior to making any liquidating distributions
to the holders of capital stock of the Company it will make provision for, the
satisfaction of the Company's obligations hereunder and under the Securities as
to the payment of principal and interest. The Company shall be deemed to have
made provision for such payments only if (1) the Company irrevocably deposits in
trust with the Trustee money or U.S. Government Obligations maturing as to
principal and interest in such amounts and at such times as are sufficient,
without consideration of any reinvestment of such interest, to pay the principal
of and interest on the Securities then outstanding to maturity and to pay all
other sums payable by it hereunder, or (2) there is an express assumption of the
due and punctual payment of the Company's obligations hereunder and under the
Securities and the performance and observance of all covenants and conditions to
be performed by the Company hereunder, by the execution and delivery of a
supplemental indenture in form reasonably satisfactory to the Trustee by a
person who acquires, or will acquire (otherwise than pursuant to a lease) a
portion of the assets of the Company, and which person will have Consolidated
Net Worth (immediately after the acquisition) equal to not less than the
Consolidated Net Worth of the Company (immediately preceding such acquisition),
and which is a corporation organized under the laws of the United States, any
State thereof or the District of Columbia; provided, however, that the Company
shall not make any liquidating distribution to the holders of capital stock of
the Company described in the first sentence of this Section 6.3 until after the
Company shall have certified to the Trustee with an Officers' Certificate at
least five days prior to the making of any liquidating distribution that it has
complied with the provisions of this Section 6.3.
SECTION 6.4 COMPLIANCE CERTIFICATES.
The Company shall deliver to the Trustee within 120 days after the end
of each fiscal year of the Company, an Officers' Certificate as to the signer's
knowledge of the Company's compliance with all conditions and covenants on its
part contained in this Indenture and stating whether or not the signer knows of
any default or Event of Default. If such signer knows of such a default or Event
of Default, the Certificate shall describe the default or Event of Default and
the
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efforts to remedy the same. For the purposes of this Section 6.4, compliance
shall be determined without regard to any grace period or requirement of notice
provided pursuant to the terms of this Indenture. The Certificate need not
comply with Section 12.4 hereof.
SECTION 6.5 NOTICE OF DEFAULTS.
The Company will give notice to the Trustee, promptly upon becoming
aware thereof, of the existence of any Event of Default hereunder.
SECTION 6.6 PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company, directly or by reason
of its ownership of any Subsidiary or upon the income, profits or property of
the Company; and (2) all material lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a lien upon the property of the
Company; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which adequate provision has been made.
SECTION 6.7 CORPORATE EXISTENCE.
Subject to Section 6.3 and Article 7, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect its
corporate existence and rights (charter and statutory); provided, however, that
the Company shall not be required to preserve any right if the Company shall
determine that the preservation is no longer desirable in the conduct of the
Company's business and that the loss thereof is not, and will not be, adverse in
any material respect to the Holders.
SECTION 6.8 MAINTENANCE OF PROPERTIES.
Subject to Section 6.3, the Company will cause all material properties
owned, leased or licensed in the conduct of its business to be maintained and
kept in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof and thereto, all as in the
judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times
while any Securities are outstanding; provided, however, that nothing in this
Section 6.8 shall prevent the Company from doing otherwise if, in the judgment
of the Company, the same is desirable in the conduct of the Company's business
and is not, and will not be, adverse in any material respect to the Holders.
SECTION 6.9 FURTHER INSTRUMENTS AND ACTS.
Upon request of the Trustee, the Company will execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purposes of this Indenture.
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SECTION 6.10 MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain in The City of New York an office or agency
where Securities may be presented or surrendered for payment or repurchase,
where Securities may be surrendered for registration of transfer or exchange and
where notices and demands to or upon the Company in respect of the Securities
and this Indenture may be served. The office of the agent of the Trustee in The
City of New York shall be such office or agency of the Company, unless the
Company shall designate and maintain some other office or agency for one or more
of such purposes. The Company will give prompt written notice to the Trustee of
any change in the location of any such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may from time to time designate one or more other offices or
agencies where the Securities may be presented or surrendered for any or all
such purposes and may from time to time rescind such designation; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in The City of New
York for such purposes. The Company will give prompt written notice to the
Trustee of any such designation or rescission and any change in the location of
any such office or agency.
SECTION 6.11 RESALE OF CERTAIN SECURITIES; REPORTING ISSUER.
During the period beginning on the last date of original issuance of the
Securities and ending on the date that is two years from such date, the Company
will not, and will use all reasonable efforts not to permit any of its
"affiliates" (as defined under Rule 144 under the Securities Act or any
successor provision thereto) to, resell (x) any Securities which constitute
"restricted securities" under Rule 144 or (y) any securities into which the
Securities have been converted under this Indenture which constitute "restricted
securities" under Rule 144, that in either case have been reacquired by any of
them. The Trustee shall have no responsibility in respect of the Company's
performance of its agreement in the preceding sentence.
SECTION 6.12 REGISTRATION RIGHTS.
(a) The Company agrees that the Holders (and any Person that has a
beneficial interest in a Security) from time to time of Registrable Securities
(as such term is defined in the Registration Rights Agreement) are entitled to
the benefits of the Registration Rights Agreement. Pursuant to the Registration
Rights Agreement, the Company has agreed for the benefit of the Holders from
time to time of Registrable Securities, at the Company's expense, (i) to file
within 90 days after the first date of original issuance of the Securities, a
shelf registration statement (the "Shelf Registration Statement") with the
Commission with respect to resales of the Transfer Restricted Securities, (ii)
to use all reasonable efforts to cause such Shelf Registration Statement to be
declared effective by the Commission not later than 180 days after the first
date of original issuance of the Securities, and (iii) to use all reasonable
efforts to maintain such Shelf
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Registration Statement continuously effective under the Securities Act subject
to and in accordance with the terms of the Registration Rights Agreement.
Additional interest (the "Additional Interest") with respect to the
Securities shall be assessed if an Event (as defined in the Registration Rights
Agreement) occurs. Additional Interest shall accrue on the Securities over and
above the interest set forth in the title of the Securities from and including
the date on which any such Event shall occur, to but excluding the date on which
such Event has been cured (in the manner described in the Registration Rights
Agreement), at a rate of 0.50% per annum.
(b) Any amounts of Additional Interest due pursuant to clause (a) of
this Section 6.12 shall be payable in cash on the regular interest payment
dates. The amount of Additional Interest shall be determined by multiplying the
applicable Additional Interest rate by the principal amount of the Securities,
multiplied by a fraction, the numerator of such period (determined on the basis
of a 360-day year comprised of twelve 30-day months), and the denominator of
which is 360.
Whenever in this Indenture there is mentioned, in any context, the
payment of the principal of, premium, if any, or interest on, or in respect of,
any Security, such mention shall be deemed to include mention of the payment of
Additional Interest provided for in this Section to the extent that, in such
context, Additional Interest are, were or would be payable in respect thereof
pursuant to the provisions of this Section 6.12 and express mention of the
payment of Additional Interest (if applicable) in any provisions hereof shall
not be construed as excluding Additional Interest in those provisions hereof
where such express mention is not made.
SECTION 6.13 ADDITIONAL INTEREST.
If Additional Interest is payable pursuant to the Registration Rights
Agreement, the Company shall deliver to the Trustee a certificate to that effect
stating (i) the amount of such Additional Interest that is payable and (ii) the
date on which such interest is payable. Unless and until a Trust Officer