-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J+XAKo22aOU/2erWXoDPbbiEV/MJrVeJAgYck6zk8GXtEHmEhixiUwF4QvsILeb6 KLmer9jM1U5H/UTpvVkrog== 0001005150-00-000449.txt : 20000331 0001005150-00-000449.hdr.sgml : 20000331 ACCESSION NUMBER: 0001005150-00-000449 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELGENE CORP /DE/ CENTRAL INDEX KEY: 0000816284 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 222711928 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16132 FILM NUMBER: 588282 BUSINESS ADDRESS: STREET 1: 7 POWDER HORN DR CITY: WARREN STATE: NJ ZIP: 07059 BUSINESS PHONE: 7322711001 MAIL ADDRESS: STREET 1: 7 POWDER HORN DRIVE STREET 2: P O BOX 4914 CITY: WARREN STATE: NJ ZIP: 07059 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1999 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ___________ to ___________ Commission File No. 0-16132 CELGENE CORPORATION ------------------- (Exact name of registrant as specified in its charter) Delaware 22-2711928 - ------------------------------------------ -------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 7 Powder Horn Drive Warren, New Jersey 07059 - ------------------------------------------ -------------- (Address of principal executive offices) (Zip Code)
(732) 271-1001 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Aggregate market value of voting stock held by non-affiliates of registrant as of March 1, 2000: $3,530,935,951 Number of shares of Common Stock outstanding as of March 1, 2000: 21,363,806 ================================================================================ CELGENE CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
ITEM NO. PAGE - ----------- ----- Part I 1. Business ................................................ 2 2. Properties .............................................. 22 3. Legal Proceedings ....................................... 22 4. Submission of Matters to a Vote of Security Holders...... 22 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters ..................................... 23 6. Selected Consolidated Financial Data .................... 24 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 25 7a. Quantitative and Qualitative Disclosures about Market Risk .................................................... 27 8. Financial Statements and Supplementary Data ............. 27 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................... 28 Part III 10. Directors and Executive Officers of the Registrant ...... 29 11. Executive Compensation .................................. 31 12. Security Ownership of Certain Beneficial Owners and Management .............................................. 34 13. Certain Relationships and Related Transactions .......... 35 Part IV 14. Exhibits, Financial Statements, and Reports on Form 8-K ..................................................... 35 Signatures .............................................. 36
i PART I ITEM 1. BUSINESS Celgene Corporation, a Delaware Corporation incorporated in 1986, is an independent biopharmaceutical company engaged primarily in the discovery, development and commercialization of orally administered, small molecule drugs for the treatment of cancer and immunological diseases. The key mechanisms of action for our drugs are modulation of the overproduction of TNF-- and inhibition of angiogenesis. Additionally, our chiral chemistry program develops chirally pure versions of existing compounds for both pharmaceutical and agrochemical markets. We had total revenues of $26.2 million in 1999. The FDA approved our first commercialized product, THALOMID, for sale in the United States in July 1998. The approved indication for THALOMID is for the treatment of acute cutaneous manifestations of moderate to severe ENL and as maintenance therapy for prevention and suppression of cutaneous manifestation recurrences. ENL is an inflammatory complication of leprosy. We sell this product in the United States through our 60 person sales and commercialization organization. Our pipeline of new drugs is highlighted by two classes of orally administered therapeutic agents: IMiDs and SelCIDs. The IMiD class is based on the activity of THALOMID in modulating the overproduction of TNF-- and inhibiting angiogenesis. In preclinical studies, our IMiDs have demonstrated a higher level of activity than thalidomide. In animal models, these compounds did not cause birth defects or sedation. We completed Phase I trials in the fourth quarter of 1999 for each of our lead IMiDs. The results, announced in February, 2000, found that both IMiDs were well-tolerated in healthy human volunteers. The second class of compounds, SelCIDs, is designed to modulate TNF-- by selectively inhibiting PDE 4, a key cell-signaling enzyme. Our SelCIDs are targeted to control inflammation without broad suppression of the immune system. Phase I trials demonstrated our lead SelCID compound, CDC 801, was safe and well tolerated. There were no signs of nausea or vomiting, common side effects of known PDE 4 inhibitors. CDC 801 is being tested in a Phase II pilot, placebo controlled trial for the treatment of Crohn's disease. This trial is expected to be completed in the first half of 2000. In the third quarter of 1999, we announced favorable clinical results of two Phase III pivotal efficacy trials for ATTENADE, a chirally pure version of dl-methylphenidate. dl-methylphenidate is commonly marketed as Ritalin. ATTENADE is designed to treat the symptoms of Attention Deficit Disorder, or ADD and Attention Deficit Hyperactivity Disorder, or ADHD. We expect that the final 12-month safety trial will be completed in the first half of 2000 and we plan to submit an NDA to the FDA in the second half of 2000. 2 CELGENE PRODUCT OVERVIEW The target disease states for, and clinical trial status of, THALOMID and our products and compounds currently under development are outlined in the following table:
PRODUCT INDICATION/INTENDED USE STATUS - ---------- ------------------------------------------ ----------------------------------------- THALOMID Erythema Nodosum Leprosum (ENL) Approved Multiple Myeloma Phase II trial data published and presented at the American Society of Hematology. Phase III pivotal trial protocol in preparation. Myelodysplastic Syndrome Phase II trial ongoing and initial data presented at the American Society of Hematology. Leukemia Multiple Phase II trials underway. Glioblastoma(1) Initial Phase II trials completed. Other Phase II trials underway. Liver Cancer Phase II trial underway. Kidney Cancer Phase II trial underway. Prostate Cancer(1) Initial Phase II trial completed. Other Phase II trials underway. Kaposi's Sarcoma(1) Phase II trial completed. Cancer Cachexia Initial Phase II trial completed. Sarcoidosis Initial Phase II trial completed. Other Phase II trials underway. Scleroderma Initial Phase II trial completed. Recurrent Aphthous Stomatitis Phase III pivotal trial completed in AIDS patients. Crohn's disease Phase II trial completed and initial data published. Ulcerative Colitis Phase II trial underway. Colon and Rectal Cancer(1) Phase II trial announced. SelCIDs CDC 801 Crohn's disease Phase II trial underway. CC 7085 Crohn's disease Preclinical toxicology. IMiDs CDC 501 Blood cancers Initial Phase I trial completed. CC 4047 Blood cancers Initial Phase I trial completed. ATTENADE Attention Deficit Disorder and Attention Phase III pivotal efficacy trials Deficit Hyperactivity Disorder completed. Phase III safety trials ongoing.
- ---------- (1) At least one study supported by the National Cancer Institute 3 OVERVIEW OF ONCOLOGY AND IMMUNOLOGY Our clinical and commercial focus is to produce a portfolio of highly potent, selective drugs that have the potential to regulate the overproduction of TNF-- and are anti-angiogenic. TNF--, produced primarily by certain white blood cells, is one of a number of proteins called cytokines that act as chemical messengers throughout the body to regulate many aspects of the immune system. TNF-- is essential to mounting an inflammatory response, which is the normal immune system reaction to infection or injury that rids the body of foreign agents and promotes tissue repair. However, chronic or excessive production of TNF-- has been implicated in a number of acute and chronic inflammatory diseases. These disease states, which are inadequately treated with existing therapies, include non-insulin dependent diabetes, Alzheimer's disease, congestive heart failure, inflammatory bowel disease, rheumatoid arthritis, cancer cachexia, Parkinson's disease, multiple sclerosis and lupus. Traditional therapies for these disease states include anti-inflammatory drugs and immunosuppressive agents. These therapies often fail to achieve significant clinical benefits and can cause serious side effects such as severe drops in certain blood component counts, liver toxicity, osteoporosis, teratogenicity and various endocrine abnormalities. We believe that selective control and reduction of TNF-- represents a promising new strategy for treating chronic inflammatory diseases. In pursuit of this strategy, two broad classes of compounds have been investigated: proteins and small synthetic molecules. Anti-TNF-- proteins, including anti-TNF-- antibodies and TNF-- soluble receptors, have demonstrated efficacy in the treatment of such chronic inflammatory diseases as rheumatoid arthritis and Crohn's disease. While initial doses of these anti-TNF-- proteins have been well tolerated and have reduced disease activity in clinical studies, these proteins exhibit certain shortcomings linked to their nature as proteins. First, they are large molecules that must currently be injected or infused. Second, the period of efficacy of a given dosage of a protein-based drug can decline with repeated administration, rendering protein-based drugs more suitable for treatment of acute pathological conditions rather than chronic disease states. This limitation is due in part to increasing production by a patient's immune system of antibodies that neutralize administered proteins. There are a number of large molecule, protein-based therapeutic products under development by other companies for TNF-- modulation. One product has received approval from the FDA for the treatment of Crohn's disease and rheumatoid arthritis, and another has received approval for rheumatoid arthritis. Synthetic small molecule drugs, however, if successfully developed, may prove to be preferable in the treatment of chronic inflammatory diseases, due to factors such as oral dosing, lower cost of therapy and avoidance of undesirable immune response that results in adverse side effects and reduced efficacy. We believe that our small molecule immunotherapeutic compounds have the potential to selectively modulate TNF-- while affording these benefits. In addition, research has indicated that our small molecule drug, THALOMID, is anti-angiogenic. Angiogenesis is the fundamental biological process by which new blood vessels are formed. Cancer cells require oxygen and nutrients and initiate a biochemical mechanism that stimulates angiogenesis which, in turn, provides the cancerous cells with the blood supply that they need to grow. Inhibition of angiogenesis could adversely affect the graft of a tumor and be a potential anti-cancer therapy. This therapy could be also used in conjunction with radiation or more traditional chemotherapeutic agents. Currently, a number of anti-angiogenic agents are being developed by a number of companies. However, we believe that THALOMID is the only product on the market that has a direct anti-angiogenic effect. Moreover, preliminary research suggests that our two new classes of small molecule immunotherapeutic compounds - -- one of which is based on thalidomide's activity -- may be anti-angiogenic. 4 THALOMID In July 1998, we received FDA approval to market THALOMID for treatment of ENL and the product was launched in late September 1998. THALOMID is the first drug approved under a special "Restricted Distribution for Safety" regulation and is distributed through our S.T.E.P.S. program. Our program is designed to support the safe and appropriate use of THALOMID and has been made a part of the approved labeling for THALOMID. We are currently developing THALOMID for the treatment of a variety of serious disease states for which we believe there are currently no adequate approved therapies. Our current intent is to seek FDA approval for THALOMID for at least one cancer of the blood, such as multiple myeloma, one solid tumor cancer and an AIDS-related indication. The immunological and anti-angiogenic properties of THALOMID are being investigated as the basis for treatment of a variety of oncological diseases, and a number of trials are ongoing, some in cooperation with the NCI, to evaluate the potential of the drug in cancer. Key investigations include multiple myeloma, which was the subject of an article and editorial in the November 18, 1999 issue of The New England Journal of Medicine, Volume 341, Number 21, and glioblastoma multiforme, for which initial data were presented in November 1999 at the Chemotherapy Foundation Symposium XVII in New York. Additional presentations have been made at the 41st ASH Symposium in December 1999. Our work with thalidomide was originally based on a scientific collaboration with The Rockefeller University's Laboratory of Cellular Physiology and Immunology. In the early 1990s, researchers at The Rockefeller University discovered that thalidomide is a selective modulator of TNF-- and, therefore, could be of potential benefit in many serious immune-related disease states, including cachexia and other AIDS-related conditions. We believe that, in serious and debilitating disease states, the risk of birth defects and other potential side effects related to thalidomide is outweighed by the drug's potential clinical benefits. The Rockefeller University has granted to us certain exclusive rights and licenses to manufacture, use and sell thalidomide for treating the toxicity associated with high concentrations of TNF-- in septic shock, cachexia and HIV-related disease states. Researchers at the Children's Medical Center, which is affiliated with Harvard University, discovered that thalidomide is anti-angiogenic and filed patents on this utility. These patents, some of which have not issued in the United States, are exclusively licensed to EntreMed, Inc. We were granted an exclusive sublicense to all of EntreMed's thalidomide patents in December 1998. As a result of our own applications and designations acquired from EntreMed, we now have Orphan Drug designations from the FDA for THALOMID covering: primary brain malignancies; HIV associated wasting syndrome; severe Recurrent Aphthous Stomatitis, or RAS, in severely, terminally immunocompromised patients; clinical manifestations of mycobacterial infections caused by Mycobacterium tuberculosis and non-tuberculous mycobacteria; ENL; multiple myeloma; Crohn's disease and Kaposi's sarcoma. If the FDA approves any of these indications for THALOMID, we will be granted a seven-year period of exclusivity during which time the FDA is prohibited, except under some conditions, from approving another version of thalidomide for the approved indication. Thalidomide was developed initially as a sedative, and was also widely prescribed by doctors in Europe in the late 1950s and early 1960s to pregnant women for relief of morning sickness. After severe birth defects were later observed with use of the drug, it was virtually removed from the world market. Thalidomide was later discovered to have therapeutic effects in the treatment of ENL, a disease that is rare in the United States but common in many parts of the developing world. Although the FDA had never approved the marketing of thalidomide, the U.S. Public Health Service has dispensed the drug for the treatment of ENL for the past 25 years. We note that thalidomide's history may limit market acceptance of THALOMID. ONCOLOGY Cancer tissue has many blood vessels. This observation has led to the realization that growth of blood vessels is essential for tumor growth, invasion and metastasis. Specifically, developing solid primary tumors are believed to remain clinically insignificant unless they can arrange to obtain nourishment from their host. Biochemically, an invasive tumor acts by altering a complex system of factors causing the 5 formation of new blood vessels from existing ones. Almost three decades ago, it was proposed that this tumor angiogenesis could be a target of cancer therapy. Anti-angiogenic compounds were believed to be able to work by reducing or halting remaining tumor growth and could also be used in conjunction with more traditional chemotherapeutic agents. Thalidomide was discovered to be anti-angiogenic at the Children's Medical Center in Boston. We are currently working with the NCI and a number of clinical investigators to assess the potential of THALOMID in the treatment of various cancers. In the first 12 months after THALOMID was commercially launched in the United States, approximately 70% of the product's prescriptions were in oncology, as reported by prescribers on our S.T.E.P.S. program enrollment surveys. Multiple Myeloma. Multiple myeloma is a malignant proliferation of plasma cells and plasmacytoid cells. It is the second most common blood borne malignancy and is invariably fatal. According to the Leukemia Society of America, multiple myeloma accounts for about 13% of blood borne disease and affects approximately 40,000 people in the United States. The incidence of this disease is approximately four per 100,000, and approximately 14,400 cases are reported annually with approximately 11,000 deaths associated with the disease every year. Clinical research published in the November 18, 1999 edition of The New England Journal of Medicine, Volume 341, Number 21, reported results of a study conducted at the University of Arkansas on the use of THALOMID in 84 multiple myeloma patients with advanced stage disease and histories of extensive prior chemotherapeutic interventions, radiation treatments and multiple bone marrow transplants. This Phase II study found that 32% of the patients had a partial response and 10% of the patients had a complete or nearly complete remission based on decreases in paraprotein, the myeloma protein in serum, or Bence Jones protein in urine, important markers of the progression of the disease. Clinical data from 180 patients in this study was presented at the December 1999 ASH meeting by researchers at the University of Arkansas who reported that 36% of the patients achieved a 25% reduction in tumor burden. Eighteen patients achieved paraprotein response of at least 90%, 14 patients achieved at least a 75% paraprotein response, 16 patients achieved at least a 50% paraprotein response and four patients achieved a complete response. Side effects reported by the investigators were constipation, weakness/fatigue and somnolence. A number of additional presentations and posters presented confirmatory evidence at the ASH meeting regarding the efficacy of THALOMID. In September 1999, similar findings were reported at the International Myeloma Workshop in Stockholm, Sweden on trials conducted at Cedars-Sinai Medical Center, Los Angeles. In this Phase II, open label study of 20 relapsing or progressive multiple myeloma patients utilizing low-dose THALOMID administered over an eight-week trial period, 30% of patients experienced a greater than 50% reduction of tumor burden. Further data confirming earlier trials was presented at the Chemotherapy Foundation Symposium XVII in November 1999 in New York on 15 refractory patients treated at Saint Vincent's Medical Center, New York in which there was observed a 67% overall response with THALOMID alone or in combination with chemotherapy. In the 12 months following the launch of THALOMID, as reported by prescribers on our S.T.E.P.S. program enrollment surveys, approximately 30% of total usage was in multiple myeloma. Based on this information and on the growing volume of clinical trial data, our plan is to develop a regulatory/clinical program based on what has been learned from these studies and file a supplemental NDA for THALOMID for the treatment of multiple myeloma. Glioblastoma Multiforme. Glioblastomas are the most common brain tumors and account for 50% of all gliomas, an aggressive form of brain cancer. The usual treatment of high-grade gliomas is surgical removal followed by radiation therapy. Studies at the New York University School of Medicine and at the Dana Farber Institute have demonstrated the potential for thalidomide as a treatment for glioblastoma multiforme. Phase I/II data from the New York University trial were presented in November 1999 at the Chemotherapy Foundation Symposium XVII in New York. THALOMID in combination with carboplatin was administered to 71 patients with recurrent glioblastoma multiforme. At the maximum tolerated dose of THALOMID, 53 of the patients were evaluated for efficacy, with 70% experiencing responses, two with partial responses, 35 6 with disease stabilization. The trial's most commonly reported side effects were constipation and drowsiness. A Phase III trial will assess whether patients benefited because of the higher carboplatin doses or if there was any synergy between thalidomide and carboplatin. Additionally, a Phase II trial has been initiated in collaboration with the NCI's Radiation Therapy Oncology Group to investigate the effect of THALOMID and radiation as co-therapy for the treatment of glioblastoma. Other Oncology Indications. In addition to glioblastoma multiforme, the NCI is currently investigating THALOMID in clinical trials on prostate, colorectal, head and neck and non-small cell lung cancer. Other trials such as those in liver cancer, kidney cancer and leukemia are being run by key investigators. Recently, researchers in London reported that continuous, low-dose thalidomide is useful as an agent in patients with advanced cancers as a palliative. That study showed that three of 18 patients with kidney cancer also showed a response benefit and three patients had stabilization of their disease for periods of up to six months. In addition, four of 17 melanoma patients experienced stable disease for up to six months. According to a report in the medical journal Lancet, follow-up studies using higher doses have also shown "encouraging results" in patients with kidney cancer. These researchers are now testing thalidomide in combination with interferon or interleukin 2 in this group. Similarly, the NCI reported trial results in which 63 patients were treated with either a low dose or a high dose of thalidomide. Approximately 53% of the low dose and 68% of the high dose patients had declines in prostate specific antigen, a recognized marker for prostate cancer. If successful, these studies would establish proof of principle, leading to the design of additional trials, including pivotal studies. IMMUNOLOGY THALOMID has been shown to impact the immune system both in vitro and in vivo. Examples of such biological activities include the inhibition of TNF--, stimulation of the anti-inflammatory cytokine IL-10 and activation of T-cell function. These types of activities could prove to have therapeutic benefit in a variety of inflammatory, infectious and autoimmune diseases. The two key areas of investigation at present involve inflammatory bowel disease and serious complications associated with HIV/AIDS. In addition, other areas of investigation include sarcoidosis, an inflammation of body tissue which often attacks the lungs and lymph nodes, and scleroderma, a chronic tissue disorder. Erythema Nodosum Leprosum. ENL is a complication of leprosy, a chronic bacterial disease. Although the disease is relatively rare in the United States, leprosy afflicts millions worldwide. ENL occurs in about 30% of leprosy patients and is characterized by cutaneous lesions, acute inflammation, fever and anorexia. On July 16, 1998, we received approval from the FDA to market THALOMID for the treatment of ENL. Inflammatory Bowel Disease. According to the Crohn's and Colitis Foundation of America, there are approximately one million Americans with active inflammatory bowel disease. Inflammatory bowel disease is characterized by serious chronic inflammation of the wall or any part of the gastrointestinal tract and results in pain, bloating and diarrhea. In addition, the chronic inflammation may result in abscesses and fistula formation. The most serious form of inflammatory bowel disease is known as Crohn's disease with an estimated 70,000 to 125,000 U.S. patients diagnosed with active moderate to severe manifestation of the disease. A Phase II pilot study using THALOMID in patients with severe Crohn's disease has been concluded at the Cedars-Sinai Medical Center, Los Angeles, and reported in the journal Gastroenterology. About 70% of the patients suffering from moderate to severe Crohn's disease who completed at least five weeks of the 12-week trial demonstrated a response when treated with low dose THALOMID, with 20% of these patients experiencing remission. All patients were able to reduce their steroid regimen by at least 50%, with 44% of patients discontinuing steroids. Data from this trial suggests that THALOMID may provide clinical benefit and potentially reduce the need for steroid treatment. This combination of effects could mean improvement over current therapeutic options. A similar Phase II pilot study has been initiated at Cedars-Sinai Medical Center using THALOMID for chronically active ulcerative colitis, which is another form of inflammatory bowel disease. Estimates of the prevalence of ulcerative colitis in the United States generally range between 250,000 and 500,000. Recent preliminary data has shown that eight of 11 patients with intractable bowel disease benefited from THALOMID. 7 HIV/AIDS. Recurrent Aphthous Stomatitis, or RAS, is a complication of AIDS characterized by lesions of the oral cavity, esophagus and gastrointestinal tract and may interfere with normal eating. We believe RAS currently afflicts an estimated 5,000 AIDS patients in the United States. Positive results have been reported in a study conducted by the AIDS Clinical Trials Group of the National Institutes of Health using a formulation of thalidomide manufactured by a third party. In mid-1997, we began a pivotal clinical trial involving 84 patients for the evaluation of THALOMID in the treatment of RAS, using the same principal investigator as the AIDS Clinical Trials Group study. We will be analyzing this clinical trial data in 2000 with a view toward the possibility of a supplemental NDA submission to the FDA. S.T.E.P.S. PROGRAM Working with the FDA and other governmental agencies as well as certain advocacy groups, we designed and implemented our S.T.E.P.S. program, the objective of which is the safe and appropriate use of THALOMID. This proprietary program includes comprehensive physician, pharmacist and patient education. Female patients are required to use contraception and are given pregnancy tests regularly. All patients are also subject to other requirements, including informed consent and participation in a confidential outcomes registry managed on our behalf by an academic epidemiology research group. Physicians are also required to comply with the educational, contraception counseling, informed consent and pregnancy testing and other elements of the program. Dispensing pharmacists are required to confirm that the physician is a registered participant in the program, and that the patient has signed an informed consent. Automatic refills are not permitted under the program and each prescription may not exceed four weeks dosing. A new prescription is required each month. SALES AND COMMERCIALIZATION We have established an organization of approximately 60 persons to sell and commercialize THALOMID. These individuals have considerable experience in the pharmaceutical industry and many have experience with oncological and immunological products. We expect to expand our THALOMID sales and commercialization group to support products we develop to treat oncological and immunological diseases. We intend to market and sell the products we develop for indications with accessible patient populations. For drugs with indications with larger patient populations, we anticipate partnering with other pharmaceutical companies. In addition, we are positioned to accelerate the expansion of these sales resources as appropriate to take advantage of product in-licensing and product acquistion opportunities. We intend to establish commercial relationships with selected companies in other countries to market THALOMID. MANUFACTURING THALOMID is formulated and encapsulated for us by Penn Pharmaceuticals Ltd. of Great Britain in an FDA approved facility devoted exclusively to the production of THALOMID capsules. Both the bulk manufacturing facility that produces the drug substance for THALOMID and the Penn facility have been certified as cGMP compliant. In certain instances, we may be required to make substantial capital expenditures to access additional manufacturing capacity. In addition, we have established a contract with another cGMP certified bulk drug substance supplier for THALOMID that will begin in 2001 once the regulatory process is completed. We are also actively seeking an alternate manufacturer to provide additional capacity for the formulation and encapsulation of THALOMID and expect that this will be concluded in 2000. IMIDS We have designed and synthesized a number of novel structural analogues of thalidomide called IMiDs which have been demonstrated in in vitro tests to be substantially more potent than thalidomide. There can be no assurance, however, that the same effect can be duplicated in humans. Animal models have suggested that our IMiDs do not cause the birth defects associated with thalidomide. Research on these compounds has identified two clinical trial candidates and each has completed a Phase I trial. Research continues on follow-on compounds with enhanced immunological and anti-angiogenic activity. 8 IMiDs may have potential for treating conditions where there is a deficiency in T-cell activity, such as viral diseases including HIV-related diseases, or for enhancing potential IL-12 mediated anti-tumor activities. In preclinical studies, our lead IMiD compound has been shown to inhibit interleukins 1-beta, 6 and 12 while stimulating the production of interleukins 10 and 2 as well as interferon gamma. The activity of T-cells is enhanced by the compound up to 1,000 times more than with thalidomide. We expect to advance our lead IMiD, CDC 501, into a Phase II pilot trial in a blood cancer during 2000. The U.S. Patent and Trademark Office has issued composition of matter and use patents to us relating to our IMiDs. SELCIDS We have designed, synthesized and tested a large number of SelCIDs. These compounds have demonstrated the ability to be highly specific inhibitors of TNF-- overproduction in in vitro bioassays of human cells. SelCIDs appear to have a specific inhibitory effect on PDE 4, which is linked to the overproduction of TNF--. Studies have determined that many of the SelCIDs decrease synthesis of TNF-- through selective inhibition of PDE 4. Preclinical and animal tests have shown this class of compounds to be up to 10,000 times more active with a longer half-life than THALOMID. We believe that control of TNF-- at its source, versus simple removal of circulating levels of the cytokine, may facilitate more effective therapy without immune suppression. There can be no assurance, however, that the same effect can be duplicated in humans. Our lead SelCID, CDC 801, was found to be well tolerated in two Phase I trials completed in 1999 in the United Kingdom. A Phase II pilot trial for this compound in Crohn's disease commenced in 1999 at the Cedars-Sinai Medical Center and results are expected in the first half of 2000. In addition, we expect to initiate a Phase II pilot trial for CDC 801 in a blood cancer during 2000. Other SelCIDs have been identified and the most advanced of these is undergoing toxicological evaluation in preparation for the initiation of Phase I trials. Unlike many therapeutics which inhibit PDE 4, SelCIDs have not shown any evidence of acute nausea and vomiting in patients. The U.S. Patent and Trademark Office has issued to us composition of matter and use patents relating to our SelCIDs. CHIRAL CHEMISTRY Many human pharmaceuticals and agrochemicals exist in two different three-dimensional configurations that are identical in chemical structure but are mirror images of each other. These conformations, known as enantiomers, or isomers, generally interact differently with biological targets. In clinical applications, one isomer may result in the desired therapeutic effect by stimulating or inhibiting a targeted biological function, while the other isomer may be inactive or cause undesirable side effects. In contrast to racemic compositions which contain both isomers, the use of chirally pure pharmaceuticals can result in significant clinical benefits such as reduced toxicity and increased efficacy. In agrochemical applications, the use of chirally pure chemicals can result in a substantially reduced volume of product required to achieve the desired benefit, thereby potentially lowering manufacturing costs and reducing the environmental burden as compared with racemic chemicals. Our biocatalytic process enables the efficient production of chirally pure compounds. This patented process is based primarily on the use of enzymes called aminotransaminases, which are optimized by us through a variety of techniques including genetic engineering. These enzymes catalyze the production of only the desired stereoisomer of a chiral compound and can be used in conventional chemical synthesis reactors at room temperature. Our biocatalytic process for producing chirally pure compounds differs from the more common approach of producing racemic mixtures followed by separation of the desired stereoisomer through resolution techniques such as crystallization or chromatography. These traditional approaches to producing chirally pure compounds can be cumbersome, result in low yields, use substantial amounts of raw materials and involve the disposition of waste product. Traditional approaches also are generally less economical than our process. We believe that our biocatalytic process can be applied to the manufacture of a wide variety of organic chemicals. 9 We believe there is a significant incremental opportunity in developing selected, chirally pure versions of approved drugs currently sold in racemic form. Compounds that have been approved and marketed have a significant body of information regarding their safety and efficacy and consequently: - the cost and duration of preclinical evaluations and clinical trials may be reduced if reference may be made to data used in the course of obtaining regulatory approval for the racemic parent compound; - the risk of not obtaining regulatory approval may be reduced; and - marketing risks may also be reduced due to the established market for the parent compound. We have made significant progress over the past year in the development of ATTENADE, the chirally pure version of Ritalin. We have also made significant progress in the development and production of chirally pure agrochemicals. We believe that the agrochemical market presents a substantial opportunity because many agrochemicals produced in racemic form could be manufactured in chirally pure form. ATTENADE We have completed two pivotal Phase III efficacy trials for ATTENADE. These trials found that ATTENADE met all efficacy parameters for controlling symptoms of ADD and ADHD in school-age children. Drugs containing dl-methylphenidate such as Ritalin have been used for decades for the treatment of ADD and ADHD. We believe that one million children in the United States were treated with dl-methylphenidate and other psychostimulants in 1998. Total U.S. sales in 1998 of drugs used to treat the symptoms of ADD and ADHD were approximately $500 million. More than 200 children participated in our pivotal trials. Both multi-center trials compared ATTENADE to placebo; the second trial directly compared the efficacy of both ATTENADE and dl-methylphenidate to placebo. As compared to placebo, ATTENADE demonstrated a statistically significant longer duration of action than dl-methylphenidate. ATTENADE controlled the symptoms of ADD and ADHD at all times measured in the study while dl-methylphenidate did not control the symptoms at the last measurement. In both trials, behavioral and objective measures were examined. ATTENADE had favorable scores over dl-methylphenidate in all parameters measured. The results of the primary efficacy analysis indicated that ATTENADE was significantly more effective than placebo as evaluated by a behavioral scale, signifying an improvement in the clinical status of the children. The results of the second trial confirmed the drug's efficacy and indicated a significantly longer duration of action for ATTENADE compared to dl-methlyphenidate as measured by a behavioral scale. The Phase III safety trial is scheduled for completion in the first quarter of 2000 and an NDA submission is anticipated later in the year. Clinical trials on a pulsed release formulation are planned to commence in the first half of 2000. We are in discussions regarding partnerships for ATTENADE in the United States and Europe. In Canada, where it is awaiting registration, ATTENADE is licensed to Biovail Corporation, which purchased $2.5 million dollars worth of our stock and will pay to us licensing fees, milestone payments and royalties. We have been issued patents for the use of ATTENADE for the treatment of ADD and ADHD, and for the once-a-day administration of methylphenidate drugs in a controlled or pulsed release formulation that includes both the chirally pure d-methylphenidate and the racemic form. In addition, we have been issued process patents covering our manufacturing process for the active substance. CHIRALLY PURE AGROCHEMICALS Celgro is applying our proprietary biocatalytic synthesis technology to agrochemicals. Celgro's approach is to work with agrochemical companies to adapt our biocatalytic technology to the manufacture of chirally pure versions of their existing crop protection product and then license the technology to these companies in exchange for royalties. Celgro will also seek to develop chirally pure versions of existing agrochemicals on its own and then enter into license agreements with third parties, who would manufacture and sell the agrochemicals. We expect that these arrangements typically will 10 include milestone payments, reimbursement of research and development expenses and royalty arrangements. We have entered into research and development agreements with two leading agrochemical companies and initiatives are underway to secure additional collaborations. We also believe that our chiral technology can be enabling in agrochemical applications because it has the potential to significantly lower manufacturing costs compared to conventional technologies and other chiral technologies. Compared to our biocatalytic process, conventional technologies require more raw materials and greater plant capacity to produce the same effective quantity of product, while other chiral technologies require specialized equipment, more expensive chiral agents, more raw material and greater capacity for handling hazardous wastes produced in the separation process. In addition, it is anticipated that the required application amount of a chirally pure form of an agrochemical could be substantially less than the racemic form and achieve the same or better results, thereby reducing environmental burden. Agrochemicals are highly price sensitive and, therefore, a process that produces chirally pure products at significant cost savings could be in substantial demand. PATENTS AND PROPRIETARY TECHNOLOGY Patents and other proprietary rights are important to our business. It is our policy to seek patent protection for our inventions, and also to rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Under an agreement with The Rockefeller University, we have obtained certain exclusive rights and licenses to manufacture, have manufactured, use and sell products that are based on compounds that were identified in research carried out by The Rockefeller University and us, that have activity associated with TNF(alpha). The Rockefeller University has identified a method of using thalidomide and certain thalidomide-like compounds to treat certain symptoms associated with abnormal concentrations of TNF(alpha), including those manifested in septic shock, cachexia and HIV infection. In 1995, The Rockefeller University was issued a U.S. patent which claims such methods. This U.S. patent expires in 2012 and is included in the patent rights exclusively licensed to us under the license from The Rockefeller University. However, The Rockefeller University did not seek corresponding patents in any other country in respect of this invention. The Rockefeller University has filed an additional U.S. patent application and an international patent application relating to the activity of thalidomide related to interleukin-12. Under the license from The Rockefeller University, we were obligated to pay certain specified royalties to The Rockefeller University on net sales of licensed products for covered indications. In November 1999, we agreed with The Rockefeller University to substitute a lump sum payment and issue stock options to The Rockefeller University and the inventors in lieu of the royalties previously payable under the license. The license from The Rockefeller University is coterminous with the last to expire of the licensed patents and is terminable by The Rockefeller University only in the event of a breach of the agreement's terms by us which breach shall fail to be remedied for more than sixty days after notice thereof. Any termination of the license from The Rockefeller University could have a material adverse effect on our business, financial condition and results of operations. In 1998, we were granted an exclusive sublicense to all of the thalidomide patents and patent applications worldwide, exclusively licensed to EntreMed by the Children's Medical Center Corp., which is affiliated with Harvard University, related to the anti-angiogenic action of thalidomide. Three U.S. patents issued to Children's Medical Center Corp. will expire in 2014. Corresponding foreign patent applications and additional U.S. patent applications are still pending. Further, we have also exclusively sublicensed pending U.S. and foreign patent applications related to the use of thalidomide in combination with other therapeutic agents. There can be no assurance that additional patents will issue, or that if patents issue, that such patents will provide us with significant proprietary protection or commercial advantage. The license from EntreMed is coterminous with the last to expire of the licensed patents and we must pay royalties for at least 12 years from our first commercial sale in the United States. The EntreMed license is terminable in the event of a breach by us, which breach shall fail to be remedied for 60 days after notice thereof. Any termination of the license from EntreMed could have a material adverse affect on our business, financial condition and results of operations. 11 We have been issued a total of 36 U.S. patents and have filed an additional 15 U.S. patent applications. Of the issued patents, 14 relate to our oncologic or immunologic compounds and uses and six are directed to methylphenidate therapeutic compositions and processes. Our U.S. patents expire between 2001 and 2019. We have filed patient applications and in some instances have obtained patents in certain other countries which correspond to some, but not all of our U.S. patents. We expect to continue to file patent applications covering the use of our proprietary inventions. Prior to the enactment in the United States of new laws adopting certain changes mandated by the General Agreement on Tariffs and Trade, the exclusive rights afforded by a U.S. patent were for a period of 17 years measured from the date of grant. Under these new laws, the term of any U.S. patent granted on an application filed subsequent to June 8, 1995 will terminate 20 years from the date on which the patent application was filed in the United States or the first priority date, whichever occurs first. Future patents granted on an application filed before June 8, 1995 will have a term that terminates 20 years from such date, or 17 years from the date of grant, whichever date is later. Under the Drug Price Competition and Patent Term Restoration Act of 1984, a U.S. product patent or use patent may be extended for up to five years under certain circumstances to compensate the patent holder for the time required for FDA regulatory review of the product. The benefits of this act are available only to the first approved use of the active ingredient in the drug product and may be applied only to one patent per drug product. There can be no assurance that we will be able to take advantage of this law. Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary and conduct its business without infringing the proprietary rights of others. The patent positions of pharmaceutical and biotechnology firms, including ours, can be uncertain and involve complex legal and factual questions. In addition, the coverage sought in a patent application can be significantly reduced before the patent is issued. Consequently, we do not know whether any of our owned or licensed pending applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or whether they will be circumvented or infringed upon by others. Since patent applications in the United States are maintained in secrecy until patents issue and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be certain that we, or our licensors, were the first to make the inventions covered by each of the pending patent applications or that we, or our licensors, were the first to file patent applications for such inventions. In the event a third party has also filed a patent for any of its inventions, we, or our licensors, may have to participate in interference proceedings declared by the U.S. patent and Trademark Office to determine priority of invention, which could result in the loss of a U.S. patent or loss of any opportunity to secure U.S. patent protection for the invention. Even if the eventual outcome is favorable to us, such interference proceedings could result in substantial cost to us. Prosecution of patent applications and litigation to establish the validity and scope of patents, to assert patent infringement claims against others and to defend against patent infringement claims by others can be expensive and time-consuming. There can be no assurance that, in the event that claims of any of our owned or licensed patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity relating to the subject matter delineated by such patent claims and may have a material adverse effect on our business. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the products or processes covered by the disputed rights, subject to significant liabilities to such third party and/or required to license technologies from such third party. Also, different countries have different procedures for obtaining patents and patents issued by different countries provide different degrees of protection against the use of a patented invention by others. There can be no assurance, therefore, that the issuance to us in one country of a patent covering an invention will be followed by the issuance in other countries of patents covering the same invention or that any judicial interpretation of the validity, enforceability or scope of the claims in a patent issued in one country will be similar to the judicial interpretation given to a corresponding patent issued in another country. Furthermore, even if our owned or licensed patents are determined to be valid and enforceable, there can be no assurance that competitors will not be able to design around such patents and compete with us using the resulting alternative 12 technology. We do not currently have, nor do we intend to seek, patent protection relating to the use of THALOMID to treat ENL. We also rely upon unpatented, proprietary and trade secret technology that we seek to protect, in part, by confidentiality agreements with our collaborative partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. There can be no assurance that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach or that our trade secrets, proprietary know-how and technological advances will not otherwise become known to others. In addition, there can be no assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology or that such technology will not be found to be non-proprietary or not a trade secret. 13 GOVERNMENTAL REGULATION Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in our ongoing research and development activities. All of our therapeutic products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical testing and clinical trials and other pre-marketing approval requirements by the FDA and regulatory authorities in other countries. In the United States, various federal, and in some cases state statutes and regulations also govern or impact upon the manufacturing, safety, labeling, storage, record-keeping and marketing of such products. The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations, require the expenditure of substantial resources. Regulatory approval, when and if obtained, may be limited in scope which may significantly limit the indicated uses for which a product may be marketed. Further, approved drugs, as well as their manufacturers, are subject to ongoing review and discovery of previously unknown problems with such products may result in restrictions on their manufacture, sale or use or in their withdrawal from the market. Any failure by us, our collaborators or licensees to obtain or maintain, or any delay in obtaining regulatory approvals could adversely affect the marketing of our products, and our ability to receive product revenue, royalty revenue or profit sharing payments. The activities required before a pharmaceutical may be marketed in the United States begin with preclinical testing not involving human subjects. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of a product and its formulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application, or IND, which must be reviewed by the FDA primarily for safety considerations before proposed clinical trials in humans can begin. Typically, clinical trials involve a three-phase process. In Phase I, clinical trials are generally conducted with a small number of individuals to determine the early safety and tolerability profile and the pattern of drug distribution and metabolism within the body. If the Phase I trials are satisfactory, Phase II clinical trials are conducted with groups of patients in order to determine preliminary efficacy, dosing regimes and expanded evidence of safety. In Phase III, large-scale, multi-center, adequately powered and well-controlled, comparative clinical trials are conducted with patients in effort to provide enough data for the statistical proof of efficacy and safety required by the FDA and others. However, in some limited circumstances Phase III trials may be modified to allow evaluation of safety and efficacy in a less regimented manner, which may allow us to rely on historical data relating to the natural course of disease in untreated patients. In some cases, as a condition of NDA approval, confirmatory trials are required to be conducted after the FDA's approval of an NDA in order to resolve any open issues. The FDA requires monitoring of all aspects of clinical trials and reports of all adverse events must be made to the agency, both before and after drug approval. The results of the preclinical testing and clinical trials are submitted to the FDA as part of an NDA for evaluation to determine if the product is adequate for approval to commence commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. When an NDA is approved, the manufacturer must employ a system for obtaining reports of experience and side effects that are associated with the drug and make appropriate submissions to the FDA. Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a drug intended to treat a "rare disease or condition" as an "orphan drug." A "rare disease or condition" is defined as one which affects less than 200,000 people in the United States or which affects more than 200,000 people, but for which the cost of development and making available the drug is not expected to be recovered from sales of the drug in the United States. Upon the approval of the first NDA for a drug designated as an orphan drug for a specified indication, the sponsor of the NDA is entitled to exclusive marketing rights in the United States for such drug for that indication for seven years. Orphan drugs may also be eligible for federal income tax credits for costs associated with the drug's development. Possible amendment of the Orphan Drug Act by the United States Congress and possible reinterpretation by the 14 FDA are the subject of frequent discussion. FDA regulations reflecting certain definitions, limitations and procedures initially went into effect in January 1993 and were amended in certain respects in 1998. Therefore, there is no assurance as to the precise scope of protection that may be afforded by orphan drug status in the future or that the current level of exclusivity and tax credits will remain in effect. We have received from the FDA orphan drug approval for thalidomide for the treatment of ENL. Celgene also has received orphan drug designations for thalidomide: for the treatment of multiple myeloma; for the treatment of HIV-associated wasting syndrome; for the treatment of the clinical manifestations of mycobacterial infection caused by Mycobacterium tuberculosis and non-tuberculosis mycobacteria; for the treatment of severe recurrent apthous stomatitis in severely, terminally compromised patients; and for the treatment of Crohn's disease. We also obtained orphan drug designation in Kaposi's sarcoma and primary brain malignancies as part of our agreement with EntreMed. However, there can be no assurance that another company also holding orphan drug designation will not receive approval prior to us for the use of thalidomide for the treatment of one or more of these indications, other than ENL. If that were to happen, our applications for that indication could not be approved until the competing company's seven-year period of exclusivity expired. Among the conditions for NDA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures continually conform with the FDA's cGMP. In complying with cGMP, manufacturers must devote extensive time, money and effort in the area of production and quality control and quality assurance to maintain full technical compliance. Manufacturing facilities and company records are subject to periodic inspections by the FDA to ensure compliance. If a manufacturing facility is not in substantial compliance with these requirements, regulatory enforcement action may be taken by the FDA which may include seeking an injunction against shipment of products from the facility and recall of products previously shipped from the facility. Failure to comply with applicable FDA regulatory requirements can result in informal administrative enforcement actions such as warning letters, recalls or adverse publicity issued by the FDA or in legal actions such as seizures, injunctions, fines based on the equitable remedy of disgorgement, restitution and criminal prosecution. Steps similar to those in the United States must be undertaken in virtually every other country comprising the market for our products before any such product can be commercialized in those countries. The approval procedure and the time required for approval vary from country to country and may involve additional testing. There can be no assurance that approvals will be granted on a timely basis or at all. In addition, regulatory approval of prices is required in most countries other than the United States. There can be no assurance that the resulting prices would be sufficient to generate an acceptable return to us. COMPETITION The pharmaceutical and agrochemical industries in which we compete are each highly competitive. Our competitors include major pharmaceutical and biotechnology companies, most of which have considerably greater financial, technical and marketing resources than us. We also experience competition in the development of our products and processes from universities and other research institutions and, in some instances, compete with others in acquiring technology from such sources. Competition in the pharmaceutical industry, and specifically in the oncology and immunology areas being addressed by us, is particularly intense. Numerous companies are pursuing techniques to modulate TNF-- production through various combinations of monoclonal antibodies, TNF-- receptors and small molecule approaches. Two U.S. companies, Centocor Inc., a wholly owned subsidiary of Johnson & Johnson, and Immunex Corporation, have registered drugs that block the disease-causing effects of TNF-- in inflammatory arthritis and bowel disease. Both drug products are registered in the United States and in Europe and have been marketed since 1998. In the United States the present cost of TNF-- modulating drugs, not including medical or other charges, is between $7,000 and $11,500 per patient year. Amgen Inc. is currently also developing a soluble TNF-- receptor. BASF A.G. has a human antibody in development and Celltech Group plc has a humanized antibody. In addition, a number of other companies are attempting to address, with other technologies and products, the disease states currently 15 being targeted by us. EntreMed is researching the effectiveness of its own thalidomide analogues as anti-angiogenic agents in the treatment of retinal disease and cancer. Andrulis Pharmaceuticals Corp., a small, privately held company, is attempting to develop thalidomide for the treatment of AIDS-related complications. Several companies have established chiral products and chiral technologies. Sepracor Inc. and Chiroscience Group plc are actively developing chirally pure versions of pharmaceuticals currently marketed in racemic form. Chiroscience has completed Phase I trials in the United Kingdom for a chirally pure version of dl-methylphenidate and is working with Medeva plc, a leading supplier of dl-methylphenidate in the United States, towards full clinical development. Chiroscience has also taken certain steps to assert patent and proprietary rights with respect to its formulation of a chirally pure version of dl-methylphenidate. The agrochemical market is large and, within this market, efforts are underway by the in-house development staffs of agrochemical companies to produce chirally pure versions of their existing racemic crop protection agents. The pharmaceutical and agrochemical industries have undergone, and are expected to continue to undergo, rapid and significant technological change, and competition is expected to intensify as technical advances in each field are made and become more widely known. In order to compete effectively, we will be required to continually upgrade our scientific expertise and technology, identify and retain capable management, and pursue scientifically feasible and commercially viable opportunities. Our competition will be determined in part by the indications for which our products are developed and ultimately approved by regulatory authorities. An important factor in competition will be the timing of market introduction of our or our competitors' products. Accordingly, the relative speed with which we can develop products, complete clinical trials and approval processes and supply commercial quantities of products to the market will be expected to be important competitive factors. Competition among products approved for sale will be based, among other things, on product efficacy, safety, convenience, reliability, availability, price and patent position. MANUFACTURING THALOMID is formulated and encapsulated for us by Penn Pharmaceuticals Ltd. of Great Britain in an FDA approved facility devoted exclusively to the production of THALOMID capsules. Both the bulk manufacturing facility that produces the drug substance for THALOMID and the Penn facility have been certified as cGMP compliant. In certain instances, we may be required to make substantial capital expenditures to access additional manufacturing capacity. In addition, we have established a contract with another cGMP certified bulk drug substance supplier for THALOMID that will begin in 2001 once the regulatory process is completed. We are also actively seeking an alternate manufacturer to provide additional capacity for the formulation and encapsulation of THALOMID and expect that this will be concluded in 2000. SALES AND COMMERCIALIZATION We have established an organization of approximately 60 persons to sell and commercialize THALOMID. These individuals have considerable experience in the pharmaceutical industry and many have experience with oncological and immunological products. We expect to expand our THALOMID sales and commercialization group to support products we develop to treat oncological and immunological diseases. We intend to market and sell the products we develop for indications with accessible patient populations. For drugs with indications with larger patient populations, we anticipate partnering with other pharmaceutical companies. In addition, we are positioned to accelerate the expansion of these sales resources as appropriate to take advantage of product in-licensing and product acquisition opportunities. We intend to establish commercial relationships with selected companies in other countries to market THALOMID. EMPLOYEES As of March 15, 2000, we had 151 full-time employees, 47 of whom were engaged primarily in research and development activities, 60 of whom were engaged in sales and commercialization activities 16 and the remainder of whom were engaged in executive and administrative activities. Of these employees, 55 have advanced degrees, including 26 who have Ph.D. degrees. We also maintain consulting arrangements with a number of scientists at various universities and other research institutions in Europe and the United States. FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated by reference in this annual report are forward-looking statements concerning our business, financial condition, results of operations, economic performance and financial condition. Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and within the meaning of Section 21E of the Securities Exchange Act of 1934 are included, for example, in the discussions about: - our strategy; - new product development or product introduction; - product sales, royalties and contract revenues; - expenses and net income; - our credit risk management; - our liquidity; - our asset/liability risk management; and - our operational and legal risks. These statements involve risks and uncertainties. Actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to, those discussed under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISK FACTORS IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. Many of our products and processes are in the early or mid-stages of development and will require the commitment of substantial resources, extensive research, development, preclinical testing, clinical trials, manufacturing scale-up and regulatory approval prior to being ready for sale. We have not yet sold any of our products other than THALOMID. All of our other products will require further development, clinical testing and regulatory approvals, and there can be no assurance that commercially viable products will result from these efforts. If any of our products, even if developed and approved, cannot be successfully commercialized, our business, financial condition and results of operations could be materially adversely affected. DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF THALOMID. At our present level of operations, we may not be able to attain profitability if physicians prescribe THALOMID only for those who are diagnosed with ENL. Under current FDA regulations, we are limited in our ability to promote THALOMID outside this approved use. The market for the use of THALOMID in patients suffering from ENL is relatively small. We have initiated clinical studies to examine whether or not THALOMID is effective and safe when used to treat disorders other than ENL, but we do not know whether these studies will in fact demonstrate safety and efficacy, or if they do, whether we will succeed in receiving regulatory approval to market THALOMID for additional indications. If the results of these studies are negative, or if adverse experiences are reported in these clinical studies or otherwise in connection with the use of THALOMID by patients, this could undermine physician and patient comfort with the product, could limit the commercial success of the product and 17 could even impact the acceptance of THALOMID in the ENL market. FDA regulations restrict our ability to communicate the results of additional clinical studies to patients and physicians without first obtaining approval from the FDA to expand the authorized uses for this product. IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. There can be no assurance that those of our products that receive regulatory approval, including THALOMID, or those products for which no regulatory approval is required, will achieve market acceptance. A number of factors render the degree of market acceptance of our products uncertain, including the extent to which we can demonstrate the products' efficacy, safety and advantages, if any, over competing products, as well as the reimbursement policies of third party payors, such as government and private insurance plans. Failure of our products to achieve market acceptance would have a material adverse effect on our business, financial condition and results of operations. WE FACE A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN INSURANCE. We may be subject to product liability or other claims based on allegations that the use of our technology or products has resulted in adverse effects, whether by participants in our clinical trials or by patients using our products. Thalidomide, when used by pregnant women, has resulted in serious birth defects. Therefore, necessary and strict precautions must be taken by physicians prescribing the drug to women with childbearing potential, and there can be no assurance that such precautions will be observed in all cases or, if observed, will be effective. Use of thalidomide has also been associated, in a limited number of cases, with other side effects, including nerve damage. Although we have product liability insurance that we believe is appropriate, there can be no assurance that we will be able to obtain additional coverage if required, or that such coverage will be adequate to protect us in the event claims are asserted against us. Our obligation to defend against or pay any product liability or other claim may have a material adverse effect on our business, financial condition and results of operations. WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT AND MAY NEED TO SEEK ADDITIONAL FUNDING. We have sustained losses in each year since our incorporation in 1986. We sustained net losses of $21.8 million, $25.1 million and $25.4 million for the years ended December 31, 1999, 1998 and 1997. We had an accumulated deficit of $166.4 million and $144.6 million at December 31, 1999 and 1998. We expect to make substantial expenditures to further develop and commercialize our products, and, based on these expenditures, it is probable that losses will continue for at least the next six months. We expect that our rate of spending will accelerate as the result of increased clinical trial costs and expenses associated with regulatory approval and commercialization of products now in development. In order to fund our future operations, we will likely seek additional capital. We may not be able to raise additional capital on reasonable terms, if at all. There can be no assurance, assuming we successfully raise additional funds, that we will achieve profitability or positive cash flow. WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS. We have historically experienced, and expect to continue for the foreseeable future to experience, significant fluctuations in our quarterly operating results. These fluctuations are due to a number of factors, many of which are outside our control, and may result in volatility of our stock price. Future operating results will depend on many factors, including: - demand for our products; - regulatory approvals for our products; - the timing of the introduction and market acceptance of new products by us or competing companies; - the timing of certain research and development milestones; and - our ability to control our costs. 18 WE HAVE NO MANUFACTURING CAPABILITIES AND WE ARE DEPENDENT ON ONE SUPPLIER FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND ENCAPSULATION OF THALOMID. We currently have no experience in, or our own facilities for, manufacturing any products on a commercial scale. Currently, we obtain all of our bulk drug material for THALOMID from a single supplier and rely on a single manufacturer to formulate and encapsulate THALOMID. The FDA requires that all suppliers of pharmaceutical bulk material and all manufacturers of pharmaceuticals for sale in or from the United States achieve and maintain compliance with the FDA's current Good Manufacturing Practice, or cGMP, regulations and guidelines. If the operations of the sole supplier or the sole manufacturer were to become unavailable for any reason, the required FDA review and approval of the operations of a new supplier or new manufacturer could cause a delay in the manufacture of THALOMID which could have a material adverse effect on our business, financial condition and results of operations. We intend to continue to utilize outside manufacturers if and when needed to produce our other products on a commercial scale. If our outside manufacturers do not meet our requirements for quality, quantity or timeliness, or do not achieve and maintain compliance with all applicable regulations, our business, financial condition and results of operations could be materially adversely affected. WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES. Although we have a 60 person sales and commercialization group to sell THALOMID, we may be required to seek a corporate partner to provide marketing services with respect to our other products. Any delay in developing these resources could have a material adverse impact on our results of operations. We have contracted with a specialty distributor to distribute THALOMID. Failure of this specialty distributor to perform its obligations could have a material adverse effect on our business, financial condition and results of operations. WE ARE DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES. Our ability to fully commercialize our products, if developed, may depend to some extent upon our entering into joint ventures or other arrangements with established pharmaceutical companies with the requisite experience and financial and other resources to obtain regulatory approvals and to manufacture and market such products. Accordingly, our success may depend, in part, upon the subsequent success of such third parties in performing preclinical and clinical trials, obtaining the requisite regulatory approvals, scaling up manufacturing, successfully commercializing the licensed product candidates and otherwise performing their obligations to us. We cannot assure you that: - we will be able to enter into joint ventures or other arrangements on acceptable terms, if at all; - our joint ventures or other arrangements will be successful; - our joint ventures or other arrangements will lead to the successful development and commercialization of any products; - we will be able to obtain or maintain proprietary rights or licenses to any technology or products developed in connection with our joint ventures or other arrangements; or - we will be able to preserve the confidentiality of any proprietary rights or information developed in connection with our joint ventures or other arrangements. THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN SIGNIFICANT LIABILITIES WHICH COULD EXCEED OUR INSURANCE COVERAGE AND FINANCIAL RESOURCES. We use some hazardous materials in our research and development activities. While we believe we are currently in substantial compliance with the federal, state and local laws and regulations governing the use of these materials, we cannot assure you that accidental injury or contamination will not occur. Any such accident or contamination could result in substantial liabilities, which could exceed our insurance coverage and financial resources. Additionally, we cannot assure you that the cost of compliance with environmental and safety laws and regulations will not increase in the future. 19 RESIDUAL YEAR 2000 PROBLEMS COULD CAUSE A MATERIAL DISRUPTION IN OUR BUSINESS. Although all of our computer hardware and software has been upgraded for Year 2000 compliance, all of our key vendors have provided assurance that they are Year 2000 compliant and there were no related problems at the transition into the Year 2000, any residual effect of the Year 2000 problem could cause a material disruption in our business. INDUSTRY RISKS THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND THERE IS NO ASSURANCE OF REGULATORY APPROVAL. The preclinical development, clinical trials, manufacturing, marketing and labeling of pharmaceuticals are all subject to extensive regulation by numerous governmental authorities and agencies in the United States and other countries. There can be no assurance that we will be able to obtain the necessary approvals required to market our products in any of these markets. The testing, marketing and manufacturing of our products will require regulatory approval, including approval from the FDA and, in some cases, from the U.S. Environmental Protection Agency, or the EPA, and the U.S. Department of Agriculture, or the USDA, or governmental authorities outside of the United States that perform roles similar to those of the FDA and EPA. Certain of our pharmaceutical products in development also fall under the Controlled Substances Act of 1970, or the CSA, which requires authorization by the U.S. Drug Enforcement Agency, or the DEA, of the U.S. Department of Justice in order to handle and distribute these products. It is not possible to predict how long the approval processes of the FDA, EPA, DEA or any other applicable federal, state or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. Positive results in preclinical testing and/or early phases of clinical studies are no assurance of success in later phases of the approval process. Risks associated with the regulatory approval process include: - in general, preclinical tests and clinical trials can take many years, and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretation that could delay, limit or prevent regulatory approval; - delays or rejections may be encountered during any stage of the regulatory approval process based upon the failure of the clinical or other data to demonstrate compliance with, or upon the failure of the product to meet, a regulatory agency's requirements for safety, efficacy and quality or, in the case of a product seeking an orphan drug indication, because another designee received approval first; - requirements for approval may become more stringent due to changes in regulatory agency policy, or the adoption of new regulations or legislation; - the scope of any regulatory approval, when obtained, may significantly limit the indicated uses for which a product may be marketed; - approved drugs and agrochemicals, as well as their manufacturers, are subject to continuing and on-going review, and discovery of previously unknown problems with these products may result in restrictions on their manufacture, sale or use or in their withdrawal from the market; and - regulatory authorities and agencies may promulgate additional regulations restricting the sale of our existing and proposed products. Once approved, we cannot guarantee that the FDA will permit us to market those products for broader or different applications, or that it will grant us approval with respect to separate product applications which represent extensions of our basic technology, or that existing approvals will not be withdrawn or modified in a significant manner. In addition, it is possible that the FDA will promulgate additional regulations restricting the sale of our present or proposed products. Labeling and promotional activities are subject to scrutiny by the FDA and state regulatory agencies and, in some circumstances, by the Federal Trade Commission. FDA enforcement policy prohibits the marketing of approved products for unapproved, or off-label, uses. These regulations, and the FDA's 20 interpretation of them, may impair our ability to effectively market THALOMID or other products which gain approval. The FDA actively enforces regulations prohibiting promotion of off-label uses and the promotion of products for which approval has not been obtained. Failure to comply with these requirements can result in regulatory enforcement action by the FDA. The FDA is aware that physicians prescribe THALOMID for off-label uses and has not, as of this date, initiated any regulatory actions against us. FDA approval of THALOMID requires that we distribute it under the rigid standards of our S.T.E.P.S. program in order to maintain approval. Delays in obtaining, or the failure to obtain and maintain, necessary approvals from the FDA, EPA, DEA or other applicable regulatory authorities or agencies for our proprietary products or regulatory enforcement actions by FDA concerning our marketing practices would have a material adverse effect on our business, financial condition and results of operations. WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY. Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties, when necessary, and conduct our business without infringing upon the proprietary rights of others. The patent positions of pharmaceutical firms, including ours, can be uncertain and involve complex legal and factual questions. In addition, the coverage sought in a patent application may not be obtained or may be significantly reduced before the patent is issued. Consequently, we do not know whether any of our pending applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage. If any of our issued or licensed patents are infringed, we cannot guarantee that we will be successful in enforcing our intellectual property rights. Moreover, we cannot assure you that we can successfully defend against any patent infringement suit that may be brought against us by a third party. Patent infringement lawsuits in the pharmaceutical and biotechnology industries can be complex, lengthy and costly to both parties. Further, we rely upon unpatented proprietary and trade secret technology that we try to protect, in part, by confidentiality agreements with our collaborative partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. There can be no assurance that these agreements will not be breached or that we would have adequate remedies for any such breach. We cannot assure you that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology or that such technology will not be found to be non-proprietary or not a trade secret. Our right to practice the inventions claimed in some patents which relate to products under development and THALOMID arises under licenses granted to us by others, including EntreMed, Inc. and The Rockefeller University. While we believe these agreements to be valid and enforceable, we cannot assure you that our rights under these agreements will continue or that disputes concerning these agreement will not arise. In addition, certain of the grants contained in the licenses granted to us depend upon the validity and enforceability of other agreements to which we are not a party. THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE. The pharmaceutical and agrochemical industries in which we operate are highly competitive and subject to rapid and significant technological change. Our present and potential competitors include major chemical and pharmaceutical companies, as well as specialized pharmaceutical firms. Most of these companies have considerably greater financial, technical and marketing resources than us. We also experience competition from universities and other research institutions and, in some instances, we compete with others in acquiring technology from these sources. The pharmaceutical and agrochemical industries have undergone, and are expected to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technical advances in each field are made and become more widely known. The development of products or processes with significant advantages over those that we are seeking to develop could have a material adverse effect on our business, financial condition and results of operations. 21 SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT. Sales of our products will depend, in part, on the extent to which the costs of our products will be paid by health maintenance, managed care, pharmacy benefit and similar health care management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. These health care management organizations and third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of health care costs has become a priority of federal and state governments, and the prices of drugs have been targeted in this effort. We cannot assure you that our products will be considered cost effective by payors, that reimbursement will be available or, if available, that the level of reimbursement will be sufficient to allow us to sell our products on a profitable basis. ITEM 2. PROPERTIES We lease a 44,500-square foot laboratory and office facility in Warren, New Jersey, under a lease with an unaffiliated party, which has a term ending in May 2002 with one five-year renewal option, and a 29,000-square foot facility which has a term ending in July 2010 with two five-year renewal options. We also lease an 18,000-square foot laboratory and office facility in North Brunswick, New Jersey, under a lease with an unaffiliated party which has a term ending in December 2009 with two five-year renewal options. We believe that our laboratory facilities are adequate for our research and development activities for at least the next 12 months. ITEM 3. LEGAL PROCEEDINGS We are not engaged in any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol "CELG." The following table sets forth, for the periods indicated, the intra-day high and low sale prices per share of common stock on the Nasdaq National Market:
HIGH LOW ---------- ---------- 1999 ........................... Fourth Quarter ............... $72 5/8 $24 3/4 Third Quarter ................ 29 14 Second Quarter ............... 20 1/16 13 9/16 First Quarter ................ 18 5/8 11 5/16 1998....... .................... Fourth Quarter ............... $17 1/4 $ 7 1/2 Third Quarter ................ 15 4 1/8 Second Quarter ............... 11 1/2 8 1/4 First Quarter ................ 11 5/8 6 15/16
The last reported sales price per share of common stock on the Nasdaq National Market on March 21, 2000 was $117 13/16. As of March 21, 2000, there were approximately 450 holders of record of our common stock. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future. 23 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following Selected Consolidated Financial Data should be read in conjunction with the our Consolidated Financial Statements and the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this Annual Report. The data set forth below with respect to our Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are derived from our Consolidated Financial Statements which have been audited by KPMG LLP, independent certified public accountants, and which are included elsewhere in this Annual Report and are qualified by reference to such Consolidated Financial Statements and related Notes thereto. Some information has been derived from other audited consolidated financial statements. Our historical results are not necessarily indicative of future results of operations.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ----------------- ---------------- ---------------- ---------------- ---------------- Statements of Operations Data: Total revenues .......................... $ 472,000 $ 881,665 $ 1,122,193 $ 3,800,490 $ 26,209,624 Loss from continuing operations ......... (8,366,380) (17,057,521) (25,019,844) (32,022,873) (21,781,200) Discontinued operations: Loss from operations .................... (2,150,143) (761,461) (427,183) (59,837) -- Gain on sale of chiral assets ........... -- -- -- 7,014,830 -- Net loss applicable to common stockholders .......................... $ (10,516,523) $ (21,609,640) $ (26,921,501) $ (25,092,528) $ (21,781,200) ============= ============= ============= ============= ============= Per share of common stock-- basic and diluted: Loss from continuing operations ......... $ (1.04) $ (1.81) $ (2.05) $ (1.98) $ (1.20) Discontinued operations: Loss from operations .................... (0.27) (0.08) (0.03) -- -- Gain on sale of chiral assets ........... -- -- -- 0.43 -- Net loss applicable to common stockholders .......................... (1.30) $ (2.29) $ (2.20) $ (1.55) $ (1.28) ============= ============= ============= ============= ============= Weighted average number of shares outstanding ........................... 8,073,000 9,450,000 12,215,000 16,160,000 17,012,000
DECEMBER 31, --------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------------- ---------------- ----------------- ----------------- ----------------- Balance Sheet Data: Cash and cash equivalents, and marketable securities ................ $ 11,712,905 $ 17,814,984 $ 13,583,445 $ 5,123,843 $ 19,526,643 Assets held for disposal ............... -- -- 485,170 -- -- Total assets ........................... 14,211,218 20,937,862 18,217,456 11,927,997 32,333,670 Convertible debentures ................. 4,592,366 2,026,043 -- -- -- Convertible notes ...................... -- -- -- 8,348,959 38,494,795 Accumulated deficit .................... (70,989,400) (92,599,039) (119,520,540) (144,613,068) (166,394,268) Stockholders' equity (deficit) ......... 7,142,501 16,065,009 15,425,092 (3,732,624) (15,709,386)
24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We were organized in 1980 as a unit of Celanese Corporation, a chemical company. Our initial mandate was to apply biotechnology to the production of fine and specialty chemicals. Following the 1986 merger of Celanese Corporation with American Hoechst Corporation, we were spun off as an independent company. In July 1987, we completed an initial public offering of our common stock and commenced the development of chemical and biotreatment processes for the chemical and pharmaceutical industries. We discontinued the biotreatment operations in 1994 to focus on our targeted small molecule cancer and immunology compound development programs and our biocatalytic chiral chemistry program. Since 1990, our revenues have been generated primarily through research and development relating to, and supply of, chirally pure intermediates to pharmaceutical companies for use in new drug development and, to a lesser degree, from agrochemical research and development contracts. However, as we developed our cancer and immunology programs, sales of chirally pure intermediates became a less integral part of our strategic focus. Accordingly, on January 9, 1998, we completed the sale of our chiral intermediate business to Cambrex Corporation for $15.0 million. The terms of the sale provided for a payment of $7.5 million at closing and an additional amount of future royalties not to exceed the net present value on the date of contract of $7.5 million, with a guarantee of certain minimum payments beginning in the third year after closing. In late September 1998, we commenced sales of our first commercial product, THALOMID. We have sustained losses in each year since our inception in 1986. In 1999, we had a net loss of $21.8 million and at December 31, 1999, had an accumulated deficit of $166.4 million. We expect to make substantial expenditures to further commercialize and develop THALOMID, develop our oncology and immunology programs and expand our chiral business. Based on these expenditures, it is likely that losses will continue for at least the next six months. Subject to the risks described elsewhere in this Annual Report on Form 10-K, we believe that there are significant market opportunities for the products and processes under development by us. To address these opportunities in a timely and effective manner, we intend to seek out collaborations and licensing arrangements with third parties. We have entered into agreements covering the manufacture and distribution for us of certain compounds, such as THALOMID, and the development by us of processes for producing chirally pure crop protection agents for license to agrochemical manufacturers. This development is performed through Celgro Corporation, our wholly owned subsidiary. We have established a commercial organization to sell THALOMID and we currently employ 60 persons in this capacity. We intend to develop and market our own pharmaceuticals for indications with accessible patient populations. For drugs with indications for larger patient populations, we anticipate partnering with other pharmaceutical companies. We also anticipate partnering with companies for the development and commercialization of our chirally pure pharmaceutical and agrochemical products. We expect that these arrangements typically will include milestone payments, reimbursement of research and development expenses and royalty arrangements. Future operating results will depend on many factors, including demand for our products, regulatory approvals of our products, the timing of the introduction and market acceptance of new products by us or competing companies, the timing of research and development milestones and our ability to control costs. RESULTS OF OPERATIONS Fiscal Years Ended December 31, 1999, 1998 and 1997 Total revenues. Total revenues in 1999 increased significantly to approximately $26.2 million from $3.8 million in 1998. The increase resulted from our first full year of product sales of THALOMID in 1999 of approximately $24.1 million compared with $3.3 million of THALOMID sales in 1998. The 1998 sales 25 of THALOMID reflected only a partial year of sales, starting from the launch date at the end of the third quarter. Revenue from research contracts increased to $2.2 million in 1999 from $535,000 in 1998 and included a milestone payment of $500,000 related to ATTENADE. The 1998 revenues increased by 238% to approximately $3.8 million from approximately $1.1 million in 1997. This was due to product sales of approximately $3.3 million of THALOMID which was approved in 1998 by the FDA and a decrease in research contracts of approximately $.6 million due to completion of a contract at the end of 1997 with a major agrochemical company. Cost of goods sold. Cost of goods sold in 1999 was approximately $3.0 million compared with approximately $282,000 in 1998. The cost of goods sold in both years does not reflect raw material or formulation and encapsulation costs of Thalomid, as these costs were charged as research and development expenses prior to receiving FDA approval. There was no cost of goods sold in 1997. Research and development expenses. Research and development expenses for 1999 were slightly lower at approximately $19.6 million compared with approximately $19.8 million in 1998. Increased spending for clinical trials, primarily for ATTENADE, was offset by a decrease in regulatory consulting fees, university research program spending, and spending for THALOMID capsules which was charged as research and development expense prior to receiving FDA approval in July of 1998. Research and development expenses for 1998 increased by 14% to approximately $19.8 million from approximately $17.4 million in 1997. This increase was primarily due to an increase of approximately $1.5 million for the our chiral pharmaceutical program primarily for clinical trials and preclinical toxicology studies and approximately $780,000 relating to the our immunotherapeutic program, primarily for clinical trials for potential new NDA filings for THALOMID. Selling, general and administrative expenses. Selling, general and administrative expenses for 1999 increased by 62% over 1998, from approximately $16.2 million to approximately $26.2 million. The increase was primarily in sales and marketing expenses, approximately $3.6 million, warehousing and distribution expenses, approximately $3.4 million, and expenditures relating to medical affairs and drug safety costs, approximately $730,000, all to support the commercialization and distribution of THALOMID. Selling, general and administrative expenses for 1998 increased by 77% to approximately $16.2 million from approximately $9.1 million in 1997. This was primarily due to sales and marketing expenses, $4.8 million, in anticipation of the THALOMID product launch as well as post launch selling activities. Other increases were primarily related to the necessary infrastructure costs required to support the commercial operations including medical affairs and drug safety costs of $928,000, information systems development cost and additional finance personnel, $423,000, and other administrative expenses such as legal, consulting and investor relations of approximately $900,000. Interest income and interest expense. Interest income for 1999 of $694,000 was slightly down from $705,000 in 1998 as average cash balances were approximately the same in both years. Interest income for 1998 increased by 42% to approximately $705,000 from approximately $496,000 in 1997. The increase was due to higher average cash balances in 1998. Interest expense in 1999 was significantly higher than 1998, at approximately $2.8 million compared with approximately $256,000 in 1998. The higher interest expense resulted from the interest on the three convertible notes which were issued in September 1998, January 1999 and July 1999. Interest expense for 1998 increased 129% to approximately $256,000 from $112,000 due primarily to the interest expenses associated with the 9.5% convertible notes issued in September 1998. Loss from continuing operations. The loss from continuing operations decreased 32% in 1999 compared with 1998, to approximately $21.8 million from approximately $32.0 million. The decreased loss resulted from the higher gross profit on THALOMID sales and an income tax benefit of $3.0 million from the sale of a portion of our New Jersey state net operating loss carryforwards, offset by increased selling, general and administrative costs and higher interest expense. The loss from continuing operations increased 28% to approximately $32.0 million in 1998 from approximately $25.0 million in 1997. The increase was due primarily to spending related to the launch of THALOMID and ongoing research programs in chiral pharmaceuticals and immunotherapeutics as described above. 26 Loss from discontinued operations. The loss from discontinued operations decreased to $60,000 in 1998 from $427,000 in 1997 due to the fact that the chiral intermediate business was sold in early January 1998. The Company recorded a gain on the sale of the chiral intermediate assets of approximately $7.0 million in 1998. LIQUIDITY AND CAPITAL RESOURCES Since our inception in 1986, we have financed our working capital requirements primarily through private and public sales of our debt and equity securities, income earned on the investment of the proceeds from the sale of such securities, and revenues from research contracts and product sales. As of December 31, 1999, we have raised approximately $100.0 million in net proceeds from three public and three private offerings, including our initial public offering in July 1987. We also issued convertible notes in September 1998, January 1999, and July 1999 with net proceeds aggregating approximately $38.0 million. Our net working capital at December 31, 1999 increased significantly to approximately $18.5 million (primarily cash and cash equivalents) from approximately $2.5 million at December 31, 1998. The increase in working capital was primarily due to the cash received from the issuance of the convertible notes in 1999 and 1998 as well as collection of receivables on sales of THALOMID. Cash and cash equivalents increased by $12.2 million in 1999 while marketable securities increased by $2.2 million from 1998. This reflects the receipt of funds from the issuance of the convertible notes and collection of receivables from sales of THALOMID. We expect that our rate of spending will increase as the result of increased clinical trial costs, increased expenses associated with the regulatory approval process and commercialization of products currently in development, increased costs related to the commercialization of THALOMID and increased working capital requirements. On February 16, 2000, we completed a public offering of 3,450,000 shares of our common stock. Proceeds from the transaction net of expenses, were approximately $278.0 million. These funds plus the increasing revenues from sales of THALOMID should fund our operations for the foreseeable future. RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements, including the recognition of non-refundable fees received upon entering into arrangements. We are in the process of evaluating this SAB and the effect it will have on our future consolidated financial statements and future revenue recognition policy. YEAR 2000 COMPUTER SYSTEMS COMPLIANCE All of our computer hardware and software has been upgraded for Year 2000 compliance. All of our key vendors have provided assurance that they are Year 2000 compliant. While there were no Year 2000 related problems at the transition into the Year 2000, we are maintaining our contingency plans in the event any problems arise in the future. The statement contained in the foregoing Year 2000 readiness disclosures is subject to protection under the Year 2000 Information and Readiness Disclosure Act. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk We do not use derivative financial instruments. Our convertible notes have a fixed interest rate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 14 of this Annual Report. 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - --------------------------------------- ----- -------------------------------------------------- John W. Jackson* ...................... 55 Chairman of the Board and Chief Executive Officer Sol J. Barer, Ph.D.* .................. 52 President, Chief Operating Officer, Director Robert J. Hugin* ...................... 45 Chief Financial Officer and Senior Vice President Jack L. Bowman ........................ 67 Director Frank T. Cary ......................... 79 Director Arthur Hull Hayes, Jr., M.D. .......... 66 Director Gilla Kaplan, Ph.D. ................... 52 Director Richard C. E. Morgan .................. 55 Director Walter L. Robb, Ph.D. ................. 71 Director Lee J. Schroeder ...................... 71 Director
- ---------- * Executive Officer JOHN W. JACKSON has been our Chairman of the Board and Chief Executive Officer since January 1996. From February 1991 to January 1996, Mr. Jackson was President of Gemini Medical, a consulting firm that he founded and which specialized in services and investment advice to start-up medical device and biotechnology companies. Previously, Mr. Jackson had been President of the worldwide Medical Device Division of American Cyanamid, a major pharmaceutical company, from February 1986 to January 1991 and served in various international positions, including Vice President -- International for American Cyanamid from 1978 to 1986. Mr. Jackson served in several human health marketing positions at Merck & Company, a major pharmaceutical company, from 1971 to 1978. Mr. Jackson received a B.A. degree from Yale University and an M.B.A. from INSEAD, France. SOL J. BARER, PH.D. has been our President since October 1993 and our Chief Operating Officer and one of our directors since March 1994. Dr. Barer was our Senior Vice President -- Science and Technology and Vice President/General Manager -- Chiral Products from October 1990 to October 1993 and our Vice President -- Technology from September 1987 to October 1990. Dr. Barer received a Ph.D. in organic and physical chemistry from Rutgers University. ROBERT J. HUGIN has been our Senior Vice President and Chief Financial Officer since June 1999. Previously, Mr. Hugin had been a Managing Director at J.P. Morgan & Co. Inc., which he joined in 1985. Mr. Hugin received an A.B. degree from Princeton University and an M.B.A. from the University of Virginia. JACK L. BOWMAN, one of our directors since April 1998, served as Company Group Chairman of Johnson & Johnson from 1987 to 1994. From 1983 to 1987, Mr. Bowman served as Executive Vice President of American Cyanamid. Mr. Bowman is also a director of NeoRx Corporation, Cell Therapeutics, Inc., CytRx Corporation, Cellegy Pharmaceuticals and Targeted Genetics. FRANK T. CARY has been Chairman of the Executive Committee of our board of directors since July 1990 and has been one of our directors since 1987. From 1973 to 1981, Mr. Cary was Chairman of the Board and Chief Executive Officer of International Business Machines Corporation. Mr. Cary also is a director of Cygnus Therapeutic Systems Inc., ICOS Corporation, Lincare Inc., Lexmark International Inc., Vion Pharmaceuticals Inc. and Teltrend, Inc. ARTHUR HULL HAYES, JR., M.D., one of our directors since 1995, has been President and Chief Operating Officer of MediScience Associates, a consulting organization that works with pharmaceutical firms, biomedical companies and foreign governments, since July 1991. Dr. Hayes has also been a partner in Issue Sphere, a public affairs firm that focuses on health science issues, since November 1995, as well as a professor in medicine, pharmacology and family and community medicine at New York Medical 29 College and clinical professor of medicine and pharmacology at the Pennsylvania State University College of Medicine. From 1986 to 1990, Dr. Hayes was President and Chief Executive Officer of E.M. Pharmaceuticals, a unit of E. Merck AG and from 1981 to 1983 was Commissioner of the United States Food and Drug Administration. Dr. Hayes also is a director of Myriad Genetics, Inc., NaPro BioTherapeutics, Inc. and Premier Research Worldwide. GILLA KAPLAN, PH.D., one of our directors since April 1998, is an immunologist in the Laboratory of Cellular Physiology and Immunology at The Rockefeller University in New York where she was appointed Assistant Professor in 1985 and Associate Professor in 1990. Dr. Kaplan is a member of numerous professional societies and has been the organizer of several major symposia on tuberculosis. Dr. Kaplan has served as an advisor to the Global Program for Vaccines and Immunization of the World Health Organization, has participated in several NIH peer review panels, and is on the Editorial Board of Microbial Drug Resistances, and Tubercle and Lung Disease. Dr. Kaplan is the author of more than 100 scientific publications and has received international recognition for her work. In 1995, she gave the Special Honorary Lecture at the American Society for Microbiology and in 1997 was appointed a Fellow of the American Academy of Microbiology. RICHARD C. E. MORGAN, one of our directors since 1987, is a co-founder, Chairman and Chief Executive Officer of incuVest LLC and a Managing Partner and co-founder of Amphion Capital Management LLC. Prior to founding Amphion, he was Managing General Partner of Wolfensohn Partners, L.P., the predecessor to Amphion Ventures L.P. Mr. Morgan also serves as Chairman of AXCESS, Inc., Quidel Corp., ONTOS, Inc., IVEX Corporation and Quantrad, Inc. In addition, he serves on the Board of Directors of ChromaVision Medical Systems, Inc. and Indigo NV. WALTER L. ROBB, PH.D., one of our directors since 1992, has been a private consultant and President of Vantage Management Inc., a consulting and investor services company, since January 1993. Mr. Robb was Senior Vice President for Corporate Research and Development of General Electric Company, and a member of its Corporate Executive Council from 1986 to December 1992. Mr. Robb also is Chairman of the board of directors of Capital District Sports and a director of Cree Research Inc., Mechanical Technology, Inc. and Plug Power, Inc. LEE J. SCHROEDER, one of our directors since 1995, has been President of Lee Schroeder & Associates, Inc., pharmaceutical business consultants, since 1985. Mr. Schroeder was President of Fox Meyer Lincoln from 1983 to 1985, and was an Executive Vice President of Sandoz, Inc. from 1981 to 1983. Mr. Schroeder also is a director of Bryan LGH Hospital, MGI Pharmaceutical, Inc., Ascent Pediatrics, Inc. and Interneuron Pharmaceuticals, Inc. ELECTION OF DIRECTORS Each director holds office (subject to our By-Laws) until the next annual meeting of stockholders and until such director's successor has been elected and qualified. There are no family relationships between any of the directors and executive officers of the Company. 30 ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth information about the compensation paid, or payable, by the Company for services rendered in all capacities to the Chief Executive Officer of the Company and each of the most highly paid executive officers of the Company who earned more than $100,000, for each of the last three fiscal years in which such officers were executive officers for all or part of the year.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------------- ------------------------------------------- OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER NAME AND COMPENSATION STOCK UNDERLYING COMPENSATION PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S) ($) OPTIONS # ($) - --------------------- ------ ---------------- ----------- -------------- -------------- ------------ --------------- John W. Jackson 1999 300,000 390,000 19,200(1) 0 220,000 13,390(2) Chairman and 1998 285,000 79,800 19,200(1) 0 100,000 13,390(2) Chief Executive 1997 270,000 97,200 9,500(1) 0 0 13,390(2) Officer Sol J. Barer, Ph.D. 1999 255,833 230,250 19,200(1) 0 70,000 0 President and 1998 243,333 51,100 19,200(1) 0 50,000 0 Chief Operating 1997 232,500 63,647 9,500(1) 0 0 0 Officer Robert J. Hugin 1999 127,385(3) 168,000 7,200 0 150,000 0 Sr. V. P. & Chief Financial Officer
- ---------- (1) Reflects matching contributions under the Company's 401K plan. (2) Reflects life insurance premiums for a life insurance policy for Mr. Jackson. (3) Mr. Hugin commenced his employment with the Company in June, 1999. EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS John W. Jackson, Sol J. Barer and Robert J. Hugin (each an "Executive") are employed pursuant to substantially similar employment agreements (the "Employment Agreements") providing for their continued employment until January 1, 2003 (the period during which Executive is employed is referred to as the "Employment Period"). The Employment Period shall be automatically renewed for successive one-year terms unless the Company or Executive gives written notice to the other at least six months prior to the expiration of the Employment Period. The Employment Agreements provide Messrs. Jackson, Barer and Hugin with a base salary (which may be increased by the Board of Directors, or a committee thereof) of $300,000, $258,000 and $240,000, respectively, per annum. In addition, each of the Employment Agreements provides for an annual bonus in an amount equal to 65%, 45% and 35%, respectively, of Executive's base salary measured against objective criteria to be determined by the Board of Directors, or a committee thereof after good faith consultation with each Executive. The Employment Agreements also provide that Messrs. Jackson, Barer and Hugin are entitled to continue to participate in all group health and insurance programs and all other fringe benefit or retirement plans which are generally available to the Company's employees. Each of the Employment Agreements provides that if the Executive is terminated by the Company without cause or due to Executive's disability, he shall be entitled to receive a lump-sum payment in an amount equal to Executive's annual base salary and a pro rata share of Executive's annual target bonus. Upon the occurrence of a change in control (as defined in the Employment Agreements) and thereafter, each Employment Agreement provides that if, (a) at any time within one year of a change in control Executive's employment is terminated by the Company without cause or for disability or by Executive for good reason (as defined in the Employment Agreement) or (b) at any time within 90 days prior to a change in control, Executive's employment is terminated by the Company without cause or by Executive for good reason, Executive shall be entitled to receive: (i) a lump sum payment in an amount equal to three times Executive's base salary and three 31 times Executive's highest annual bonus within the three years prior to the change in control; (ii) any accrued benefits; (iii) payment of health and welfare premiums for Executive and his dependants; and (iv) full and immediate vesting of all stock options and equity awards; provided, however, that such payment shall be reduced by any payments made to Executive prior to the change in control pursuant to Sections 10(a)(iv) and (v) of the Employment Agreements. Each Employment Agreement also provides that Executive shall be entitled to receive a gross-up payment on any payments made to Executive that are subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, except that a gross-up will not be made if the payments made to Executive do not exceed 105% of the greatest amount that could be paid to Executive such that the receipt of payments would not give rise to the excise tax. Each Executive is subject to a non-compete which applies during the period the Executive is employed and until the first anniversary of the date Executive's employment terminates (the non-compete applies to the second anniversary of the date Executive's employment terminates if the Executive receives change in control payments and benefits). STOCK OPTIONS The following table sets forth information for each of the named executive officers with respect to the value of options exercised during the year ended December 31, 1999 and the value of outstanding and unexercised options held as of December 31, 1999. There were no SARs exercised during 1999 and none were outstanding as of December 31, 1999. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED VALUE AT DECEMBER 31, 1999 AT DECEMBER 31, 1999 ON EXERCISE REALIZED ----------------------------- ---------------------------- NAME ($) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------- ------------- --------- ------------- --------------- ------------- -------------- John W. Jackson ............. -- -- 206,423 286,667 $11,850,905 $15,640,820 Sol J. Barer, Ph.D. ......... -- -- 250,746 103,334 $10,205,964 $ 5,740,441 Robert J. Hugin ............. -- -- -- 150,000 -- $ 8,156,250
- ---------- (1) Represents the difference between the closing market price of the Common Stock as reported by Nasdaq on December 31, 1999 of $70 per share and the exercise price per share of in-the-money options multiplied by the number of shares underlying the in-the-money options. COMPENSATION COMMITTEE REPORT The Compensation Committee determines our executive compensation policies. The Compensation Committee determines the compensation of our executive officers and approves and oversees the administration of incentive compensation programs for all employees including executive officers. The Compensation Committee is composed solely of outside directors. EXECUTIVE COMPENSATION POLICIES AND PROGRAMS Our executive compensation program is part of a company-wide program covering all employees. The program's goals are to attract, retain, and motivate employees, and it utilizes incentives such that employees and stockholders share the same risks. The compensation program is designed to link compensation to performance. A portion of each employee's compensation relates to the grant of stock options, and such grants are based on the successful attainment of strategic corporate, commercial, and individual goals. We do not have a pension plan or other capital accumulation program. Grants of stock options are therefore of great importance to executives as well as all employees. Any long-term value to be derived from such grants will be consistent with stockholder gains. 32 Executive and employee compensation includes salary, employment-related benefits, and long-term incentive compensation: Salary. Salaries are set competitively relative to the biotechnology and pharmaceutical industries--industries with which we compete for our highly skilled personnel. Individual experience and performance is considered when setting salaries within the range for each position. Annual reviews are held and adjustments are made based on attainment of individual goals. Benefits. All employees are eligible for similar benefits, such as health, disability, and life insurance. Long-Term Incentive Compensation. An incentive compensation program is established annually. The purpose of this program is to provide financial incentives to executives and employees to achieve annual corporate, business unit, and individual goals. The incentive program also aligns executive and employee interests with those of stockholders by using grants of stock options. Such grants vest over time thereby encouraging continued employment with the Company. The size of grants is tied to comparative biotechnology industry practices. To determine such comparative data, the Company relies on outside compensation consultants and third party industry surveys. Under our 1998 incentive program, it was agreed that each year, subject to the achievement of certain goals by the Company, we would grant at certain dates pursuant to approval of the compensation committee of the Board of Directors, options to purchase shares of common stock. A similar incentive program has been designed for 1999 based on attainment of corporate, business unit, and individual goals. The program is open to all regular full-time employees, other than the executive officers of the Company. Chief Executive Officer Compensation. Pursuant to Mr. Jackson's contract with the Company entered into on September 30, 1997, Mr. Jackson received base salary of $300,000 for 1999. Mr. Jackson also received a bonus of $390,000 for 1999. Factors considered in determining Mr. Jackson's bonus included the successful attainment of several important milestones in the development of our products, as well as comparisons to total compensation packages of chief executive officers at corporations within our industry that are of comparable size. Members of the Compensation Committee Richard C. E. Morgan, Chairman Frank T. Cary Jack L. Bowman Lee J. Schroeder COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Compensation Committee are Richard C. E. Morgan, Chairman, Frank T. Cary, Jack L. Bowman, and Lee J. Schroeder. Each is an outside director of the Company. DIRECTOR COMPENSATION Directors do not receive salaries or cash fees for serving as directors nor do they receive any cash compensation for serving on committees; however, all members of the Board of Directors who are not employees of the Company ("Non-Employee Directors") are reimbursed for their expenses for each meeting attended and are eligible to receive stock options pursuant to the 1995 Non-Employee Directors' Plan (the "1995 Directors' Plan"). The 1995 Directors' Plan was adopted by the Board of Directors on April 5, 1995, and approved by the Company's stockholders at the 1995 Annual Meeting of Stockholders. The 1995 Directors' Plan provides for the granting to Non-Employee Directors of non-qualified options to purchase an aggregate of not more than 250,000 shares (subject to adjustment in certain circumstances) of Common Stock. Under the 1995 Directors' Plan, each Non-Employee Director as of April 5, 1995 was granted a non-qualified option to purchase 20,000 shares of Common Stock, and each new Non-Employee Director upon the date of his election or appointment will be granted a non-qualified option to purchase 20,000 shares of Common Stock. These initial options vest in four equal annual installments commencing on the first anniversary of the date of grant, assuming the Non-Employee Director remains a director. 33 Upon the date of each Annual Meeting of Stockholders, each Non-Employee Director is granted a non-qualified option to purchase 10,000 shares of Common Stock (or a pro rata portion thereof if the director did not serve the entire year since the date of the last annual meeting). These options vest in full on the date of the first Annual Meeting of Stockholders held following the date of the grant, assuming the Non-Employer Director is a director on that date. All options granted pursuant to the 1995 Directors' Plan will expire no later than 10 years from the date of grant and no options may be granted after June 16, 2005. If a Non-Employee Director terminates his service on the Board of Directors for any reason, options which were exercisable on the date of termination and which have not expired may be exercised at any time until the date of expiration of such options. In addition, if there is a change of control and within two years thereafter a director is removed without cause (as defined) or is not nominated for election by the Company's stockholders, all unvested portions of a stock option will automatically vest. In 1999, pursuant to the 1995 Directors' Plan, each of Messrs. Bowman, Cary, Hayes, Morgan, Robb, Schroeder and Dr. Kaplan received an option to purchase 10,000 shares of Common Stock at an exercise price of $15.625 per share, the fair market value of the stock on the date of the grant. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The table below sets forth the beneficial ownership of the Common Stock as of February 29, 2000 (i) by each director, (ii) by each of the named executive officers, (iii) by all directors and executive officers of Celgene as a group, and (iv) by all persons known by the Board of Directors to be beneficial owners of more than five percent of the outstanding shares of Common Stock.
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OWNERSHIP CLASS - ---------------------------------------------------------------- ---------------------- ----------- John W. Jackson ................................................ 388,133(1) 1.8% Sol J. Barer, Ph.D. ............................................ 232,427(1)(2) 1.1% Robert J. Hugin ................................................ 11,667(1) * Frank T. Cary .................................................. 97,780 * Arthur Hull Hayes, Jr., M.D .................................... 40,000(1) * Richard C. E. Morgan ........................................... 79,090(1)(3) * Walter L. Robb, Ph.D. .......................................... 100,000(1) * Lee J. Schroeder ............................................... 56,000(1) * Gilla Kaplan, Ph.D. ............................................ 16,700(1) * Jack L. Bowman ................................................. 12,700(1) * All directors and current executive officers of the Company as a group (ten persons) ........................................... 1,034,497(4) 4.7% Donald P. Moriarty (5) c/o McGrath, Doyle & Phair 150 Broadway New York, NY 10038 ............................................ 1,122,500 (5) 5.3% Pilgrim Baxter & Associates Ltd. 825 Duportail Road Wayne, PA 19087 ............................................... 1,084,500(6) 5.1%
- ---------- * Less than one percent (1%). (1) Includes shares of Common Stock which the directors and executive officers have the right to acquire through the exercise of options within 60 days of February 29, 2000, as follows: John W. Jackson -- 327,123; Sol J. Barer -- 232,412; Robert J. Hugin -- 11,667; Frank T. Cary -- 0; Arthur Hull Hayes, Jr. -- 40,000; Richard C. E. Morgan -- 25,000 shares; Walter L. Robb -- 64,000; Lee J. Schroeder -- 20,000; Gilla Kaplan -- 16,700; Jack Bowman -- 11,700. Does not include shares of Common Stock which the directors and executive officers had the right to acquire through the exercise of options not exercisable within 60 days 34 of February 29, 2000, as follows: John W. Jackson -- 246,667; Sol J. Barer -- 96,668; Robert J. Hugin -- 173,333; Frank T. Cary -- 10,000; Arthur Hull Hayes, Jr. -- 10,000; Richard C. E. Morgan -- 10,000; Walter L. Robb -- 10,000; Lee J. Schroeder -- 10,000; Gilla Kaplan -- 25,333; and Jack L. Bowman -- 20,000. (2) Includes with respect to Dr. Barer, 15 shares owned by the daughter of Dr. Barer, as to which shares Dr. Barer disclaims beneficial ownership. (3) Includes with respect to Mr. Morgan, 90 shares owned by the son of Mr. Morgan, as to which shares Mr. Morgan disclaims beneficial ownership. (4) Includes or excludes, as the case may be, shares of Common Stock as indicated in the preceding footnotes. (5) Information regarding Donald P. Moriarty was obtained from a Schedule 13D, as amended, filed with the Securities and Exchange Commission. Such Schedule 13D states that Mr. Moriarty is deemed to be the beneficial owner of and to have sole dispositive power over all such shares of Common Stock, and that such shares are held by Mr. Moriarty, his family members, and Twin Oaks Partners, a partnership in which Mr. Moriarty is a general partner. (6) Information regarding Pilgrim Baxter & Associates Ltd. was obtained from a Schedule 13G, filed by it with the Securities and Exchange Commission. Such Schedule 13G states that Pilgrim Baxter & Associates Ltd. is the beneficial owner of and has the sole dispositive power over all such shares of Common Stock and has sole voting power over 852,500 of those shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K. (a)(1), (a)(2) See Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule immediately following Exhibit Index. (b) None (c) Exhibits The following exhibits are filed with this report:
EXHIBIT NO. EXHIBIT DESCRIPTION - -------- --------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, dated July 24, 1987). 3.2 Bylaws of the Company (incorporated by reference to the Company's Current Report on Form 8K, dated September 16, 1996). 10.1 Lease Agreement, dated January 16, 1987, between the Company and Powder Horn Associates (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, dated July 24, 1987). 10.2 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement, dated May 30, 1997). 10.3 1995 Non-Employee Directors' Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement, dated May 24, 1999). 10.4 Agent's Warrant issued in connection with the placement of 8% Convertible Debentures (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10Q for the quarter ended June 30, 1995).
35
Agent's Warrant issued in connection with the placement of Series A Convertible Preferred Stock (incorporated by reference to the Company's Annual Report on Form 10.5 10K for the year ended December 31, 1995). 10.6 Form of Lock-Up Warrant issued to certain holders of Series A Convertible Preferred Stock (incorporated by reference to the Company's Registration Statement on Form S-3 dated November 25, 1997 (No. 333-38891)). 10.7 Form of Warrant to be issued in connection with the issuance of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8K dated June 10, 1997). 10.8 Rights Agreement, dated as of September 16, 1996, between Celgene Corporation and American Stock Transfer & Trust Company (incorporated by reference to the Company's Registration Statement on Form 8A, filed on September 16, 1996). 10.9 Form of indemnification agreement between the Company and each officer and director of the Company (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10K for the year ended December 31, 1996). 10.10 Employment Agreement dated as of January 1, 2000 between the Company and John W. Jackson. 10.11 Employment Agreement dated as of January 1, 2000 between the Company and Sol J. Barer. 10.12 Manufacturing Agreement between Penn Pharmaceuticals Limited and the Company (incorporated by reference to the Company's Registration Statement on Form S-3 dated November 25, 1997 (No. 333-38891)). 10.13 Celgene Corporation Replacement Stock Option Plan (incorporated by reference to Exhibit 99.1 of the Company's Registration Statement on Form S-3 dated May 18, 1998 (No. 333-52963)). 10.14 Form of Stock Option Agreement to be issued in connection with the Celgene Corporation Replacement Stock Option Plan (incorporated by reference to Exhibit 99.2 of the Company's Registration Statement on Form S-3 dated May 18, 1998 (No. 333-52963)). 10.15 1998 Long Term-Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement, dated May 18, 1998). 10.16 Stock Purchase Agreement dated June 23, 1998 between the Company and Biovail Laboratories Incorporated (incorporated by reference to the Company's Current Report on Form 8K filed on July 17, 1998 (No. 000-16132)). 10.17 Agreement dated December 9, 1998 between the Company and EntreMed, Inc. (certain portions of the agreement have been omitted and filed separately with the United States Securities and Exchange Commission pursuant to a request for confidential treatment. 10.18 Employment Agreement dated as of January 1, 2000 between the Company and Robert J. Hugin. 10.19 Convertible Note Purchase Agreement, dated September 16, 1998 between the Company and Warburg Dillon Read LLC. 10.20 9.25% Convertible Note Due September 16, 2003. 10.21 Registration Rights Agreement dated as of September 16, 1998 between the Company and Warburg Dillon Read LLC.
36
10.22 Note Purchase Agreement dated January 20, 1999 between the Company and the Purchasers named on Schedule I to the agreement in connection with the purchase of $15,000,000 principal amount of the Company's 9.00% Senior Convertible Note Due January 20, 2004. 10.23 Form of 9.00% Senior Convertible Note Due January 20, 2004. 10.24 Registration Rights Agreement dated as of January 20, 1999 between the Company and the Purchasers in connection with the issuance of the Company's 9.00% Senior Convertible Note Due January 20, 2004. 10.25 Note Purchase Agreement dated July 6, 1999 between the Company and the Purchasers named in Schedule I to the agreement in connection with the purchase of $15,000,000 principal amount of the Company's 9.00% Senior Convertible Note Due June 30, 2004. 10.26 Form of 9.00% Senior Convertible Note Due June 30, 2004. 10.27 Registration Rights Agreement dated as of July 6, 1999 between the Company and the Purchasers in connection with the issuance of the Company's 9.00% Senior Convertible Note Due June 30, 2004. 23.1 Consent of KPMG LLP 24.1 Power of Attorney (included in Signature Page). * 27. Financial Data Schedule
- ------------------ * Previously Filed 37 SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature appears below constitutes and appoints John W. Jackson, Sol J. Barer and Robert J. Hugin, and each of them, its true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for it and in its name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all contents and purposes as it might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CELGENE CORPORATION By /s/ John W. Jackson ----------------------------- John W. Jackson Chairman of the Board and Chief Executive Officer Date: March 30, 2000 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.
SIGNATURE TITLE DATE - -------------------------------- --------------------------------------- --------------- /s/ John W. Jackson Chairman of the Board and March 30, 2000 --------------------------- Chief Executive Officer John W. Jackson /s/ Sol J. Barer President and Chief Operating Officer March 30, 2000 --------------------------- Sol J. Barer /s/ Jack L. Bowman Director March 30, 2000 --------------------------- Jack L. Bowman /s/ Frank T. Cary Director March 30, 2000 --------------------------- Frank T. Cary Director March 30 2000 --------------------------- Arthur Hull Hayes, Jr. /s/ Gilla Kaplan Director March 30, 2000 --------------------------- Gilla Kaplan /s/ Richard C.E. Morgan Director March 30, 2000 --------------------------- Richard C. E. Morgan
/s/ Walter L. Robb - --------------------------- Walter L. Robb Director March 30, 2000 Director March 30, 2000 --------------------------- Lee J. Schroeder /s/ Robert J. Hugin Senior Vice President & Chief March 30, 2000 --------------------------- Financial Officer Robert J. Hugin /s/ James R. Swenson Controller (Chief Accounting Officer) March 30, 2000 --------------------------- James R. Swenson
The foregoing constitutes a majority of the directors. CELGENE CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Consolidated Financial Statements Independent Auditors' Report ............................................................ F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................ F-3 Consolidated Statements of Operations - Years Ended December 31, 1997, 1998, and 1999 ... F-4 Consolidated Statements of Stockholders' Equity (Deficit) - Years Ended December 31, 1997,98 and 1999 ......................................................................... F-5 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1998 and 1999 .... F-6 Notes to Consolidated Financial Statements .............................................. F-8 Consolidated Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts ......................................... F-20
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CELGENE CORPORATION: We have audited the consolidated financial statements of Celgene Corporation and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celgene Corporation and subsidiary as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Short Hills, New Jersey January 27, 2000, except as to note 14, which is as of February 16, 2000 F-2 CELGENE CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------------- 1998 1999 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 3,066,953 $ 15,255,422 Marketable securities available for sale ........................... 2,056,890 4,271,221 Accounts receivable, net of allowance of $43,386 and $121,437 at December 31, 1998 and 1999, respectively .......................... 2,662,389 4,928,472 Inventory .......................................................... 1,571,408 2,456,059 Other current assets ............................................... 229,060 895,602 -------------- -------------- Total current assets ............................................ 9,586,700 27,806,776 Plant and equipment, net ........................................... 2,262,130 2,336,242 Other assets ....................................................... 79,167 2,190,652 -------------- -------------- Total assets .................................................... $ 11,927,997 $ 32,333,670 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable ................................................... $ 3,848,853 $ 2,358,563 Accrued expenses ................................................... 3,041,859 6,761,889 Capitalized lease obligation ....................................... 225,372 179,885 -------------- -------------- Total current liabilities ....................................... 7,116,084 9,300,337 Capitalized lease obligation-net of current portion ................ 195,578 22,924 Other non-current liabilities ...................................... -- 225,000 Long term convertible notes ........................................ 8,348,959 38,494,795 -------------- -------------- Total liabilities ............................................... 15,660,621 48,043,056 -------------- -------------- Stockholders' deficit: Preferred stock,$.01 par value per share 5,000,000 authorized; none outstanding at December 31,1998 and 1999 .......................... Common stock, $.01 par value per share 30,000,000 authorized; issued and outstanding 16,612,973 and 17,703,646 shares at December 31, 1998 and December 31,1999, respectively ........................... 166,130 177,036 Additional paid-in capital ......................................... 140,714,314 150,599,750 Accumulated deficit ................................................ (144,613,068) (166,394,268) Accumulated other comprehensive loss ............................... -- (91,904) -------------- -------------- Total stockholders' deficit ..................................... (3,732,624) (15,709,386) -------------- -------------- Total liabilities and stockholders' deficit ..................... $ 11,927,997 $ 32,333,670 ============== ==============
See accompanying notes to consolidated financial statements. F-3 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1997 1998 1999 ---------------- ---------------- ----------------- Revenues: Product sales ............................... $ -- $ 3,265,490 $ 24,052,124 Research contracts .......................... 1,122,193 535,000 2,157,500 ------------- ------------- ------------- Total revenues ............................ 1,122,193 3,800,490 26,209,624 ------------- ------------- ------------- Expenses: .................................... Cost of goods sold .......................... -- 282,307 2,982,713 Research and development .................... 17,380,390 19,771,953 19,646,129 Selling, general and administrative ......... 9,145,456 16,218,486 26,235,802 ------------- ------------- ------------- Total expenses ........................... 26,525,846 36,272,746 48,864,644 ------------- ------------- ------------- Operating loss ............................... (25,403,653) (32,472,256) (22,655,020) Other income and expense: Interest income ............................. 495,580 705,215 694,390 Interest expense ............................ 111,771 255,832 2,838,480 ------------- ------------- ------------- Loss before tax benefit ...................... (25,019,844) (32,022,873) (24,799,110) Tax benefit (note 9) ......................... -- -- 3,017,910 ------------- ------------- ------------- Loss from continuing operations .............. (25,019,844) (32,022,873) (21,781,200) Discontinued operations: (note 10) Loss from operations ........................ (427,183) (59,837) -- Gain on sale of chiral assets ............... -- 7,014,830 -- ------------- ------------- ------------- Net loss ..................................... (25,447,027) (25,067,880) (21,781,200) Accretion of premium payable on preferred stock and warrants ................ 521,397 24,648 -- Deemed dividend for preferred stock conversion discount ......................... 953,077 -- -- ------------- ------------- ------------- Net loss applicable to common stockholders ................................ $ (26,921,501) $ (25,092,528) $ (21,781,200) ============= ============= ============= Per share basic and diluted: (note 2) Loss from continuing operations ............. $ (2.05) $ (1.98) $ (1.28) Discontinued operations: Loss from operations ...................... ( 0.03) ( 0.00) -- Gain on sale of chiral assets ............. -- 0.43 -- Net loss applicable to common stockholders .............................. $ (2.20) $ (1.55) $ (1.28) ============= ============= ============= Weighted average number of shares of common stock outstanding .................... 12,215,000 16,160,000 17,012,000 ============= ============= =============
See accompanying notes to consolidated financial statements. F-4 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
COMMON STOCK PREFERRED STOCK TREASURY STOCK ------------------------ ---------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------ ----------- ----------- ---------------- ------------ -------------- Balances at January 1, 1997 ................. 10,611,422 $106,114 267 $ 13,883,416 (29,985) $ (100,239) Exercised stock options ..................... 2,986 30 Shares issued in lieu of cash bonus ......... 5,000 50 Amortization of deferred compensation . Conversion of convertible debenture ........ 441,248 4,412 Issuance of Series B Preferred Stock - net 5,000 4,046,923 Conversion of preferred stock ............... 2,166,193 21,662 (5,180) (14,654,071) Accretion of premium on preferred stock 521,397 Redemption of preferred stock ............... (13) (721,287) Deemed dividend on Series B Preferred Stock and fair value of warrants ........... 953,077 Comprehensive loss: Net loss ................................... Net change in unrealized gain (loss) on investment securities ...................... Total comprehensive loss .................... Treasury shares issued ...................... 7,097 23,704 Issuance of common stock, net ............... 2,201,100 22,011 ---------- -------- Balances at December 31, 1997 ............... 15,427,949 $154,279 74 $ 4,029,455 (22,888) $ (76,535) Exercised stock options ..................... 283,120 2,831 Exercise of warrants ........................ 118,230 1,183 Costs related to secondary offering ......... Conversion of preferred stock ............... 575,669 5,757 (74) (4,054,103) Accretion of premium on preferred stock 24,648 Shares issued for employee benefit plans 8,317 83 22,888 76,535 Sale of common stock ........................ 199,688 1,997 Net loss and comprehensive loss ............. Balances at December 31, 1998 ............... 16,612,973 $166,130 -- $ -- -- $ -- Exercised stock options ..................... 949,323 9,493 Exercise of warrants ........................ 59,434 594 Shares issued for employee benefit plans 81,916 819 Issuance of options related to license agreement .................................. Comprehensive loss: Net loss ................................... Net change in unrealized gain (loss) on investment securities ...................... Total comprehensive loss ................... Balances at December 31, 1999 .............. 17,703,646 $177,036 -- $ -- -- $ -- ========== ======== ====== ============== ======= ========== ACCUMULATED OTHER ADDITIONAL UNAMORTIZED COMPREHENSIVE PAID-IN DEFERRED ACCUMULATED INCOME CAPITAL COMPENSATION DEFICIT (LOSS) TOTAL --------------- -------------- ------------------ -------------- ----------------- Balances at January 1, 1997 ................. $ 94,770,176 $ (1,133) $ (92,599,039) $ 5,714 $ 16,065,009 Exercised stock options ..................... 20,187 20,217 Shares issued in lieu of cash bonus ......... 55,575 55,625 Amortization of deferred compensation . 1,133 1,133 Conversion of connvertible debenture ........ 2,326,892 2,331,304 Issuance of Series B Preferred Stock - net 793,825 4,840,748 Conversion of preferred stock ............... 14,632,409 -- Accretion of premium on preferred stock (521,397) -- Redemption of preferred stock ............... (721,287) Deemed dividend on Series B Preferred Stock and fair value of warrants ........... (953,077) -- Comprehensive loss: Net loss ................................... (25,447,027) (25,447,027) Net change in unrealized gain (loss) on investment securities ...................... (5,714) (5,714) ------------- Total comprehensive loss .................... (25,452,741) ------------- Treasury shares issued ...................... 55,250 78,954 Issuance of common stock, net ............... 18,184,119 18,206,130 ------------ ------------- Balances at December 31, 1997 ............... $130,838,433 $ -- $ (119,520,540) $ -- $ 15,425,092 Exercised stock options ..................... 2,028,715 2,031,546 Exercise of warrants ........................ 986,883 988,066 Costs related to secondary offering ......... (73,136) (73,136) Conversion of preferred stock ............... 4,048,346 -- Accretion of premium on preferred stock (24,648) -- Shares issued for employee benefit plans 387,070 463,688 Sale of common stock ........................ 2,498,003 2,500,000 Net loss and comprehensive loss ............. (25,067,880) (25,067,880) -------------- ------------- Balances at December 31, 1998 ............... $140,714,314 $ -- $ (144,613,068) $ -- $ (3,732,624) Exercised stock options ..................... 8,028,139 8,037,632 Exercise of warrants ........................ 361,398 361,992 Shares issued for employee benefit plans 799,004 799,823 Issuance of options related to license agreement .................................. 696,895 696,895 Comprehensive loss: Net loss ................................... (21,781,201) (21,781,201) Net change in unrealized gain (loss) on investment securities ...................... (91,904) (91,904) Total comprehensive loss ................... (21,873,105) ------------- Balances at December 31, 1999 .............. $150,599,750 $ -- $ (166,394,269) $ (91,904) $ (15,709,387) ============ ========= ============== ========= =============
See accompanying notes to consolidated financial statements. F-5 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1997 1998 1999 ----------------- ----------------- ----------------- Cash flows from operating activities: Loss from continuing operations ............................... $ (25,019,844) $ (32,022,873) $ (21,781,200) Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Depreciation ............................................... 380,364 812,555 993,389 Provision for losses on accounts receivable ................ -- 43,386 78,051 Amortization of convertible debt costs ..................... 126,577 -- -- Amortization of deferred compensation ...................... 1,133 -- -- Interest on convertible debentures ......................... 68,736 -- -- Issuance of stock award .................................... 55,625 -- -- Amortization of debt issuance costs ........................ -- -- 250,000 Amortization of discount on convertible note ............... -- -- 145,836 Shares issued for employee benefit plans ................... 78,954 463,688 799,823 Change in current assets & liabilities: Increase in inventory ........................................ -- (1,571,408) (884,651) Increase(decrease) in accounts payable and accrued expenses ................................................... (379,091) 4,659,517 2,454,740 Increase in accounts receivable .............................. (1,051,789) (1,275,391) (2,344,133) (Increase)decrease in other assets ........................... 150,304 124,206 (416,544) ------------- ------------- ------------- Net cash used in continuing operations ........................ (25,589,031) (28,766,320) (20,704,689) Net cash used in discontinued operations ...................... (302,996) (59,837) -- ------------- ------------- ------------- Net cash used in operating activities ......................... (25,892,027) (28,826,157) (20,704,689) ------------- ------------- ------------- Cash flows from investing activities: Capital expenditures .......................................... (1,240,775) (788,661) (1,782,090) Proceeds from sales and maturities of marketable securities available for sale ................................ 47,470,593 8,559,604 2,495,992 Purchases of marketable securities available for sale ......... (30,584,284) (10,616,494) (4,802,227) Proceeds from sale of chiral assets ........................... -- 7,500,000 -- Purchase of license rights .................................... -- -- (450,000) ------------- ------------- ------------- Net cash provided by (used in) investing activities ........... 15,645,534 4,654,449 (4,538,325) ------------- ------------- ------------- Cash flows from financing activities: Net proceeds from secondary offering .......................... 18,206,130 -- -- Costs related to secondary offering ........................... -- (73,136) -- Proceeds from sale of stock ................................... -- 2,500,000 -- Proceeds from exercise of common stock options and warrants ..................................................... 20,217 3,019,612 8,399,624 Redemption of Series A preferred stock ........................ (721,287) -- -- Net proceeds from issuance of preferred stock ................. 4,840,748 -- -- Capital lease buyout .......................................... -- (400,414) (218,141) Capital lease funding ......................................... 561,169 260,195 -- Debt issuance costs ........................................... -- -- (750,000) Net proceeds from issuance of convertible notes ............... -- 8,348,959 30,000,000 ------------- ------------- ------------- Net cash provided by financing activities ..................... 22,906,977 13,655,216 37,431,483 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents .......... 12,660,484 (10,516,492) 12,188,469 Cash and cash equivalents at beginning of year ................ 922,961 13,583,445 3,066,953 ------------- ------------- ------------- Cash and cash equivalents at end of year ...................... $ 13,583,445 $ 3,066,953 $ 15,255,422 ============= ============= =============
F-6
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1997 1998 1999 --------------- -------------- -------------- Non-cash investing activity: Change in net unrealized gain(loss) on marketable securities available for sale ........................... $ (5,714) $ -- $ (91,904) =========== =========== ========== Issuance of options related to license agreement ......... $ -- $ -- $ 696,895 =========== =========== ========== Non-cash financing activities: Issuance of common stock upon the conversion of convertible debentures and accrued interest thereon, net ..................................................... $ 2,331,304 $ -- $ -- =========== =========== ========== Accretion of premium payable on preferred stock and warrants ................................................ $ 521,397 $ 24,648 $ -- =========== =========== ========== Deemed dividend for preferred stock conversion discount $ 953,077 $ -- $ -- =========== =========== ========== Issuance of common stock upon the conversion of convertible preferred stock and accrued accretion thereon, net ............................................ $14,654,071 $ 4,054,103 $ -- =========== =========== ========== Supplemental disclosure of cash flow information: Interest paid ............................................ $ 20,599 $ 19,766 $1,504,441 =========== =========== ========== Cash received related to tax benefit ..................... $ -- $ -- $3,017,910 =========== =========== ==========
See accompanying notes to consolidated financial statements. F-7 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 (1) NATURE OF BUSINESS AND LIQUIDITY Celgene Corporation and its subsidiary (collectively "Celgene" or the "Company") is an independent biopharmaceutical company engaged in the discovery, development and commercialization of novel human pharmaceuticals for the treatment of cancer and immunological diseases. The Company's primary therapeutic focus is on the development of orally administered, small molecule pharmaceuticals that regulate tumor necrosis factor alpha, or TNF--, and are anti-angiogenic. TNF-- has been linked to the cause and symptoms of many chronic inflammatory and immunological diseases. Anti-angiogenic drugs inhibit the growth of undesirable blood vessels, including those that promote tumor growth. Our lead product, THALOMID(TM) (thalidomide), was approved for sale in the United States by the U.S. Food and Drug Administration, ("FDA"), on July 16, 1998. THALOMID is approved for the treatment of erythema nodosum leprosum, ("ENL"), an inflammatory complication of leprosy. Our cancer and immunology pharmaceutical pipeline is highlighted by two classes of novel and proprietary oral therapeutic agents, IMiDs, or ImmunoModulatory Drugs, and SelCIDs, or Selective Cytokine Inhibitory Drugs. Both classes are being developed for the treatment of cancer, chronic inflammatory diseases, such as inflammatory bowel disease and rheumatoid arthritis, and other diseases of the immune system. The Company expects that its rate of spending will increase as the result of increased clinical trial costs, increased expenses associated with the regulatory approval process and commercialization of products now in development, increased costs related to the commercialization of THALOMID, and increased working capital requirements. This increased spending will be mitigated by the collection of receivables resulting from sales of THALOMID. It is anticipated that the increasing sales of THALOMID, as well as existing cash resources, will be sufficient to fund operations through 2000. The consolidated financial statements include the parent Company and its subsidiary Celgro. All inter-company transactions have been eliminated. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The Company is subject to certain risks and uncertainties such as uncertainty of product development, uncertainties regarding regulatory approval, no assurance of market acceptance of products, risk of product liability, uncertain scope of patent and proprietary rights, intense competition, and rapid technological change. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) CASH EQUIVALENTS At December 31, 1998 and 1999, cash equivalents consisted principally of funds invested in money market funds, and United States government securities such as treasury bills and notes. (B) MARKETABLE SECURITIES The Company classifies all of its marketable securities as securities available for sale. Such securities are held for an indefinite period of time and were intended to be used to meet the ongoing liquidity needs of the Company. Realized gains and losses are included in operations and are measured using the specific cost identification method. (C) INVENTORY Inventories are priced at lower of cost or market using the first-in, first-out (FIFO) method. Prior to FDA approval, the raw material, formulation and encapsulation costs related to THALOMID production were recorded as research and development expense. F-8 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) (D) LONG-LIVED ASSETS Plant and equipment are stated at cost. Depreciation of plant and equipment is provided using the straight-line method. The estimated useful lives of fixed assets are as follows: Laboratory equipment and machinery ......... 5-10 years Furniture and fixtures ..................... 5-10 years
Amortization of leasehold improvements is calculated using the straight-line method over the term of the lease or the life of the asset, whichever is shorter. Maintenance and repairs are charged to operations as incurred, while renewals and improvements are capitalized. The Company reviews long-lived assets for impairment whenever events or changes in business circumstances occur that indicate that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of long-lived assets held and to be used based on undiscounted cash flows and measures the impairment, if any, using discounted cash flows. (E) RESEARCH AND DEVELOPMENT COSTS All research and development costs are expensed as incurred. (F) INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. Research and development tax credits will be recognized as a reduction of the provision for income taxes when realized. (G) REVENUE RECOGNITION Revenue from the sale of products is recognized upon product shipment. Revenue under research contracts is recorded as earned under the contracts, generally as services are provided. Revenue is recognized immediately for nonrefundable license fees when agreement terms require no additional performance on the part of the Company. (H) STOCK OPTION PLAN The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. (I) EARNINGS PER SHARE "Basic" earnings per common share equals net income divided by weighted average common shares outstanding during the period. "Diluted" earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents if dilutive. The Company's basic and diluted per share amounts are the same since the assumed exercise F-9 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) of stock options, and warrants, and the conversion of convertible debentures and preferred stock are all anti-dilutive. The amount of common stock equivalents excluded from the calculation were 3,770,954 in 1997, 3,863,535 in 1998 and 5,296,624 in 1999. (J) COMPREHENSIVE INCOME Comprehensive income (loss) consists of net losses and the change in net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholders' equity (deficit). (K) PRESENTATION In connection with the disposition of the Company's chiral intermediate operation in January 1998 (see note 10), the 1997 and 1998 financial results applicable to continuing operations exclude amounts from this discontinued operation. (L) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value, which equals carrying value, of marketable securities available for sale is based on quoted market prices. For all other financial instruments, excluding convertible notes (see note 6), their carrying value approximates fair value due to the short maturity of these instruments. In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued and, as amended, is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133 standardizes the accounting for derivative instruments including certain derivative instruments embedded in other contracts and requires derivative instruments to be recognized as assets and liabilities and be recorded at fair value. The Company is currently not party to any derivative instruments. Any future transactions involving derivative instruments will be evaluated based on SFAS No. 133. (M) OTHER ASSETS Other assets include certain patent rights, the cost of which is amortized using the straight line method over the life of the patents. The weighted average remaining patent life at December 31, 1999 is 12 years. (3) INVENTORY
DECEMBER 31, ------------------------------- 1998 1999 -------------- -------------- Raw materials ........... $ 440,400 $ 1,411,663 Work in process ......... 535,494 647,841 Finished goods .......... 595,514 396,555 ----------- ----------- $ 1,571,408 $ 2,456,059 =========== ===========
Inventory costs prior to FDA approval of THALOMID on July 16, 1998 were expensed as research and development costs. F-10 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) (4) PLANT AND EQUIPMENT Plant and equipment consists of the following:
DECEMBER 31, ------------------------------- 1998 1999 -------------- -------------- Leasehold improvements ..................... $ 4,008,246 $ 4,375,013 Laboratory equipment and machinery ......... 4,874,733 5,323,897 Furniture and fixtures ..................... 470,667 605,623 Leased equipment ........................... 675,304 675,304 ----------- ----------- 10,028,950 10,979,837 Less: accumulated depreciation ............. 7,766,820 8,643,595 ----------- ----------- $ 2,262,130 $ 2,336,242 =========== ===========
(5) ACCRUED EXPENSES Accrued expenses consists of the following:
DECEMBER 31, ------------------------------- 1998 1999 -------------- -------------- Professional and consulting fees ......... $ 787,381 $ 905,072 Accrued compensation ..................... 1,650,048 3,098,540 Accrued interest and royalties ........... 361,809 1,989,394 Other .................................... 242,621 768,883 ----------- ----------- $ 3,041,859 $ 6,761,889 =========== ===========
(6) CONVERTIBLE DEBT On September 16, 1998, the Company issued a convertible note to an institutional investor in the amount of $8,750,000. The note has a five year term and a coupon rate of 9.25% with interest payable on a semi-annual basis. The note contains a conversion feature that allows the note holder to convert the note into common shares at $11 per share. The Company can redeem the note after three years at 103% of the principal amount (two years if the Company's stock trades at $24.75 or higher for a period of 20 consecutive trading days). This note was issued at a discount of $437,500 which is being amortized over three years. On January 20, 1999, the Company issued to an institutional investor a convertible note in the amount of $15,000,000. The note has a five year term and a coupon rate of 9% with interest payable on a semi-annual basis. The note contains a conversion feature that allows the note holder to convert the note into common shares after one year at $18 per share. The Company can redeem the note after three years at 103% of the principal amount (two years under certain conditions). Issuance costs of $750,000 incurred in connection with this note are being amortized over three years. On July 6, 1999, the Company issued to a third institutional investor a convertible note in the amount of $15,000,000. The note has a five year term and a coupon rate of 9% with interest payable on a semi-annual basis. The note contains a conversion feature that allows the note holder to convert the note into common shares after one year at $19 per share. The Company can redeem the note after three years at 103% of the principal amount (two years under certain conditions). There was no fee or discount associated with this note. F-11 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) At December 31, 1999, the fair value of the Company's convertible notes exceeded their carrying value, reflecting the increase to $70 per share in the market value of the Company's common stock at that date. (7) STOCKHOLDERS' EQUITY PREFERRED STOCK The Board of Directors has the authority to issue, at any time, without further stockholder approval, up to 5,000,000 shares of preferred stock, and to determine the price, rights, privileges, and preferences of those shares. SERIES A CONVERTIBLE PREFERRED STOCK During 1996, in a private placement, the Company completed the sale of 503 shares of Series A Convertible Preferred Stock, par value $.01 per share, at an issue price of $50,000 per share. All of the shares of the Series A Convertible Preferred Stock with their respective accrued accretion, had been converted or redeemed into 3,342,202 shares of common stock at December 31, 1998. During 1996, the Company had issued warrants valued at $138,156, that entitle certain stockholders of the Series A Convertible Preferred Stock to purchase 153,507 shares of common stock at an exercise price of $11.50. The warrants were issued in exchange for the deferral of conversion for 90 days. All these warrants either expired or were exercised for 3,418 shares of common stock at December 31, 1998. In connection with the private placement, the Company also granted to certain executives and affiliates of the placement agent warrants, valued at $60,168, to purchase an aggregate of 66,853 shares of common stock at an exercise price of $20.52, subject to proportional adjustment in the event that the Company undertakes a stock split, stock dividend, recapitalization or similar event. These warrants are exercisable for a period of five years from the date of issuance. As of December 31, 1999, 35,039 warrants were exercised to purchase 23,322 shares of common stock. SERIES B CONVERTIBLE PREFERRED STOCK During 1997, in a private placement, the Company completed the sale of 5,000 shares of Series B Convertible Preferred Stock (the "Series B Preferred"), par value $.01 per share, at an issue price of $1,000 per share. The Company received net proceeds, after offering costs of $4,840,748. Shares could be converted at an initial conversion price of $6.50 per share. All shares of the Series B Preferred had been converted into 788,469 shares of common stock at December 31, 1998. Upon request of the purchasers of the Series B Preferred, the Company is required to issue warrants to acquire a number of shares of common stock equal to (i) 1,500,000 divided by the Conversion Price in effect on the Issuance Date (230,769 warrants as of December 31, 1999) plus (ii) 37.5% of the conversion shares issuable on such issuance date upon conversion of all shares of Series B Preferred issued through the issuance date (288,461 warrants as of December 31, 1999). All such warrants will have a term of four years from the issuance date and an exercise price equal to 115% of the conversion price in effect on the issuance date ($6.50 at December 31, 1999). The fair value of warrants at the issuance date was $1.28 per warrant. As of December 31, 1999 no warrants have been exercised. RIGHTS PLAN During 1996, the Company adopted a shareholder rights plan ("Rights Plan"). The Rights Plan involves the distribution of one "Right" as a dividend on each outstanding share of the Company's common stock to each holder of record on September 26, 1996. Each Right shall entitle the holder to purchase one-tenth of a share of common stock. The Rights trade in tandem with the common stock until, and are exercisable upon, certain triggering events, and the exercise price is based on the estimated long term value of the Company's common stock. In certain circumstances, the Rights Plan permits the F-12 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) holders to purchase shares of the Company's common stock at a discounted rate. The Company's Board of Directors retains the right at all times prior to acquisition of 15% of our voting common stock by an acquiror, to discontinue the Rights Plan through the redemption of all rights or to amend the Rights Plan in any respect. (8) STOCK BASED COMPENSATION (A) STOCK OPTIONS The Company has two Incentive Plans that provide for the granting of options, restricted stock awards, stock appreciation rights, performance awards and other stock-based awards to employees and officers of the Company to purchase not more than an aggregate of 1,400,000 shares of common stock under the 1992 plan and 1,500,000 shares of common stock under the 1998 plan, subject to adjustment under certain circumstances. The Management Compensation and Development Committee of the Board of Directors (the "Committee") determines the type, amount and terms, including vesting, of any awards made under the Incentive Plans. The Plans terminate in 2002 and 2008, respectively. With respect to options granted under the Incentive Plans, the exercise price may not be less than the fair market value of the common stock on the date of grant. In general, each option granted under the Plans vests evenly over a three or four year period and expires 10 years from the date of grant, subject to earlier expiration in case of termination of employment. The vesting period for options and restricted stock awards granted under the Plans is subject to certain acceleration provisions if a change in control, as defined in the Plans, occurs. On June 16, 1995, the stockholders of the Company approved the 1995 Non-Employee Directors' Incentive Plan, which provides for the granting of non-qualified stock options to purchase an aggregate of not more than 350,000 shares of common stock (subject to adjustment under certain circumstances) to directors of the Company who are not officers or employees of the Company ("Non-Employee Directors"). Each new Non-Employee Director, upon the date of election or appointment, receives an option to purchase 20,000 shares of common stock. Additionally, upon the date of each annual meeting of stockholders, each continuing Non-Employee Director receives an option to purchase 10,000 shares of common stock (or a pro rata portion thereof for service less than one year). The shares subject to each non-employee director's option grant of 20,000 shares vest in four equal annual installments commencing on the first anniversary of the date of grant. The shares subject to an annual meeting option grant vest in full on the date of the first annual meeting of stockholders held following the date of grant. On June 22, 1999, the stockholders of the Company approved an amendment to the 1995 Non-Employee Directors' Incentive Plan that a.) increased the number of shares to 600,000 and b.) provided for a discretionary grant upon the date of each annual meeting of an additional option to purchase up to 5,000 shares to a non-employee director who serves as a member (but not a chairman) of a committee of the Board of Directors and up to 10,000 shares to a non-employee director who serves as the chairman of a committee of the Board of Directors. All options are granted at an exercise price that equals the fair market value of the Company's common stock at the grant date and expire 10 years after the date of grant. This plan terminates in 2005. F-13 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) The weighted-average fair value per share for stock options granted was $9.26 for the 1999 options, $3.97 for the 1998 options and $3.93 for those granted in 1997. The Company estimated the fair values using the Black-Scholes option pricing model and used the following assumptions:
1997 1998 1999 ---------- ---------- ---------- Risk-free interest rate ....................... 6.37% 5.68% 6.38% Expected stock price volatility ............... 55% 66% 46% Expected term until exercise (years) .......... 3.09 2.86 4.98 Expected dividend yield ....................... 0% 0% 0%
The Company does not record compensation expense for stock option grants. The following table summarizes results as if compensation expense was recorded for the annual option grants under the fair value method:
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1997 1998 1999 - --------------------------------------------------------------- -------------- -------------- -------------- Net loss applicable to common stockholders: As reported ............................................. $ (26,922) $ (25,093) $ (21,781) Pro forma ............................................... (28,652) (26,745) (25,491) Net loss per share applicable to common stockholders basic and diluted: As reported ............................................. (2.20) (1.55) (1.28) Pro forma ............................................... (2.35) (1.66) (1.50)
The pro forma effects on net loss applicable to common stockholders and net loss per share applicable to common stockholders (basic and diluted) for 1997, 1998 and 1999 may not be representative of the pro forma effects in future years since compensation cost is allocated on a straight-line basis over the vesting periods of the grants, which extends beyond the reported years. F-14 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) The following table summarizes the stock option activity for the aforementioned Plans:
OPTIONS OUTSTANDING SHARES ------------------------------- AVAILABLE WEIGHTED AVERAGE FOR GRANT SHARES PRICE PER SHARE ------------- ------------- ----------------- Balance January 1, 1997 ........... 442,845 2,006,214 $ 9.60 Authorized ....................... 500,000 -- -- Expired .......................... (74,797) -- -- Granted .......................... (492,775) 492,775 9.39 Exercised ........................ -- (6,986) 7.83 Cancelled ........................ 142,027 (142,027) 9.36 -------- --------- -------- Balance December 31, 1997 ......... 517,300 2,349,976 9.59 Authorized ....................... 1,620,000 -- -- Expired .......................... (85,095) -- -- Granted .......................... (559,983) 559,983 8.87 Exercised ........................ -- (283,120) 7.18 Cancelled ........................ 198,726 (198,726) 10.74 --------- --------- -------- Balance December 31, 1998 ......... 1,690,948 2,428,113 9.62 Authorized ....................... 250,000 -- -- Expired .......................... (70,047) -- -- Granted .......................... (890,530) 890,530 19.26 Exercised ........................ -- (949,323) 8.46 Cancelled ........................ 42,053 (42,053) 10.66 --------- --------- -------- Balance December 31, 1999 ......... 1,022,424 2,327,267 $ 13.76 ========= ========= ========
The following table summarizes information concerning options outstanding under the Plans at December 31, 1999:
WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE EXERCISE PRICE AT 12/31/99 PRICE TERM (YRS.) AT 12/31/99 PRICE - ---------------- ------------- ---------- ------------- ------------- ----------- 5.00 -- 9.00 627,518 $ 7.78 6.8 322,966 $ 7.25 9.01 --13.00 450,920 10.69 6.9 294,861 10.69 13.01--18.00 1,137,329 15.93 8.2 349,407 14.43 18.01 + 111,500 37.74 9.8 -- -- --------- -------- --- ------- -------- 2,327,267 $ 13.76 7.6 967,234 $ 10.89 ========= ======== === ======= ========
(B) STOCK AWARDS On January 1, 1997, the Company awarded 5,000 shares to the Company's Chairman and Chief Executive Officer, which were immediately vested. The fair value of $55,625 for this award was expensed. (C) WARRANTS In connection with the retention of an investment firm to assist in the sale and issuance of the Series A Convertible Preferred Stock, the Company, in 1996 granted to such firm, warrants to purchase until March 10, 2001, 66,853 shares of common stock at a price of $20.52. There were 31,814 warrants outstanding as of December 31, 1999. F-15 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) In connection with the placement of the Series B Convertible Preferred Stock in June, 1997, the Company has an obligation to issue warrants to purchase 519,230 shares of common stock until June 1, 2002, at a price of $7.48 per share. As of December 31, 1999 these warrants were outstanding. (9) INCOME TAXES At December 31, 1998 and 1999, the tax effects of temporary differences that give rise to deferred tax assets are as follows:
1998 1999 --------------- --------------- Deferred assets: Federal and state net operating loss carryforwards ...................... $ 54,779,000 $ 73,147,000 Research and experimentation tax credit carryforwards ................... 3,235,000 3,984,000 Plant and equipment, principally due to differences in depreciation ..... 772,000 1,075,000 Patents, principally due to differences in amortization ................. 62,000 58,000 Accrued expenses ........................................................ 665,000 560,000 ------------- ------------- Total deferred tax assets ............................................ 59,513,000 78,824,000 Valuation allowance ..................................................... (59,513,000) (78,824,000) ------------- ------------- Net deferred tax assets .............................................. $ -- $ -- ============= =============
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 1999, the Company had Federal net operating loss carryforwards of approximately $184,000,000 and state net operating loss carryforwards of approximately $121,000,000 that will expire in the years 2001 through 2019. State net operating loss carryforwards differ from Federal net operating loss carryforwards primarily due to the fact that the Company sold approximately $39,000,000 of its state net operating loss carryforwards during 1999 and approximately $24,000,000 has expired. The Company also has research and experimentation credit carryforwards of approximately $3,984,000 that expire in the years 2001 through 2019. Ultimate utilization/availability of such net operating losses and credits may be curtailed if a significant change in ownership occurs. Of the deferred tax asset related to the Federal and state net operating loss carryforwards, approximately $12,500,000 relates to a tax deduction for non qualified stock options. The Company will increase paid in capital when these benefits are realized for tax purposes. (10) DISCONTINUED OPERATION On January 9, 1998, the Company concluded an agreement with Cambrex Corporation ("Cambrex") for Cambrex to acquire Celgene's chiral intermediate business for approximately $15 million. The Company received $7.5 million upon the closing of the transaction, and will receive future royalties with a present value not exceeding $7.5 million, with certain minimum royalty payments in the third through sixth year following the closing of the transaction. Included in the transaction are the rights to Celgene's enzymatic technology for the production of chirally pure intermediates for the pharmaceutical industry, including the current pipeline of third party products and the equipment and personnel associated with the business. (11) MARKETABLE SECURITIES AVAILABLE FOR SALE Marketable securities available for sale at December 31, 1999 include debt securities with maturities ranging from January 2000 to August 2004. A summary of marketable securities at December 31, 1999 is as follows: F-16 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ------------- ------------ ------------ ------------- Government Bonds & Notes ......... $2,313,125 -- $ (25,579) $2,287,546 Government Agencies .............. 2,050,000 -- (66,325) 1,983,675 ---------- -- --------- ---------- Total ........................... $4,363,125 -- $ (91,904) $4,271,221 ========== == ========= ==========
Marketable securities available for sale at December 31, 1998 include debt securities with maturities ranging from March, 1999 to October, 2002. Marketable securities at December 31, 1998 include Corporate Bonds ($1,006,890) and U.S. Government and agency obligations ($1,050,000). The cost equaled fair market value. (12) COMMITMENTS AND CONTINGENCIES (A) LEASES Celgene leases its main laboratory and office facilities in Warren Township, New Jersey. The current lease term for the main laboratory and office space expires in 2002 and has one five-year renewal option. Annual payments are $330,000. The lease provides that at the end of each five-year term, the rent will be increased based upon the change in the consumer price index, but in no case shall the increase be greater than 20%. Celgene is also required to pay additional amounts for real estate taxes, utilities, and maintenance. Total rental expense amounted to $477,000, $486,000 and $479,000 in 1997, 1998 and 1999, respectively. Celgene has subleased 12,500 square feet of this facility to Cambrex Corporation for up to three years for the Chiral Intermediate business which Cambrex purchased on January 9, 1998. In November, 1999, the Company leased an additional 29,000 square feet of office and laboratory space in the same building facility in Warren, New Jersey adjacent to our existing leased space. The initial term of the lease extends to July 2010 with two five year renewal options. In March 1999, the Company entered into a lease agreement with The New Jersey Economic Development Authority (NJEDA) to lease approximately 18,000 square feet of office and laboratory space in North Brunswick, New Jersey for Celgro, our agrochemical subsidiary. The lease agreement is for ten years commencing January 1, 2000 and provides for two five year renewal terms. In July, 1997, the Company entered into an equipment leasing agreement; under the agreement, the Company can lease up to $1,000,000 of equipment for a three year term after which the Company can purchase the equipment for a nominal value. Through December 31, 1999, the Company has leased $675,000 of laboratory equipment under this agreement. The following table shows the approximate minimum lease commitments for the next five years:
2000 2001 2002 2003 2004 AFTER 2004 - ------------- ------------- ------------- ------------- ------------- ------------- $1,257,000 $1,106,000 $1,086,000 $1,122,000 $1,131,000 $4,903,000
(B) EMPLOYMENT AGREEMENTS Celgene has employment agreements with certain officers and employees. The related outstanding commitment for 2000 is approximately $1.3 million. Employment contracts provide for an increase in compensation reflecting annual reviews and related salary adjustments. F-17 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) (C) CONTRACTS Pursuant to the terms of a research and development agreement with The Rockefeller University ("Rockefeller"), the Company has purchased for cash and stock options the world-wide exclusive license to manufacture and market any drugs, including THALOMID, which may result from the research performed at Rockefeller and funded by the Company. The portion of the agreement that provides for research services to be performed by Rockefeller is renewable for one year terms upon agreement of both parties. Under terms of the current research agreement extension, the Company is committed to pay Rockefeller $504,000 annually for research. The Company has an agreement with Penn Pharmaceutical, Ltd. of Great Britain ("Penn") for the production of THALOMID. Penn manufactures THALOMID and sells it exclusively to the Company. The agreement is renewable for one year terms and has been renewed for 2000, for facility payments totaling approximately $480,000. In October 1997, the Company entered into a contract with Boston University to manage the surveillance registry which is intended to monitor compliance to the requirements of the Company's S.T.E.P.S. (System for THALOMID Education and Prescribing Safety) program for all THALOMID patients. The contract has been renewed for 2000. Under the terms of the agreement, quarterly payments of approximately $395,000 are required. The contract is renewable for one year terms upon agreement of both parties. In December 1997, the Company entered into a research agreement with the University of Glasgow for clinical testing and evaluation of certain of Celgene's patented compounds. Under terms of the agreement, the Company agreed to pay the University approximately $200,000 in two annual installments. The term of the original agreement was for two years and has been extended through 2000. In June 1998, the Company entered into a research agreement with a contract research organization to manage the pivotal clinical trial for d-methylphenidate encompassing four separate protocols. The agreement is for approximately two years and is estimated at approximately $5.0 million over the life of the agreement. In December 1998, the Company entered into an exclusive license agreement with EntreMed, Inc. ("EntreMed") whereby EntreMed granted to us an exclusive license to its patent and technology rights for thalidomide. In return, EntreMed will receive royalties on all sales of THALOMID. (D) CONTINGENCIES The Company believes it maintains insurance coverage adequate for its current needs. The Company's operations are subject to environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company reviews the effects of such laws and regulations on its operation and modifies its operations as appropriate. The Company believes that it is in substantial compliance with all applicable environmental laws and regulations. (13) SEGMENTS Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. As discussed in Note 1, the Company manages its operations as one line of business of discovery, development and commercialization of orally administered, small molecule drugs for the treatment of cancer and immunological diseases. Additionally, our chiral chemistry program develops chirally pure versions of existing compounds for both pharmaceutical and agrochemical markets. The Company markets and sells its products in the United States. During 1999, no single customer accounted for more than 3% of the Company's product sales. F-18 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED ) (14) SUBSEQUENT EVENT On February 16, 2000, the Company completed an offering to sell 3,450,000 shares of its common stock at a price of $101 per share. 2,934,000 shares were for the account of the Company and 516,000 shares were for the account of a selling shareholder pursuant to the conversion of $9,288,000 of the 9%, January 1999 convertible notes held by that shareholder. Proceeds to the Company, net of expenses, were approximately $278 million. F-19 SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS CELGENE CORPORATION
BALANCE AT ADDITIONS BALANCE AT BEGINNING OF CHARGED TO END OF YEAR EXPENSE DEDUCTIONS YEAR -------------- ------------ ------------ ----------- Year ended December 31, 1998 Allowance for doubtful accounts .......... -- 43,386 -- 43,386 -- ------ -- ------ -- 43,386 -- 43,386 Year ended December 31, 1999 Allowance for doubtful accounts .......... 43,386 58,051 -- 101,437 Allowance for customer discounts ......... -- 453,208 433,208 20,000 ------ ------- ------- ------- 43,386 511,259 433,208 121,437 ====== ======= ======= =======
EX-10.10 2 EXHIBIT 10.10 EXHIBIT 10.10 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), dated as of January 1, 2000, between Celgene Corporation, a Delaware corporation with offices at 7 Powder Horn Drive, Warren, New Jersey 07059 (the "Company"), and John W. Jackson, residing at 32 Gregory Lane, Warren, New Jersey 07059 ("Employee"). W I T N E S S E T H - - - - - - - - - - WHEREAS, the Company and Employee have previously entered into an employment agreement, originally effective September 30, 1997 (the "Employment Agreement"); WHEREAS, Employee is currently employed as the Chief Executive Officer of the Company, and serves as Chairman of the Board of Directors of the Company (the "Board"); WHEREAS, the Company and Employee desire to amend and restate the Employment Agreement to modify certain terms of the Employment Agreement, effective as of the date set forth above or such other date as specified herein. NOW THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term. The Company agrees to continue to employ Employee, and Employee agrees to continue to serve, on the terms and conditions of this Agreement for a period commencing on the date hereof and ending three years from the date hereof, or such other period as may be provided for in Section 10 or 11. The period during which Employee is employed hereunder is hereinafter referred to as the "Employment Period." The Employment Period shall be automatically renewed for successive one-year terms unless either party gives written notice to the other at least six (6) months prior to the expiration of the then Employment Period, of such party's intention to terminate Employee's employment hereunder at the end of the then current Employment Period. 2. Duties and Services. During the Employment Period, Employee shall continue to be employed in the business of the Company as Chief Executive Officer of the Company. In addition, Employee shall continue to serve as Chairman of the Board. Employee shall perform such duties and services, within his expertise and experience, as may be assigned to him by, and subject to the direction of, the Board. Employee agrees to continue his employment as described in this Section 2 and agrees to devote all of his working time and efforts to the performance of his duties under this Agreement, excepting disabilities, illness and vacation time as provided by Section 3(e). In performing his duties hereunder, Employee shall be available for reasonable travel as the needs of the business require. Except as provided in Section 6 hereof, the foregoing shall not be construed as preventing Employee from: (i) making investments in other businesses and managing his and his family's personal investments; and (ii) participating in charitable, civic, educational, professional, community or industry affairs or serving on the board of directors of other companies ("Professional Activities"), provided that these Professional Activities are approved by the Company's Board. 3. Compensation and Other Benefits. (a) As compensation for his services hereunder, the Company shall pay Employee, during the Employment Period, a base salary payable in equal semi-monthly installments at an annual rate of $300,000, provided that such salary shall be reviewed annually by the Company's Board, or a committee thereof, which may, in its sole discretion, increase (but not decrease) such salary. (b) The Company shall also pay Employee, during the Employment Period, an annual target bonus, payable in January of each year for the preceding year, in an amount equal to sixty-five percent (65%) of Employee's base salary (payable under Section 3(a) of this Agreement) measured against objective criteria to be determined by the Company's Board, or a committee thereof, after good faith consultation with Employee. (c) Employee shall be entitled to continue to participate in all group health and insurance programs and all other fringe benefit or retirement plans which the Company may, in its sole and absolute discretion, elect to make available to its employees generally, provided Employee meets the qualifications therefor. (d) Employee shall be eligible to participate in the Company's 1998 Long- Term Incentive Plan (the "Plan") and any other incentive plans of the Company. Upon the Employee's Disability (as defined in the Plan), termination of employment with the Company due to Retirement (as defined in the Plan) or death, Employee (or the legal representative of his estate, in the case of Employee's death) shall be entitled to: (i) full vesting and immediate exercisability of any outstanding stock options and other equity awards (and lapse of any forfeiture provisions) granted to Employee at any time; and (ii) with respect to stock options granted to Employee on or after January 1, 2000, Employee (or the legal representative of his estate, in the case of Employee's death) shall be entitled to exercise such stock options at any time during the three (3) year period from the date of Employee's Disability, Retirement or death. (e) Employee shall be entitled to four weeks of paid vacation per year during the Employment Period. 4. Expenses. Employee shall be entitled to reimbursement for all reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. 2 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder or the other rights of the Company hereunder. 6. Non-Competition. (a) In view of the unique and valuable services that Employee has rendered or is expected to render to the Company, Employee's knowledge of the customers, trade secrets and other proprietary information relating to the business of the Company and its customers and suppliers and similar knowledge regarding the Company which Employee has obtained or is expected to obtain, and in consideration of the compensation to be received hereunder, Employee agrees that: (i) during the period he is employed by the Company under this Agreement or otherwise, he will not Participate In (as hereinafter defined in this Section 6) any other business or organization, whether or not such business or organization now is or shall then be competing with or of a nature similar to the business of the Company, without obtaining the prior written consent of the Executive Committee of the Board; (ii) until the first anniversary of the date of the termination of Employee's employment under this Agreement or otherwise, he will not Participate In any business which is engaged, directly or indirectly, in the same business as the Company with respect to any specific product or specific service sold or activity in which the Company engages up to the time of termination of employment in any geographical area in which at the time of termination such product or service is sold or activity is engaged in by the Company; (iii) if a Change in Control occurs and Employee's employment with the Company is terminated under this Agreement without Cause (as hereinafter defined) or by Employee for Good Reason (as hereinafter defined) at any time during the period beginning on the date of a Change in Control and ending one (1) year after the date of such Change in Control or within ninety (90) days prior to a Change in Control, then beginning on the later of the date Employee's employment terminates (as described under this Section 6(a)(iii)) and the date of a Change in Control and ending on the second anniversary of such date, he will not Participate In any activity or business in the United States involved in the research, development, commercialization of a small molecule which is: (A) the generic equivalent of THALOMID (i.e., the same chemical structure); (B) an anti-angiogenic agent for oncology use; (C) a substantially specific TNFalpha inhibitor (via inhibition of synthesis of TNFalpha, including via inhibition of PDE4) for the treatment of Crohn's disease, rheumatoid arthritis, dermatological and auto-immune conditions having excess levels of TNFalpha as the prime causative factor, cachexia (AIDS or cancer), or any other indication for which the Company has been granted orphan drug status; or (D) a formulation of d- or dl-methylphenidate for the treatment of ADD/ADHD. 3 (b) For purposes of this Section 6 the term "Participate In" shall mean: "directly or indirectly, for his own benefit or for, with or through any other person, firm or corporation, own, manage, operate, control, loan money to or participate in the ownership, management, operation or control of, or be connected as a director, officer, employee, partner, consultant, agent, independent contractor or otherwise with, or acquiesce in the use of his name in." (c) Employee further agrees that, during the period he is employed by the Company under this Agreement or otherwise and until the first anniversary of the date of the termination of Employee's employment under this Agreement or otherwise, he will not directly or indirectly reveal the name of, solicit or interfere with, or endeavor to entice away from the Company, any of its suppliers, customers or employees. 7. Patents, etc. Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs and processes ("Inventions") which Employee during the period he is employed by the Company under this Agreement or otherwise, and for six months thereafter, may conceive of or develop and either relating to the specific fields in which the Company may then be engaged or conceived of or developed utilizing the time, material, facilities or information of the Company shall belong to the Company; as soon as Employee conceives of or develops any Invention, he agrees immediately to communicate such fact in writing to the Secretary of the Company, and without further compensation, but at the Company's expense (except as noted in clause (a) of this Section 7), forthwith upon request of the Company, Employee shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks and assignments thereof) and take all such other action as the Company may reasonably request in order (a) to vest in the Company all Employee's right, title and interest in and to the Inventions, free and clear of liens, mortgages, security interests, pledges, charges and encumbrances arising from the acts of Employee ("Liens") (Employee to take such action, at his expense, as is necessary to remove all such Liens) and (b) if patentable or copyrightable, to obtain patents or copyrights (including extensions and renewals) therefor in any and all countries in such name as the Company shall determine. 8. Confidential Information. All confidential information which Employee may now possess, may obtain during or after the Employment Period, or may create prior to the end of the period he is employed by the Company under this Agreement or otherwise relating to the business of the Company or of any customer or supplier of the Company shall not be published, disclosed or made accessible by him to any other person, firm or corporation either during or after the termination of his employment or used by him except during the Employment Period in the business and for the benefit of the Company, in each case without the prior written permission of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment. As used in this Section 8, "confidential information" shall mean any information except that information which is or comes into the public domain through no fault of Employee or which 4 Employee obtains after the termination of his employment by the Company under this Agreement or otherwise from a third party who has the right to disclose such information. 9. Life Insurance. If requested by the Company, Employee shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain life insurance on the life of Employee. Subject to its ability to do so under the terms of such policy, if any, insuring the life of Employee, upon the termination of Employee's employment hereunder, the Company will assign to Employee its rights under such insurance policy, provided that, concurrently with such assignment, Employee shall reimburse the Company for any premium payments made by the Company in respect of time periods subsequent to such date of termination. Nothing herein contained shall obligate the Company to obtain such insurance. 10. Termination. (a) Employee's employment and the Employment Period shall terminate on the first of the following to occur: (i) the Company provides written notice to Employee of a termination for Cause; such written notice shall be provided to Employee not less than ten (10) days prior to the date of termination. "Cause" shall mean: (A) Employee's conviction of a crime involving moral turpitude or a felony, (B) Employee's acts or omissions taken in bad faith and to the detriment of the Company after a written demand for cessation of such conduct is delivered to Employee by the Company, which demand specifically identifies the manner in which the Company believes that Employee has engaged in such conduct and the injury to the Company, and after Employee's failure to correct such act or omission within ten (10) days following such written demand, or (C) Employee's breach of any material term of this Agreement after written demand for substantial performance is delivered to Employee by the Company, which demand specifically identifies the manner in which the Company believes Employee has breached this Agreement, and after Employee's failure to correct such breach within ten (10) days following such written demand. (ii) Employee's death, in which case, this Agreement shall terminate on the date of Employee's death, whereupon Employee or his estate, as the case may be, shall be entitled to receive a lump sum payment in an amount equal to Employee's annual base salary (at the rate in effect, or required to be in effect, immediately prior to the date of Employee's death) and the portion of Employee's annual target bonus (as provided in Section 3(b)) pro-rated up to Employee's date of death (assuming the target has been met). (iii) Nothing contained in this Section 10(a) shall be deemed to limit any other right the Company may have to terminate Employee's employment hereunder upon any ground permitted by law. 5 (iv) If Employee's employment is terminated by the Company as a result of the disability or incapacitation of Employee or for any reason other than pursuant to the provisions of paragraphs (i) or (ii) of this Section 10(a) or the provisions of Section 10(b), upon termination by the Company of Employee's employment, whether during the Employment Period or thereafter, Employee shall be entitled to receive a lump sum payment in an amount equal to Employee's annual base salary (at the rate in effect, or required to be in effect, immediately prior to the date of Employee's termination) and the portion of Employee's annual target bonus (as provided in Section 3(b)) pro-rated up to Employee's date of disability, incapacitation or termination (assuming the target has been met). (v) In the event of the Employee's termination for any reason under this Agreement or otherwise, the Company shall pay and provide to Employee (in addition to any other payments or benefits payable under this Agreement): (A) any incurred but reimbursed business expenses for the period prior to the termination payable in accordance with the Company's policies; (B) any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to Employee but not yet paid; and (C) any other amounts or benefits due under the terms of the then applicable employee benefit, equity or incentive plans of the Company applicable to Employee (the "Accrued Benefits"). (vi) Payments of any amounts or benefits hereunder shall be made no later than ten (10) days after Employee's termination date, other than benefits under a plan with the terms which do not require or permit payment within such ten (10) day period. (b) During the ninety (90) day period prior to Change in Control or during the one (1) year period following a Change in Control, Employee may terminate his employment by written notice to the Company within thirty (30) calendar days after he has obtained actual knowledge of the occurrence of a Good Reason event. For purposes of this Agreement, Good Reason shall mean the occurrence of any of the following events without Employee's express written consent: (i) failure to elect or appoint, or reelect or reappoint, Employee to, or removal of Employee from, his position with the Company as Chief Executive Officer or Chairman of the Board, except in connection with the termination of Employee's employment pursuant to Section 10(a); (ii) a significant change in the nature or scope of the authorities, powers, functions, duties or responsibilities normally attached to Employee's position as Chief Executive Officer or Chairman of the Board, except in each case in connection with the termination of Employee's employment for Cause or as a result of Employee's death, or temporarily as a result of Employee's illness or other absence; (iii) a determination by Employee made in good faith that, as a result of a Change in Control, he is unable effectively to carry out the authorities, powers, 6 functions, duties or responsibilities attached to his position as Chief Executive Officer or Chairman of the Board and the situation is not remedied within 30 calendar days after receipt by the Company of written notice from Employee of such determination; (iv) a breach by the Company of any material provision of this Agreement (not covered by clause (i), (ii) or (iii) of this Section 10(b)) or of any other agreement, which is not remedied within 30 calendar days after receipt by the Company of written notice from Employee of such breach; (v) a reduction in Employee's annual base salary; (vi) a fifty (50) mile or greater relocation of the Company's principal office; (vii) failure of the Company to continue in effect any health or welfare plan, employee benefit plan, pension plan, fringe benefit plan or compensation plan in which Employee (and eligible dependents) are participating immediately prior to a Change in Control, unless Employee (and eligible dependents) are permitted to participate in other plans providing Employee (and eligible dependents) with substantially comparable benefits at no greater after-tax cost to Employee (and eligible dependents), or the taking of any action by the Company which would adversely affect the Employee's (and eligible dependents) participation in or reduce Employee's (and eligible dependents) benefits under any such plan; or (viii) failure of a successor to assume this Agreement. An election by Employee to terminate his employment under the provisions of this Section 10(b) shall not constitute a breach by Employee of this Agreement and shall not be deemed a voluntary termination of employment by Employee for the purpose of interpreting the provisions of any of the Company's employee benefit plans, programs or policies. (c) Upon the occurrence of a Change in Control and thereafter: (A) if Employee's employment with the Company is terminated by the Company without Cause or as a result of the disability or incapacitation of Employee, or by Employee with Good Reason at any time during the period beginning on the date of the Change in Control and ending one (1) year after the date of such Change in Control, or (B) if Employee's employment with the Company is terminated by the Company without Cause or by Employee for Good Reason within ninety (90) days prior to the occurrence of a Change in Control, then Employee shall be entitled to receive from the Company: (i) a lump sum amount, payable within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to (A) three (3) times Employee's base salary in effect, or required to be in effect, immediately prior to the Change in Control, 7 and (B) three (3) times the highest annual bonus paid or payable to Employee within three (3) years prior to the Change in Control; (ii) within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to the Accrued Benefits; (iii) payment by the Company of the premiums for Employee (except in the case of Employee's death) and Employee's and dependents' health and welfare coverage (including, without limitation, medical, dental, life insurance and disability coverage) for three (3) years from the later of the occurrence of a Change in Control or the date of termination of Employee's employment, under the Company's health and welfare plans which cover the senior executives of the Company or materially similar benefits ("Continuation Coverage"), subject to Employee's payment of customary premiums (if any) in effect prior to the Change in Control; (iv) upon the occurrence of a Change in Control, full and immediate vesting of all stock options and equity awards held by Employee. Payments under (iii) above may, at the discretion of the Company, be made by continuing Employee's participation in the plan as a terminee or by covering Employee and Employee's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent Employee incurs tax that Employee would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Employee shall receive from the Company an additional grossed up payment in the amount necessary so that Employee will have no additional cost for receiving such items or any additional payment. Notwithstanding anything herein to the contrary, Employee (and his eligible dependents) shall retain all rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and such COBRA continuation coverage shall be available to Employee (and his eligible dependents) at the expiration of the Continuation Coverage described herein. (d) For purposes of this Agreement, a Change in Control shall mean the occurrence of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company and any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of any such plan acting in his capacity as trustee), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing thirty percent (30%) of the total combined voting power of the Company's then outstanding securities; 8 (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than (A) a Transaction involving only the Company and one or more of its subsidiaries, or (B) a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person (other than those covered by the exceptions in (a) above) becomes the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a- 11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of any plan of complete liquidation of the Company or an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of such sale. (v) To the extent that Employee is entitled to payment under Section 10(c) upon a Change in Control due to Employee's termination without Cause or for Good Reason within ninety (90) days prior to a Change in Control, any such payments under Section 10(c) shall be reduced by any payments made to Employee prior to a Change in Control under Sections 10(a)(iv) and 10(a)(v). 11. Limitation on Payments. (a) In the event that Employee shall become entitled to the payments and/or benefits provided by Section 10(c) or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of 9 the Code (and any similar tax that may hereafter be imposed) the Company shall pay to Employee at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. Notwithstanding the foregoing provisions of this Section 11 to the contrary, if it shall be determined that Employee is entitled to a Gross-up Payment, but the Company Payments do not exceed one hundred five percent (105%) of the greatest amount that could be paid to Employee such that the receipt of Company Payments would not give rise to any Excise Tax (the "Reduced Amount"), then no Gross-up Payment shall be made to Employee and the Company Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants (the "Accountants") such Total Payments (in whole or in part), (A) do not constitute "parachute payments," (B) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code" or (C) are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Gross-up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Employee shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be 10 required until actual refund or credit of such portion has been made to Employee, and interest payable to the Company shall not exceed the interest received or credited to Employee by such tax authority for the period it held such portion. Employee and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Employee's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (d) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which sub jects Employee to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Employee on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code Section 1274(b)(2)(B) of the Code), subject to further payments pursuant to subsection (c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the event subjecting Employee to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Employee, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (e) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 11, Employee shall permit the Company to control issues related to this Section 11 (at its expense), provided that such issues do not potentially materially adversely affect Employee, but Employee shall control any other issues. In the event the issues are interrelated, Employee and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree, Employee shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Employee shall permit the representative of the Company to accompany him, and Employee and his representative shall cooperate with the Company and its representative. (f) The Company shall be responsible for all charges of the Accountants. 12. Successors. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree in writing to perform this 11 Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 13. Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment. 14. Entire Agreement; Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter (including, without limitation, the employment agreement in effect prior to the date hereof) and may be modified only by a written instrument duly executed by each party. 15. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 15). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 15. Any notice or other communication given by certified mail shall be deemed given three days after the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 16. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving such waiver. 17. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and its assigns under Section 12. 18. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Sections 12 and 17). 19. Legal Fees. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred in connection with any dispute 12 concerning payments, benefits and other entitlements to which Employee may have under this Agreement; provided, however, the Company shall be reimbursed by Employee for the fees and expenses advanced in the event Employee's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. 20. Pooling of Interests; Severability. In the event that the Company's independent public accountants determine in good faith that any provision of this Agreement would preclude "pooling of interests" accounting and provided that the Company engages in a transaction which utilizes "pooling of interests" accounting, such provision shall be deemed invalid and inoperative solely to the extent necessary to permit "pooling of interests" transactions. If any portion of this Agreement is held invalid or inoperative (including a determination by the Company's independent public accountants in good faith that any provision of this Agreement would preclude "pooling of interests" accounting), the other provisions of this Agreement shall be deemed to be valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held valid or inoperative. 21. No Duty to Mitigate/No Offset. The Company agrees that if Employee's employment with the Company is terminated pursuant to this Agreement during the term of this Agreement, Employee shall not be required to seek other employment or to attempt in any way to reduce any amounts payable to Employee by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Employee or benefit provided to Employee as the result of employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counter claim, recoupment, defense or other right which the Company may have against Employee. Notwithstanding the foregoing, payments and benefits under the Agreement will cease to be paid and may be recouped by the Company in the event Employee breaches any of the terms of Section 6, 7 or 8 hereunder. 22. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to the conflict of laws. 13 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. CELGENE CORPORATION By: ----------------------------- Richard C. E. Morgan Chairman of the Compensation Committee By: ----------------------------- Sol J. Barer President -------------------------------- John W. Jackson 14 EX-10.11 3 EXHIBIT 10.11 EXHIBIT 10.11 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), dated as of January 1, 2000, between Celgene Corporation, a Delaware corporation with offices at 7 Powder Horn Drive, Warren, New Jersey 07059 (the "Company"), and Sol J. Barer, residing at 625 Westfield Avenue, Westfield, New Jersey 07090 ("Employee"). W I T N E S S E T H - - - - - - - - - - WHEREAS, the Company and Employee have previously entered into an employment agreement, originally effective September 30, 1997 (the "Employment Agreement"); WHEREAS, Employee is currently employed as the President of the Company, and serves as a member of the Board of Directors of the Company (the "Board"); WHEREAS, the Company and Employee desire to amend and restate the Employment Agreement to modify certain terms of the Employment Agreement, effective as of the date set forth above or such other date as specified herein. NOW THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term. The Company agrees to continue to employ Employee, and Employee agrees to continue to serve, on the terms and conditions of this Agreement for a period commencing on the date hereof and ending three years from the date hereof, or such other period as may be provided for in Section 10 or 11. The period during which Employee is employed hereunder is hereinafter referred to as the "Employment Period." The Employment Period shall be automatically renewed for successive one-year terms unless either party gives written notice to the other at least six (6) months prior to the expiration of the then Employment Period, of such party's intention to terminate Employee's employment hereunder at the end of the then current Employment Period. 2. Duties and Services. During the Employment Period, Employee shall be employed in the business of the Company as President and Chief Operating Officer of the Company. In addition, Employee shall continue to serve as a member of the Board. Employee shall perform such duties and services, within his expertise and experience, as may be assigned to him by, and subject to the direction of, the Chief Executive Officer and the Board. Employee agrees to continue his employment as described in this Section 2 and agrees to devote all of his working time and efforts to the performance of his duties under this Agreement, excepting disabilities, illness and vacation time as provided by Section 3(e). In performing his duties hereunder, Employee shall be available for reasonable travel as the needs of the business require. Except as provided in Section 6 hereof, the foregoing shall not be construed as preventing Employee from: (i) making investments in other businesses and managing his and his family's personal investments; and (ii) participating in charitable, civic, educational, professional, community or industry affairs or serving on the board of directors of other companies ("Professional Activities"), provided that these Professional Activities are approved by the Company's Board. 3. Compensation and Other Benefits. (a) As compensation for his services hereunder, the Company shall pay Employee, during the Employment Period, a base salary payable in equal semi-monthly installments at an annual rate of $258,000, provided that such salary shall be reviewed annually by the Company's Board, or a committee thereof, which may, in its sole discretion, increase (but not decrease) such salary. (b) The Company shall also pay Employee, during the Employment Period, an annual target bonus, payable in January of each year for the preceding year, in an amount equal to forty-five percent (45%) of Employee's base salary (payable under Section 3(a) of this Agreement) measured against objective criteria to be determined by the Company's Board, or a committee thereof, after good faith consultation with Employee. (c) Employee shall be entitled to continue to participate in all group health and insurance programs and all other fringe benefit or retirement plans which the Company may, in its sole and absolute discretion, elect to make available to its employees generally, provided Employee meets the qualifications therefor. (d) Employee shall be eligible to participate in the Company's 1998 Long- Term Incentive Plan (the "Plan") and any other incentive plans of the Company. Upon the Employee's Disability (as defined in the Plan), termination of employment with the Company due to Retirement (as defined in the Plan) or death, Employee (or the legal representative of his estate, in the case of Employee's death) shall be entitled to: (i) full vesting and immediate exercisability of any outstanding stock options and other equity awards (and lapse of any forfeiture provisions) granted to Employee at any time; and (ii) with respect to stock options granted to Employee on or after January 1, 2000, Employee (or the legal representative of his estate, in the case of Employee's death) shall be entitled to exercise such stock options at any time during the three (3) year period from the date of Employee's Disability, Retirement or death. (e) Employee shall be entitled to four weeks of paid vacation per year during the Employment Period. 4. Expenses. Employee shall be entitled to reimbursement for all reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. 2 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder or the other rights of the Company hereunder. 6. Non-Competition. (a) In view of the unique and valuable services that Employee has rendered or is expected to render to the Company, Employee's knowledge of the customers, trade secrets and other proprietary information relating to the business of the Company and its customers and suppliers and similar knowledge regarding the Company which Employee has obtained or is expected to obtain, and in consideration of the compensation to be received hereunder, Employee agrees that: (i) during the period he is employed by the Company under this Agreement or otherwise, he will not Participate In (as hereinafter defined in this Section 6) any other business or organization, whether or not such business or organization now is or shall then be competing with or of a nature similar to the business of the Company, without obtaining the prior written consent of the Chief Executive Officer of the Company; (ii) until the first anniversary of the date of the termination of Employee's employment under this Agreement or otherwise, he will not Participate In any business which is engaged, directly or indirectly, in the same business as the Company with respect to any specific product or specific service sold or activity in which the Company engages up to the time of termination of employment in any geographical area in which at the time of termination such product or service is sold or activity is engaged in by the Company; (iii) if a Change in Control occurs and Employee's employment with the Company is terminated under this Agreement without Cause (as hereinafter defined) or by Employee for Good Reason (as hereinafter defined) at any time during the period beginning on the date of a Change in Control and ending one (1) year after the date of such Change in Control or within ninety (90) days prior to a Change in Control, then beginning on the later of the date Employee's employment terminates (as described under this Section 6(a)(iii)) and the date of a Change in Control and ending on the second anniversary of such date, he will not Participate In any activity or business in the United States involved in the research, development, commercialization of a small molecule which is: (A) the generic equivalent of THALOMID (i.e., the same chemical structure); (B) an anti-angiogenic agent for oncology use; (C) a substantially specific TNFalpha inhibitor (via inhibition of synthesis of TNFalpha, including via inhibition of PDE4) for the treatment of Crohn's disease, rheumatoid arthritis, dermatological and auto-immune conditions having excess levels of TNFalpha as the prime causative factor, cachexia (AIDS or cancer), or any other indication for which the Company has been 3 granted orphan drug status; or (D) a formulation of d- or dl-methylphenidate for the treatment of ADD/ADHD. (b) For purposes of this Section 6 the term "Participate In" shall mean: "directly or indirectly, for his own benefit or for, with or through any other person, firm or corporation, own, manage, operate, control, loan money to or participate in the ownership, management, operation or control of, or be connected as a director, officer, employee, partner, consultant, agent, independent contractor or otherwise with, or acquiesce in the use of his name in." (c) Employee further agrees that, during the period he is employed by the Company under this Agreement or otherwise and until the first anniversary of the date of the termination of Employee's employment under this Agreement or otherwise, he will not directly or indirectly reveal the name of, solicit or interfere with, or endeavor to entice away from the Company, any of its suppliers, customers or employees. 7. Patents, etc. Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs and processes ("Inventions") which Employee during the period he is employed by the Company under this Agreement or otherwise, and for six months thereafter, may conceive of or develop and either relating to the specific fields in which the Company may then be engaged or conceived of or developed utilizing the time, material, facilities or information of the Company shall belong to the Company; as soon as Employee conceives of or develops any Invention, he agrees immediately to communicate such fact in writing to the Secretary of the Company, and without further compensation, but at the Company's expense (except as noted in clause (a) of this Section 7), forthwith upon request of the Company, Employee shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks and assignments thereof) and take all such other action as the Company may reasonably request in order (a) to vest in the Company all Employee's right, title and interest in and to the Inventions, free and clear of liens, mortgages, security interests, pledges, charges and encumbrances arising from the acts of Employee ("Liens") (Employee to take such action, at his expense, as is necessary to remove all such Liens) and (b) if patentable or copyrightable, to obtain patents or copyrights (including extensions and renewals) therefor in any and all countries in such name as the Company shall determine. 8. Confidential Information. All confidential information which Employee may now possess, may obtain during or after the Employment Period, or may create prior to the end of the period he is employed by the Company under this Agreement or otherwise relating to the business of the Company or of any customer or supplier of the Company shall not be published, disclosed or made accessible by him to any other person, firm or corporation either during or after the termination of his employment or used by him except during the Employment Period in the business and for the benefit of the Company, in each case without the prior written permission of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment. As used in this Section 8, "confidential information" shall mean any information except that 4 information which is or comes into the public domain through no fault of Employee or which Employee obtains after the termination of his employment by the Company under this Agreement or otherwise from a third party who has the right to disclose such information. 9. Life Insurance. If requested by the Company, Employee shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain life insurance on the life of Employee. Subject to its ability to do so under the terms of such policy, if any, insuring the life of Employee, upon the termination of Employee's employment hereunder, the Company will assign to Employee its rights under such insurance policy, provided that, concurrently with such assignment, Employee shall reimburse the Company for any premium payments made by the Company in respect of time periods subsequent to such date of termination. Nothing herein contained shall obligate the Company to obtain such insurance. 10. Termination. (a) Employee's employment and the Employment Period shall terminate on the first of the following to occur: (i) the Company provides written notice to Employee of a termination for Cause; such written notice shall be provided to Employee not less than ten (10) days prior to the date of termination. "Cause" shall mean: (A) Employee's conviction of a crime involving moral turpitude or a felony, (B) Employee's acts or omissions taken in bad faith and to the detriment of the Company after a written demand for cessation of such conduct is delivered to Employee by the Company, which demand specifically identifies the manner in which the Company believes that Employee has engaged in such conduct and the injury to the Company, and after Employee's failure to correct such act or omission within ten (10) days following such written demand, or (C) Employee's breach of any material term of this Agreement after written demand for substantial performance is delivered to Employee by the Company, which demand specifically identifies the manner in which the Company believes Employee has breached this Agreement, and after Employee's failure to correct such breach within ten (10) days following such written demand. (ii) Employee's death, in which case, this Agreement shall terminate on the date of Employee's death, whereupon Employee or his estate, as the case may be, shall be entitled to receive a lump sum payment in an amount equal to Employee's annual base salary (at the rate in effect, or required to be in effect, immediately prior to the date of Employee's death) and the portion of Employee's annual target bonus (as provided in Section 3(b)) pro-rated up to Employee's date of death (assuming the target has been met). (iii) Nothing contained in this Section 10(a) shall be deemed to limit any other right the Company may have to terminate Employee's employment hereunder upon any ground permitted by law. 5 (iv) If Employee's employment is terminated by the Company as a result of the disability or incapacitation of Employee or for any reason other than pursuant to the provisions of paragraphs (i) or (ii) of this Section 10(a) or the provisions of Section 10(b), upon termination by the Company of Employee's employment, whether during the Employment Period or thereafter, Employee shall be entitled to receive a lump sum payment in an amount equal to Employee's annual base salary (at the rate in effect, or required to be in effect, immediately prior to the date of Employee's termination) and the portion of Employee's annual target bonus (as provided in Section 3(b)) pro-rated up to Employee's date of disability, incapacitation or termination (assuming the target has been met). (v) In the event of the Employee's termination for any reason under this Agreement or otherwise, the Company shall pay and provide to Employee (in addition to any other payments or benefits payable under this Agreement): (A) any incurred but reimbursed business expenses for the period prior to the termination payable in accordance with the Company's policies; (B) any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to Employee but not yet paid; and (C) any other amounts or benefits due under the terms of the then applicable employee benefit, equity or incentive plans of the Company applicable to Employee (the "Accrued Benefits"). (vi) Payments of any amounts or benefits hereunder shall be made no later than ten (10) days after Employee's termination date, other than benefits under a plan with the terms which do not require or permit payment within such ten (10) day period. (b) During the ninety (90) day period prior to Change in Control or during the one (1) year period following a Change in Control, Employee may terminate his employment by written notice to the Company within thirty (30) calendar days after he has obtained actual knowledge of the occurrence of a Good Reason event. For purposes of this Agreement, Good Reason shall mean the occurrence of any of the following events without Employee's express written consent: (i) failure to elect or appoint, or reelect or reappoint, Employee to, or removal of Employee from, his position with the Company as President and Chief Operating Officer or as a member of the Board, except in connection with the termination of Employee's employment pursuant to Section 10(a); (ii) a significant change in the nature or scope of the authorities, powers, functions, duties or responsibilities normally attached to Employee's position as President and Chief Operating Officer or as a member of the Board, except in each case in connection with the termination of Employee's employment for Cause or as a result of Employee's death, or temporarily as a result of Employee's illness or other absence; (iii) a determination by Employee made in good faith that, as a result of a Change in Control, he is unable effectively to carry out the authorities, powers, 6 functions, duties or responsibilities attached to his position as President and Chief Operating Officer or as a member of the Board and the situation is not remedied within 30 calendar days after receipt by the Company of written notice from Employee of such determination; (iv) a breach by the Company of any material provision of this Agreement (not covered by clause (i), (ii) or (iii) of this Section 10(b)) or of any other agreement, which is not remedied within 30 calendar days after receipt by the Company of written notice from Employee of such breach; (v) a reduction in Employee's annual base salary; (vi) a fifty (50) mile or greater relocation of the Company's principal office; (vii) failure of the Company to continue in effect any health or welfare plan, employee benefit plan, pension plan, fringe benefit plan or compensation plan in which Employee (and eligible dependents) are participating immediately prior to a Change in Control, unless Employee (and eligible dependents) are permitted to participate in other plans providing Employee (and eligible dependents) with substantially comparable benefits at no greater after-tax cost to Employee (and eligible dependents), or the taking of any action by the Company which would adversely affect the Employee's (and eligible dependents) participation in or reduce Employee's (and eligible dependents) benefits under any such plan; or (viii) failure of a successor to assume this Agreement. An election by Employee to terminate his employment under the provisions of this Section 10(b) shall not constitute a breach by Employee of this Agreement and shall not be deemed a voluntary termination of employment by Employee for the purpose of interpreting the provisions of any of the Company's employee benefit plans, programs or policies. (c) Upon the occurrence of a Change in Control and thereafter: (A) if Employee's employment with the Company is terminated by the Company without Cause or as a result of the disability or incapacitation of Employee, or by Employee with Good Reason at any time during the period beginning on the date of the Change in Control and ending one (1) year after the date of such Change in Control, or (B) if Employee's employment with the Company is terminated by the Company without Cause or by Employee for Good Reason within ninety (90) days prior to the occurrence of a Change in Control, then Employee shall be entitled to receive from the Company: (i) a lump sum amount, payable within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to (A) three (3) times Employee's base salary in effect, or required to be in effect, immediately prior to the Change in Control, 7 and (B) three (3) times the highest annual bonus paid or payable to Employee within three (3) years prior to the Change in Control; (ii) within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to the Accrued Benefits; (iii) payment by the Company of the premiums for Employee (except in the case of Employee's death) and Employee's and dependents' health and welfare coverage (including, without limitation, medical, dental, life insurance and disability coverage) for three (3) years from the later of the occurrence of a Change in Control or the date of termination of Employee's employment, under the Company's health and welfare plans which cover the senior executives of the Company or materially similar benefits ("Continuation Coverage"), subject to Employee's payment of customary premiums (if any) in effect prior to the Change in Control; (iv) upon the occurrence of a Change in Control, full and immediate vesting of all stock options and equity awards held by Employee. Payments under (iii) above may, at the discretion of the Company, be made by continuing Employee's participation in the plan as a terminee or by covering Employee and Employee's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent Employee incurs tax that Employee would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Employee shall receive from the Company an additional grossed up payment in the amount necessary so that Employee will have no additional cost for receiving such items or any additional payment. Notwithstanding anything herein to the contrary, Employee (and his eligible dependents) shall retain all rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and such COBRA continuation coverage shall be available to Employee (and his eligible dependents) at the expiration of the Continuation Coverage described herein. (d) For purposes of this Agreement, a Change in Control shall mean the occurrence of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company and any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of any such plan acting in his capacity as trustee), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing thirty percent (30%) of the total combined voting power of the Company's then outstanding securities; 8 (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than (A) a Transaction involving only the Company and one or more of its subsidiaries, or (B) a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person (other than those covered by the exceptions in (a) above) becomes the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a- 11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of any plan of complete liquidation of the Company or an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of such sale. (v) To the extent that Employee is entitled to payment under Section 10(c) upon a Change in Control due to Employee's termination without Cause or for Good Reason within ninety (90) days prior to a Change in Control, any such payments under Section 10(c) shall be reduced by any payments made to Employee prior to a Change in Control under Sections 10(a)(iv) and 10(a)(v). 11. Limitation on Payments. (a) In the event that Employee shall become entitled to the payments and/or benefits provided by Section 10(c) or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of 9 the Code (and any similar tax that may hereafter be imposed) the Company shall pay to Employee at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment pro vided for by this paragraph (a), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. Notwithstanding the foregoing provisions of this Section 11 to the contrary, if it shall be determined that Employee is entitled to a Gross-up Payment, but the Company Payments do not exceed one hundred five percent (105%) of the greatest amount that could be paid to Employee such that the receipt of Company Payments would not give rise to any Excise Tax (the "Reduced Amount"), then no Gross-up Payment shall be made to Employee and the Company Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants (the "Accountants") such Total Payments (in whole or in part), (A) do not constitute "parachute payments," (B) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code" or (C) are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Gross-up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Employee shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be 10 required until actual refund or credit of such portion has been made to Employee, and interest payable to the Company shall not exceed the interest received or credited to Employee by such tax authority for the period it held such portion. Employee and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Employee's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (d) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which sub jects Employee to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Employee on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code Section 1274(b)(2)(B) of the Code), subject to further payments pursuant to subsection (c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the event subjecting Employee to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Employee, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (e) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 11, Employee shall permit the Company to control issues related to this Section 11 (at its expense), provided that such issues do not potentially materially adversely affect Employee, but Employee shall control any other issues. In the event the issues are interrelated, Employee and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree, Employee shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Employee shall permit the representative of the Company to accompany him, and Employee and his representative shall cooperate with the Company and its representative. (f) The Company shall be responsible for all charges of the Accountants. 12. Successors. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree in writing to perform this 11 Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 13. Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment. 14. Entire Agreement; Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter (including, without limitation, the employment agreement in effect prior to the date hereof) and may be modified only by a written instrument duly executed by each party. 15. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 15). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 15. Any notice or other communication given by certified mail shall be deemed given three days after the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 16. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving such waiver. 17. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and its assigns under Section 12. 18. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Sections 12 and 17). 19. Legal Fees. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred in connection with any dispute 12 concerning payments, benefits and other entitlements to which Employee may have under this Agreement; provided, however, the Company shall be reimbursed by Employee for the fees and expenses advanced in the event Employee's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. 20. Pooling of Interests; Severability. In the event that the Company's independent public accountants determine in good faith that any provision of this Agreement would preclude "pooling of interests" accounting and provided that the Company engages in a transaction which utilizes "pooling of interests" accounting, such provision shall be deemed invalid and inoperative solely to the extent necessary to permit "pooling of interests" transactions. If any portion of this Agreement is held invalid or inoperative (including a determination by the Company's independent public accountants in good faith that any provision of this Agreement would preclude "pooling of interests" accounting), the other provisions of this Agreement shall be deemed to be valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held valid or inoperative. 21. No Duty to Mitigate/No Offset. The Company agrees that if Employee's employment with the Company is terminated pursuant to this Agreement during the term of this Agreement, Employee shall not be required to seek other employment or to attempt in any way to reduce any amounts payable to Employee by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Employee or benefit provided to Employee as the result of employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against Employee. Notwithstanding the foregoing, payments and benefits under the Agreement will cease to be paid and may be recouped by the Company in the event Employee breaches any of the terms of Section 6, 7 or 8 hereunder. 22. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to the conflict of laws. 13 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. CELGENE CORPORATION By: ----------------------------- Richard C. E. Morgan Chairman of the Compensation Committee By: ----------------------------- John W. Jackson Chief Executive Officer -------------------------------- Sol J. Barer 13 EX-10.18 4 EXHIBIT 10.18 EXHIBIT 10.18 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of January 1, 2000, between Celgene Corporation, a Delaware corporation with offices at 7 Powder Horn Drive, Warren, New Jersey 07059 (the "Company"), and Robert J. Hugin, residing at 58 Ox Bow Lane, Summit, New Jersey 07901 ("Employee"). W I T N E S S E T H - - - - - - - - - - WHEREAS, Employee is currently employed by the Company; WHEREAS, the Company desires that Employee be employed in a senior executive capacity with the Company subject to the terms and conditions hereof, and Employee desires to be employed by the Company in such capacity; and WHEREAS, the parties hereto desire to set forth in writing the terms and conditions of their understandings and agreements and to supersede any existing agreement between the parties. NOW THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term. The Company agrees to employ Employee, and Employee agrees to serve, on the terms and conditions of this Agreement for a period commencing on the date hereof and ending three years from the date hereof, or such other period as may be provided for in Section 10 or 11. The period during which Employee is employed hereunder is hereinafter referred to as the "Employment Period." The Employment Period shall be automatically renewed for successive one- year terms unless either party gives written notice to the other at least six (6) months prior to the expiration of the then Employment Period, of such party's intention to terminate Employee's employment hereunder at the end of the then current Employment Period. 2. Duties and Services. During the Employment Period, Employee shall be employed in the business of the Company as Senior Vice President and Chief Financial Officer of the Company. In addition, Employee shall serve as Secretary to the Board. Employee shall perform such duties and services, within his expertise and experience, as may be assigned to him by, and subject to the direction of, the Chief Executive Officer and the Board. Employee agrees to his employment as described in this Section 2 and agrees to devote all of his working time and efforts to the performance of his duties under this Agreement, excepting disabilities, illness and vacation time as provided by Section 3(e). In performing his duties hereunder, Employee shall be available for reasonable travel as the needs of the business require. Except as provided in Section 6 hereof, the foregoing shall not be construed as preventing Employee from: (i) making investments in other businesses and managing his and his family's personal investments; and (ii) participating in charitable, civic, educational, professional, community or industry affairs or serving on the board of directors of other companies ("Professional Activities"), provided that these Professional Activities are approved by the Company's Board. 3. Compensation and Other Benefits. (a) As compensation for his services hereunder, the Company shall pay Employee, during the Employment Period, a base salary payable in equal semi-monthly installments at an annual rate of $240,000, provided that such salary shall be reviewed annually by the Company's Board, or a committee thereof, which may, in its sole discretion, increase (but not decrease) such salary. (b) The Company shall also pay Employee, during the Employment Period, an annual target bonus, payable in January of each year for the preceding year, in an amount equal to thirty-five percent (35%) of Employee's base salary (payable under Section 3(a) of this Agreement) measured against objective criteria to be determined by the Company's Board, or a committee thereof, after good faith consultation with Employee. (c) Employee shall be entitled to participate in all group health and insurance programs and all other fringe benefit or retirement plans which the Company may, in its sole and absolute discretion, elect to make available to its employees generally, provided Employee meets the qualifications therefor. (d) Employee shall be eligible to participate in the Company's 1998 Long-Term Incentive Plan (the "Plan") and any other incentive plans of the Company. Upon the Employee's Disability (as defined in the Plan), termination of employment with the Company due to Retirement (as defined in the Plan) or death, Employee (or the legal representative of his estate, in the case of Employee's death) shall be entitled to: (i) full vesting and immediate exercisability of any outstanding stock options and other equity awards (and lapse of any forfeiture provisions) granted to Employee at any time; and (ii) with respect to stock options granted to Employee on or after January 1, 2000, Employee (or the legal representative of his estate, in the case of Employee's death) shall be entitled to exercise such stock options at any time during the three (3) year period from the date of Employee's Disability, Retirement or death. (e) Employee shall be entitled to four weeks of paid vacation per year during the Employment Period. 4. Expenses. Employee shall be entitled to reimbursement for all reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder or the other rights of the Company hereunder. 2 6. Non-Competition. (a) In view of the unique and valuable services that Employee has rendered or is expected to render to the Company, Employee's knowledge of the customers, trade secrets and other proprietary information relating to the business of the Company and its customers and suppliers and similar knowledge regarding the Company which Employee has obtained or is expected to obtain, and in consideration of the compensation to be received hereunder, Employee agrees that: (i) during the period he is employed by the Company under this Agreement or otherwise, he will not Participate In (as hereinafter defined in this Section 6) any other business or organization, whether or not such business or organization now is or shall then be competing with or of a nature similar to the business of the Company, without obtaining the prior written consent of the Chief Executive Officer of the Company; (ii) until the first anniversary of the date of the termination of Employee's employment under this Agreement or otherwise, he will not Participate In any business which is engaged, directly or indirectly, in the same business as the Company with respect to any specific product or specific service sold or activity in which the Company engages up to the time of termination of employment in any geographical area in which at the time of termination such product or service is sold or activity is engaged in by the Company; (iii) if a Change in Control occurs and Employee's employment with the Company is terminated under this Agreement without Cause (as hereinafter defined) or by Employee for Good Reason (as hereinafter defined) at any time during the period beginning on the date of a Change in Control and ending one (1) year after the date of such Change in Control or within ninety (90) days prior to a Change in Control, then beginning on the later of the date Employee's employment terminates (as described under this Section 6(a)(iii)) and the date of a Change in Control and ending on the second anniversary of such date, he will not Participate In any activity or business in the United States involved in the research, development, commercialization of a small molecule which is: (A) the generic equivalent of THALOMID (i.e., the same chemical structure); (B) an anti-angiogenic agent for oncology use; (C) a substantially specific TNFalpha inhibitor (via inhibition of synthesis of TNFalpha, including via inhibition of PDE4) for the treatment of Crohn's disease, rheumatoid arthritis, dermatological and auto-immune conditions having excess levels of TNFalpha as the prime causative factor, cachexia (AIDS or cancer), or any other indication for which the Company has been granted orphan drug status; or (D) a formulation of d- or dl-methylphenidate for the treatment of ADD/ADHD. (b) For purposes of this Section 6 the term "Participate In" shall mean: "directly or indirectly, for his own benefit or for, with or through any other person, firm or corporation, own, manage, operate, control, loan money to or participate in the ownership, management, operation or control of, or be connected as a director, officer, employee, partner, consultant, agent, independent contractor or otherwise with, or acquiesce in the use of his name in." 3 (c) Employee further agrees that, during the period he is employed by the Company under this Agreement or otherwise and until the first anniversary of the date of the termination of Employee's employment under this Agreement or otherwise, he will not directly or indirectly reveal the name of, solicit or interfere with, or endeavor to entice away from the Company, any of its suppliers, customers or employees. 7. Patents, etc. Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs and processes ("Inventions") which Employee during the period he is employed by the Company under this Agreement or otherwise, and for six months thereafter, may conceive of or develop and either relating to the specific fields in which the Company may then be engaged or conceived of or developed utilizing the time, material, facilities or information of the Company shall belong to the Company; as soon as Employee conceives of or develops any Invention, he agrees immediately to communicate such fact in writing to the Secretary of the Company, and without further compensation, but at the Company's expense (except as noted in clause (a) of this Section 7), forthwith upon request of the Company, Employee shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks and assignments thereof) and take all such other action as the Company may reasonably request in order (a) to vest in the Company all Employee's right, title and interest in and to the Inventions, free and clear of liens, mortgages, security interests, pledges, charges and encumbrances arising from the acts of Employee ("Liens") (Employee to take such action, at his expense, as is necessary to remove all such Liens) and (b) if patentable or copyrightable, to obtain patents or copyrights (including extensions and renewals) therefor in any and all countries in such name as the Company shall determine. 8. Confidential Information. All confidential information which Employee may now possess, may obtain during or after the Employment Period, or may create prior to the end of the period he is employed by the Company under this Agreement or otherwise relating to the business of the Company or of any customer or supplier of the Company shall not be published, disclosed or made accessible by him to any other person, firm or corporation either during or after the termination of his employment or used by him except during the Employment Period in the business and for the benefit of the Company, in each case without the prior written permission of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment. As used in this Section 8, "confidential information" shall mean any information except that information which is or comes into the public domain through no fault of Employee or which Employee obtains after the termination of his employment by the Company under this Agreement or otherwise from a third party who has the right to disclose such information. 9. Life Insurance. If requested by the Company, Employee shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain life insurance on the life of Employee. Subject to its ability to do so under the terms of such policy, if any, insuring the life of Employee, upon the termination of Employee's employment hereunder, the Company will assign to Employee its rights under such insurance policy, provided 4 that, concurrently with such assignment, Employee shall reimburse the Company for any premium payments made by the Company in respect of time periods subsequent to such date of termination. Nothing herein contained shall obligate the Company to obtain such insurance. 10. Termination. (a) Employee's employment and the Employment Period shall terminate on the first of the following to occur: (i) the Company provides written notice to Employee of a termination for Cause; such written notice shall be provided to Employee not less than ten (10) days prior to the date of termination. "Cause" shall mean: (A) Employee's conviction of a crime involving moral turpitude or a felony, (B) Employee's acts or omissions taken in bad faith and to the detriment of the Company after a written demand for cessation of such conduct is delivered to Employee by the Company, which demand specifically identifies the manner in which the Company believes that Employee has engaged in such conduct and the injury to the Company, and after Employee's failure to correct such act or omission within ten (10) days following such written demand, or (C) Employee's breach of any material term of this Agreement after written demand for substantial performance is delivered to Employee by the Company, which demand specifically identifies the manner in which the Company believes Employee has breached this Agreement, and after Employee's failure to correct such breach within ten (10) days following such written demand. (ii) Employee's death, in which case, this Agreement shall terminate on the date of Employee's death, whereupon Employee or his estate, as the case may be, shall be entitled to receive a lump sum payment in an amount equal to Employee's annual base salary (at the rate in effect, or required to be in effect, immediately prior to the date of Employee's death) and the portion of Employee's annual target bonus (as provided in Section 3(b)) pro-rated up to Employee's date of death (assuming the target has been met). (iii) Nothing contained in this Section 10(a) shall be deemed to limit any other right the Company may have to terminate Employee's employment hereunder upon any ground permitted by law. (iv) If Employee's employment is terminated by the Company as a result of the disability or incapacitation of Employee or for any reason other than pursuant to the provisions of paragraphs (i) or (ii) of this Section 10(a) or the provisions of Section 10(b), upon termination by the Company of Employee's employment, whether during the Employment Period or thereafter, Employee shall be entitled to receive a lump sum payment in an amount equal to Employee's annual base salary (at the rate in effect, or required to be in effect, immediately prior to the date of Employee's termination) and the portion of Employee's annual target bonus (as provided in Section 3(b)) pro-rated up to Employee's date of disability, incapacitation or termination (assuming the target has been met). (v) In the event of the Employee's termination for any reason under this Agreement or otherwise, the Company shall pay and provide to Employee (in addition to 5 any other payments or benefits payable under this Agreement): (A) any incurred but reimbursed business expenses for the period prior to the termination payable in accordance with the Company's policies; (B) any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to Employee but not yet paid; and (C) any other amounts or benefits due under the terms of the then applicable employee benefit, equity or incentive plans of the Company applicable to Employee (the "Accrued Benefits"). (vi) Payments of any amounts or benefits hereunder shall be made no later than ten (10) days after Employee's termination date, other than benefits under a plan with the terms which do not require or permit payment within such ten (10) day period. (b) During the ninety (90) day period prior to Change in Control or during the one (1) year period following a Change in Control, Employee may terminate his employment by written notice to the Company within thirty (30) calendar days after he has obtained actual knowledge of the occurrence of a Good Reason event. For purposes of this Agreement, Good Reason shall mean the occurrence of any of the following events without Employee's express written consent: (i) failure to elect or appoint, or reelect or reappoint, Employee to, or removal of Employee from, his position with the Company as Senior Vice President and Chief Financial Officer or as Secretary to the Board, except in connection with the termination of Employee's employment pursuant to Section 10(a); (ii) a significant change in the nature or scope of the authorities, powers, functions, duties or responsibilities normally attached to Employee's position as Senior Vice President and Chief Financial Officer or as Secretary to the Board, except in each case in connection with the termination of Employee's employment for Cause or as a result of Employee's death, or temporarily as a result of Employee's illness or other absence; (iii) a determination by Employee made in good faith that, as a result of a Change in Control, he is unable effectively to carry out the authorities, powers, functions, duties or responsibilities attached to his position as Senior Vice President and Chief Financial Officer or as Secretary to the Board and the situation is not remedied within 30 calendar days after receipt by the Company of written notice from Employee of such determination; (iv) a breach by the Company of any material provision of this Agreement (not covered by clause (i), (ii) or (iii) of this Section 10(b)) or of any other agreement, which is not remedied within 30 calendar days after receipt by the Company of written notice from Employee of such breach; (v) a reduction in Employee's annual base salary; 6 (vi) a fifty (50) mile or greater relocation of the Company's principal office; (vii) failure of the Company to continue in effect any health or welfare plan, employee benefit plan, pension plan, fringe benefit plan or compensation plan in which Employee (and eligible dependents) are participating immediately prior to a Change in Control, unless Employee (and eligible dependents) are permitted to participate in other plans providing Employee (and eligible dependents) with substantially comparable benefits at no greater after-tax cost to Employee (and eligible dependents), or the taking of any action by the Company which would adversely affect the Employee's (and eligible dependents) participation in or reduce Employee's (and eligible dependents) benefits under any such plan; or (viii) failure of a successor to assume this Agreement. An election by Employee to terminate his employment under the provisions of this Section 10(b) shall not constitute a breach by Employee of this Agreement and shall not be deemed a voluntary termination of employment by Employee for the purpose of interpreting the provisions of any of the Company's employee benefit plans, programs or policies. (c) Upon the occurrence of a Change in Control and thereafter: (A) if Employee's employment with the Company is terminated by the Company without Cause or as a result of the disability or incapacitation of Employee, or by Employee with Good Reason at any time during the period beginning on the date of the Change in Control and ending one (1) year after the date of such Change in Control, or (B) if Employee's employment with the Company is terminated by the Company without Cause or by Employee for Good Reason within ninety (90) days prior to the occurrence of a Change in Control, then Employee shall be entitled to receive from the Company: (i) a lump sum amount, payable within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to (A) three (3) times Employee's base salary in effect, or required to be in effect, immediately prior to the Change in Control, and (B) three (3) times the highest annual bonus paid or payable to Employee within three (3) years prior to the Change in Control; (ii) within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to the Accrued Benefits; (iii) payment by the Company of the premiums for Employee (except in the case of Employee's death) and Employee's and dependents' health and welfare coverage (including, without limitation, medical, dental, life insurance and disability coverage) for three (3) years from the later of the occurrence of a Change in Control or the date of termination of Employee's employment, under the Company's health and welfare plans 7 which cover the senior executives of the Company or materially similar benefits ("Continuation Coverage"), subject to Employee's payment of customary premiums (if any) in effect prior to the Change in Control; (iv) upon the occurrence of a Change in Control, full and immediate vesting of all stock options and equity awards held by Employee. Payments under (iii) above may, at the discretion of the Company, be made by continuing Employee's participation in the plan as a terminee or by covering Employee and Employee's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent Employee incurs tax that Employee would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Employee shall receive from the Company an additional grossed up payment in the amount necessary so that Employee will have no additional cost for receiving such items or any additional payment. Notwithstanding anything herein to the contrary, Employee (and his eligible dependents) shall retain all rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and such COBRA continuation coverage shall be available to Employee (and his eligible dependents) at the expiration of the Continuation Coverage described herein. (d) For purposes of this Agreement, a Change in Control shall mean the occurrence of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company and any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of any such plan acting in his capacity as trustee), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing thirty percent (30%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than (A) a Transaction involving only the Company and one or more of its subsidiaries, or (B) a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person (other than those covered by the exceptions in (a) above) becomes the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any 8 successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of any plan of complete liquidation of the Company or an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of such sale. (v) To the extent that Employee is entitled to payment under Section 10(c) upon a Change in Control due to Employee's termination without Cause or for Good Reason within ninety (90) days prior to a Change in Control, any such payments under Section 10(c) shall be reduced by any payments made to Employee prior to a Change in Control under Sections 10(a)(iv) and 10(a)(v). 11. Limitation on Payments. (a) In the event that Employee shall become entitled to the payments and/or benefits provided by Section 10(c) or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed) the Company shall pay to Employee at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. Notwithstanding the foregoing provisions of this Section 11 to the contrary, if it shall be determined that Employee is entitled to a Gross-up Payment, but the Company Payments do not exceed one hundred five percent (105%) of the greatest amount that could be paid to Employee such that the receipt of Company Payments would not give rise to any Excise Tax (the "Reduced Amount"), then no Gross-up Payment shall be made to Employee and the Company Payments, in the aggregate, shall be reduced to the Reduced Amount. 9 (b) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants (the "Accountants") such Total Payments (in whole or in part), (A) do not constitute "parachute payments," (B) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code" or (C) are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Gross-up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Employee shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to Employee, and interest payable to the Company shall not exceed the interest received or credited to Employee by such tax authority for the period it held such portion. Employee and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Employee's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. 10 (d) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which subjects Employee to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Employee on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code Section 1274(b)(2)(B) of the Code), subject to further payments pursuant to subsection (c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the event subjecting Employee to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Employee, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (e) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 11, Employee shall permit the Company to control issues related to this Section 11 (at its expense), provided that such issues do not potentially materially adversely affect Employee, but Employee shall control any other issues. In the event the issues are interrelated, Employee and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree, Employee shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Employee shall permit the representative of the Company to accompany him, and Employee and his representative shall cooperate with the Company and its representative. (f) The Company shall be responsible for all charges of the Accountants. 12. Successors. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree in writing to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 13. Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment. 14. Entire Agreement; Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter (including, without limitation, the employment agreement in effect prior to the date hereof) and may be modified only by a written instrument duly executed by each party. 11 15. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 15). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 15. Any notice or other communication given by certified mail shall be deemed given three days after the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 16. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving such waiver. 17. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and its assigns under Section 12. 18. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Sections 12 and 17). 19. Legal Fees. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred in connection with any dispute concerning payments, benefits and other entitlements to which Employee may have under this Agreement; provided, however, the Company shall be reimbursed by Employee for the fees and expenses advanced in the event Employee's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. 20. Pooling of Interests; Severability. In the event that the Company's independent public accountants determine in good faith that any provision of this Agreement would preclude "pooling of interests" accounting and provided that the Company engages in a transaction which utilizes "pooling of interests" accounting, such provision shall be deemed invalid and inoperative solely to the extent necessary to permit "pooling of interests" transactions. If any portion of this Agreement is held invalid or inoperative (including a determination by the Company's independent public accountants in good faith that any provision of this Agreement 12 would preclude "pooling of interests" accounting), the other provisions of this Agreement shall be deemed to be valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held valid or inoperative. 21. No Duty to Mitigate/No Offset. The Company agrees that if Employee's employment with the Company is terminated pursuant to this Agreement during the term of this Agreement, Employee shall not be required to seek other employment or to attempt in any way to reduce any amounts payable to Employee by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Employee or benefit provided to Employee as the result of employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against Employee. Notwithstanding the foregoing, payments and benefits under the Agreement will cease to be paid and may be recouped by the Company in the event Employee breaches any of the terms of Section 6, 7 or 8 hereunder. 22. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to the conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. CELGENE CORPORATION By: ---------------------------- Richard C. E. Morgan Chairman of the Compensation Committee By: ---------------------------- John W. Jackson Chief Executive Officer ---------------------------- Robert J. Hugin 13 EX-10.19 5 EXHIBIT 10.19 EXHIBIT 10.19 CONVERTIBLE NOTE PURCHASE AGREEMENT September 16, 1998 Warburg Dillon Read LLC 677 Washington Blvd. Stamford, CT 06901 Dear Sirs: CELGENE CORPORATION (the "Company") wishes to confirm its arrangement with you in connection with the issuance to you today, against payment in immediately available funds of the purchase price of 100% of the principal amount thereof, of a convertible note in the form attached hereto as Annex I (the "Convertible Note") in an aggregate principal amount of $8,750,000 and convertible initially into 795,463 fully paid and non-assessable shares (each a "Share") of the Company's Common Stock, par value $.01 per share (the "Common Stock"), subject to adjustment as set forth in the Convertible Note. In consideration of your purchase of the Convertible Note, the Company will pay to you, in immediately available funds, a fee of 5% of the principal amount thereof, which shall be netted against the purchase price of the Convertible Note. Simultaneously with the issuance of the Convertible Note pursuant to this Agreement, you and the Company have entered into a Registration Rights Agreement, dated as of the date hereof (the "Registration Rights Agreement"), pursuant to which the Company has agreed to register the Shares under certain circumstances. All capitalized terms not defined herein shall have the meaning ascribed in the Convertible Note. 1. AGREEMENT TO ISSUE AND ACCEPT. On the basis of the representations and warranties and subject to the terms and conditions set forth herein, the Company agrees to issue to you, and you agree to accept from the Company, the Convertible Note against payment of the above-specified purchase price therefor, The closing of the issuance and acceptance of the Convertible Note against such payment shall take place on the date hereof, at which time the Company shall deliver to you the 1 Convertible Note, against delivery by you of a wire transfer of the purchase price to the Company's account at PNC Bank New Jersey Trust, ABA No. 031000053, benefit Account No. 8511074024, for further credit to Account No. 42432012020943, Celgene Corporation, Attn: Lisa Goldhammer, Telephone No. (732) 220-3112. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the representations and warranties to you set forth on Annex II hereto. 3. AGREEMENTS OF PURCHASER. You covenant and agree with the Company that: (a) You will not offer, sell, assign, hypothecate or otherwise transfer the Convertible Note except (i) pursuant to an effective registration statement under the Securities Act of 1933 (the "Act"), (ii) to a person you reasonably believe to be an "accredited investor" within the meaning of Rule 501 under the Act, pursuant to an available exemption under the Act or (iii) in offshore transactions within the meaning and meeting the requirements of Rule 903 under the Act. (b) You will not offer, sell, assign, hypothecate or otherwise transfer any Shares issued upon conversion of the Convertible Note except (i) pursuant to an effective registration statement under the Act; (ii) to a person you reasonably believe to be an "accredited investor" within the meaning of Rule 501 under the Act, pursuant to an available exemption under the Act or (iii) in an offshore transaction within the meaning and meeting the requirements of Rule 903 under the Act. (c) You are an "accredited investor" within the meaning of Rule 501 under the Act. (d) You will not, in hedging transactions effected in connection with your purchase and holding of the Convertible Note, effect sales of Common Stock (other than "blocks" of Common Stock, as defined in Rule 10b-18 under the Securities Exchange Act of 1934) in an amount that exceeds, for any trading day, 25% of the "trading volume" of the Common Stock (as defined in Rule 10b-18). 4. CONDITIONS. Your obligations under this Agreement shall be subject to the condition that all representations and warranties and other statements of the Company herein are true and correct at and as of the closing of the purchase and sale of the Convertible Note, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: 2 (a) Counsel for the Company specified in Annex III hereto shall have furnished to you their respective written opinions, dated the date of such closing, in form and substance satisfactory to you, to the effect set forth in Annex III hereto. (b) On the date of such closing, the Company shall have furnished to you such appropriate further information, certificates and documents as you may reasonably request. 5. MISCELLANEOUS. (a) This Agreement shall be binding upon, and inure solely to the benefit of, you and the Company and the respective successors and assigns thereof, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of the Convertible Note from you shall be deemed a successor or assign by reason merely of such purchase. (b) Any notice or other communication required or permitted to be given hereunder shall be deemed effectively given when personally delivered, telexed, transmitted by facsimile or mailed by pre-paid certified mail, return receipt requested, or by telephone when confirmed in writing by one of the preceding methods addressed as follows (as applicable): 3 If to the Company, to: Celgene Corporation 7 Powder Horn Drive Warren, NJ 07059 Attention: John W. Jackson Telephone Number: (732) 271-1001 Facsimile Transmission Number: (732) 805-3931 with a copy to: Proskauer Rose LLP 1585 Broadway New York, NY 10036 Attention: Robert A. Cantone, Esq. Telephone Number: (212) 969-3000 Facsimile Transmission Number: (212) 969-2900 If to Warburg Dillon Read LLC, to: Warburg Dillon Read LLC 677 Washington Blvd. Stamford, CT 06901 Attention: General Counsel Capital Markets ' Telephone Number: (203) 719-3000 Facsimile Transmission Number: (201) 719-6097 or to such other address or number and to the attention of such other person as either party may designate by written notice to the other party. Notice shall be effective upon actual receipt. (c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (d) Time shall be of the essence in the performance of this Agreement. 4 (e) This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. Very truly yours, CELGENE CORPORATION By: ------------------------------- Name: Title: Accepted as of the date hereof: WARBURG DILLON READ LLC By: ------------------------------- Name: Title: ANNEX II REPRESENTATIONS AND WARRANTIES OF THE COMPANY (a) Each of the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and each report filed by the Company pursuant to the Exchange Act after the filing of such Annual Report on Form 10-K (collectively, the "Exchange Act Reports") conforms in all material respects with the requirements of the Exchange Act and the rules and regulations of the Securities and Exchange Commission thereunder; and no such document, when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (b) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; the Shares initially issuable upon conversion of the Convertible Note have been duly and validly authorized and reserved for issuance out of the Company's authorized and unissued shares of Common Stock and, when issued and delivered in accordance with the provisions of the Convertible Note will be duly and validly issued, fully paid and non-assessable and will conform to the description of the Common Stock contained in the Company's Registration Statement on Form 8-A, File No. 0-16132. (c) The Convertible Note has been duly authorized and, when issued and delivered pursuant to this Agreement, will have been duly executed, issued and delivered and will constitute a valid and legally binding obligation of the Company; and the Registration Rights Agreement has been duly authorized and, when executed and delivered by the parties thereto, will constitute a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) The execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Convertible Note, compliance by the Company with all provisions hereof and thereof and the consummation of the transactions contemplated hereby and the issuance and delivery of the Convertible Note will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries, or any agreement, indenture or other instrument to which it or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties are bound, or violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company, any of its subsidiaries or their respective property; and, except (i) as required pursuant to the Registration Rights Agreement, or (ii) for the disclosure required to be included in the Company's next Quarterly Report on Form 10-Q, when filed, pursuant to Item 2(c) of Form 10-Q, no consent, approval, authorization or order of or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Convertible Note by the Company and the consummation of the transactions contemplated hereby and thereby. (e) Except as otherwise set forth in the Exchange Act Reports, there are no material legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any of their respective property is the subject which, if determined adversely to the Company or its subsidiaries, might have a material adverse effect on the business, condition (financial or otherwise), stockholders' equity, properties, business prospects or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"), and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated. (f) The Company is not, and the Company covenants that at any time when the Convertible Note is outstanding it will not be, an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940, as amended. (g) When the Convertible Note is issued and delivered pursuant to this Agreement, the Convertible Note will not be of the same class (within the meaning of Rule 144A under the Securities Act of 1933) as securities which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. (h) The Company is, and the Company covenants that while the Convertible Note is outstanding it will remain, subject to Section 13 or 15(d) of the Exchange Act. (i) Neither the Company nor any person acting on its behalf has offered or sold the Convertible Note by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Act. 2 ANNEX III OPINION OF COMPANY COUNSEL (a) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority required to carry on its business as described in the Exchange Act Reports and to own, lease and operate its properties. (b) All the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights. (c) The Shares initially issuable upon conversion of the Convertible Note have been duly authorized and reserved for issuance and when issued and delivered upon conversion in accordance with the provisions of the Convertible Note, will have been validly issued and will be fully paid and non-assessable, and the issuance of such Shares is not subject to any preemptive or similar rights. (d) This Agreement has been duly authorized, executed and delivered by the Company. (e) The Convertible Note has been duly authorized, executed, issued and delivered, and constitutes the valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (f) The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; provided that such counsel need express no opinion with respect to Section 6 of such Agreement. (g) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Company's Registration Statement on Form 8-A, File No. 0-16132. (h) Except (i) as required pursuant to the Registration Rights Agreement, or (ii) for the disclosure required to be included in the Company's next Quarterly Report on Form 10-Q, when filed, pursuant to Item 2(c) of Form 10-Q, no consent, approval, authorization or order of or filing or registration with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Convertible Note by the Company and the consummation of the transactions contemplated by this Agreement and thereby, (i) The execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Convertible Note by the Company, compliance by the Company with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any agreement, indenture or other instrument to which the Company is a party or by which the Company or its properties are bound, or violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company or its properties in any case which is reasonably likely to have a Material Adverse Effect. (j) The Company is not an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940, as amended. 2 EX-10.20 6 EXHIBIT 10.20 EXHIBIT 10.20 THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. CELGENE CORPORATION 9.25 % CONVERTIBLE NOTE DUE SEPTEMBER 16, 2003 No. R-1 $8,750,000 CELGENE CORPORATION, a corporation duly organized and existing under the laws of Delaware (the "Company") for value received, hereby promises to pay to Warburg Dillon Read LLC, or registered assigns, the principal sum of eight million, seven hundred and fifty thousand Dollars ($8,750,000) on September 16, 2003 and to pay interest thereon, from September 16, 1998, or from the most recent interest payment date to which interest has been paid or duly provided for, semiannually on March 16 and September 16 in each year, commencing March 16, 1999, at the rate of 9.25% per annum, until the principal hereof is due, and at the rate of 9.25% per annum on any overdue principal and premium, if any, and, to the extent permitted by law, on any overdue interest. The interest so payable, and punctually paid or duly provided for, on any interest payment date will be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the regular record date for such interest, which shall be the March 1 or September 1 (whether or not a business day), as the case may be, next preceding such interest payment date. Payment of the principal of (and premium, if any, on) this Security shall be made upon the surrender of this Security to the Company, at its office at 7 Powder Horn Drive, Warren, NJ 07059 (or such other office within the United States as shall be notified by the Company to the holder hereof) (the "Designated Office"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, by transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America. Payment of interest on this Security shall be made by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America, provided that if the holder shall not have furnished wire instructions in writing to the Company no later than the record date relating to an interest payment date, such payment may be made by U.S. dollar check mailed to the address of the person entitled thereto as such address shall appear in the Company security register. In respect of any interest payment date, the Company may, at its election but subject to fulfillment of the conditions set forth in Section 6 and subject to the limitations set forth therein, pay all or a portion of the interest on this Security in shares of Common Stock having a fair market value equal to the amount then payable hereunder, as described in Section 6. 1. Redemption. This Security is subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time on or after September 16, 2000, as a whole or in part, (in any amount that is an integral multiple of $1000) at the election of the Company, at a redemption price of 103% the principal amount thereof, together with accrued interest to the redemption date, but interest installments whose stated maturity is on or prior to such redemption date will be payable to the holder of this Security, or one or more predecessor Securities, of record at the close of business on the relevant record dates referred to on the face hereof; provided, however, that the Company may not redeem this Security on or prior to September 16, 2001 unless the Closing Price of the Common Stock exceeds 225% of the Conversion Price for each Trading Day in a period of 20 Consecutive Trading Days commencing not earlier than September 16, 2000. The term "Conversion Price" on any day shall equal $1,000 divided by the Conversion Rate in effect on each such day. 2. Conversion. (a) The holder of this Security is entitled at any time on or after September 16, 1999 and before the close of business on September 16, 2003 (or, in case this Security or a portion hereof is called for redemption or the holder hereof has exercised his right to require the Company to repurchase this Security or a portion hereof, then in respect of this Security or such portion hereof, as the case may be, until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the redemption date or the Repurchase Date, as the case may be) to convert this Security (or any portion of the principal amount hereof that is an integral multiple of $1,000), into fully paid and nonassessable 1,000 shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at the rate of 90.91 shares of Common Stock for each $1,000 principal amount of Security (or at the current adjusted rate if an adjustment has been made as provided below) (the "Conversion Rate") by surrender of this Security, duly endorsed or assigned to the Company or in blank to the Company at the Designated Office, accompanied by written notice to the Company that the holder hereof elects to convert this Security (or if less than the entire principal amount hereof is to be converted, specifying the portion hereof to be converted). Upon surrender of this Security for conversion, the holder will be entitled to receive the interest accruing on the principal amount of this Security then being converted from the interest payment date next preceding the date of such conversion to such date of conversion. No payment or adjustment is to be made on conversion for dividends on the Common Stock issued on conversion hereof. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest, the Company shall pay a cash adjustment, computed on the basis of the Closing Price of the Common Stock on the date of conversion, or, at its option, the Company shall round up to the next higher whole share. Notwithstanding the foregoing, at no time will the holder be entitled to convert this Security into shares of Common Stock that, together with the number of shares of Common Stock owned (or deemed for bank regulatory purposes to be owned) by such holder and its affiliates as set forth in the notice of conversion, represent more than 4.9% of the Common Stock then outstanding. If at any time the Conversion Rate and the principal amount of this Security would result in a greater number of shares being issuable upon conversion, then for so long as such condition shall exist, upon exercise of the conversion right the holder shall receive (i) up to that number of shares of Common 2 Stock that, together with the number of shares of Common Stock owned (or deemed for bank regulatory purposes to be owned) by such holder and its affiliates as set forth in the notice of conversion, represent 4.9% of the Common Stock then outstanding, and (ii) an amount (in cash but not less than zero), payable in immediately available funds, determined pursuant to the formula: C = (P/CR - I) x CP where C = the cash amount receivable by the holder; P = the principal amount of this Security being converted; CR = the Conversion Rate; I = the number of shares issuable pursuant to clause (i) above; and CP = the Closing Price of the Common Stock on the date of conversion. (b) The Conversion Rate shall be subject to adjustments from time to time as follows: (1) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company payable in shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the Determination Date for such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following such Determination Date. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall issue rights, options or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on the Determination Date for such distribution, the Conversion Rate in effect at the opening of business on the day following such Determination Date shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the 3 number of shares of Common Stock so offered for subscription or purchase, such increase to become effective immediately after the opening of business on the day following such Determination Date. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights, options or warrants in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, or other property (including securities, but excluding (i) any rights, options or warrants referred to in paragraph (2) of this Section 2(b) (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (1) of this Section 2(b) and (iv) any merger or consolidation to which Section 2(h) applies), the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following such Determination Date. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section 2(b). (5) In case the Company shall, by dividend or otherwise, make a Cash Distribution, then, and in each such case, immediately after the close of business on the Determination Date for such Cash Distribution, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on such Determination Date by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of 4 (1) the amount of such Cash Distribution divided by (2) the number of shares of Common Stock outstanding on such Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date. (6) In case the Company or any Subsidiary shall make an Excess Purchase Payment, then, and in each such case, immediately prior to the opening of business on the day after the tender offer in respect of which such Excess Purchase Payment is to be made expires, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such tender offer by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of (A) the Excess Purchase Payment divided by (B) the number of shares of Common Stock outstanding (including any tendered shares) as of the Determination Date less the number of all shares validly tendered and not withdrawn as of the Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock as of such Determination Date. (7) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 2(h) applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be the Determination Date), and (b) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective"' within the meaning of paragraph (3) of this Section 2(b)). Rights or warrants issued by the Company to all holders of its Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights or warrants (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect, of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 2(b) not be deemed issued until the occurrence of the earliest Trigger Event. (8) For the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 2(b) the current market price per share of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Prices for the five consecutive Trading Days selected by the Company commencing not more than 10 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "ex date", when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way in the applicable securities 5 market or on the applicable securities exchange without the right to receive such issuance or distribution. (9) No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (9)) would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (9) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (10) The Company may make such increases in the Conversion Rate, for the remaining term of the Securities or any shorter term, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section 2(b) as it considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. (c) Whenever the Conversion Rate is adjusted as provided in Section 2(b), the Company shall compute the adjusted Conversion Rate in accordance with Section 2(b) and shall prepare a certificate signed by the chief financial officer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and shall promptly deliver such certificate to the holder of this Security. (d) In case: (1) the Company shall declare a dividend or other distribution on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 2(b); or (2) the Company shall authorize the granting to the holders of its Common Stock of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) of any reclassification of the Common Stock of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or (4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (5) the Company or any Subsidiary shall commence a tender offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender offer); 6 then the Company shall cause to be delivered to the holder of this Security, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options or warrants are to be determined, (y) the date on which the right to make tenders under such tender offer expires or (z) the date on which such reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (5) of this Section 2(d). (e) The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Security, the full number of shares of Common Stock then issuable upon the conversion of this Security. (f) Except as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of this Security. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of this Security, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. (g) The Company agrees that all shares of Common Stock which may be delivered upon conversion of the Security, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable (and shall be issued out of the Company's authorized but unissued Common Stock) and, except as provided in Section 2(f), the Company will pay all taxes, liens and charges with respect to the issue thereof. (h) In ease of any consolidation of the Company with any other person, any merger of the Company into another person or of another person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company) or any conveyance, sale, transfer or lease of all or substantially all of the properties and assets of the Company, the person formed by such consolidation or resulting from such merger or which acquires such properties and assets, as the case may be, shall execute and deliver to the holder of this Security a supplemental agreement providing that such holder has the right thereafter, during the period this Security shall be convertible as specified in Section 2(a), to convert this Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (including any Common Stock retainable) by a holder of the number of shares of Common Stock of the Company into which this Security might have been converted immediately prior to such consolidation, merger, conveyance, sale, transfer or 7 lease, assuming such holder of Common Stock of the Company (i) is not a person with which the Company consolidated, into which the Company merged or which merged into the Company or to which such conveyance, sale, transfer or lease was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer, or lease is not the same for each share of Common Stock of the Company held immediately prior to such consolidation, merger, conveyance, sale, transfer or lease by others than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 2(h) the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease by the holders of each Non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares). Such supplemental agreement shall provide for adjustments which, for events subsequent to the effective date of such supplemental agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2. The above provisions of this Section 2(h) shall similarly apply to successive consolidations, mergers, conveyances, sales, transfers or leases. In this paragraph, "securities of the kind receivable" upon such consolidation, merger, conveyance, transfer, sale or lease by a holder of Common Stock means securities that, among other things, are registered and transferable under the Securities Act, and listed and approved for quotation in all securities markets, in each case to the same extent as such securities so receivable by a holder of Common Stock. (i) The Company (i) will effect all registrations with, and obtain all approvals by, all governmental authorities that may be necessary under any United States Federal or state law (including the Securities Act of 1933, the Securities Exchange Act of 1934 and state securities and Blue Sky laws) for the shares of Common Stock issuable upon conversion of this Security to be lawfully issued and delivered as provided herein, and thereafter publicly traded (if permissible under such Securities Act) and qualified or listed as contemplated by clause (ii) (it being understood that the Company shall not be required to register the Common Stock issuable on conversion hereof under the Securities Act, except pursuant to the Registration Rights Agreement between the Company and the initial holder of this Security); and (ii) will list the shares of Common Stock required to be issued and delivered upon conversion of Securities, prior to such issuance or delivery, on each national Securities exchange on which outstanding Common Stock is listed or quoted at the time of such delivery, or if the Common Stock is not then listed on any securities exchange, to qualify the Common Stock for quotation on the Nasdaq National Market or such other inter-dealer quotation system, if any, on which the Common Stock is then quoted. (j) For purposes hereof: "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control", when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 8 "Cash Distribution" means the distribution by the Company to all holders of its Common Stock of cash, other than any cash that is distributed upon a merger or consolidation to which Section 2(h) applies or as part of a distribution referred to in paragraph (4) of Section 2(b). "Closing Price" means, with respect to the Common Stock of the Company, for any day, the reported last sale price per share on the Nasdaq National Market, or, if the Common Stock is not admitted to trading on the Nasdaq National Market, on the principal national securities exchange or inter-dealer quotation system on which the Common Stock is listed or admitted to trading, or if not admitted to trading on the Nasdaq National Market, or listed or admitted to trading on any national securities exchange or inter-dealer quotation system, the average of the closing bid and asked prices per share in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. "Common Stock" means the Common Stock, par value $.01 per share, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 2(h), shares issuable on conversion or repurchase of this Security shall include only shares of Common Stock or shares of any class or classes of common stock resulting from any reclassification or reclassifications thereof; provided, however, that if at any time there shall be more than one such resulting class, the shares so issuable on conversion of this Security shall include shares of all such classes, and the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Determination Date" means, in the case of a dividend or other distribution, including the issuance of rights, options or warrants, to shareholders, the date fixed for the determination of shareholders entitled to receive such dividend or other distribution and, in the case of a tender offer, the last time that tenders could have been made pursuant to such tender offer. "Excess Purchase Payment" means the product of (A) the excess, if any, of (i) the amount of cash plus the fair market value (as determined in good faith by the Company's Board of Directors) of any non-cash consideration required to be paid with respect to one share of Common Stock acquired or to be acquired in a tender offer made by the Company or any subsidiary of the Company for all or any portion of the Common Stock over (ii) the current market price per share as of the last time that tenders could have been made pursuant to such tender offer and (B) the number of shares validly tendered and not withdrawn as of the Determination Date in respect of such tender offer. "Trading Day" means (i) if the Common Stock is admitted to trading on the Nasdaq National Market or any other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq National Market or listed or admitted for trading on any national securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the over-the-counter market and for which a closing bid and a closing asked price for the Common Stock are available. 9 3. Right to Require Repurchase. (a) In the event that a Change in Control (as hereinafter defined) shall occur, then the holder of this Security shall have the right, at such holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, this Security, or any portion of the principal amount hereof that is equal to $1,000 or any integral multiple thereof, on the date (the "Repurchase Date") that is fifteen Trading Days after the date on which the Company gives notice thereof to the holder of this Security, at a purchase price equal to 100% of the principal amount of this Security to be repurchased plus interest accrued to the Repurchase Date (the "Repurchase Price"); provided, however, that installments of interest on this Security whose stated maturity is on or prior to the Repurchase Date shall be payable to the holder of this Security, or one or more predecessor Securities, registered as such on the relevant Record Date according to their terms. 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 6 and subject to the limitations set forth therein, by delivery of shares of Common Stock having a fair market value equal to the Repurchase Price as described in Section 6. The Company agrees to give the holder of this Security notice of any Change in Control, by facsimile transmission confirmed in writing by overnight courier service, promptly and in any event within two Trading Days of the occurrence thereof. (b) To exercise a repurchase right, the holder shall deliver to the Company on or before the 10th trading day prior to the Repurchase Date, together with this Security, written notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the number of shares of Common Stock then owned by such holder and its affiliates, the principal amount of this Security to be repurchased (and, if this Security is to be repurchased in part, the portion of the principal amount thereof to be repurchased and the name of the person in which the portion thereof to remain outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase right is being made thereby, and, in the event that the Repurchase Price shall be paid in shares of Common Stock, the name or names (with addresses) in which the certificates for shares of Common Stock shall be issued. Such written notice shall be irrevocable, except that the right of the holder to convert this Security (or the portion hereof with respect to which the repurchase right is being exercised) shall continue until the close of business on the Repurchase Date (or if the Company elects to pay the Repurchase Price by delivery of shares of Common Stock, until the close of business on the Trading Day immediately preceding the first delivery of Common Stock in respect thereof). (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the holder the Repurchase Price in cash or shares of Common Stock, as provided above, together with accrued and unpaid interest to the Repurchase Date; provided, however, that installments of interest that mature on or prior to the Repurchase Date shall be payable in cash, to the holders of this Security, or one or more predecessor Securities, registered as such at the close of business on the relevant regular record date. (d) If this Security (or portion thereof) is surrendered for repurchase and is not so paid on or prior to the Repurchase Date, the principal amount of this Security (or such portion hereof, as the case may be) shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at the rate per annum borne by this Security, and shall remain convertible into Common Stock until the principal of this Security (or portion thereof, as the case may be) shall have been paid or duly provided for. 10 (e) If this Security is to be repurchased only in part, it shall be surrendered to the Company at the Designated Office (with, if the Company so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing), and the Company shall execute and make available for delivery to the holder without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. (f) For purposes of this Section 3. (1) the term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934; and (2) a "Change in Control" shall be deemed to have occurred at the time, after the original issuance of this Security, of: (i) the acquisition by any person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the elections of directors (any shares of voting stock of which such person is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any such acquisition by the Company or any employee benefit plan of the Company; or (ii) any consolidation or merger of the Company with or into, any other person, any merger of another person with or into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the assets of the Company to another person (other than (a) any such transaction (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock and (y) pursuant to which holders of Common Stock immediately prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving person immediately after such transaction and (b) any merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock into solely shares of common stock); provided, however, that a Change in Control shall not be deemed to have occurred if the Closing Price for any five Trading Days within the period of 10 consecutive Trading Days (x) ending immediately after the later of the date of the Change in Control or the date of the public announcement of the Change in Control (in the case of a Change in Control under Clause (i) above) or (y) ending immediately prior to the date of the Change in Control (in the case of a Change in Control under Clause (ii) above) shall equal or exceed 105% of the Conversion Price in effect on each such Trading Day. 11 4. Events of Default. (a) "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon this Security when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default by the Company in the performance of its obligations in respect of any conversion of this Security (or any portion hereof) in accordance with Section 2; or (3) failure by the Company to give any notice of a Change of Control required to be delivered in accordance with Section 3(a); or (4) default in the performance, or breach, of any material covenant or warranty of the Company herein (other than a covenant or warranty a default in the performance or breach of which is specifically dealt with elsewhere in this Section 4(a)) and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the holder of this Security a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company, or under any agreement, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company, with a principal amount then outstanding in excess of $1,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of such indebtedness (in whole or in any part greater than $1,000,000) when due and payable or shall have resulted in such indebtedness (in whole or in any part greater than $1,000,000) becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 15 days after there shall have been given, by registered or certified mail, to the Company by the holder of this Security a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the 12 continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (7) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or similar relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. (b) If an Event of Default (other than an Event of Default specified in Section 4(a)(6) or 4(a)(7)) occurs and is continuing, then in every such case the holder of this Security may declare the principal hereof to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal and all accrued interest thereon shall become immediately due and payable. If an Event of Default specified in Section 4(a)(6) or 4(a)(7) occurs and is continuing, the principal of, and accrued interest on, this Security shall ipso facto become immediately due and payable without any declaration or other act of the holders. 5. Consolidation, Merger, Etc. (a) The Company shall not consolidate with or merge into any other person or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to any person, and the Company shall not permit any person to consolidate with or merge into the Company or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another person or convey, transfer, sell or lease all or substantially all of its properties and assets to any person, the person formed by such consolidation or into which the Company is merged or the person which acquires by conveyance, transfer or sale, or which leases, all or substantially all the properties and assets of the Company shall be a corporation, limited liability company, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, executed and delivered to the holder of this Security in form satisfactory to the holder, the due and punctual payment of the principal of (and premium, if any) and interest on this Security and the performance or observance of every covenant of this Security on the part of the Company to be performed or observed, including the conversion rights provided herein (which shall thereafter relate to common stock of such successor, on a basis reasonably designed to preserve the economic value to the holder of this Security of such conversion rights); 13 (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a subsidiary of the Company as a result of such transaction as having been incurred by the Company or such subsidiary of the Company at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (3) the Company has delivered to the holder of this Security an officers' certificate stating that such consolidation, merger, conveyance, transfer, sale or lease and, if a supplemental agreement is required in connection with such transaction, such supplemental agreement, comply with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with; and (4) counsel for the Company has delivered to the holder of this Security an opinion of such counsel with respect to such consolidation, merger, conveyance, transfer, sale or lease, and if a supplemental agreement is required in connection with such transaction, such supplemental agreement, which opinion shall be, in form and substance, reasonably acceptable to such holder and its counsel. (b) Upon any consolidation of the Company with, or merger of the Company into, any other person or any conveyance, transfer, sale or lease of all or substantially all of the properties and assets of the Company in accordance with Section 5(a), the successor person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer, sale or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Security with the same effect as if such successor person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor person shall be relieved of all obligations and covenants under this Security. 6. Payment in Stock. (a) The Company may elect to pay any amount due hereunder in respect of interest or Repurchase Price in respect hereof by delivery of shares of Common Stock if and only if the following conditions have been satisfied: (1) Any such payment shall be made in five equal installments, on each of the five consecutive Trading Days ending on and including the third Trading Day immediately preceding the date when cash payment would otherwise be due, and the shares of Common Stock deliverable in payment of each such installment shall have a fair market value as of the date of such installment of not less than 20% of the amount of such payment due hereunder. For purposes of this Section 6, the fair market value of shares of Common Stock shall be equal to 95% of the Closing Price for the immediately preceding Trading Day; (2) In the event any shares of Common Stock to be issued in respect of such amount due hereunder require registration under any Federal securities law before such shares may be freely transferrable without being subject to any transfer restrictions under the Securities Act of 1933 upon issuance, such registration shall have been completed and shall have become effective prior to the date of the first such installment; 14 (3) In the event any shares of Common Stock to be issued in respect of such amount due hereunder 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 issuance, such registration shall have been completed or have become effective and such approval shall have been obtained, in each case, prior to the date of the first such installment; (4) The shares of Common Stock deliverable in payment of such amount due hereunder shall have been approved for quotation in the Nasdaq National Market immediately prior to the date of the first such installment; (5) All shares of Common Stock deliverable in payment of such amount due hereunder shall, upon issue, be duly and validly issued and fully paid and non-assessable and free of any preemptive rights; and (6) In respect of each such payment date, the Company shall have given the holder of this Security not less than 10 nor more than 15 Trading Days' notice of its election to effect payment in respect of such payment date by delivery of shares of Common Stock; provided that any such notice in respect of amounts payable on a Repurchase Date shall accompany the Company's notice of a Change of Control relating thereto. If all of the conditions set forth in this Section 6(a) are not satisfied in accordance with the terms thereof, any such amount due hereunder shall be paid by the Company only in cash. Notwithstanding the foregoing, at no time will the Company deliver shares of Common Stock to any holder in satisfaction of an obligation to pay interest or Repurchase Price if the number of shares so delivered, together with the number of shares of Common Stock owned (or deemed for bank regulatory purposes to be owned) by such holder and its affiliates as theretofore notified to the Company (in a notice delivered not less than five Trading Days prior to the relevant interest payment date, in the case of interest, or as set forth in the election of holder to require repurchase, in the case of Repurchase Price), represent more than 4.9% of the Common Stock then outstanding. If the limitation set forth in the previous sentence would apply to any payment of interest or Repurchase Price, the Company may elect (by notice to the holder delivered not less than three Trading Days prior to the relevant interest payment date, in the case of interest, or not less than eight Trading Days prior to the Repurchase Date, in the case of Repurchase Price) to satisfy a portion of such payment in shares of Common Stock (up to the maximum number of shares permitted under the limitation set forth in the previous sentence) and the balance in cash. (b) Any issuance of shares of Common Stock in respect of any installment due hereunder pursuant to this Section 6 shall be deemed to have been effected immediately prior to the close of business on the date of delivery of such installment and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such delivery shall be deemed to have become on such date the holder or holders of record of the shares represented thereby; provided, however, that in case any installment shall be due on a date when the stock transfer books of the Company shall be closed, the person or persons in whose name or names the certificate or certificates for such shares are to be issued shall be deemed to have become the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on 15 which such stock transfer books are open. No payment or adjustment shall be made for dividends or distributions on any Common Stock issued pursuant to this Section 6 declared prior to the relevant delivery date. (c) No fractions of shares shall be issued upon payment made in shares of Common Stock in respect of this Security. Instead of any fractional share of Common Stock which would otherwise be so issuable, the Company will round up to the next higher whole share. (d) Any issuance and delivery of certificates for shares of Common Stock pursuant to this Section 6 shall be made without charge to the holder of this Security for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the securities represented thereby; provided, however, that the Company shall not be required to pay any tax or duty which may be payable in respect of 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 this Security, 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. 7. Other. (a) No provision of this Security shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Security as herein provided. (b) The Company will give prompt written notice to the holder of Security of any change in the location of the Designated Office. (c) The transfer of this Security is registrable on the Security Register of the Company upon surrender of this Security for registration of transfer at the Designated Office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Such Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service charge shall be made for any such registration of transfer, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this Security for registration of transfer, the Company and any agent of the Company may treat the person in whose name this Security is registered as the owner thereof for all purposes, whether or not this Security be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Notwithstanding any other provision of this Security, this Security and the shares of Common Stock issuable upon conversion hereof may only be transferred by the holder of this Security (a) in the case of the Common Stock only, in a widely dispersed registered public offering; (b) to one or more accredited investors, in one or more transactions, any one of whom, after such purchase, would hold not more than 2 % of the shares of Common Stock then outstanding (assuming conversion of any portion of this Security so transferred); (c) to any person or entity that already controls more 16 than 50% of the voting securities of the Company prior to such transfer; or (d) in a transaction that complies with the volume and manner of sale restrictions of Rule 144 under the Securities Act of 1933. The holder of this Security, by acceptance thereof, shall be deemed to have agreed to the foregoing restriction on transfers. 17 (D) THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. IN WITNESS WHEREOF, the Company has caused this Security to be duly executed under its corporate seal. Dated: September __, 1998 CELGENE CORPORATION By: -------------------------------- Name: Title: Attest: - -------------------------------- Name: Title: ELECTION OF HOLDER TO REQUIRE REPURCHASE 1. Pursuant to Section 3(a) of this Security, the undersigned hereby elects to have all or a portion of this Security repurchased by the Company. 2. The undersigned hereby directs the Company to pay [choose one] (a) it or (b) Name: _______________________; address: _____________________; Social Security or Other Taxpayer Identification Number, if any: ___________________,in amount in cash or, at the Company's election (subject to the limitations set forth in the Security) Common Stock valued as set forth in the Security, equal to 100 % of the principal amount to be repurchased (as set forth below), plus interest accrued to the Repurchase Date, as provided herein. Dated: ------------------------------ ------------------------------ Signature Number of shares of Common Stock owned by the holder and its affiliates: ------------------------------ Principal amount to be repurchased (an integral multiple of $1,000): ------------------------------ Remaining principal amount following such repurchase (not less than $1,000): ------------------------------ NOTICE: The signature to the foregoing Election must correspond to the name as written upon the face of this Security in every particular, without alteration or any change whatsoever. CONVERSION NOTICE The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security, or any portion of the principal amount hereof (which is an integral multiple of $1,000) below designated, into shares of Common Stock (subject to the limitation set forth in the second paragraph of Section 2(a) of the Security) in accordance with the terms of this Security, and directs that such shares, together with a check in payment for any fractional share and any Security representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If shares of Common Stock or Securities are to be registered in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated: ------------------------------ ------------------------------ Signature Number of shares of Common Stock owned by the holder and its affiliates: ------------------------------ If shares or Securities are to be If only a portion of the Securities is registered in the name of a person to be converted, please indicate: other than the holder, please print such person's name and address: 1. Principal amount to be converted: $ ------------------------------ Name 2. Principal amount and denomination of Security representing unconverted principal amount to be issued: ------------------------------ Address Amount: $________ Denominations: $________ (any integral multiple of $1,000) ------------------------------ Social Security or other Taxpayer Identification Number, if any EX-10.21 7 EXHIBIT 10.21 EXHIBIT 10.21 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of September 16, 1998, by and between Celgene Corporation, a Delaware corporation (the "Company"), and Warburg Dillon Read LLC (the "Purchaser") entered into in connection with the issuance of a Convertible Note due September 16, 2003 convertible into shares of Common Stock, par value $.01 per share ("Common Stock") of the Company. 1. Certain Definitions. For purposes of this Registration Rights Agreement, the following terms shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Exchange Act or the Securities Act, whichever is the relevant statute for the particular purpose. (b) "Convertible Note" shall mean the Convertible Note due September 16, 2003, of the Company to be issued and sold to the Purchaser, and any Convertible Note issued in exchange therefor or in lieu thereof. (c) "Effective Time" shall mean the date on which the Commission declares the Shelf Registration effective or on which the Shelf Registration otherwise becomes effective. (d) "Exchange Act" shall mean the Securities Exchange Act of 1934, or any successor thereto, as the same shall be amended from time to time. (e) "Issue Date" shall mean the date on which a Convertible Note is initially issued. (f) The term "person" shall mean a corporation, association, partnership, organization, business, individual, government or political subdivision thereof or governmental agency. (g) "Registration Expenses" shall have the meaning assigned thereto in Section 4 hereof. (h) "Securities Act" shall mean the Securities Act of 1933, or any successor thereto, as the same shall be amended from time to time. (i) "Shares" means the shares of Common Stock issuable upon exercise of the Convertible Note. (j) "Shelf Registration" shall have the meaning assigned thereto in Section 2 hereof. In addition, capitalized terms not defined herein shall have the meaning ascribed in the Convertible Note. 2. Shelf Registration of Shares. (a) Not later than September 16, 1999, the Company shall file under the Securities Act a "shelf" registration statement providing for the registration of, and the sale on a continuous or delayed basis by the Purchaser of, all Shares issuable upon conversion of the Convertible Notes, pursuant to Rule 415 under the Securities Act and/or any similar rule that may be adopted by the Commission (the "Shelf Registration"). The Company agrees to use its best efforts to cause the Shelf Registration to become or be declared effective no later than 45 calendar days after the filing thereof and to keep such Shelf Registration continuously effective for a period ending on the earliest to occur of (i) the second anniversary of the Issue Date, (ii) notification to the Company by the Purchaser that it has sold all Shares issuable upon conversion of the Convertible Notes so owned by it, or (iii) such time as the Purchaser may sell all of such shares pursuant to Rule 144(k) under the Securities Act. The Company further agrees, if necessary, to supplement or make amendments to the Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration or by the Securities Act or rules and regulations thereunder for shelf registration, and the Company agrees to furnish to the Purchaser copies of any such supplement or amendment prior to its being used and/or filed with the Commission, and will not file any such supplement or amendment to which the Purchaser reasonably objects. (b) Notwithstanding the foregoing, following the effectiveness of the Shelf Registration, the Company may, at any time, suspend the effectiveness of such Shelf Registration for up to 60 days, as appropriate (a "Suspension Period"), by giving notice to the Purchaser, if the Company shall have determined that the Company may be required to disclose any material corporate development which disclosure may jeopardize a material transaction or otherwise have a material adverse effect on the Company. The Company will use its best efforts to minimize the length of any Suspension Period. Notwithstanding the foregoing, no more than one Suspension Period may occur within any 180 day period. The period of any such suspension of the registration statement shall be added to the period of time the Company agrees to keep the Shelf Registration effective as provided in Section 2(a). The Purchaser agrees that, upon receipt of any notice from the Company of a Suspension Period, the Purchaser shall forthwith discontinue disposition of shares covered by the Shelf Registration until the Purchaser (i) is advised in writing by the Company that the use of the applicable prospectus may be resumed, (ii) has received copies of a supplemental or amended prospectus, if applicable, and (iii) has received copies of any additional or supplemental filings which are incorporated or deemed to be incorporated by reference in such prospectus. 3. Registration Procedures. (a) In connection with any obligation of the Company to register Shares, the Company shall use its best efforts to effect or cause such registration to permit the sale of the Shares by the Purchaser in accordance with the intended method or methods of distribution thereof described in the applicable registration statement. In connection therewith, the Company shall, within the time specified in Section 2 above: (i) prepare and file with the Commission a registration statement on any form which may be utilized by the Company and which shall permit the disposition of the Shares in accordance with the intended method or methods thereof, as specified in writing by the Purchaser; 2 (ii) comply with the provisions of the Securities Act with respect to the disposition of all of the Shares covered by such registration statement in accordance with the intended methods of disposition by the Purchaser set forth in such registration statement; (iii) provide (A) the Purchaser, (B) the underwriters (which term, for purposes of these Registration Rights, shall include a person deemed to be an underwriter within the meaning of Section 2(1.1) of the Securities Act), if any, thereof, (C) the sales or placement agent, if any, therefor, (D) counsel for such underwriters or agent, and (E) counsel for the Purchaser the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment or supplement thereto; (iv) for a reasonable period prior to the filing of such registration statement, and throughout the period specified in Section 2 hereof, make available for inspection by the parties referred to in Section 3(a)(iii) above who shall certify to the Company that they have a current intention to sell the Shares pursuant to the registration statement such financial and other information and books and records of the Company, and cause the officers, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to in such Section, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that each such party shall be required to maintain in confidence and not to disclose to any other person any information or records provided by the Company until such time as (A) such information becomes a matter of public record (whether by virtue of its inclusion in such registration statement or otherwise), or (B) such person shall be required so to disclose such information pursuant to the subpoena or order of any court or other governmental agency or body having jurisdiction over the matter (subject to the requirements of such order, and only after such person shall have given the Company prompt prior written notice of such requirement), or (C) such information is required to be set forth in such registration statement, or the prospectus included therein or in an amendment to such registration statement or an amendment or supplement to such prospectus in order that such registration statement, prospectus, amendment or supplement, as the case may be, does not contain an untrue statement of a material fact or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (v) promptly notify the Purchaser, the sales or placement agent, if any, therefor and the managing underwriter or underwriters, if any, thereof and confirm such advice in writing, (A) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (B) of any comments by the Commission and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or any request by the Commission for amendments or supplements to such registration statement or prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation or overt threatening of any proceedings for that purpose, (D) if at any time the representations and warranties of the Company contemplated by Section 5 hereof cease to be true and correct in all material respects, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or overt threatening of any proceeding for such purpose, or (F) at any time when a prospectus is required to be delivered under the Securities Act, if such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue 3 statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (vi) use its best efforts to obtain the withdrawal of any order suspending the , effectiveness of such registration statement or any post-effective amendment thereto at the earliest practicable date; (vii) if requested by any managing underwriter or underwriters, any placement or sales agent or the Purchaser, promptly incorporate in a prospectus supplement or post-effective amendment such information as is required by the applicable rules and regulations of the Commission that such managing underwriter or underwriters, such agent or the Purchaser specify should be included therein relating to the terms of the sale of such Shares, including, without limitation, information with respect to the number of Shares being sold by the Purchaser or agent or to any underwriters, the name and description of the Purchaser, agent or underwriter, the offering price of such Shares and any discount, commission or other compensation payable in respect thereof, the purchase price being paid therefor by such underwriters and with respect to any other terms of the offering of the Shares to be sold by the Purchaser or agent or to such underwriters; and make all required filings of such prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus supplement or post-effective amendment; (viii) furnish to the Purchaser, each placement or sales agent, if any, therefor, each underwriter, if any, thereof and the respective counsel referred to in Section 3(a)(iii) a copy of such registration statement in the form in which it became effective, each such amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and such number of copies of such registration statement (excluding exhibits thereto and documents incorporated by reference therein unless specifically so requested by the Purchaser, agent or underwriter, as the case may be) and of the prospectus included in such registration .statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as the Purchaser, agent, if any, and underwriter, if any, may reasonably request in order to facilitate the offering and disposition of the Shares owned by the Purchaser, offered or sold by such agent or underwritten by such underwriter and to permit the Purchaser, agent and underwriter to satisfy the prospectus delivery requirements of the Securities Act; and the Company hereby consents to the use of such prospectus (including such preliminary and summary prospectus) and any amendment or supplement thereto by the Purchaser and by any such agent and underwriter, in each case in the form most recently provided to such party by the Company, in connection with the offering and sale of the Shares covered by the prospectus (including such preliminary and summary prospectus) or any supplement or amendment thereto; (ix) use its best efforts to (A) register or qualify the Shares to be included in such registration statement under such securities laws or blue sky laws of such jurisdictions as the Purchaser and each placement or sales agent, if any, therefor and underwriter, if any, thereof shall reasonably request, (B) keep such registrations or qualifications in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein in such jurisdictions during the respective periods such registration statements are required to remain effective under Section 2 above and for so long as may be necessary to enable the Purchaser or any agent or underwriter to complete its distribution of Shares pursuant to such registration statement and (C) take any and all other actions as may be reasonably necessary or advisable to enable the Purchaser, agent, if any, and underwriter, if any, to consummate the disposition in such jurisdictions of such Shares; provided, however, that the Company 4 shall not be required for any such purpose to (I) qualify as a foreign corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 3(a)(ix) or (II) consent to general service of process in any such jurisdiction; (x) use its best efforts to obtain the consent or approval of each governmental agency or authority, whether federal, state or local, which may be required to effect the Shelf Registration or the offering or sale in connection therewith or to enable the Purchaser to offer, or to consummate the disposition of, its Shares; (xi) cooperate with the Purchaser and the managing underwriters, if any, to facilitate the timely preparation and delivery of any certificates representing Shares to be sold, which certificates shall be printed, lithographed or engraved, or produced by any combination of such methods, and which shall not, once sold under the Shelf Registration, bear any restrictive legends; and, in the case of an underwritten offering, enable such Shares to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of the Shares: (xii) enter into one or more underwriting agreements, engagement letters, agency agreements or similar agreements, as appropriate, including (without limitation) customary provisions relating to indemnification and contribution, and take such other actions in connections therewith as the Purchaser shall reasonably request in order to expedite or facilitate the disposition of the Shares; (xiii) notify the Purchaser in writing of any proposal by the Company to amend or waive any provision of these Registration Rights pursuant to Section 7(g) hereof and of any amendment or waiver effected pursuant thereto, each of which notices shall contain the text of the amendment or waiver proposed or effected, as the case may be; (xiv) in the event that any broker-dealer registered under the Exchange Act shall underwrite any Shares or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Rules of Fair Practice and the By-Laws of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, assist such broker-dealer in complying with the requirements of such Rules and By-Laws, including, without limitation, by providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules of Fair Practice of the NASD; (xv) comply with all applicable rules and regulations of the Commission, and make generally available to its security holders as soon as practicable but in any event not later than eighteen months after the effective date of such registration statement, an earning statement of the Company and its subsidiaries complying with Section 1l(a) of the Securities Act (including, at the option of the Company, Rule 158 thereunder); and (xvi) use its best efforts to have the Shares approved for trading on the Nasdaq National Market. (b) In the event that the Company would be required, pursuant to Section 3(a)(v)(F) above, to notify the Purchaser, the placement or sales agent, if any, therefor and the managing underwriters, if any, thereof, the Company shall without delay prepare and furnish to the Purchaser, to each placement or sales agent, 5 if any, and to each underwriter, if any, a reasonable number of copies of a prospectus supplemented or amended in form and substance reasonably satisfactory to them, so that, as thereafter delivered to purchasers of Shares, such prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. The Purchaser agrees that upon receipt of any notice from the Company pursuant to Section 3(a)(v)(F) hereof, the Purchaser shall forthwith discontinue the disposition of Shares pursuant to the registration statement applicable to such Shares until the Purchaser shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, the Purchaser shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in the Purchaser's possession of the prospectus covering such Shares at the time of receipt of such notice. (c) The Company may require the Purchaser to furnish to the Company such information regarding the Purchaser and the Purchaser's intended method of distribution of the Shares as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Securities Act. The Purchaser agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by the Purchaser to the Company or of the occurrence of any event in either case as a result of which any prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding the Purchaser or the Purchaser's intended method of distribution of such Shares or omits to state any material fact regarding the Purchaser or the Purchaser's intended method of distribution of such Shares required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such prospectus shall not contain, with respect to the Purchaser or the distribution of such Shares, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. The Purchaser agrees that upon delivering any notice to the Company pursuant to this Section 3(c), the Purchaser shall forthwith discontinue the disposition of Shares pursuant to the registration statement applicable to such Shares until the Purchaser shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, the Purchaser shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in the Purchaser's possession of the prospectus covering such Shares at the time of receipt of such notice. 4. Registration Expenses. The Company agrees to bear and to pay or cause to be paid promptly upon request being made therefor all expenses incident to the Company's performance of or compliance with these Registration Rights as they relate to the Shelf Registration, including, without limitation, (i) all Commission and any NASD registration and filing fees and expenses, (ii) all fees and expenses in connection with the qualification of the Shares for offering and sale under the State securities and blue sky laws referred to in Section 3(a)(ix) hereof, including reasonable fees and disbursements of counsel for the placement or sales agent or underwriters in connection with such qualifications, (iii) all fees and expenses in connection with the approval for trading of the Shares on the Nasdaq National Market, (iv) all expenses relating to the preparation, printing, distribution and reproduction of each registration statement required to be filed hereunder, each prospectus included therein or prepared for distribution pursuant hereto, each amendment or supplement to the foregoing, the certificates representing the Shares and all other documents relating hereto, (v) internal expenses (including, without limitation, all salaries and expenses of the Company's officers and employees performing legal or accounting duties), and (vi) fees, disbursements and expenses of counsel and independent certified public accountants of the Company (including the expenses of any opinions or "cold comfort" letters required by or incident to such 6 performance and compliance) (collectively, the "Registration Expenses"). Notwithstanding the foregoing, the Purchaser shall pay all agency fees and commissions and underwriting discounts and commissions attributable to the sale of the Shares and the fees and disbursements of any counsel or other advisors or experts retained by the Purchaser. 5. Representations and Warranties. The Company represents and warrants to, and agrees with, the Purchaser that: (a) Each registration statement covering Shares and each prospectus (including any preliminary or summary prospectus) contained therein or furnished pursuant to Section 3(a)(viii) hereof and any further amendments or supplements to any such registration statement or prospectus, when it becomes effective or is filed with the Commission, as the ease may be, and, in the case of an underwritten offering of Shares, at the time of the closing under the underwriting agreement relating thereto will conform in all material respects to the requirements of the Securities Act, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at all times subsequent to the Effective Time when a prospectus would be required to be delivered under the Securities Act, other than from (i) such time as a notice has been given to the Purchaser pursuant to Section 3(a)(v)(F) hereof until (ii) such time as the Company furnishes an amended or supplemented prospectus pursuant to Section 3(b) hereof, each such registration statement, and each prospectus (including any summary prospectus) contained therein or furnished pursuant to Section 3(a)(viii) hereof, as then amended or supplemented, will conform in all material respects to the requirements of the Securities Act, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by the Purchaser expressly for use therein. (b) Any documents incorporated by reference in any prospectus referred to in Section 5(a) hereof, when they become or became effective or are or were filed with the Commission, or if amended, when amended, as the case may be, will conform or conformed in all material respects to the requirements of the Exchange Act, and none of such documents will contain or contained an untrue statement of a material fact or will omit or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by the Purchaser expressly for use therein. 6. Indemnification. (a) Indemnification by the Company. Upon the registration of Shares pursuant to Section 2 hereof, and in consideration of the agreements of the Purchaser contained herein, and as an inducement to the Purchaser to purchase the Convertible Notes, the Company shall, and it hereby agrees to, indemnify and hold harmless the Purchaser and each person who participates as a placement or sales agent or as an underwriter in any offering or sale of such Shares against any losses, claims, damages or liabilities, joint or several, to which the Purchaser or any such agent or underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Shares were registered under the Securities Act, or any preliminary, 7 final or summary prospectus contained therein or furnished by the Company to the Purchaser, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company shall, and it hereby agrees to, reimburse the Purchaser, such agent and such underwriter for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable to any such person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, or preliminary, final or summary prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such person expressly for use therein; provided further, however, that the Company shall not be liable to any such Person if such Person failed to deliver a prospectus in the form most recently provided by the Company (including any amendments or supplements thereto previously provided by the Company), in any such case to the extent that any loss, claim, damage or liability arises out of or is based upon an untrue statement or an omission which was corrected in such most recently furnished prospectus (including any such amendments or supplements). (b) Indemnification by the Purchaser and any Agents and Underwriters. The Company may require, as a condition to including any Shares in any registration statement filed pursuant to Section 2 hereof and to entering into an underwriting agreement, if any, with respect thereto, that the Company shall have received an undertaking reasonably satisfactory to it from the Purchaser and from each underwriter, if any, named in any such underwriting agreement, severally and not jointly, to (i) indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such registration statement, or any preliminary, final or summary prospectus contained therein or furnished by the Company to the Purchaser, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the Purchaser or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Notices of Claims. Etc. Promptly after receipt by an indemnified party under subsection (a) or (b) above of written notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party pursuant to the indemnification provisions of or contemplated by this Section 6, notify such indemnifying party in writing of the commencement of such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under the indemnification provisions of or contemplated by Section 6(a) or 6(b) hereof. In case any such action shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, such indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, such indemnifying party shall not be liable to such indemnified party for any legal expenses of other counsel or any 8 other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. (d) Contribution. Each party hereto agrees that, if for any reason the indemnification provisions contemplated by Section 6(a) or Section 6(b) are unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to .therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by indemnified party on the one hand and the indemnifying party on the other from any offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Purchaser on the other shall be deemed to be in the same proportion as the total purchase price received by the Company upon issuance of the Convertible Note bears to the difference between the proceeds from the offering of the Shares received by the Purchaser and such purchase price. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were determined by pro rata allocation (even if the Purchaser or any agents or underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), the Purchaser shall not be required to contribute any amount in excess of the amount by which the dollar amount of the proceeds received by the Purchaser from the sale of any Shares (after deducting any fees, discounts and commissions applicable thereto) exceeds the amount of any damages which the Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 1 l(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Any underwriters' obligations in this Section 6(d) to contribute shall be several in proportion to the principal amount of Shares underwritten by them and not joint. (e) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and Conditions, to each officer, director and partner of the Purchaser, any agent and any underwriter and each person, if any, who controls the Purchaser or any agent or underwriter within the meaning of the Securities Act; and the obligations of the Purchaser and any agents and underwriters contemplated by this Section 6 shall be in addition to any 9 liability which the Purchaser or any such agent or underwriter, respectively, may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his consent, is named in any registration statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Securities Act. 7. Miscellaneous. (a) No Inconsistent Agreements. The Company represents, warrants, covenants and agrees that it has not granted, and shall not grant, registration rights with respect to Shares or any other securities which would conflict with the terms contained in these Registration Rights. (b) Specific Performance. The parties hereto acknowledge that there may be no adequate remedy at law if any party fails to perform any of its obligations hereunder and that each party may be irreparably harmed by any such failure, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under these Registration Rights in accordance with the terms and conditions of these Registration Rights, in any court of the United States or any State thereof having jurisdiction. (c) Notices. Any notice or other communication required or permitted to be given hereunder shall be deemed effectively given when personally delivered, telexed, transmitted by facsimile or mailed by pre-paid certified mail, return receipt requested, or by telephone when confirmed in writing by one of the preceding methods addressed as follows (as applicable): If to the Company, to: Celgene Corporation 7 Powder Horn Drive Warren, NJ 07059 Attention: John W. Jackson Telephone Number: (732) 271-1001 ' Facsimile Transmission Number: (732) 805-3931 with a copy to: Proskauer Rose LLP 1585 Broadway New York, NY 10036 Attention: Robert A. Cantone, Esq. Telephone Number: (212) 969-3000 Facsimile Transmission Number: (212) 969-2900 10 If to Warburg Dillon Read LLC, to: Warburg Dillon Read LLC 677 Washington Blvd. Stamford, CT 06901 Attention: General Counsel Capital Markets Telephone Number: (203) 719-3000 Facsimile Transmission Number: (203) 719-6097 or to such other address or number and to the attention of such other person as either party may designate by written notice to the other party. Notice shall be effective upon actual receipt. (d) Survival. The respective indemnities, agreements, representations, warranties and each other provision set forth in these Registration Rights or made pursuant hereto shall remain in full force and effect regardless of any investigation (or statement as to the results thereof) made by or on behalf of the Purchaser, any director, officer or partner of the Purchaser, any agent or underwriter or any director, officer or partner thereof, or any controlling person of any of the foregoing. (e) Law Governing. These Registration Rights shall be governed by and construed in accordance with the laws of the State of New York. (f) Headings. The descriptive headings of the several Sections and paragraphs of these Registration Rights are inserted for convenience only, do not constitute a part of these Registration Rights and shall not affect in any way the meaning or interpretation of these Registration Rights. (g) Entire Agreement: Amendments. These Registration Rights and the other writings referred to herein or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. These Registration Rights supersede all prior agreements and understandings between the parties with respect to its subject matter. These Registration Rights may be amended and the observance of any term of these Registration Rights may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument duly executed by the Company and the Purchaser. (h) Assignment. In connection with. any permitted transfer of the Convertible Note or any portion thereof in a principal amount of not less than $1,000,000 the Purchaser may assign its rights hereunder in respect of such Convertible Note to the transferee. Upon such assignment the transferee shall, insofar as the transferred Convertible Notes are concerned, be entitled to all of the rights, and be subject to all of the obligations, of the Purchaser under these Registration Rights, and all references to the "purchaser" herein shall thereafter be deemed to refer to the Purchaser, or such transferee, or both, as the circumstances warrant. (i) Counterparts. This agreement may be executed by the parties counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 11 Agreed to and accepted as of the date referred to above. CELGENE CORPORATION By: ---------------------------- Name: Title: WARBURG DILLON READ LLC By: ---------------------------- Name: Title: EX-10.22 8 EXHIBIT 10.22 EXHIBIT 10.22 NOTE PURCHASE AGREEMENT January 20,1999 To the Purchasers listed on attached Schedule I Dear Sirs: CELGENE CORPORATION (the "Company") wishes to confirm its arrangement with the Purchasers named on Schedule I to this Agreement (the "Purchasers" and singly each "Purchaser") in connection with the issuance to the Purchasers, against payment in immediately available funds of the purchase price of 100% of the principal amount thereof, of one or more senior convertible notes in the form attached hereto as Exhibit A (collectively the "Convertible Notes") in an aggregate principal amount of $15,000,000 and convertible initially into 833,400 fully paid and non-assessable shares (each a "Share") of the Company's Common Stock, par value $.01 per share (the "Common Stock"), subject to adjustment as set forth in the Convertible Notes. Simultaneously with the issuance of the Convertible Notes pursuant to this Agreement, the Company and the Purchasers have entered into a Registration Rights Agreement, dated as of the date hereof (the "Registration Rights Agreement"), pursuant to which the Company has agreed to register the Shares under certain circumstances. Any capitalized term not defined herein shall have the meaning ascribed to such term in the Convertible Notes. 1. AGREEMENT TO ISSUE AND ACCEPT. On the basis of the representations and warranties made by the Company to induce the Purchasers to purchase the Convertible Notes and subject to the terms and conditions set forth herein, the Company will issue to each Purchaser, and each Purchaser will accept from the Company, the Convertible Notes in the principal amount specified opposite such Purchaser's name on Schedule I attached hereto at the purchase price of 100% of the principal amount thereof against payment of the above-specified purchase price therefor. The closing (the "Closing") of the issuance and acceptance of the Convertible Notes against such payment shall take place on the date hereof, at which time the Company shall deliver to each Purchaser the Convertible Notes, against delivery by each Purchaser of a wire transfer of the purchase price to the Company's account at PNC Bank New Jersey Trust, ABA No. 031000053, benefit Account No. 8511074024, for further credit to Account No. 42432012020943, Celgene Corporation, Attn: Lisa Goldhammer, Telephone No. (732) 220-3112. If at the Closing the Company shall fail to tender the Convertible Notes to each Purchaser as provided in this Section 1 or any of the conditions specified in Section 5 shall not have been fulfilled to each Purchaser's satisfaction, each Purchaser, at its election, shall be relieved of all further obligations under this Agreement, without thereby waiving any rights each Purchaser may have by reason of such failure or such nonfulfillment. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the representations and warranties set forth on Annex II hereto to the Purchasers. 3. AGREEMENTS OF PURCHASER. Each Purchaser covenants and agrees with the Company that: (a) Such Purchaser will not offer, sell, assign, hypothecate or otherwise transfer the Convertible Notes except (i) pursuant to an effective registration statement under the Securities Act of 1933 (the "Act"), (ii) to a person you reasonably believe to be an "accredited investor" within the meaning of Rule 501 under the Act, pursuant to an available exemption under the Act or (iii) in offshore transactions within the meaning and meeting the requirements of Rule 903 under the Act. (b) Such Purchaser will not offer, sell, assign, hypothecate or otherwise transfer any Shares issued upon conversion of the Convertible Notes except (i) pursuant to an effective registration statement under the Act; (ii) to a person you reasonably believe to be an "accredited investor" within the meaning of Rule 501 under the Act, pursuant to an available exemption under the Act or (iii) in an offshore transaction within the meaning and meeting the requirements of Rule 903 under the Act. (c) Such Purchaser is an "accredited investor" within the meaning of Rule 501 under the Act. (d) During the period that the Company is prohibited from making an optional redemption under Section 1 of the Convertible Note, so long as a Purchaser holds a Convertible Note, such Purchaser shall not undertake any form of short sale, derivative or other transaction which has the effect of taking a "short position" in the Common Stock of the Company to hedge such Purchaser's investment in the Company, provided, however, that no affiliate of any Purchaser shall be subject to the provisions of this subsection 3(d). The covenant contained in this Section 3(d) shall be, subject to the limitations contained herein, binding on any holder of a Convertible Note. (e) Each Purchaser represents that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by such Purchaser to pay the purchase price of the Convertible Notes to be purchased by it hereunder: (i) the Source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no employee benefit plan, treating as a single plan all plans, maintained by the same employer (or affiliate thereof as defined in Section V(a)(1) of PTE 95-60) or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan exceeds ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with such Purchaser's state of domicile; or 2 (ii) the Source is either (a) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption ("PTE") 90-1 (issued January 29, 1990), or (b) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (ii), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (iii) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (a) the identity of such QPAM and (b) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (iii); or (iv) the Source is a governmental plan; or (v) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (vi) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 3(e), the terms "employee benefit plan", "governmental plan", "party in interest" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. Prior to any holder of this Security transferring this Security, the holder of this Security shall provide a certificate from such proposed subsequent transferee wherein such proposed subsequent transferee shall make the representations made in this Section 3(e) and shall simultaneously deliver any disclosure letter required under Section 3(e)(iii). Such subsequent transferee's failure to deliver such a certificate shall not relieve the Company from any of the terms, covenants or conditions of this Security. 3 4. Agreements of the Company. From and after the date of this Agreement, and thereafter so long as any of the Convertible Notes remain outstanding, the Company will duly perform and observe, for the benefit of the holders of the Convertible Notes, each and all of the covenants and agreements hereinafter set forth: (a) The Company shall deliver to each holder of a Convertible Note: i. Quarterly Statements -- upon the earlier of (x) when the Company files its Form 10-Q with the Securities and Exchange Commission for a fiscal period and (y) 50 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (1) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (2) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 4(a)(i); ii. Annual Statements -- upon the earlier of(x) when the Company files its Form 10-K with the Securities and Exchange Commission for a fiscal period and (y) 105 days after the end of each fiscal year of the Company, duplicate copies of, (1) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (2) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied 4 (A) by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 4(a)(ii); iii. SEC and Other Reports -- promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement that shall have become effective (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and statements in the nature thereof made available generally by the Company or any Subsidiary to the public concerning developments that are Material; iv. Notice of Default or Event of Default -- promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default under any of the Convertible Notes or that any Person has given any notice or taken may action with respect to a claimed default of the type referred to in Section 5 4(a)(7) of the Convertible Notes, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; v. ERISA Matters -- promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (1) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or (2) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (3) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; vi. Notices from Governmental Authority -- promptly, and in any event within thirty days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and vii. Requested Information -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Convertible Notes as from time to time may be reasonably requested by any such holder of Convertible Notes. (b) The Company shall permit the representatives of each holder of Convertible Notes: 6 i. No Default -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and ii. Default -- if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. (c) The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (d) The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. (e) The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 7 (f) The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect. (g) The Company will at all times preserve and keep in full force and effect its corporate existence. The Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. (h) The Company will promptly notify the holders in the event the Company discovers or determines that any computer application (including those of its suppliers, vendors and customers) that is Material to its or any of its Subsidiaries' business and operations will not be Year 2000 compliant, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. (i) The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon terms determined by the Company's Board of Directors, in its good faith judgment, to be fair and reasonable terms and no less favorable to the Company or such Subsidiary than would be obtainable in a comparable transaction with a Person not an Affiliate. 5. CONDITIONS. The obligations of the Purchasers under this Agreement shall be subject to the condition that all representations and warranties and other statements of the Company herein are true and correct at and as of the closing of the purchase and sale of the Convertible Notes, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: 8 (a) Counsel for the Company specified in Annex III hereto shall have furnished to you its written opinion, dated the date of such closing, in form and substance satisfactory to each Purchaser, to the effect set forth in Annex III hereto. (b) On the date of such closing, the Company shall have furnished to each Purchaser such appropriate further information, certificates and documents as such Purchaser may reasonably request. (c) The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. (d) The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Convertible Notes, no Default or Event of Default shall have occurred and be continuing. (e) The Company shall have delivered to each Purchaser an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 5(c), 5(d) and 5(k) have been fulfilled. (f) The Company shall have delivered to each Purchaser a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Convertible Notes and the Agreements. (g) On the date of the Closing the purchase of Convertible Notes by each Purchaser shall (i) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation U, T or X of the Board of Governors of the Federal Reserve System) and (iii) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by any Purchaser, such Purchaser shall have received an Officer's Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted. (h) The Company shall sell the entire principal amount of the Convertible Notes scheduled to be sold at the Closing as specified in Schedule I hereto. (i) Without limiting the provisions of Section 6(f), the Company shall have paid on or before the Closing the fees, charges and disbursements of the Purchasers' special counsel. 9 (j) A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Convertible Notes. (k) The Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in the Memorandum (defined below). (1) All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to each Purchaser and its special counsel, and each Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser or it may reasonably request. 6. MISCELLANEOUS. (a) This Agreement shall be binding upon, and inure solely to the benefit of, the Purchasers and the Company and the respective successors and assigns thereof, and no other person shall acquire or have any right raider or by virtue of this Agreement. No purchaser of the Convertible Notes from a Purchaser shall be deemed a successor or assign by reason merely of such purchase. (b) Any notice or other communication required or permitted to be given hereunder shall be deemed effectively given when personally delivered, telexed, transmitted by facsimile or mailed by pre-paid certified mail, return receipt requested, or by telephone when confirmed in writing by one of the preceding methods addressed as follows (as applicable): If to the Company, to: Celgene Corporation 7 Powder Horn Drive Warren, NJ 07059 Attention: John W. Jackson Telephone Number: (732) 271-1001 Facsimile Transmission Number: (732) 805-3931 with a copy to: Proskauer Rose LLP 1585 Broadway New York, NY 10036 10 Attention: Robert A. Cantone, Esq. Telephone Number: (212) 969-3000 Facsimile Transmission Number: (212) 969-2900 If to Purchaser: at the address and to the Person appearing on Schedule I to this Agreement with a copy to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109 Attention: Frank B. Porter, Jr. Telephone Number: (617) 248-5000 Facsimile Transmission Number: (617) 248-4000 or to such other address or number and to the attention of such other person as either party may designate by written notice to the other party. Notice shall be effective upon actual receipt. (c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (d) Time shall be of the essence in the performance of this Agreement. (e) This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. (f) Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel) incurred by each Purchaser or holder of a Convertible Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Convertible Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Convertible Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Convertible Notes, or by reason of being a holder of any Convertible Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the 11 transactions contemplated hereby and by the Convertible Notes. The Company will pay, and will save each Purchaser and each other holder of a Convertible Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). (g) Anything in this Agreement or the Convertible Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Convertible Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. (h) This Agreement and the Convertible Notes may be amended, and the observance of any term hereof or of the Convertible Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and each of the holders. (i) From time to time hereafter, the Company will execute and deliver, or will cause to be executed and delivered, such additional agreements, documents and instruments and will take all such other actions as any holder or holders of the Convertible Notes may reasonably request [END OF PAGE] 12 Signature Page of Note Purchase Agreement for the purpose of implementing or effectuating the provisions contained herein, in the Convertible Notes or in the Registration Rights Agreement. Very truly yours, CELGENE CORPORATION By:/s/ Sol J. Barer ------------------------ Name: Sol J. Barer Title: Pres/COO Signature Page of Note Purchase Agreement with Celgene Corporation Accepted as of the date hereof: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- SIGNATURE lA (CAYMAN), LTD. By: John Hancock Mutual Life Insurance Company, Portfolio Advisor By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- Signature 3 Limited By: John Hancock Mutual Life Insurance Company, as Portfolio Advisor By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- Hancock Mezzanine Partners L.P. By: Hancock Mezzanine Investments LLC, its General Partner By: John Hancock Mutual Life Insurance Company. as Investment Manager By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- EXHIBIT A THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. CELGENE CORPORATION 9.00% SENIOR CONVERTIBLE NOTE DUE JANUARY , 2004 _______ $______ No. R- CELGENE CORPORATION, a corporation duly organized and existing under the laws of Delaware (the "Company") for value received, hereby promises to pay to __________________, or registered assigns, the principal sum of ___________________________________________ Dollars ($__________________) on January _____, 2004 and to pay interest thereon, from __________________, 1999, or from the most recent interest payment date to which interest has been paid or duly provided for, semi-annually on January __ and July __ in each year, commencing July __, 1999, at the rate of 9.00% per annum, until the principal hereof is due, and at the rate of 11.00% per annum on any overdue principal and premium, if any, and, to the extent permitted by law, on any overdue interest. The interest so payable, and punctually paid or duly provided for, on any interest payment date will be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the regular record date for such interest, which shall be the January 1 or July 1 (whether or not a Business Day), as the case may be, next preceding such interest payment date. Payment of the principal of (and premium, if any, on) this Security shall be made upon the surrender of this Security to the Company, at its office at 7 Powder Horn Drive, Warren, NJ 07059 (or such other office within the United States as shall be notified by the Company to the holder hereof) (the "Designated Office"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, by transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America. Payment of interest on this Security shall be made by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America, provided that if the holder shall not have furnished wire instructions in writing to the Company no later than the record date relating to an interest payment date, such payment may be made by U.S. dollar check mailed to the address of the Person entitled thereto as such address shall appear in the Company security register. This Security will rank pari passu with all existing and future senior debt of the Company. This Security is one of the Company's 9.00% Senior Convertible Notes due January 20, 2004, limited to $15,000,000.00 aggregate principal amount, issued pursuant to that certain Note Purchase Agreement dated January 20, 1999 (such agreements, as amended, modified and supplemented from time to time, the "Note Purchase Agreement") between the Company and the Purchasers named therein, and the holder hereof is entitled to the benefits of the Note Purchase Agreement, and may enforce the agreements contained herein and therein and exercise the remedies provided for hereby and thereby or otherwise available in respect hereof and thereof, all in accordance with the terms hereof and thereof. 1. Optional Redemption With Premium. This Security is subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time on or after January 20, 2001, as a whole or in part, (in any amount that is an integral multiple of $1000) at the election of the Company, at a redemption price of 103% the principal amount thereof, together with accrued interest to the redemption date, but interest installments whose stated maturity is on or prior to such redemption date will be payable to the holder of this Security, or one or more predecessor Securities, of record at the close of business on the relevant record dates referred to on the face hereof; provided, however, that the Company may not redeem this Security on or prior to January 20, 2002 unless the Closing Price of the Common Stock exceeds 225 % of the Conversion Price for each Trading Day in a period of 20 Consecutive Trading Days commencing not earlier than January 20, 2001. The term "Conversion Price" on any day shall equal $1,000 divided by the Conversion Rate in effect on each such day. 2. Conversion. (a) The holder of this Security is entitled at any time on or after January 20, 2000 and before the close of business on January 20, 2004 (or, in case this Security or a portion hereof is called for redemption or the holder hereof has exercised its right to require the Company to repurchase this Security or a portion hereof, then in respect of this Security or such portion hereof, as the case may be, until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the redemption date or the Repurchase Date, as the case may be) to convert this Security (or any portion of the principal amount hereof that is an integral multiple of $1,000), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at the rate of 55.56 shares of Common Stock for each $1,000 principal amount of Security (or at the current adjusted rate if an adjustment has been made as provided below) (the "Conversion Rate") by surrender of this Security, duly endorsed or assigned to the Company or in blank to the Company at the Designated Office, accompanied by written notice to the Company that the holder hereof elects to convert this Security (or if less than the entire principal amount hereof is to be converted, specifying the portion hereof to be converted). Upon surrender of this Security for conversion, the holder will be entitled to receive the interest accruing on the principal amount of this Security then being converted from the interest payment date next preceding the date of such conversion to such date of conversion. No payment or adjustment is to be made on conversion for dividends on the 2 Common Stock issued on conversion hereof. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest, the Company shall pay a cash adjustment, computed on the basis of the Closing Price of the Common Stock on the date of conversion, or, at its option, the Company shall round up to the next higher whole share. This Security shall be deemed to have been converted immediately prior to the close of business on the day of surrender hereof for conversion, in accordance with the foregoing provisions, and at such time the rights of the holder hereof, as a holder hereof, shall cease, and the Person or Persons entitled to receive the Common Stock issuable on conversion shall be treated by all Persons as the holder or holders of such Common Stock at such time. Upon any partial conversion of this Security, the Company, at its expense, will forthwith issue and deliver to, or upon the order of the holder hereof, a new Convertible Note or Convertible Notes in principal amount equal to the unconverted principal amount of such surrendered Convertible Note, such new Convertible Note or Convertible Notes to be dated and to bear interest from the date to which interest has been paid on such surrendered Convertible Note. As promptly as possible after the conversion of this Security, in whole or in part, and in any event within ten (10) days thereafter, the Company, at its expense, will issue and deliver a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion. (b) The Conversion Rate shall be subject to adjustments from time to time as follows: (1) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company payable in shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the Determination Date for such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following such Determination Date. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall issue rights, options, warrants or convertible securities entitling the holders thereof to subscribe for or purchase shares of Common Stock at a 3 price per share less than the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on the Determination Date for such distribution, the Conversion Rate in effect at the opening of business on the day following such Determination Date, shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock which the aggregate amount received by the Company upon the issuance of such rights, options, warrants or convertible securities plus the aggregate amount receivable by the Company upon the exercise or conversion of such rights, options, warrants or convertible securities would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock so offered for subscription or purchase, such increase to become effective immediately after the opening of business on the day following such Determination Date provided, that no such adjustment need to be made in the case of the granting by the Company to employees or directors of the Company or consultants to the Company of Common Stock and/or options to purchase Common Stock and the issuance of Common Stock upon the exercise of such options. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights, options, warrants or convertible securities in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall each be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall, by dividend or otherwise, distribute evidences of its indebtedness, shares of any class of capital stock, or other property (including securities, but excluding (i) any rights, options, warrants or convertible security referred to in paragraph (2) of this Section 2(b) (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (1) of this Section 2(b) and (iv) any merger or consolidation to which Section 2(h) applies), 4 the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following such Determination Date provided, that no such adjustment need be made in the case of an underwritten public offering of Common Stock in which the shares of Common Stock are sold to the public at a price per share equal to or in excess of 95 % of the market price per share of the Common Stock as of the date of the pricing of such underwritten public offering. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section 2(b). (5) In case the Company shall, by dividend or otherwise, make a Cash Distribution, then, and in each such case, immediately after the close of business on the Determination Date for such Cash Distribution, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on such Determination Date by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of (1) the amount of such Cash Distribution divided by (2) the number of shares of Common Stock outstanding on such Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date. (6) In case the Company or any Subsidiary shall make an Excess Purchase Payment, then, and in each such case, immediately prior to the opening of business on the day after the tender offer in respect of which such Excess Purchase Payment is to be made expires, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such tender offer by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of (A) the Excess Purchase 5 Payment divided by (B) the number of shares of Common Stock outstanding (including any tendered shares) as of the Determination Date less the number of all shares validly tendered and not withdrawn as of the Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock as of such Determination Date. (7) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 2(h) applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be the Determination Date), and (b) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (3) of this Section 2(b)). Rights, options, warrants or convertible securities issued by the Company entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights, options, warrants or convertible securities (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 2(b) not be deemed issued until the occurrence of the earliest Trigger Event. (8) Except as otherwise provided in the last sentence of this subsection (8) of Section 2(b) for the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 2(b) the current market price per share of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Prices for the five (5) consecutive Trading Days selected by the Company commencing not more than ten (10) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "ex date", when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. The current market price with respect to any option issued to any employee or director of the Company or consultant to the Company shall be the fair market value on the date of grant determined by reference to the market price on the day of the grant of such option or to the market price at the close of business on the Trading Day immediately preceding such grant. 6 (9) No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (9)) would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (9) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (10) The Company may make such increases in the Conversion Rate, for the remaining term of the Securities or any shorter term, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section 2(b) as it considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights, options, warrants or convertible securities to purchase or subscribe for stock or from any event treated as such for income tax purposes. (c) Whenever the Conversion Rate is adjusted as provided in Section 2(b), the Company shall compute the adjusted Conversion Rate in accordance with Section 2(b) and shall prepare a certificate (the "Conversion Rate Certificate") signed by the Senior Financial Officer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and shall promptly deliver such certificate to the holder of this Security. If the holders of the Convertible Notes and the Company cannot agree in writing as to the adjusted Conversion Rate in accordance with Section 2(b), the holders of the Convertible Notes and the Company shall determine the adjusted Conversion Rate in accordance with the following procedure. The holders of the Convertible Notes and the Company shall each appoint one registered securities broker, licensed with the Securities and Exchange Commission to sell securities to the public, which broker shall be a senior vice president, managing director or equivalent of a major securities brokerage company with offices in New York, New York. Each of such brokers shall have no less than ten (10) years experience in such field, shall be unaffiliated with, and their employer securities brokerage company shall be unaffiliated with, the holders of the Convertible Notes and the Company and shall not have previously participated in any underwriting of the Company's Common Stock in any public offering or provided any Material investment banking or corporate advisory services to the Company. The holders of the Convertible Notes and the Company shall make their appointments promptly and, in any event, within thirty (30) days from the date of the Conversion Rate Certificate. The two brokers shall meet and shall be instructed to render a determination of the adjusted Conversion Rate to the holders of the Convertible Notes and the Company within sixty (60) days of the date of the Conversion Rate Certificate. If the two brokers cannot agree, then each broker shall render their independent determination and the two brokers shall simultaneously therewith provide the name of a third broker acceptable to the two brokers meeting the criteria set forth above. The third broker shall be instructed to render a determination of the adjusted Conversion Rate within thirty (30) days of his or her 7 appointment. The two closest determinations of the adjusted Conversion Rate shall be averaged and shall constitute the adjusted Conversion Rate. If the two brokers cannot agree upon a third broker, the selection of a third broker shall be submitted to binding arbitration in New York, New York under the rules of the American Arbitration Association. In the event that the difference between the Company's calculation of the adjusted Conversion Rate and the calculation of the adjusted Conversion Rate determined by the foregoing process is five percent (5 %) or greater then the costs and expenses of the brokers and any arbitration shall be paid by and be the obligation of the Company and in the event that such difference is less than five percent (5 %) the holders of the Convertible Notes (as a group) shall each pay its pro rata share of 50% of such costs and expenses and the Company shall pay 50% of such costs and expenses. (d) In case: (1) the Company shall declare a dividend or other distribution on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 2(b); or (2) the Company shall authorize the granting to the holders of its Common Stock of rights, options, warrants or convertible securities to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) of any reclassification of the Common Stock of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or (4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (5) the Company or any Subsidiary shall commence a tender offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender offer); then the Company shall cause to be delivered to the holder of this Security, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options, warrants or convertible securities or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options, 8 warrants or convertible securities are to be determined, (y) the date on which the right to make tenders under such tender offer expires or (z) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (5) of this Section 2(d). (e) The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Security, the full number of shares of Common Stock then issuable upon the conversion of this Security. (f) Except as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of this Security. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of this Security, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. (g) The Company agrees that all shares of Common Stock which may be delivered upon conversion of the Security, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable (and shall be issued out of the Company's authorized but unissued Common Stock) and, except as provided in the second sentence of Section 2(f), the Company will pay all taxes, liens and charges with respect to the issue thereof. (h) In case of any consolidation of the Company with any other Person, any merger of the Company into another Person or of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company) or any conveyance, sale, transfer or lease of all or substantially all of the properties and assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such properties and assets, as the case may be, shall execute and deliver to the holder of this Security a supplemental agreement providing that such holder has the right, during the period this Security shall be convertible as specified in Section 2(a), to convert this Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (including any Common Stock 9 retainable) by a holder of the number of shares of Common Stock of the Company into which this Security might have been converted immediately prior to such consolidation, merger, conveyance, sale, transfer or lease, assuming such holder of Common Stock of the Company (i) is not a Person with which the Company consolidated, into which the Company merged or which merged into the Company or to which such conveyance, sale, transfer or lease was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise its rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer, or lease is not the same for each share of Common Stock of the Company held immediately prior to such consolidation, merger, conveyance, sale, transfer or lease by others than a Constituent Person or an Affiliate of a Constituent Person and in respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 2(h) the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease by the holders of each Non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares). Such supplemental agreement shall provide for adjustments which, for events subsequent to the effective date of such supplemental agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2. The above provisions of this Section 2(h) shall similarly apply to successive consolidations, mergers, conveyances, sales, transfers or leases. In this paragraph, "securities of the kind receivable" upon such consolidation, merger, conveyance, transfer, sale or lease by a holder of Common Stock means securities that, among other things, are registered and freely transferable under the Securities Act, and listed and approved for quotation in all securities markets, in each case to the same extent as such securities so receivable by a holder of Common Stock. (i) The Company (i) will effect all registrations with, and obtain all approvals by, all governmental authorities that may be necessary under any United States Federal or state law (including the Securities Act, the Exchange Act and state securities and Blue Sky laws) for the shares of Common Stock issuable upon conversion of this Security to be lawfully issued and delivered as provided herein, and thereafter publicly traded (if permissible under the Securities Act) and qualified or listed as contemplated by clause (ii) (it being understood that the Company shall not be required to register the Common Stock issuable on conversion hereof under the Securities Act, except pursuant to the Registration Rights Agreement between the Company and the initial holder of this Security); and (ii) will list the shares of Common Stock required to be issued and delivered upon conversion of Securities, prior to such issuance or delivery, on each national securities exchange on which outstanding Common Stock is listed or quoted at the time of such delivery, or if the Common Stock is not then listed on any securities exchange, to qualify the Common Stock for quotation on the Nasdaq National Market or such other inter-dealer quotation system, if any, on which the Common Stock is then quoted. 10 (j) For purposes hereof: (references to Sections shall mean Sections of this Security unless otherwise specified) "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day other than a Saturday, a Sunday or other day which shall be in Boston, Massachusetts or New York, New York or a legal holiday or a day on which commercial banks in Boston, Massachusetts or New York, New York are required or authorized to be closed. "Cash Distribution" means the distribution by the Company to holders of its Common Stock of cash, other than any cash that is distributed upon a merger or consolidation to which Section 2(h) applies or as part of a distribution referred to in paragraph (4) of Section 2(b). "Change of Control" is defined in Section 3(f)(2). "Closing" is defined in Section 1 of the Note Purchase Agreement. "Closing Price" means, with respect to the Common Stock of the Company, for any day, the reported last sale price per share on the Nasdaq National Market, or, if the Common Stock is not admitted to trading on the Nasdaq National Market, on the principal national securities exchange or inter-dealer quotation system on which the Common Stock is listed or admitted to trading, or if not admitted to trading on the Nasdaq National Market, or listed or admitted to trading on any national securities exchange or inter-dealer quotation system, the average of the closing bid and asked prices per share in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Common Stock" means the Common Stock, par value $.01 per share, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 2(h), shares issuable on conversion or repurchase of this Security shall include only shares of Common Stock or shares of any class or classes of common stock resulting from any reclassification or reclassifications thereof; provided, however, that if at 11 any time there shall be more than one such resulting class, the shares so issuable on conversion of this Security shall include shares of all such classes, and the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Convertible Note(s)"shall mean one or more of the Company's 9.00% Senior Convertible Notes due January 20, 2004. "Conversion Price" is defined in Section 1. "Conversion Rate" is defined in Section 2(a). "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Designated Office" is defined in the Preamble. "Determination Date" means, in the case of a dividend or other distribution, including the issuance of rights, options, warrants or convertible securities, to the date fixed for the determination of those entitled to receive such dividend or other distribution, and in the case of a tender offer, the last time that tenders could have been made pursuant to such tender offer. "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, licenses, written agreements or written governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "Excess Purchase Payment" means the product of (A) the excess, if any, of (i) the amount of cash plus the fair market value (as determined in good faith by the Company's Board of Directors) of any non-cash consideration required to be paid with respect to one share of Common Stock acquired or to be acquired in a tender offer made by the Company 12 or any Subsidiary of the Company for all or any portion of the Common Stock over (ii) the current market price per share as of the last time that tenders could have been made pursuant to such tender offer and (B) the number of shares validly tendered and not withdrawn as of the Determination Date in respect of such tender offer. "Event of Default" is defined in the preamble to Section 4. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Hazardous Materials" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the remediation of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is restricted, prohibited or penalized by any applicable Environmental Law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "holder" means, with respect to this Security or any other Convertible Note, the Person in whose name it is registered in the register maintained by the Company pursuant to Section 6(d). "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease (as defined by GAAP), upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Make-Whole Amount" is defined in Section 4(g). "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under the Note Purchase Agreement, the Registration Rights Agreement and the Convertible Notes, or (cc.) the validity or enforceability of this Agreement or the Convertible Notes. 13 "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Note Purchase Agreement" is defined in the Preamble. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "Purchaser(s)" JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY; JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY; SIGNATURE 1A (CAYMAN), LTD; SIGNATURE 3 LIMITED; and HANCOCK MEZZANINE PARTNERS L.P. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the date hereof among the Purchasers and the Company. "Repurchase Date" is defined in Section 3(a). "Repurchase Price" is defined in Section 3(a). "Responsible Officer" means any), Senior Financial Officer and any other senior officer of the Company with responsibility for the administration of the relevant covenants in this Security or in the Note Purchase Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "Senior Financial Officer" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or 14 more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Trading Day" means (i) if the Common Stock is admitted to trading on the Nasdaq National Market or any other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq National Market or listed or admitted for trading on any national securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the over-the-counter market and for which a closing bid and a closing asked price for the Common Stock are available. 3. Right to Require Repurchase. (a) In the event that a Change in Control shall occur, then the holder of this Security shall have the right, at such holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, this Security, or any portion of the principal amount hereof that is equal to $1,000 or any integral multiple thereof, on the date (the "Repurchase Date") that is thirty (30) Trading Days after the date on which the Company gives notice thereof to the holder of this Security, at a purchase price equal to 100% of the principal amount of this Security to be repurchased plus interest accrued to the Repurchase Date (the "Repurchase Price"); provided, however, that installments of interest on this Security whose stated maturity is on or prior to the Repurchase Date shall be payable to the holder of this Security, or one or more predecessor Securities, registered as such on the relevant Record Date according to their terms. 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 each of Section 5 and Section 6 and subject to the limitations set forth in each of Section 5 and Section 6, by delivery of shares of Common Stock or in common stock of any Person which succeeds the Company up to a maximum amount of ten percent (10%) of the then issued and outstanding Common Stock or common stock of such Person following any Change in Control, provided, however, the cash plus the fair market value of such shares shall equal the Repurchase Price. The Company agrees to give the holder of this Security notice of any Change in Control, by facsimile transmission confirmed in writing by overnight courier service, promptly and in any event within two (2) Trading Days of the occurrence thereof. 15 (b) To exercise a repurchase right, the holder shall deliver to the Company on or before the 10th Trading Day prior to the Repurchase Date, together with this Security, written notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the number of shares of Common Stock then owned by such holder and its affiliates, the principal amount of this Security to be repurchased (and, if this Security is to be repurchased in part, the portion of the principal amount thereof to be repurchased and the name of the person in which the portion thereof to remain outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase fight is being made thereby and, in the event that the Repurchase Price shall be paid in whole or in part by the delivery of shares, as provided above, the name or names (and the addresses) in which the certificates for shares shall be issued. Such written notice shall be irrevocable, except that the fight of the holder to convert this Security (or the portion hereof with respect to which the repurchase right is being exercised) shall continue until the close of business on the Repurchase Date (or if the Company elects to pay the Repurchase Price by delivery of shares as provided above, until the close of business on the Trading Day immediately preceding the first delivery of shares with respect thereto). (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the holder the Repurchase Price in cash or shares, as provided above, together with accrued and unpaid interest to the Repurchase Date; provided, however, that installments of interest that mature on or prior to the Repurchase Date shall be payable in cash, to the holders of this Security, or one or more predecessor Securities, registered as such at the close of business on the relevant regular record date. (d) If this Security (or portion thereof) is surrendered for repurchase and is not so paid on or prior to the Repurchase Date, the principal amount of this Security (or such portion hereof, as the case may be) shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at eleven percent (11%) per annum, and shall remain convertible into Common Stock until the principal of this Security (or portion thereof, as the case may be) shall have been paid or duly provided for. (e) If this Security is to be repurchased only in part, it shall be surrendered to the Company at the Designated Office (with, if the Company so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing), and the Company shall execute and make available for delivery to the holder without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. (f) For purposes of this Section 3. (1) the term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission pursuant to the Exchange Act; and 16 (2) a "Change in Control" shall be deemed to have occurred at the time, after the original issuance of this Security, of: (i) the acquisition by any Person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the election of directors (any shares of voting stock of which such Person is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any such acquisition by the Company or any employee benefit plan of the Company; or (ii) any consolidation or merger of the Company with or into, any other Person, any merger of another Person with or into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the assets of the Company to another Person (other than (a) any such transaction (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock and (y) pursuant to which holders of Common Stock immediately prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving Person immediately after such transaction and (b) any merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock into solely shares of common stock, 4. Events of Default. (a) "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) (A) default in the payment of any principal or premium, if any, upon this Security when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise or (B) default in the payment of any interest upon this Security when it becomes due and payable, and continuance of such default for a period of five (5) days; or (2) default by the Company in the performance of its obligations in respect of any conversion of this Security (or any portion hereof) in accordance with Section 2; or (3) failure by the Company to give any notice of a Change of Control required to be delivered in accordance with Section 3(a); or (4) default in the performance, or breach, of any material covenant or warranty of the Company herein, in the Note Purchase Agreement, or in the Registration 17 Rights Agreements (other than a covenant or warranty a default in the performance or breach of which is specifically dealt with elsewhere in this Section 4(a)) and continuance of such default or breach for a period of 30 days after the earlier to occur of (A) the Company's obtaining knowledge of such default or (B) the Company's receiving written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (6) a final judgment or judgments for the payment of money aggregating in excess of $250,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (7) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company, or under any agreement, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company, with a principal amount then outstanding in excess of $1,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of such indebtedness (in whole or in any part greater than $1,000,000) when due and payable or shall have resulted in such indebtedness (in whole or in any part greater than $1,000,000) becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable; or (8) if(i) any Plan other than a Multiemployer Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan other than a Multiemployer Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan other than a Multiemployer Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan other than a Multiemployer Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans other than a Multiemployer Plan, determined in accordance with Title IV of ERISA, shall exceed $250,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the 18 Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. (As used in this Section 4(a)(8), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA.); or (9) if, as a result of any Change of Control or any other consolidation or merger, the holding by the Purchasers or any assignees thereof of this Security or the holding of any Common Stock or common stock of any Person succeeding the Company, issued to the Purchasers or any assignees thereof after conversion of this Security would constitute, with respect to any Plan (other than a Multiemployer Plan) a prohibited transaction which would violate the prohibitions of section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975(c)(1)(A)-(D) of the Code; or (10) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (11) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or similar relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or not paying its debts as they become due or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. (b) If an Event of Default (other than an Event of Default specified in Section 4(a)(10) or 4(a)(11)) occurs and is continuing, then in every such case the holder of this Security may declare the principal hereof to be due and payable immediately, by a notice in 19 writing to the Company, and upon any such declaration such principal and all accrued interest hereon shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security 0) the entire principal of and interest accrued on this Security, and (ii) in addition, to the extent permitted by applicable law, an amount equal to the Make Whole Amount, as liquidated damages and not as a penalty; and, in case of the occurrence of an Event of Default of the character described in subdivisions 4(a)(10) or 4(a)(11) the principal of and accrued interest on this Security, ipso facto shall become immediately due and payable without any declaration or other act of the holder of this Security and without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security (x) the entire principal of and interest accrued on this Security and (y) in addition, if such Event of Default is "Voluntary" (as hereinafter defined), to the extent permitted by applicable law, an amount equal to the Make-Whole Amount, as liquidated damages and not as a penalty. For purposes of this section 4(a), "Voluntary" shall mean an Event of Default of the character described in subdivisions 4(a)(10) or 4(a)(11) which shall have been (x-) procured by the Company or any officer, director, stockholder or Affiliate of the Company or (y) primarily the result of action or inaction by the Company or by any officer, director, stockholder or Affiliate of the Company. (c) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, and irrespective of whether this Security has become or has been declared immediately due and payable under section 4(a), the holder of this Security may proceed to protect and enforce its rights either by suit in equity or by action at law, or both. The Company stipulates that the remedies at law of the holder of this Security in the event of any Default or threatened Default by the Company in the performance of or compliance with any covenant or agreement in this Security, the Note Purchase Agreement or the Registration Rights Agreement are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance thereof, whether by an injunction against a violation thereof or otherwise. (d) No remedy conferred in this Security, the Note Purchase Agreement or the Registration Rights Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or thereunder or now or hereafter existing at law or in equity or by statute or otherwise. (e) No course of dealing between the Company and any of its Subsidiaries, on the one hand, and the holder of this Security, on the other hand, and no delay by any such holder in exercising any rights hereunder or under the Note Purchase Agreement or the Registration Rights Agreement shall operate as a waiver of any rights of such holder. 20 (f) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, all amounts to be applied to the prepayment or payment of this Security shall be applied, after the payment of all related costs and expenses incurred by the holder of this Security (including, without limitation, compensation to any and all trustees, liquidators, receivers or similar officials and reasonable fees, expenses and disbursements of counsel) in such order of priority as is determined by the holder of this Security. (g) The term "Make-Whole Amount" means, with respect to this Security, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of this Security over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "Called Principal" means, with respect to this Security, the principal of this Security that has become or is declared to be immediately due and payable pursuant to Section 4(b). "Discounted Value" means, with respect to the Called Principal of this Security, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on this Security is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of this Security, 150 basis points over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "PX-I" of the Bloomberg Financial Markets Services Screen for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H. 15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. 21 "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (,a.) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payment" means, with respect to the Called Principal of this Security, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of this Security, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date. "Settlement Date" means, with respect to the Called Principal of this Security, the date on which such Called Principal or has become or is declared to be immediately due and payable pursuant to Section 4(b). 5. Consolidation, Merger, Etc. (a) The Company shall not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or sale, or which leases, all or substantially all the properties and assets of the Company shall be a corporation, limited liability company, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, executed and delivered to the holder of this Security in form satisfactory to the holder, the due and punctual payment of the principal of (and premium, if any) and interest on this Security and the performance or observance of every covenant of this Security on the part of the Company to be performed or observed, including the conversion rights provided herein (which shall thereafter relate to common stock of such successor, on a basis reasonably designed to preserve the economic value to the holder of this Security of such conversion rights); (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary of the Company as a result of such transaction as having been incurred by the Company or such Subsidiary of the Company at the time of such transaction, no Event of Default, and no 22 event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (3) the Company has delivered to the holder of this Security an officers' certificate stating that such consolidation, merger, conveyance, transfer, sale or lease and, if a supplemental agreement is required in connection with such transaction, such supplemental agreement, comply with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with; and (4) counsel for the Company has delivered to the holder of this Security an opinion of such counsel with respect to such consolidation, merger, conveyance, transfer, sale or lease, and if a supplemental agreement is required in connection with such transaction, such supplemental agreement, which opinion shall be, in form and substance, reasonably acceptable to such holder and its counsel. (b) upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer, sale or lease of all or substantially all of the properties and assets of the Company in accordance with Section 5(a), the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer, sale or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Security with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Security. 6. Payment in Stock. (a) The Company may elect to pay some or all of the Repurchase Price by delivery of shares of Common Stock or shares of common stock in any Person succeeding the Company, if and only if, each of the following conditions shall be satisfied (without limiting any other conditions contained herein): (1) Any such payment shall be made in five equal installments, on each of the five consecutive Trading Days ending on and including the third Trading Day immediately preceding the date when any cash payment would otherwise be due, and the shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of each such installment shall have a fair market value as of the date of such installment of not less than 20% of the amount of such payment due hereunder which is payable in shares of stock. For purposes of this Section 6, the fair market value of shares of Common Stock shall be equal to 95% of the Closing Price for the immediately preceding Trading Day; (2) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder require registration under any Federal securities law before such shares may be freely transferrable without being subject to any transfer restrictions under the Securities Act of 1933 upon 23 issuance, such registration shall have been completed and shall have become effective prior to the date of the first such installment; (3) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder 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 issuance or transferred freely, such registration shall have been completed or have become effective and such approval shall have been obtained, in each case, prior to the date of the first such installment; (4) The shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall have been approved for quotation in the Nasdaq National Market immediately prior to the date of the first such installment or, if at the time its shares of Common Stock or shares of common stock of any Person succeeding the Company are listed or admitted for trading on any national securities exchange, the shares of Common Stock or common stock in any Person succeeding the Company and deliverable shall have been so listed or admitted for trading. (5) All shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall, upon issue, be duly and validly issued and fully paid and non-assessable and free of any preemptive rights; (6) In respect of each such payment date, the Company shall have given the holder of this Security not less than 10 nor more than 15 Trading Days' notice of its election to effect payment in respect of such payment date by delivery of shares of Common Stock; provided that any such notice shall accompany the Company's notice of a Change of Control relating thereto; and (7) The Company shall deliver, or cause to be delivered a certificate from the Person succeeding the Company which states, that after giving effect to any Change of Control that the holding by the Purchasers or any assignees thereof of this Security, or the holding of any Common Stock or common stock of any Person succeeding the Company after conversion of this Security would not constitute a prohibited transaction which would violate the prohibition of section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975 (c)(1)(A)-(D) of the Code. If all of the conditions set forth in this Section 6(a) are not satisfied in accordance with the terms hereof, any such amount due hereunder shall be paid by the Company only in cash. (b) Any issuance of shares of Common Stock or shares of common stock of any Person succeeding the Company in respect of any installment due hereunder pursuant to this Section 6 shall be deemed to have been effected immediately prior to the close of 24 business on the date of delivery of such installment and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such delivery shall be deemed to have become on such date the holder or holders of record of the shares represented thereby; provided, however, that in case any installment shall be due on a date when the stock transfer books of the Company shall be closed, the person or persons in whose name or names the certificate or certificates for such shares are to be issued shall be deemed to have become 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 pursuant to this Section 6 declared prior to the relevant delivery date; and (c) Any issuance and delivery of certificates for shares of common stock or shares of common stock of any Person succeeding the Company pursuant to this Section 6 shall be made without charge to the holder of this Security for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the securities represented thereby. 7. Other. (a) No provision of this Security shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security in cash at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Security as herein provided. (b) The Company will give prompt written notice to the holder of Security of any change in the location of the Designated Office. (c) The transfer of this Security is registrable on the Security Register of the Company upon surrender of this Security for registration of transfer at the Designated Office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Such Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof, No service charge shall be made for any such registration of transfer, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this Security for registration of transfer, the Company and any agent of the Company may treat the Person in whose name this Security is registered as the owner thereof for all purposes, whether or not this Security be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. (d) The Company shall keep at the Designated Office a register for the registration and registration of transfers of Convertible Notes. The name and address of each holder of one or more Convertible Notes, each transfer thereof and the name and address of each transferee of one or more Convertible Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Convertible Note 25 shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Convertible Note promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Convertible Notes. (e) Upon surrender of any Convertible Note at the Designated Office for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Convertible Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Convertible Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Convertible Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Convertible Note. Each such new Convertible Note shall be payable to such Person as such holder may request and shall be substantially in the form of this Security. Each such new Convertible Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Convertible Note or dated the date of the surrendered Convertible Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of this Security. Convertible Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Convertible Notes, one Convertible Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Convertible Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 3 of the Note Purchase Agreement. (f) Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Security (which evidence shall be notice from such holder of such ownership and such loss, theft, destruction or mutilation), and (i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provide) that if the holder of this Security is, or is a nominee for, an original holder or another institutional investor holder of this Security, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (ii) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Convertible Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Convertible Note or dated the date of such lost, stolen, destroyed or mutilated Convertible Note if no interest shall have been paid thereon. 26 (G) THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. (h) So long as you or your nominee shall be holder of this Security and notwithstanding anything in this Security to the contrary, the Company will pay all sums becoming due hereunder for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule I of the Note Purchase Agreement, or by such other method provided in the Preamble or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of this Security, or the making of any notation hereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment in full of this Security, you shall surrender this Security for cancellation, reasonably promptly after any such request to the Company at its principal executive office or at the place of payment most recently designated by the Company. Prior to any sale or other disposition of this Security you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender this Security to the Company in exchange for a new Convertible Note pursuant to the terms hereof. The Company will afford the benefits of this Section to any institutional investor that is the direct or indirect transferee of this Security. [END OF PAGE - SIGNATURE PAGE FOLLOWS] 27 Signature Page of Note Purchase Agreement for the purpose of implementing or effectuating the provisions contained herein, in the Convertible Notes or in the Registration Rights Agreement. Very truly yours, CELGENE CORPORATION By:/s/ Sol J. Barer ------------------------ Name: Sol J. Barer Title: Pres/COO Signature Page of Note Purchase Agreement with Celgene Corporation Accepted as of the date hereof: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- SIGNATURE 1A (CAYMAN), LTD. By: John Hancock Mutual Life Insurance Company, Portfolio Advisor . By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- Signature 3 Limited By: John Hancock Mutual Life Insurance Company, as Portfolio Advisor By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- Hancock Mezzanine Partners L.P. By: Hancock Mezzanine Investments LLC, its General Partner By: John Hancock Mutual Life Insurance Company. as Investment Manager By: /s/Stephen J. Blewitt ----------------------------------- Name: Stephen J. Blewitt --------------------------------- Title: Senior Investment Officer -------------------------------- ELECTION OF HOLDER TO REQUIRE REPURCHASE 1. Pursuant to Section 3(a) of this Security, the undersigned hereby elects to have all or a portion of this Security repurchased by the Company. 2. The undersigned hereby directs the Company to pay [choose one] (a) it or (b) Name: _______________________; address: _______________________; Social Security or Other Taxpayer Identification Number, if any: __________________, an amount in cash or equal to 100% of the principal amount to be repurchased (as set forth below), plus interest accrued to the Repurchase Date, as provided herein. Dated: ------------------------------ ------------------------------ Signature Number of shares of Common Stock owned by the holder and its affiliates: -------------------- Principal amount to be repurchased (an integral multiple of $1,000): -------------------- Remaining principal amount following such repurchase (not less than $1,000): -------------------- NOTICE: The signature to the foregoing Election must correspond to the name as written upon the face of this Security in every particular, without alteration or any change whatsoever. CONVERSION NOTICE The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security, or any portion of the principal amount hereof (which is an integral multiple of $1,000) below designated, into shares of Common Stock (subject to the limitation set forth in the second paragraph of Section 2(a) of the Security) in accordance with the terms of this Security, and directs that such shares, together with a check in payment for any fractional share and any Security representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If shares of Common Stock or Securities are to be registered in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated: ------------------------------ ------------------------------ Signature Number of shares of Common Stock owned by the holder and its affiliates: ------------------------------ If shares or Securities are to be If only a portion of the Securities is registered in the name of a person to be converted, please indicate: other than the holder, please print such person's name and address: 1. Principal amount to be converted: $ - ------------------------------ ------ Name 2. Principal amount and denomination of Security representing unconverted principal amount to be issued: - ------------------------------ Address Amount: $__________ Denominations: $__________ (any integral multiple of $1,000) - ------------------------------ Social Security or other Taxpayer Identification Number, if any ANNEX II REPRESENTATIONS AND WARRANTIES OF THE COMPANY (a) Each of the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and each report filed by the Company pursuant to the Exchange Act after the filing of such Annual Report on Form 10-K (collectively, the "Exchange Act Reports") conforms in all material respects with the requirements of the Exchange Act and the rules and regulations of the Securities and Exchange Commission thereunder; and no such document, when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) All the outstanding shares of capital stock of the Company have been authorized duly and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; the Shares initially issuable upon conversion of the Convertible Notes have been duly and validly authorized and reserved for issuance out of the Company's authorized and unissued shares of Common Stock and, when issued and delivered in accordance with the provisions of the Convertible Notes will be duly and validly issued, fully paid and non-assessable and will conform to the description of the Common Stock contained in the Company's Registration Statement on Form 8-A, File No. 0-16132. (c) The Convertible Notes has been duly authorized and, when issued and delivered pursuant to this Agreement, will have been duly executed, issued and delivered and will constitute a valid and legally binding obligation of the Company; and the Registration Rights Agreement has been duly authorized and, when executed and delivered by the parties thereto, will constitute a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) The execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Convertible Notes, compliance by the Company with all provisions hereof and thereof and the consummation of the transactions contemplated hereby or thereby and the issuance and delivery of the Convertible Notes will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its Subsidiaries, or any agreement, indenture or other instrument to which it or any of its Subsidiaries is a party or by which it or any of its Subsidiaries or their respective properties are bound, or violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company, any of its subsidiaries or their respective property; and, except (i) as required pursuant to the Registration Rights Agreement, or (ii) for the disclosure required to be included in the Company's next Quarterly Report on Form 10-Q, when filed, pursuant to Item 2(c) of Form 10-Q, no consent, approval, authorization or order of or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Registration 1 Rights Agreement and the Convertible Notes by the Company and the consummation of the transactions contemplated hereby and thereby. (e) Except as otherwise set forth in the Exchange Act Reports, there are no material legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any of their respective property is the subject which, if determined adversely to the Company or its subsidiaries, might have a Material Adverse Effect, and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated. (f) The Company is not, and the Company covenants that at any time when the Convertible Notes are outstanding it will not be, an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940, as amended. (g) When the Convertible Notes are issued and delivered pursuant to this Agreement, the Convertible Notes will not be of the same class (within the meaning of Rule 144A under the Securities Act of 1933) as securities which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. (h) The Company is, and the Company covenants that while the Convertible Notes are outstanding it will remain, subject to Section 13 or 15(d) of the Exchange Act. (i) Neither the Company nor any person acting on its behalf has offered or sold the Convertible Notes by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Act. (j) The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreements and the Convertible Notes and to perform the provisions hereof and thereof. (k) The Company, through its agent, Warburg, Dillon, Read LLC, has delivered to each Purchaser a copy of a Private Placement Memorandum, dated December 1998 (the "MEMORANDUM"), relating to the transactions contemplated hereby. The "Executive Summary", "Investment Highlights" and "Management and Directors" sections of the Memorandum, when read together with Exhibits 1, 2 and 3 of the Memorandum, fairly describe, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. This Agreement, the aforesaid sections of the Memorandum and the documents, certificates or other writings delivered to you by or on behalf of the Company pursuant hereto 2 taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or in one of the documents, certificates or other writings identified therein, or in the financial statements comprising part of Exhibits 1, 2 or 3 of the Memorandum, since September 30, 1998, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum (including the Exhibits thereto) or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. The projections referred to in the Memorandum in Section 4 were prepared in good faith, are based upon assumptions that the Company believes are reasonable to make and, in good faith judgment of the Company, take into account all Material information regarding the matters set forth therein. Such projections represent a reasonable estimate by the Company of the future financial performance of the Company. The Company does not presently anticipate any Material deviation from such projections and the Company reasonably believes that the results of operations reflected therein are obtainable. The statements of action the Company plans to take, the prediction of potential sales and returns on investments and similar statements regarding events to occur in the future contained in Section 2 of the Memorandum were made in good faith, are based upon assumptions that the Company believes are reasonable to make and take into account all Material information regarding the matters set forth therein. Such statements represent a reasonable estimate by the Company of the future performance of the Company and are not statements of currently existing facts. The Company does not presently anticipate any Material deviation from such plans or predictions and the Company reasonably believes that the results suggested by such predictions are obtainable. (1) No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Convertible Notes. (m) (i) the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others, except for those conflicts that individually, or in the aggregate, would not have a Material Adverse Effect; (ii) to the best knowledge of the Company, no product of the Company infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person except for those infringements which would not individually, or in the aggregate, have a Material Adverse Effect; and 3 (iii) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other fight owned or used by the Company or any of its Subsidiaries. (n) (i) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (ii) The present value of the aggregate benefit liabilities under each of the Plans subject to Title IV of ERISA (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "benefit liabilities" has the meaning specified in section 4001 of ERISA and the terms "current value" and "present value" have the meaning specified in section 3 of ERISA. (iii) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (iv) The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material. (v) The execution and delivery of this Agreement and the issuance and sale of the Convertible Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section Annex II n(v) is made in reliance upon and subject 4 to the accuracy of the representation made by each Purchaser in Section 3 of this Agreement as to the sources of the funds used to pay the purchase price of the Convertible Notes to be purchased by the Purchasers. (o) Neither the Company nor anyone acting on its behalf has offered the Convertible Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you, the Other Purchasers and no other Institutional Investors, each of which has been offered the Convertible Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Convertible Notes to the registration requirements of Section 5 of the Securities Act. (p) No part of the proceeds from the sale of the Convertible Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation U. (q) Neither the sale of the Convertible Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. (r) Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and neither the Company nor any Subsidiary has any knowledge of any proceeding that has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing, (i) neither the Company nor any Subsidiary has knowledge of any facts which is reasonably likely to give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Company or any Subsidiary or to their respective assets or the use thereof, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (ii) neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by the Company 5 or any Subsidiary and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws, in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (iii) all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where the failure to comply could not reasonably be expected to result in a Material Adverse Effect. (s) The Company has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Company or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. Based on the foregoing, the Company believes that its computer applications that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure to do so could not reasonably be expected to have Material Adverse Effect. The Company is not aware that any of its suppliers, vendors and customers' computer applications that are Material to the Company's or any of its Subsidiaries' business and operations are not expected on a timely basis to be Year 2000 compliant. The Company has requested a certificate from suppliers, vendors and customers certifying that such Person is Year 2000 compliant. As of the date hereof, the Company has not received all of such certificates. All representations and warranties contained herein shall survive the execution and delivery of this Note Purchase Agreement, the Convertible Notes and the Registration Rights Agreement, the purchase or transfer by a holder of a Convertible Note or any portion thereof or interest therein and the payment of any Convertible Note and may be relied upon by any subsequent holder of a Convertible Note regardless of any investigation made at any time by or on behalf of you or any other holder of a Convertible Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Note Purchase Agreement shall be deemed representations and warranties of the Company under this Note Purchase Agreement. Subject to the preceding sentence, this Note Purchase Agreement, the Convertible Notes, and the Registration Rights Agreement, embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 6 ANNEX III OPINION OF COMPANY COUNSEL (a) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority required to carry on its business as described in the Exchange Act Reports and to own, lease and operate its properties. (b) All the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights. (c) The Shares initially issuable upon conversion of the Convertible Notes have been duly authorized and reserved for issuance and when issued and delivered upon conversion in accordance with the provisions of the Convertible Notes, will have been validly issued and will be fully paid and non-assessable, and the issuance of such Shares is not subject to any preemptive or similar rights. (d) This Note Purchase Agreement has been duly authorized, executed and delivered by the Company and is enforceable in accordance with its terms. (e) The Convertible Notes have been duly authorized, executed, issued and delivered, and constitutes the valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (f) The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; provided that such counsel need express no opinion with respect to Section 6 of such Agreement. (g) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Company's Registration Statement on Form 8-A, File No. 0-16132. (h) Except (i) as required pursuant to the Registration Rights Agreement, or (ii) for the disclosure required to be included in the Company's next Quarterly Report on Form 10-Q, when filed, pursuant to Item 2(c) of Form 10-Q, no consent, approval, authorization or order of or filing or registration with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Convertible Notes by the Company and the consummation of the transactions contemplated by this Agreement and thereby. (i) The execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Convertible Notes by the Company, compliance by the Company with all the 1 provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any agreement, indenture or other instrument to which the Company is a party or by which the Company or its properties are bound, or violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company or its properties in any case which is reasonably likely to have a Material Adverse Effect. (j) The Company is not and is not controlled by a company that is an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940, as amended. (k) Assuming that the proceeds are used in accordance with the Officers' Certificate, no part of the proceeds of the sale of the Convertible Notes will be used directly or indirectly to purchase, acquire or carry any "margin security" or "margin stock" as such terms are used in Regulation U, X and T of the Board of Governors of the Federal Reserve System 12 C.F.R. Parts 221,224 and 220 respectively. ['33 Act and '39 Act opinion] [litigation] 2 SCHEDULE I Cover Page
Payee Amount No. ----- ------ --- John Hancock Mutual Life Insurance $2,100,000 R-1 Company John Hancock Mutual Life Insurance $2,000,000 R-2 Company John Hancock Mutual Life Insurance $200,000 R-3 Company John Hancock Variable Life Insurance $200,000 R-4 Company John Hancock Mutual Life Insurance $500,000 R-5 Company Signature lA (Cayman), Ltd. $500,000 R-6 (nominee: Barnett & Co.) Signature 3 Limited $2,000,000 R-7 (nominee: Hare & Co.) Hancock Mezzanine Partners L.P. $7,500,000 R-8
SCHEDULE I JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY $2,100,000 GENERAL ACCOUNT $2,000,000 GUARANTEED BENEFIT SUB ACCOUNT $200,000 SEPARATE ACCOUNT 12 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: BankBoston ABA No. 011000390 Boston, Massachusetts 02110 Account of: John Hancock Mutual Life Insurance Company Private Placement Collection Account Account Number: 541-55417 On Order of: Celgene Corporation [PPN No.]o Celgene Corporation 9.00% Senior Convertible Notes due January 20, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Convertible Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager 1 of 12 Investment Accounting Division, B-3 Fax: 617-572-0628 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. All securities shall be registered in the name of: John Hancock Mutual Life Insurance Company 7. Tax I.D. No. 04-1414660 2 of 12 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY $200,000 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: BankBoston ABA No. 011000390 Boston, Massachusetts 02110 Account of: John Hancock Mutual Life Insurance Company Private Placement Collection Account Account Number: 541-55417 On Order of: Celgene Corporation [PPN No.] Celgene Corporation 9.00% Senior Convertible Notes due January 20, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Convertible Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent shall be delivered or fixed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3 of 12 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. All securities shall be registered in the name of: John Hancock Variable Life Insurance Company 7. Tax I.D. No. 04-2664016 4 of 12 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY $500,000 SEPARATE ACCOUNT 18 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: Investors Bank & Trust Company Boston, Massachusetts 02110 ABA No. 011001438 Account Number: 79650-9107 for further credit to Separate Account 18, Account 99266 On Order of: Celgene Corporation [PPN No.] Celgene Corporation 9.00% Senior Convertible Notes due January 20, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Convertible Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 5 of 12 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. All securities shall be registered in the name of: John Hancock Mutual Life Insurance Company 7. Tax I.D. No. 04-1414660 6 of 12 SIGNATURE lA (CAYMAN), LTD. $500,000 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: Bankers Trust Company ABA #021-001-033 Acct. #99-911-145 For further credit to: Bankers Trust Company, as Indenture Trustee for Signature lA (Cayman), Ltd., Account #98016 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Convertible Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company Company, Portfolio Advisor 200 Clarendon Street Boston, MA 02117 Attention: George H. Braun Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 with a copy to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company Company, Portfolio Advisor 200 Clarendon Street Boston, MA 02117 7 of 12 Attention: George H. Braun Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 with a copy to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company Company, Portfolio Advisor 200 Clarendon Street Boston, MA 02117 Attention: George H. Braun Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. Execution documents shall be executed as follows: SIGNATURE lA (CAYMAN), LTD. By: John Hancock Mutual Life Insurance Company, Portfolio Advisor By: ---------------------------------------- Title: ------------------------------------- [authorized John Hancock Officer] 7. All securities shall be registered in the name of: BARNETT & CO. 8 of 12 SIGNATURE 3 LIMITED $2,000,000 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: Investors Bank & Trust Company Boston, Massachusetts 02110 ABA No. 011001438 Account Number: 796509107 for further credit to Signature 3 Limited, Account 99292 On Order of: Celgene Corporation [PPN No.] Celgene Corporation 9.00% Senior Convertible Notes due January 20, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Convertible Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street 9 of 12 Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. Execution documents shall be executed as follows: Signature 3 Limited By: John Hancock Mutual Life Insurance Company, as Portfolio Advisor By: ---------------------------------------- [authorized John Hancock Officer] 7. All securities shall be registered in the name of: Hare & Co. 8. Tax I.D. No.: Not Applicable. 10 of 12 HANCOCK MEZZANINE PARTNERS L.P. $7,500,000 1. All payments on account of the Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: Investors Bank & Trust Company Boston, Massachusetts 02110 ABA No. 011001438 Account Number: 58215013 for further credit to Hancock Mezzanine Partners L.P., Account 99274 On Order of: Celgene Corporation [PNN No.] Celgene Corporation 9.00% Senior Convertible Notes due January 20, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of bank (or Trustee) from which wire transfer was sent shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street 11 of 12 Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. Execution documents shall be executed as follows: Hancock Mezzanine Partners L.P. By: Hancock Mezzanine Investments LLC, its General Partner By: John Hancock Mutual Life Insurance Company. as Investment Manager By: ---------------------------------------- [authorized John Hancock Officer] 7. All securities shall be registered in the name of: Hancock Mezzanine Partners L.P. 8. Tax I.D. No. 04-3428544 12 of 12 EX-10.23 9 EXHIBIT 10.23 THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. CELGENE CORPORATION 9.00% SENIOR CONVERTIBLE NOTE DUE JANUARY 20, 2004 PPN No.: $2,100,000 No. R-1 CELGENE CORPORATION, a corporation duly organized and existing under the laws of Delaware (the "Company") for value received, hereby promises to pay to JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, or registered assigns, the principal sum of TWO MILLION ONE HUNDRED THOUSAND DOLLARS ($2,100,000) on January 20, 2004 and to pay interest thereon, from January 20, 1999, or from the most recent interest payment date to which interest has been paid or duly provided for, semiannually on January 20 and July 20 in each year, commencing July 20, 1999, at the rate of 9.00% per annum, until the principal hereof is due, and at the rate of 11.00% per annum on any overdue principal and premium, if any, and, to the extent permitted by law, on any overdue interest. The interest so payable, and punctually paid or duly provided for, on any interest payment date will be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the regular record date for such interest, which shall be the January 1 or July 1 (whether or not a Business Day), as the case may be, next preceding such interest payment date. Payment of the principal of (and premium, if any, on) this Security shall be made upon the surrender of this Security to the Company, at its office at 7 Powder Horn Drive, Warren, NJ 07059 (or such other office within the United States as shall be notified by the Company to the holder hereof) (the "Designated Office"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, by transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America. Payment of interest on this Security shall be made by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America, provided that if the holder shall not have furnished wire instructions in writing to the Company no later than the record date relating to an interest payment date, such payment may be made by U.S. dollar check mailed to the address of the Person entitled thereto as such address shall appear in the Company security register. This Security will rank pari passu with all existing and future senior debt of the Company. This Security is one of the Company's 9.00% Senior Convertible Notes due January 20, 2004, limited to $15,000,000.00 aggregate principal amount, issued pursuant to that certain Note Purchase Agreement dated January 20, 1999 (such agreements, as amended, modified and supplemented from time to time, the "Note Purchase Agreement") between the Company and the Purchasers named therein, and the holder hereof is entitled to the benefits of the Note Purchase Agreement, and may enforce the agreements contained herein and therein and exercise the remedies provided for hereby and thereby or otherwise available in respect hereof and thereof, all in accordance with the terms hereof and thereof. 1. Optional Redemption With Premium. This Security is subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time on or after January 20, 2001, as a whole or in part, (in any amount that is an integral multiple of $1000) at the election of the Company, at a redemption price of 103% the principal amount thereof, together with accrued interest to the redemption date, but interest installments whose stated maturity is on or prior to such redemption date will be payable to the holder of this Security, or one or more predecessor Securities, of record at the close of business on the relevant record dates referred to on the face hereof; provided, however, that the Company may not redeem this Security on or prior to January 20, 2002 unless the Closing Price of the Common Stock exceeds 225 % of the Conversion Price for each Trading Day in a period of 20 Consecutive Trading Days commencing not earlier than January 20, 2001. The term "Conversion Price" on any day shall equal $1,000 divided by the Conversion Rate in effect on each such day. 2. Conversion. (a) The holder of this Security is entitled at any time on or after January 20, 2000 and before the close of business on January 20, 2004 (or, in case this Security or a portion hereof is called for redemption or the holder hereof has exercised its right to require the Company to repurchase this Security or a portion hereof, then in respect of this Security or such portion hereof, as the case may be, until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the redemption date or the Repurchase Date, as the case may be) to convert this Security (or any portion of the principal amount hereof that is an integral multiple of $1,000), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at the rate of 55.56 shares of Common Stock for each $1,000 principal amount of Security (or at the current adjusted rate if an adjustment has been made as provided below) (the "Conversion Rate") by surrender of this Security, duly endorsed or assigned to the Company or in blank to the Company at the Designated Office, accompanied by written notice to the Company that the holder hereof elects to convert this Security (or if less than the entire principal amount hereof is to be converted, specifying the portion hereof to be converted). Upon surrender of this Security for conversion, the holder will be entitled to receive the interest accruing on the principal amount of this Security then being converted from the interest payment date next preceding the date of such conversion to such date of conversion. No payment or adjustment is to be made on conversion for dividends on the 2 Common Stock issued on conversion hereof. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest, the Company shall pay a cash adjustment, computed on the basis of the Closing Price of the Common Stock on the date of conversion, or, at its option, the Company shall round up to the next higher whole share. This Security shall be deemed to have been converted immediately prior to the close of business on the day of surrender hereof for conversion, in accordance with the foregoing provisions, and at such time the rights of the holder hereof, as a holder hereof, shall cease, and the Person or Persons entitled to receive the Common Stock issuable on conversion shall be treated by all Persons as the holder or holders of such Common Stock at such time. Upon any partial conversion of this Security, the Company, at its expense, will forthwith issue and deliver to, or upon the order of the holder hereof, a new Convertible Note or Convertible Notes in principal amount equal to the unconverted principal amount of such surrendered Convertible Note, such new Convertible Note or Convertible Notes to be dated and to bear interest from the date to which interest has been paid on such surrendered Convertible Note. As promptly as possible after the conversion of this Security, in whole or in part, and in any event within ten (10) days thereafter, the Company, at its expense, will issue and deliver a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion. (b) The Conversion Rate shall be subject to adjustments from time to time as follows: (1) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company payable in shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the Determination Date for such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following such Determination Date. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall issue rights, options, warrants or convertible securities entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on the Determination Date for such distribution, the Conversion Rate in effect at the opening of business on the day following such Determination Date, shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock which the aggregate amount received by the Company upon the issuance of such rights, options, warrants or convertible securities plus the aggregate amount receivable by the Company upon the exercise or conversion of such rights, options, warrants or convertible securities would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock so offered for subscription or purchase, such increase to become effective immediately after the opening of business on the day following such Determination Date provided, that no such adjustment need to be made in the case of the granting by the Company to employees or directors of the Company or consultants to the Company of Common Stock and/or options to purchase Common Stock and the issuance of Common Stock upon the exercise of such options. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights, options, warrants or convertible securities in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall each be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall, by dividend or otherwise, distribute evidences of its indebtedness, shares of any class of capital stock, or other property (including securities, but excluding (i) any rights, options, warrants or convertible security referred to in paragraph (2) of this Section 2(b) (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (1) of this Section 2(b) and (iv) any merger or consolidation to which Section 2(h) applies), 4 the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following such Determination Date provided, that no such adjustment need be made in the case of an underwritten public offering of Common Stock in which the shares of Common Stock are sold to the public at a price per share equal to or in excess of 95% of the market price per share of the Common Stock as of the date of the pricing of such underwritten public offering. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section 2(b). (5) In case the Company shall, by dividend or otherwise, make a Cash Distribution, then, and in each such case, immediately after the close of business on the Determination Date for such Cash Distribution, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on such Determination Date by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of (1) the amount of such Cash Distribution divided by (2) the number of shares of Common Stock outstanding on such Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date. (6) In case the Company or any Subsidiary shall make an Excess Purchase Payment, then, and in each such case, immediately prior to the opening of business on the day after the tender offer in respect of which such Excess Purchase Payment is to be made expires, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such tender offer by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of (A) the Excess Purchase Payment divided by (B) the number of shares of Common Stock outstanding (including any tendered shares) as of the Determination Date less the number of all shares validly tendered and not withdrawn as of the Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock as of such Determination Date. (7) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 2(h) applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be the Determination Date), and (b) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (3) of this Section 2(b)). Rights, options, warrants or convertible securities issued by the Company entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights, options, warrants or convertible securities (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 2(b) not be deemed issued until the occurrence of the earliest Trigger Event. (8) Except as otherwise provided in the last sentence of this subsection (8) of Section 2(b) for the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 2(b) the current market price per share of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Prices for the five (5) consecutive Trading Days selected by the Company commencing not more than ten (10) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "ex date", when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. The current market price with respect to any option issued to any employee or director of the Company or consultant to the Company shall be the fair market value on the date of grant determined by reference to the market price on the day of the grant of such option or to the market price at the close of business on the Trading Day immediately preceding such grant. 6 (9) No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (9)) would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (9) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (10) The Company may make such increases in the Conversion Rate, for the remaining term of the Securities or any shorter term, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section 2(b) as it considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights, options, warrants or convertible securities to purchase or subscribe for stock or from any event treated as such for income tax purposes. (c) Whenever the Conversion Rate is adjusted as provided in Section 2(b), the Company shall compute the adjusted Conversion Rate in accordance with Section 2(b) and shall prepare a certificate (the "Conversion Rate Certificate") signed by the Senior Financial Officer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and shall promptly deliver such certificate to the holder of this Security. If the holders of the Convertible Notes and the Company cannot agree in writing as to the adjusted Conversion Rate in accordance with Section 2(b), the holders of the Convertible Notes and the Company shall determine the adjusted Conversion Rate in accordance with the following procedure. The holders of the Convertible Notes and the Company shall each appoint one registered securities broker, licensed with the Securities and Exchange Commission to sell securities to the public, which broker shall be a senior vice president, managing director or equivalent of a major securities brokerage company with offices in New York, New York. Each of such brokers shall have no less than ten (10) years experience in such field, shall be unaffiliated with, and their employer securities brokerage company shall be unaffiliated with, the holders of the Convertible Notes and the Company and shall not have previously participated in any underwriting of the Company's Common Stock in any public offering or provided any Material investment banking or corporate advisory services to the Company. The holders of the Convertible Notes and the Company shall make their appointments promptly and, in any event, within thirty (30) days from the date of the Conversion Rate Certificate. The two brokers shall meet and shall be instructed to render a determination of the adjusted Conversion Rate to the holders of the Convertible Notes and the Company within sixty (60) days of the date of the Conversion Rate Certificate. If the two brokers cannot agree, then each broker shall render their independent determination and the two brokers shall simultaneously therewith provide the name of a third broker acceptable to the two brokers meeting the criteria set forth above. The third broker shall be instructed to render a determination of the adjusted Conversion Rate within thirty (30) days of his or her appointment. The two closest determinations of the adjusted Conversion Rate shall be averaged and shall constitute the adjusted Conversion Rate. If the two brokers cannot agree upon a third broker, the selection of a third broker shall be submitted to binding arbitration in New York, New York under the rules of the American Arbitration Association. In the event that the difference between the Company's calculation of the adjusted Conversion Rate and the calculation of the adjusted Conversion Rate determined by the foregoing process is five percent (5%) or greater then the costs and expenses of the brokers and any arbitration shall be paid by and be the obligation of the Company and in the event that such difference is less than five percent (5%) the holders of the Convertible Notes (as a group) shall each pay its pro rata share of 50% of such costs and expenses and the Company shall pay 50% of such costs and expenses. (d) In case: (1) the Company shall declare a dividend or other distribution on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 2(b); or (2) the Company shall authorize the granting to the holders of its Common Stock of rights, options, warrants or convertible securities to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) of any reclassification of the Common Stock of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or (4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (5) the Company or any Subsidiary shall commence a tender offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender offer); then the Company shall cause to be delivered to the holder of this Security, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options, warrants or convertible securities or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options, warrants or convertible securities are to be determined, (y) the date on which the right to make tenders under such tender offer expires or (z) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (5) of this Section 2(d). (e) The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Security, the full number of shares of Common Stock then issuable upon the conversion of this Security. (f) Except as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of this Security. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of this Security, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. (g) The Company agrees that all shares of Common Stock which may be delivered upon conversion of the Security, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable (and shall be issued out of the Company's authorized but unissued Common Stock) and, except as provided in the second sentence of Section 2(f), the Company will pay all taxes, liens and charges with respect to the issue thereof. (h) In case of any consolidation of the Company with any other Person, any merger of the Company into another Person or of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company) or any conveyance, sale, transfer or lease of all or substantially all of the properties and assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such properties and assets, as the case may be, shall execute and deliver to the holder of this Security a supplemental agreement providing that such holder has the right, during the period this Security shall be convertible as specified in Section 2(a), to convert this Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (including any Common Stock 9 retainable) by a holder of the number of shares of Common Stock of the Company into which this Security might have been converted immediately prior to such consolidation, merger, conveyance, sale, transfer or lease, assuming such holder of Common Stock of the Company (i) is not a Person with which the Company consolidated, into which the Company merged or which merged into the Company or to which such conveyance, sale, transfer or lease was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise its rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer, or lease is not the same for each share of Common Stock of the Company held immediately prior to such consolidation, merger, conveyance, sale, transfer or lease by others than a Constituent Person or an Affiliate of a Constituent Person and in respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 2(h) the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease by the holders of each Non- electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares). Such supplemental agreement shall provide for adjustments which, for events subsequent to the effective date of such supplemental agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2. The above provisions of this Section 2(h) shall similarly apply to successive consolidations, mergers, conveyances, sales, transfers or leases. In this paragraph, "securities of the kind receivable" upon such consolidation, merger, conveyance, transfer, sale or lease by a holder of Common Stock means securities that, among other things, are registered and freely transferable under the Securities Act, and listed and approved for quotation in all securities markets, in each case to the same extent as such securities so receivable by a holder of Common Stock. (i) The Company (i) will effect all registrations with, and obtain all approvals by, all governmental authorities that may be necessary under any United States Federal or state law (including the Securities Act, the Exchange Act and state securities and Blue Sky laws) for the shares of Common Stock issuable upon conversion of this Security to be lawfully issued and delivered as provided herein, and thereafter publicly traded (if permissible under the Securities Act) and qualified or listed as contemplated by clause (ii) (it being understood that the Company shall not be required to register the Common Stock issuable on conversion hereof under the Securities Act, except pursuant to the Registration Rights Agreement between the Company and the initial holder of this Security); and (ii) will list the shares of Common Stock required to be issued and delivered upon conversion of Securities, prior to such issuance or delivery, on each national securities exchange on which outstanding Common Stock is listed or quoted at the time of such delivery, or if the Common Stock is not then listed on any securities exchange, to qualify the Common Stock for quotation on the Nasdaq National Market or such other inter-dealer quotation system, if any, on which the Common Stock is then quoted. 10 (i) For purposes hereof: (references to Sections shall mean Sections of this Security unless otherwise specified) "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day other than a Saturday, a Sunday or other day which shall be in Boston, Massachusetts or New York, New York or a legal holiday or a day on which commercial banks in Boston, Massachusetts or New York, New York are required or authorized to be closed. "Cash Distribution" means the distribution by the Company to holders of its Common Stock of cash, other than any cash that is distributed upon a merger or consolidation to which Section 2(h) applies or as part of a distribution referred to in paragraph (4) of Section 2(b). "Change of Control" is defined in Section 3(f)(2). "Closing" is defined in Section 1 of the Note Purchase Agreement. "Closing Price" means, with respect to the Common Stock of the Company, for any day, the reported last sale price per share on the Nasdaq National Market, or, if the Common Stock is not admitted to trading on the Nasdaq National Market, on the principal national securities exchange or inter-dealer quotation system on which the Common Stock is listed or admitted to trading, or if not admitted to trading on the Nasdaq National Market, or listed or admitted to trading on any national securities exchange or inter-dealer quotation system, the average of the closing bid and asked prices per share in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Common Stock" means the Common Stock, par value $.01 per share, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 2(h), shares issuable on conversion or repurchase of this Security shall include only shares of Common Stock or shares of any class or classes of common stock resulting from any reclassification or reclassifications thereof; provided, however, that if at 11 any time there shall be more than one such resulting class, the shares so issuable on conversion of this Security shall include shares of all such classes, and the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Convertible Note(s)"shall mean one or more of the Company's 9.00% Senior Convertible Notes due January 20, 2004. "Conversion Price" is defined in Section 1. "Conversion Rate" is defined in Section 2(a). "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Designated Office" is defined in the Preamble. "Determination Date" means, in the case of a dividend or other distribution, including the issuance of rights, options, warrants or convertible securities, to the date fixed for the determination of those entitled to receive such dividend or other distribution, and in the case of a tender offer, the last time that tenders could have been made pursuant to such tender offer. "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, licenses, written agreements or written governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "Excess Purchase Payment" means the product of (A) the excess, if any, of (i) the amount of cash plus the fair market value (as determined in good faith by the Company's Board of Directors) of any non-cash consideration required to be paid with respect to one share of Common Stock acquired or to be acquired in a tender offer made by the Company 12 or any Subsidiary of the Company for all or any portion of the Common Stock over (ii) the current market price per share as of the last time that tenders could have been made pursuant to such tender offer and (B) the number of shares validly tendered and not withdrawn as of the Determination Date in respect of such tender offer. "Event of Default" is defined in the preamble to Section 4. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Hazardous Materials" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the remediation of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is restricted, prohibited or penalized by any applicable Environmental Law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "holder" means, with respect to this Security or any other Convertible Note, the Person in whose name it is registered in the register maintained by the Company pursuant to Section 6(d). "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease (as defined by GAAP), upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Make-Whole Amount" is defined in Section 4(g). "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under the Note Purchase Agreement, the Registration Rights Agreement and the Convertible Notes, or (c) the validity or enforceability of this Agreement or the Convertible Notes. 13 "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Note Purchase Agreement" is defined in the Preamble. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "Purchaser(s)" JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY; JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY; SIGNATURE lA (CAYMAN), LTD; SIGNATURE 3 LIMITED; and HANCOCK MEZZANINE PARTNERS L.P. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the date hereof among the Purchasers and the Company. "Repurchase Date" is defined in Section 3(a). "Repurchase Price" is defined in Section 3(a). "Responsible Officer" means any Senior Financial Officer and any other senior officer of the Company with responsibility for the administration of the relevant covenants in this Security or in the Note Purchase Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "Senior Financial Officer" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or 14 more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Trading Day" means (i) if the Common Stock is admitted to trading on the Nasdaq National Market or any other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq National Market or listed or admitted for trading on any national securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the over-the-counter market and for which a closing bid and a closing asked price for the Common Stock are available. 3. Right to Require Repurchase. (a) In the event that a Change in Control shall occur, then the holder of this Security shall have the right, at such holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, this Security, or any portion of the principal amount hereof that is equal to $1,000 or any integral multiple thereof, on the date (the "Repurchase Date") that is thirty (30) Trading Days after the date on which the Company gives notice thereof to the holder of this Security, at a purchase price equal to 100% of the principal amount of this Security to be repurchased plus interest accrued to the Repurchase Date (the "Repurchase Price"): provided, however, that installments of interest on this Security whose stated maturity is on or prior to the Repurchase Date shall be payable to the holder of this Security, or one or more predecessor Securities, registered as such on the relevant Record Date according to their terms. 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 each of Section 5 and Section 6 and subject to the limitations set forth in each of Section 5 and Section 6, by delivery of shares of Common Stock or in common stock of any Person which succeeds the Company up to a maximum amount of ten percent (10%) of the then issued and outstanding Common Stock or common stock of such Person following any Change in Control, provided, however, the cash plus the fair market value of such shares shall equal the Repurchase Price. The Company agrees to give the holder of this Security notice of any Change in Control, by facsimile transmission confirmed in writing by overnight courier service, promptly and in any event within two (2) Trading Days of the occurrence thereof. 15 (b) To exercise a repurchase right, the holder shall deliver to the Company on or before the 10th Trading Day prior to the Repurchase Date, together with this Security, written notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the number of shares of Common Stock then owned by such holder and its affiliates, the principal amount of this Security to be repurchased (and, if this Security is to be repurchased in part, the portion of the principal amount thereof to be repurchased and the name of the person in which the portion thereof to remain outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase right is being made thereby and, in the event that the Repurchase Price shall be paid in whole or in part by the delivery of shares, as provided above, the name or names (and the addresses) in which the certificates for shares shall be issued. Such written notice shall be irrevocable, except that the right of the holder to convert this Security (or the portion hereof with respect to which the repurchase right is being exercised) shall continue until the close of business on the Repurchase Date (or if the Company elects to pay the Repurchase Price by delivery of shares as provided above, until the close of business on the Trading Day immediately preceding the first delivery of shares with respect thereto). (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the holder the Repurchase Price in cash or shares, as provided above, together with accrued and unpaid interest to the Repurchase Date; provided, however, that installments of interest that mature on or prior to the Repurchase Date shall be payable in cash, to the holders of this Security, or one or more predecessor Securities, registered as such at the close of business on the relevant regular record date. (d) If this Security (or portion thereof) is surrendered for repurchase and is not so paid on or prior to the Repurchase Date. the principal amount of this Security (or such portion hereof, as the case maybe) shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at eleven percent (11%) per annum, and shall remain convertible into Common Stock until the principal of this Security (or portion thereof, as the case may be) shall have been paid or duly provided for. (e) If this Security is to be repurchased only in part, it shall be surrendered to the Company at the Designated Office (with, if the Company so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing), and the Company shall execute and make available for delivery to the holder without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. (f) For purposes of this Section 3. (1) the term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission pursuant to the Exchange Act; and 16 (2) a "Change in Control" shall be deemed to have occurred at the time, after the original issuance of this Security, of: (i) the acquisition by any Person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the election of directors (any shares of voting stock of which such Person is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any such acquisition by the Company or any employee benefit plan of the Company; or (ii) any consolidation or merger of the Company with or into, any other Person, any merger of another Person with or into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the assets of the Company to another Person (other than (a) any such transaction (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock and (y) pursuant to which holders of Common Stock immediately prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving Person immediately after such transaction and (b) any merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock into solely shares of common stock, 4. Events of Default. (a) "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary, or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) (A) default in the payment of any principal or premium, if any, upon this Security when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise or (B) default in the payment of any interest upon this Security when it becomes due and payable, and continuance of such default for a period of five (5) days; or (2) default by the Company in the performance of its obligations in respect of any conversion of this Security (or any portion hereof) in accordance with Section 2; or (3) failure by the Company to give any notice of a Change of Control required to be delivered in accordance with Section 3(a); or (4) default in the performance, or breach, of any material covenant or warranty of the Company herein, in the Note Purchase Agreement, or in the Registration 17 Rights Agreements (other than a covenant or warranty a default in the performance or breach of which is specifically dealt with elsewhere in this Section 4(a)) and continuance of such default or breach for a period of 30 days after the earlier to occur of(A) the Company's obtaining knowledge of such default or (B) the Company's receiving written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (6) a final judgment or judgments for the payment of money aggregating in excess of $250,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after tile expiration of such stay; or (7) a default under all3, bond, debenture, note or other evidence of indebtedness for money borrowed by the Company, or under any agreement, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company. with a principal amount then outstanding in excess of $1,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of such indebtedness (in whole or in any part greater than $1,000,0003 when due and payable or shall have resulted in such indebtedness (in whole or in any part greater than $1,000.0003 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable; or (8) if(i) any Plan other than a Multiemployer Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan other than a Multiemployer Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan other than a Multiemployer Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan other than a Multiemployer Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(183 of ERISA) under all Plans other than a Multiemployer Plan, determined in accordance with Title IV of ERISA, shall exceed $250,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment wealthier benefits in a manner that would increase the liability of the 18 Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. (As used in this Section 4(a)(8), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA.); or (9) if, as a result of any Change of Control or any other consolidation or merger, the holding by the Purchasers or any assignees thereof of this Security or the holding of any Common Stock or common stock of any Person succeeding the Company, issued to the Purchasers or any assignees thereof after conversion of this Security would constitute, with respect to any Plan (other than a Multiemployer Plan) a prohibited transaction which would violate the prohibitions of section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975(c)(1)(A)-(D) of the Code; or (10) the entry by a court having jurisdiction in the premises of(A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (11) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or similar relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or not paying its debts as they become due or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. (b) If an Event of Default (other than an Event of Default specified in Section 4(a)(l0) or 4(a)(11)) occurs and is continuing, then in every such case the holder of this Security may declare the principal hereof to be due and payable immediately, by a notice in 19 writing to the Company, and upon any such declaration such principal and all accrued interest hereon shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security (i) the entire principal of and interest accrued on this Security, and (ii) in addition, to the extent permitted by applicable law, an amount equal to the Make Whole Amount, as liquidated damages and not as a penalty; and, in case of the occurrence of an Event of Default of the character described in subdivisions 4(a)(10) or 4(a)(11) the principal of and accrued interest on this Security, ipso facto shall become immediately due and payable without any declaration or other act of the holder of this Security and without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security (x) the entire principal of and interest accrued on this Security and (y) in addition, if such Event of Default is "Voluntary" (as hereinafter defined), to the extent permitted by applicable law, an amount equal to the Make-Whole Amount, as liquidated damages and not as a penalty. For purposes of this section 4(a), "Voluntary" shall mean an Event of Default of the character described in subdivisions 4(a)(l 0) or 4(a)(11 ) which shall have been (x) procured by the Company or any officer, director, stockholder or Affiliate of the Company or (y) primarily the result of action or inaction by the Company or by any officer, director, stockholder or Affiliate of the Company. (c) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, and irrespective of whether this Security has become or has been declared immediately due and payable under section 4(a), the holder of this Security may proceed to protect and enforce its rights either by suit in equity or by action at law, or both. The Company stipulates that the remedies at law of the holder of this Security in the event of any Default or threatened Default by the Company in the performance of or compliance width any covenant or agreement in this Security, the Note Purchase Agreement or the Registration Rights Agreement are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance thereof, whether by an injunction against a violation thereof or otherwise. (d) No remedy conferred in this Security, the Note Purchase Agreement or the Registration Rights Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or thereunder or now or hereafter existing at law or in equity or by statute or otherwise. (e) No course of dealing between the Company and any of its Subsidiaries, on the one hand, and the holder of this Security, on the other hand, and no delay by any such holder in exercising any rights hereunder or under the Note Purchase Agreement or the Registration Rights Agreement shall operate as a waiver of any rights of such holder. 20 (f) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, all amounts to be applied to the prepayment or payment of this Security shall be applied, after the payment of all related costs and expenses incurred by the holder of this Security (including, without limitation, compensation to any and all trustees, liquidators, receivers or similar officials and reasonable fees, expenses and disbursements of counsel) in such order of priority as is determined by the holder of this Security. (g) The term "Make-Whole Amount" means, with respect to this Security, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of this Security over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "Called Principal" means, with respect to this Security, the principal of this Security that has become or is declared to be immediately due and payable pursuant to Section 4(b). "Discounted Value" means, with respect to the Called Principal of this Security, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on this Security is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of this Security, 150 basis points over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "PX-I" of the Bloomberg Financial Markets Services Screen for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. 21 "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payment" means, with respect to the Called Principal of this Security, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of this Security, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date. "Settlement Date" means, with respect to the Called Principal of this Security, the date on which such Called Principal or has become or is declared to be immediately due and payable pursuant to Section 4(b). 5. Consolidation. Merger, Etc. (a) The Company shall not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or sale, or which leases, all or substantially all the properties and assets of the Company shall be a corporation, limited liability company, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, executed and delivered to the holder of this Security in form satisfactory to the holder, the due and punctual payment of the principal of(and premium, if any) and interest on this Security and the performance or observance of every covenant of this Security on the part of the Company to be performed or observed, including the conversion rights provided herein (which shall thereafter relate to common stock of such successor, on a basis reasonably designed to preserve the economic value to the holder of this Security of such conversion rights); (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary of the Company as a result of such transaction as having been incurred by the Company or such Subsidiary of the Company at the time of such transaction, no Event of Default, and no 22 event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (3) the Company has delivered to the holder of this Security an officers' certificate stating that such consolidation, merger, conveyance, transfer, sale or lease and, if a supplemental agreement is required in connection with such transaction, such supplemental agreement, comply with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with; and (4) counsel for the Company has delivered to the holder of this Security an opinion of such counsel with respect to such consolidation, merger, conveyance, transfer, sale or lease, and if a supplemental agreement is required in connection with such transaction, such supplemental agreement, which opinion shall be, in form and substance, reasonably acceptable to such holder and its counsel. (b) Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer, sale or lease of all or substantially all of the properties and assets of the Company in accordance with Section 5(a), the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer, sale or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Security with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved o fall obligations and covenants under this Security. 6. Payment in Stock. (a) The Company may elect to pay some or all of the Repurchase Price by delivery of shares of Common Stock or shares of common stock in any Person succeeding the Company, if and only if, each of the following conditions shall be satisfied (without limiting any other conditions contained herein): (1) Any such payment shall be made in five equal installments, on each of the five consecutive Trading Days ending on and including the third Trading Day immediately preceding the date when any cash payment would otherwise be due, and the shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of each such installment shall have a fair market value as of the date of such installment of not less than 20% of the amount of such payment due hereunder which is payable in shares of stock. For purposes of this Section 6, the fair market value of shares of Common Stock shall be equal to 95% of the Closing Price for the immediately preceding Trading Day; (2) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder require registration under any Federal securities law before such shares may be freely transferrable without being subject to any transfer restrictions under the Securities Act of 1933 upon 23 issuance, such registration shall have been completed and shall have become effective prior to the date of the first such installment; (3) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder 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 issuance or transferred freely, such registration shall have been completed or have become effective and such approval shall have been obtained, in each case, prior to the date of the first such installment; (4) The shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall have been approved for quotation in the Nasdaq National Market immediately prior to the date of the first such installment or, if at the time its shares of Common Stock or shares of common stock of any Person succeeding the Company are listed or admitted for trading on any national securities exchange, the shares of Common Stock or common stock in any Person succeeding the Company and deliverable shall have been so listed or admitted for trading. (5) All shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall, upon issue, be duly and validly issued and fully paid and non-assessable and free of any preemptive rights; (6) In respect of each such payment date, the Company shall have given the holder of this Security not less than 10 nor more than 15 Trading Days' notice of its election to effect payment in respect of such payment date by delivery of shares of Common Stock; provided that any such notice shall accompany the Company's notice of a Change of Control relating thereto; and (7) The Company shall deliver, or cause to be delivered a certificate from the Person succeeding the Company which states, that after giving effect to any Change of Control that the holding by the Purchasers or any assignees thereof of this Security, or the holding of any Common Stock or common stock of any Person succeeding the Company after conversion of this Security would not constitute a prohibited transaction which would violate the prohibition of section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975 (c)(1)(A)-(D) of the Code. If all of the conditions set forth in this Section 6(a) are not satisfied in accordance with the terms hereof, any such amount due hereunder shall be paid by the Company only in cash. (b) Any issuance of shares of Common Stock or shares of common stock of any Person succeeding the Company in respect of any installment due hereunder pursuant to this Section 6 shall be deemed to have been effected immediately prior to the close of 24 business on the date of delivery of such installment and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such delivery shall be deemed to have become on such date the holder or holders of record of the shares represented thereby; provided, however, that in case any installment shall be due on a date when the stock transfer books of the Company shall be closed, the person or persons in whose name or names the certificate or certificates for such shares are to be issued shall be deemed to have become 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 pursuant to this Section 6 declared prior to the relevant delivery date; and (c) Any issuance and delivery of certificates for shares of common stock or shares of common stock of any Person succeeding the Company pursuant to this Section 6 shall be made without charge to the holder of this Security for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the securities represented thereby. 7. Other. (a) No provision of this Security shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security in cash at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Security as herein provided. (b) The Company will give prompt written notice to the holder of Security of any change in the location of the Designated Office. (c) The transfer of this Security is registrable on the Security Register of the Company upon surrender of this Security for registration of transfer at the Designated Office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Such Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service charge shall be made for any such registration of transfer, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this Security for registration of transfer, the Company and any agent of the Company may treat the Person in whose name this Security is registered as the owner thereof for all purposes, whether or not this Security be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. (d) The Company shall keep at the Designated Office a register for the registration and registration of transfers of Convertible Notes. The name and address of each holder of one or more Convertible Notes, each transfer thereof and the name and address of each transferee of one or more Convertible Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Convertible Note 25 shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Convertible Note promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Convertible Notes. (e) Upon surrender of any Convertible Note at the Designated Office for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Convertible Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Convertible Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Convertible Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Convertible Note. Each such new Convertible Note shall be payable to such Person as such holder may request and shall be substantially in the form of this Security. Each such new Convertible Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Convertible Note or dated the date of the surrendered Convertible Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of this Security. Convertible Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Convertible Notes, one Convertible Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Convertible Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 3 of the Note Purchase Agreement. (f) Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Security (which evidence shall be notice from such holder of such ownership and such loss, theft, destruction or mutilation), and (i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of this Security is, or is a nominee for, an original holder or another institutional investor holder of this Security, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (ii) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Convertible Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Convertible Note or dated the date of such lost, stolen, destroyed or mutilated Convertible Note if no interest shall have been paid thereon. 26 (g) This Security shall be governed by and construed in accordance with the laws of the State of New York, United States of America. (h) So long as you or your nominee shall be holder of this Security and notwithstanding anything in this Security to the contrary, the Company will pay all sums becoming due hereunder for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule I of the Note Purchase Agreement, or by such other method provided in the Preamble or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of this Security, or the making of any notation hereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment in full of this Security, you shall surrender this Security for cancellation, reasonably promptly after any such request to the Company at its principal executive office or at the place of payment most recently designated by the Company. Prior to any sale or other disposition of this Security you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender this Security to the Company in exchange for a new Convertible Note pursuant to the terms hereof. The Company will afford the benefits of this Section to any institutional investor that is the direct or indirect transferee of this Security. [END OF PAGE - SIGNATURE PAGE FOLLOWS] 27 Signature Page of 9.00% Senior Convertible Note due January 20, 2004 1N WITNESS WHEREOF, the Company has caused this Security to be duly executed under its corporate seal. Dated: January 20, 1999 CELGENE CORPORATION Name: Title: Attest: ELECTION OF HOLDER TO REQUIRE REPURCHASE 1. Pursuant to Section 3(a) of this Security, the undersigned hereby elects to have all or a portion of this Security repurchased by the Company. 2. The undersigned hereby directs the Company to pay [choose one] (a) it or (b) Name: ; address: ; Social Security or Other Taxpayer Identification Number, if any: , an amount in cash or equal to 100% of the principal amount to be repurchased (as set forth below), plus interest accrued to the Repurchase Date, as provided herein. Dated: Signature Number of shares of Common Stock owned by the holder and its affiliates: Principal amount to be repurchased (an integral multiple of $1,000): Remaining principal amount following such repurchase (not less than $1,000): NOTICE: The signature to the foregoing Election must correspond to the name as written upon the face of this Security in every particular, without alteration or any change whatsoever. CONVERSION NOTICE The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security, or any portion of the principal amount hereof (which is an integral multiple of $1,000) below designated, into shares of Common Stock (subject to the limitation set forth in the second paragraph of Section 2(a) of the Security) in accordance with the terms of this Security, and directs that such shares, together with a check in payment for any fractional share and any Security representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If shares of Common Stock or Securities are to be registered in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated: Signature Number of shares of Common Stock owned by the holder and its affiliates: If shares or Securities are to be registered in If only a portion of the Securities is to be the name of a person other than the holder, converted, please indicate: please print such person's name and address: 1. Principal amount to be converted: $ Name 2. Principal amount and denomination of Security representing unconverted principal amount to be issued: Address Amount: $ Denominations: $ (any integral multiple of $1,000) Social Security or other Taxpayer Identification Number, if any EX-10.24 10 EXHIBIT 10.24 EXHIBIT 10.24 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of January 20, 1999, by and between Celgene Corporation, a Delaware corporation (the "Company"), and John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, Signature lA (Cayman) Ltd., Signature 3 Limited and Hancock Mezzanine Partners L.P. (collectively, the "Purchasers" and singly, each "Purchaser") entered into in connection with the issuance of a Convertible Note due January 20, 2004 convertible into shares of Common Stock, par value $.01 per share ("Common Stock") of the Company. 1. Certain Definitions. For purposes of this Registration Rights Agreement, the following terms shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Exchange Act or the Securities Act, whichever is the relevant statute for the particular purpose. (b) Convertible Note" shall mean the Convertible Note due January 20, 2004, of the Company to be issued and sold to the Purchaser, and any Convertible Note issued in exchange therefor or in lieu thereof. (c) "Effective Time" shall mean the date on which the Commission declares the Shelf Registration effective or on which the Shelf Registration otherwise becomes effective. (d) "Exchange Act" shall mean the Securities Exchange Act of 1934, or any successor thereto and the rules and regulations promulgated thereunder, as the same shall be amended from time to time. (e) "Issue Date" shall mean the date on which a Convertible Note is initially issued. (f) The term "person" shall mean a corporation, association, partnership, organization, business, individual, government or political subdivision thereof or governmental agency. (g) "Registration Expenses" shall have the meaning assigned thereto in Section 4 hereof. (h) "Securities Act" shall mean the Securities Act of 1933, or any successor thereto and the rules and regulations promulgated thereunder, as the same shall be amended from time to time. (i) "Shares" means the shares of Common Stock issuable upon exercise of the Convertible Note. (j) "Shelf Registration" shall have the meaning assigned thereto in Section 2 hereof. In addition, capitalized terms not defined herein shall have the meaning ascribed in the Convertible Note. 2. Shelf Registration of Shares. (a) Not later than January 20, 2000, the Company shall file under the Securities Act a "shelf" registration statement providing for the registration of, and the sale on a continuous or delayed basis by the Purchasers of, all shares issuable upon conversion of the Convertible Notes, pursuant to Rule 415 under the Securities Act and/or any similar rule that may be adopted by the Commission (the "Shelf Registration"). The Company agrees to use its best efforts to cause the Shelf Registration to become or be declared effective no later than 45 calendar days after the filing thereof and to keep such Shelf Registration continuously effective for a period ending on the earliest to occur of (i) the second anniversary of the Issue Date, (ii) notification to the Company by each Purchaser that it has sold all Shares issuable upon conversion of the Convertible Notes so owned by it, or (iii) such time as the Purchasers may sell all of such shares pursuant to Rule 144(k) under the Securities Act. The Company further agrees, if necessary, to supplement or make amendments to the Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration or by the Securities Act or rules and regulations thereunder for shelf registration, and the Company agrees to furnish to each Purchaser copies of any such supplement or amendment prior to its being used and/or filed with the Commission, and will not file any such supplement or amendment to which any Purchaser reasonably objects. (b) Notwithstanding the foregoing, following the effectiveness of the Shelf Registration, the Company many, at any time, suspend the effectiveness of such Shelf Registration for up to 60 days, as appropriate (a "Suspension Period"), by giving notice to each Purchaser, if the Company shall have determined that the Company may be required to disclose any material corporate development which disclosure may jeopardize a material transaction or otherwise have a material adverse effect on the Company. The Company will use its best efforts to minimize the length of any Suspension Period. Notwithstanding the foregoing, no more than one Suspension Period may occur within any 180 day period, and no Suspension Period shall be effective at any time the Company or any affiliate of the Company is publicly selling shares of the capital stock of the Company (other than pursuant to a registration statement on the Securities and Exchange Commission Form S-8). The period of any such suspension of registration statement shall be added to the period of time the Company agrees to keep the Shelf Registration effective as provided in Section 2(a). Each Purchaser agrees that, upon receipt of any notice from the Company of a Suspension Period, such Purchaser shall forthwith discontinue disposition of shares covered by the Shelf Registration until such Purchaser (i) is advised in writing by the Company that the use of the 2 applicable prospectus may be resumed, (ii) has received copies of a supplemental or amended prospectus, if applicable, and (iii) has received copies of any additional or supplemental filings which are incorporation or deemed to be incorporated by reference in such prospectus. 3. Registration Procedures. (a) In connection with any obligation of the Company to register Shares, the Company shall use its best efforts to effect or cause such registration to permit the sale of the Shares by the Purchasers in accordance with the intended method or methods of distribution thereof described in the applicable registration statement. In connection therewith, the Company shall, within the time specified in Section 2 above: (i) prepare and file with the Commission a registration statement on any form which may be utilized by the Company and which shall permit the disposition of the Shares in accordance with the intended method or methods thereof, as specified in writing by each Purchaser; (ii) comply with the provisions of the Securities Act with respect to the disposition of all of the Shares covered by such registration statement in accordance with the intended methods of disposition by each Purchaser set forth in such registration statements; (iii) provide (A) each Purchaser, (B) the underwriters (which term, for purposes of these Registration Rights, shall include a person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, thereof, (C) the sales or placement agent, if any, therefor, (D) counsel for such underwriters or agent, and (E) counsel for the Purchasers the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment or supplement thereto; (iv) for a reasonable period prior to the filing of such registration statement, and throughout the period specified in Section 2 hereof, make available for inspection by the parties referred to in Section 3(a)(iii) above who shall certify to the Company that they have a current intention to sell the Shares pursuant to the registration statement such financial and other information and books and records of the Company, and cause the officers, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to in such Section, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that each such party shall be required to maintain in confidence and not to disclose to any other person any information or records provided by the Company and clearly marked or otherwise adequately identified by the Company as being confidential until such time as (A) such information becomes a matter of public record (whether by virtue of its inclusion in 3 such registration statement or otherwise), or (B) such person shall be required so to disclose such information pursuant to the subpoena or order of any court or other governmental agency or body having jurisdiction over the matter or over such party (subject to the requirements of such order, and only after such person shall have given the Company prompt prior written notice of such requirement), or (C) such information is required to be set forth in such registration statement or the prospectus included therein or in an amendment to such registration statement or an amendment or supplement to such prospectus in order that such registration statement, prospectus, amendment or supplement, as the case may be, does not contain an untrue statement of a material fact or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (v) promptly notify each Purchaser, the sales or placement agent, if any, therefor and the managing underwriter or underwriters, if any, thereof and confirm such advice in writing, (A) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (B) of any comments by the Commission and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or any request by the Commission for amendments or supplements to such registration statement or prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation or overt threatening of any proceedings for that purpose, (D) if at any time the representations and warranties of the Company contemplated by Section 5 hereof cease to be true and correct in all material respects, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or overt threatening of any proceeding for such purpose, or (F) at any time when a prospectus is required to be delivered under the Securities Act, if such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (vi) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement or any post-effective amendment thereto at the earliest practicable date; (vii) if requested by any managing underwriter or underwriters, any placement or sales agent or any Purchaser, promptly incorporate in a prospectus supplement or post-effective amendment such information as is required by the applicable rules and regulations of the Commission that such managing underwriter or underwriters, such agent or such Purchaser specify should be included therein 4 relating to the terms of the sale of such Shares, including, without limitation, information with respect to the number of Shares being sold by such Purchaser or agent or to any underwriters, the name and description of such Purchaser, agent or underwriter, the offering price of such Shares and any discount, commission or other compensation payable in respect thereof, the purchase price being paid therefor by such underwriters and with respect to any other terms of the offering of the Shares to be sold by such Purchaser or agent or to such underwriters; and make all required filings of such prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus supplement or post-effective amendment; (viii) furnish to each Purchaser, each placement or sales agent, if any, therefor, each underwriter, if any, thereof and the respective counsel referred to in Section 3(a)(iii) a copy of such registration statement in the form in which it became effective, each such amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and such number of copies of such registration statement (excluding exhibits thereto and documents incorporated by reference therein unless specifically so requested by any Purchaser, agent or underwriter, as the case may be) and of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as any Purchaser, agent, if any, and underwriter, if any, may reasonably request in order to facilitate the offering and disposition of the Shares owned by such Purchaser, offered or sold by such agent or underwritten by such underwriter and to permit such Purchaser, agent and underwriter to satisfy the prospectus delivery requirements of the Securities Act; and the Company hereby consents to the use of such prospectus (including such preliminary and summary prospectus) and any amendment or supplement thereto by any Purchaser and by any such agent and underwriter, in each case in the form most recently provided to such party by the Company, in connection with the offering and sale of the Shares covered by the prospectus (including such preliminary and summary prospectus) or any supplement or amendment thereto; (ix) use its best efforts to (A) register or qualify the Shares to be included in such registration statement under such securities laws or blue sky laws of such jurisdictions as each Purchaser and each placement or sales agent, if any, therefor and underwriter, if any, thereof shall reasonably request, (B) keep such registrations or qualifications in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein in such jurisdictions during the respective periods such registration statements are required to remain effective under Section 2 above and for so long as may be necessary to enable each Purchaser or any agent or underwriter to complete its distribution of Shares pursuant to such registration statement and (C) take any and all other actions as may be reasonably necessary or advisable to enable each Purchaser, agent, if any, and underwriter, if any, to 5 consummate the disposition in such jurisdictions of such Shares; provided, however, that the Company shall not be required for any such purpose to (I) qualify as a foreign corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 3(a)(ix) or (II) consent to general service of process in any such jurisdiction; (x) use its best efforts to obtain the consent or approval of each governmental agency or authority, whether federal, state or local, which may be required to effect the Shelf Registration or the offering or sale in connection therewith or to enable the Purchaser to offer, or to consummate the disposition of, its Shares; (xi) cooperate with each Purchaser and the managing underwriters, if any, to facilitate the timely preparation and delivery of any certificates representing Shares to be sold, which certificates shall be printed, lithographed or engraved, or produced by any combination of such methods, and which shall not, once sold under the Shelf Registration, bear any restrictive legends; and, in the case of an underwritten offering, enable such Shares to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of the Shares; (xii) enter into one or more underwriting agreements, engagement letters, agency agreements or similar agreements, as appropriate, including (without limitation) customary provisions relating to indemnification and contribution, and take such other actions in connections therewith as any Purchaser shall reasonably request in order to expedite or facilitate the disposition of the Shares; (xiii) notify each Purchaser in writing of any proposal by the Company to amend or waive any provision of these Registration Rights pursuant to Section 7(g) hereof and of any amendment or waiver effected pursuant thereto, each of which notices shall contain the text of the amendment or waiver proposed or effected, as the case may be; (xiv) in the event that any broker-dealer registered under the Exchange Act shall underwrite any Shares or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Rules of Fair Practice and the By-Laws of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, assist such broker-dealer in complying with the requirements of such Rules and By-Laws, including, without limitation, by providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules of Fair Practice of the NASD; 6 (xv) comply with all applicable rules and regulations of the Commission, and make generally available to its security holders as soon as practicable but in any event not later than eighteen months after the effective date of such registration statement, an earning statement of the Company and in subsidiaries complying with Section 11 (a) of the Securities Act (including, at the option of the Company, Rule 158 thereunder); and (xvi) use its best efforts to have the Shares approved for trading on the Nasdaq National Market. (b) In the event that the Company would be required, pursuant to Section 3(a)(v)(F) above, to notify each Purchaser, the placement or sales agent, if any, therefor and the managing underwriters, if any, thereof, the Company shall without delay prepare and furnish to each Purchaser, to each placement or sales agent, if any, and to each underwriter, if any, a reasonable number of copies of a prospectus supplemented or amended in form and substance reasonably satisfactory to them, so that, as thereafter delivered to purchasers of Shares, such prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each Purchaser agrees that upon receipt of any notice from the Company pursuant to Section 3(a)(v)(F) hereof, such Purchaser shall forthwith discontinue the disposition of Shares pursuant to the registration statement applicable to such Shares until such Purchaser shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, such Purchaser shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Purchaser's possession of the prospectus covering such Shares at the time of receipt of such notice. (c) The Company may require any Purchaser to furnish to the Company such information regarding such Purchaser and such Purchaser's intended method of distribution of the Shares as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Securities Act. Each Purchaser agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Purchaser to the Company or of the occurrence of any event in either case as a result of which any prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding such Purchaser or such Purchaser's intended method of distribution of such Shares or omits to state any material fact regarding such Purchaser or such Purchaser's intended method of distribution of such Shares required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such prospectus shall not contain, with respect to such Purchaser or the distribution of such Shares, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each Purchaser agrees that upon delivering any notice to the Company pursuant to this Section 3(c), such Purchaser shall forthwith discontinue the disposition of Shares pursuant to the registration statement applicable to such Shares until such 7 Purchaser shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, such Purchaser shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Purchaser's possession of the prospectus covering such Shares at the time of receipt of such notice. 4. Registration Expenses. The Company agrees to bear and to pay or cause to be paid promptly upon request being made therefor all expenses incident to the Company's performance of or compliance with these Registration Rights as they relate to the Shelf Registration, including, without limitation, (i) all Commission and any NASD registration and filing fees and expenses, (ii) all fees and expenses in connection with the qualification of the Shares for offering and sale under the State securities and blue sky laws referred to in Section 3(a)(ix) hereof, including reasonable fees and disbursements of counsel for the placement or sales agent or underwriters in connection with such qualifications, (iii) all fees and expenses in connection with the approval for trading of the Shares on the Nasdaq National Market, (iv) all expenses relating to the preparation, printing, distribution and reproduction of each registration statement required to be filed hereunder, each prospectus included therein or prepared for distribution pursuant hereto, each amendment or supplement to the foregoing, the certificates representing the Shares and all other documents relating hereto, (v) internal expenses (including, without limitation, all salaries and expenses of the Company's officers and employees performing legal or accounting duties), and (vi) fees, disbursements and expenses of counsel and independent certified public accountants of the Company (including the expenses of any opinions or "cold comfort" letters required by or incident to such performance and compliance) (collectively, the "Registration Expenses"). Notwithstanding the foregoing, such Purchaser shall pay all agency fees and commissions and underwriting discounts and commissions attributable to the sale of the Shares and the fees and disbursements of any counsel or other advisors or experts retained by such Purchaser in connection with the sale of its shares. 5. Representations and Warranties. The Company represents and warrants to, and agrees with, each Purchaser that: (a) Each registration statement covering Shares and each prospectus (including any preliminary or summary prospectus) contained therein or furnished pursuant to Section 3(a)(viii) hereof and any further amendments or supplements to any such registration statement or prospectus, when it becomes effective or is filed with the Commission, as the case may be, and, in the case of an underwritten offering of Shares, at the time of the closing under the underwriting agreement relating thereto will conform in all material respects to the requirements of the Securities Act, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at all times subsequent to the Effective Time when a prospectus would be required to be delivered under the Securities Act, other than from (i) such time as a notice has been give to such Purchaser pursuant to Section 3(a)(v)F) hereof until (ii) such time as the Company furnishes an amended or supplemented prospectus pursuant to Section 3(b) hereof, each such registration statement, and each prospectus 8 (including any summary prospectus) contained therein or furnished pursuant to Section 3(a)(viii) hereof, as then amended or supplemented, will conform in all material respects to the requirements of the Securities Act, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by such Purchaser expressly for use therein. (b) Any documents incorporated by reference in any prospectus referred to in Section 5(a) hereof, when they become or became effective or are or were filed with the Commission, or if amended, when amended, as the case may be, will conform or conformed in all material respects to the requirements of the Exchange Act, and none of such documents will contain or contained an untrue statement of a material fact or will omit or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by such Purchaser expressly for use therein. 6. Indemnification. (a) Indemnification by the Company. Upon the registration of Shares pursuant to Section 2 hereof, and in consideration of the agreements of the Purchasers contained herein, and as an inducement to the Purchasers to purchase the Convertible Notes, the Company shall, and it hereby agrees to, indemnify and hold harmless each Purchaser and each person who participates as a placement or sales agent or as an underwriter in any offering or sale of such Shares against any losses, claims, damages or liabilities, joint or several, to which such Purchaser or any such agent or underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Shares were registered under the Securities Act, or any preliminary, final or summary prospectus contained therein or furnished by the Company to such Purchaser, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company shall, and it hereby agrees to, reimburse such Purchaser, such agent and such underwriter for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable to any such Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or preliminary, final or summary prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Person expressly for use therein; provided further, however, that the Company shall not be liable to any such Person if such Person failed to deliver a prospectus in the form most recently provided by the Company (including any amendments or supplements thereto previously provided by the 9 Company), in any such case to the extent that any loss, claim, damage or liability arises out of or is based upon an untrue statement or an omission which was corrected in such most recently furnished prospectus (including any such amendments or supplements). (b) Indemnification by the Purchaser and any Agents and Underwriters. The Company may require, as a condition to including any Shares in any registration statement filed pursuant to Section 2 hereof and to entering into an underwriting agreement, if any, with respect thereto, that the Company shall have received an undertaking reasonably satisfactory to it from each participating Purchaser and from each underwriter, if any, named in any such underwriting agreement, severally and not jointly or jointly and severally, to (i) indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof') arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such registration statement, or any preliminary, final or summary prospectus contained therein or furnished by the Company to any Purchaser, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Purchaser or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. Notwithstanding the above, the obligation of such Purchaser for indemnity shall be limited to an amount equal to the net proceeds received by such Purchaser in the applicable underwriting. (c) Notices of Claims, Etc. Promptly after receipt by an indemnified party under subsection (a) or (b) above of written notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party pursuant to the indemnification provisions of or contemplated by this Section 6, notify such indemnifying party in writing of the commencement of such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under the indemnification provisions of or contemplated by Section 6(a) or 6(b) hereof. In case any such action shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, such indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, such indemnifying party shall not be liable to such indemnified party for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation unless, in the case of an indemnification obligation arising under Section (a), (i) the employment of such additional counsel has been authorized in writing by the Company in connection with defending such action, 10 or (ii) the Company and the Purchaser are advised by such additional counsel that the Purchaser has available defenses involving a potential conflict with the interests of the Company, in which event, the fees and expenses of such additional counsel shall be borne by the Company. No indemnifying party shall consent to entry of any judgment or enter into any settlement of a claim against an indemnified party without the consent of the indemnified party which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of an unconditional release from all liability in respect to such claim or litigation. (d) Contribution. Each party hereto agrees that, if for any reason the indemnification provisions contemplated by Section 6(a) or Section 6(b) are unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by indemnified party on the one hand and the indemnifying party on the other from any offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and each Purchaser on the other shall be deemed to be in the same proportion as the total purchase price received by the Company upon issuance of the Convertible Note bears to the difference between the proceeds from the offering of the Shares received by such Purchaser and such purchase price. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were determined by pro rata allocation (even if any Purchaser or any agents or underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), no Purchaser shall be required to contribute any amounts in excess of the amount by which the dollar amount of the proceeds received by such Purchaser from the sale of any Shares (after deducting any fees, discounts and commissions applicable thereto) exceeds the amount of any damages which such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no underwriter shall be required to contribute any amount in excess of the amount by 11 which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribute from any person who was not guilty of such fraudulent misrepresentation. Any underwriters' obligations in this Section 6(d) to contribute shall be several in proportion to the principal amount of Shares underwritten by them and not joint. (e) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each officer, director and partner of each Purchaser, any agent and any underwriter and each person, if any, who controls such Purchaser or any agent or underwriter within the meaning of the Securities Act; and the obligations of each Purchaser and any agents and underwriters contemplated by this Section 6 shall be in addition to any liability which such Purchaser or any such agent or underwriter, respectively, may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his consent, is named in any registration statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Securities Act. 7. Miscellaneous (a) No Inconsistent Agreements. The Company represents, warrants, covenants and agrees that it has not granted, and shall not grant, registration rights with respect to Shares or any other securities which would conflict with the terms contained in these Registration Rights. (b) Specific Performance. The parties hereto acknowledge that there may be no adequate remedy at law if any party fails to perform any of its obligations hereunder and that each party may be irreparably harmed by any such failure, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under the Registration Rights in accordance with the terms and conditions of these Registration Rights, in any court of the United States or any State thereof having jurisdiction. (c) Notices. Any notice or other communication required or permitted to be given hereunder shall be deemed effectively given when personally delivered, telexed, transmitted by facsimile or mailed by pre-paid certified mail, return receipt requested, or by telephone when confirmed in writing by one of the preceding methods addressed as follows (as applicable): If to the Company, to: Celgene Corporation 7 Powder Horn Drive Warren, NJ 07059 12 Attention: John W. Jackson Telephone Number: (732) 271-1001 Facsimile Transmission Number: (732) 805-3931 with a copy to: Proskauer Rose LLP 1585 Broadway New York, NY 10036 Attention: Robert A. Cantone, Esq. Telephone Number: (212) 969-3000 Facsimile Transmission Number: (212) 969-2900 If to Purchasers, to the Person designated by Purchaser and at the address as set forth on Schedule I in the Note Purchase Agreement dated the date hereof between the Purchasers and the Company with a copy to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109 Attention: Frank B. Porter, Jr. Telephone Number: (617) 248-5000 Facsimile Transmission Number: (617) 248-4000 or to such other address or number and to the attention of such other person as either party may designate by written notice to the other party. Notice shall be effective upon actual receipt. (d) Survival. The respective indemnities, agreements, representations, warranties and each other provision set forth in these Registration Rights or made pursuant hereto shall remain in full force and effect regardless of any investigation (or statement as to the results thereof) made by or on behalf of each Purchaser, any director, officer or partner of such Purchaser, any agent or underwriter or any director, officer or partner thereof, or any controlling person of any of the foregoing and shall survive the transfer of the Shares by such Purchaser. (e) Law Governing. These Registration Rights shall be governed by and construed in accordance with the laws of the State of New York. (f) Headings. The descriptive headings of the several Sections and paragraphs of these Registration Rights are inserted for convenience only, do not constitute a part of these 13 Registration Rights and shall not affect in any way the meaning or interpretation of these Registration Rights. (g) Entire Agreement; Amendments. These Registration Rights and the other writings referred to herein or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. These Registration Rights supersede all prior agreements and understandings between the parties with respect to its subject matter. These Registration Rights may be amended and the observance of any term of these Registration Rights may be waived (either generally or in a particular instance and either retroactively or prospectively) only be a written instrument duly executed by the Company and each Purchaser. (h) Assignment. In connection with any permitted transfer of the Convertible Note or any portion thereof in a principal amount of not less than $100,000 any Purchaser may assign its rights hereunder in respect of such Convertible Note to the transferee. Upon such assignment the transferee shall, insofar as the transferred Convertible Notes are concerned, be entitled to all of the rights, and be subject to all of the obligations, of a Purchaser under these Registration Rights, and all references to such "Purchaser" herein shall thereafter be deemed to refer to the Purchaser, or such transferee, or both, as the circumstances warrant. (i) Counterparts. This agreement may be executed by the parties counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. [the remainder of this page is intentionally left blank] 14 Signature Page of Registration Rights Agreement Agreed to and accepted as of the date referred to above, CELGENE CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- SIGNATURE 1 A (CAYMAN), LTD. By: John Hancock Mutual Life Insurance Company, Portfolio Advisor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Signature Page of Registration Rights Agreement Agreed to and accepted as of the date referred to above, CELGENE CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- SIGNATURE lA (CAYMAN), LTD. By: John Hancock Mutual Life Insurance Company, Portfolio Advisor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Signature Page of Registration Rights Agreement Agreed to and accepted as of the date referred to above. CELGENE CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: ----------------------------------- Name: --------------------------------- Title: Senior Investment Officer -------------------------------- JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: ----------------------------------- Name: --------------------------------- Title: Senior Investment Officer -------------------------------- SIGNATURE lA (CAYMAN), LTD. By: John Hancock Mutual Life Insurance Company, Portfolio Advisor By: ----------------------------------- Name: --------------------------------- Title: Senior Investment Officer -------------------------------- Signature Page of Registration Rights Agreement Continued Signature 3 Limited By: John Hancock Mutual Life Insurance Company, as Portfolio Advisor By: ----------------------------------- Name: --------------------------------- Title: Senior Investment Officer -------------------------------- Hancock Mezzanine Partners L.P. By: Hancock Mezzanine Investments LLC, its General Partner By: John Hancock Mutual Life Insurance Company. as Investment Manager By: ----------------------------------- Name: --------------------------------- Title: Senior Investment Officer -------------------------------- EX-10.25 11 EXHIBIT 10.25 EXHIBIT 10.25 CONFORMED COPY NOTE PURCHASE AGREEMENT July 6, 1999 To the Purchasers listed on attached Schedule I Dear Sirs: CELGENE CORPORATION (the "Company") wishes to confirm its arrangement with the Purchasers named on Schedule I to this Agreement (the "Purchasers" and singly each "Purchaser") in connection with the issuance to the Purchasers, against payment in immediately available funds of the purchase price of 100% of the principal amount thereof, of one or more senior convertible notes in the form attached hereto as Exhibit A (collectively the "Convertible Notes") in an aggregate principal amount of $15,000,000 and convertible initially into 789,474 fully paid and non-assessable shares (each a "Share") of the Company's Common Stock, par value $.01 per share (the "Common Stock"), subject to adjustment as set forth in the Convertible Notes. Simultaneously with the issuance of the Convertible Notes pursuant to this Agreement, the Company and the Purchasers have entered into a Registration Rights Agreement, dated as of the date hereof(the "Registration Rights Agreement"), pursuant to which the Company has agreed to register the Shares under certain circumstances. Any capitalized term not defined herein shall have the meaning ascribed to such term in the Convertible Notes. 1. AGREEMENT TO ISSUE AND ACCEPT. On the basis of the representations and warranties made by the Company to induce the Purchasers to purchase the Convertible Notes and subject to the terms and conditions set forth herein, the Company will issue to each Purchaser, and each Purchaser will accept from the Company, the Convertible Notes in the principal amount specified opposite such Purchaser's name on Schedule I attached hereto at the purchase price of 100% of the principal amount thereof against payment of the above-specified purchase price therefor. The closing (the "Closing") of the issuance and acceptance of the Convertible Notes against such payment shall take place on the date hereof, at which time the Company shall deliver to each Purchaser the Convertible Notes, against delivery by each Purchaser of a wire transfer of the purchase price to the Company's account at PNC Bank New Jersey Trust, ABA No. 031000053, benefit Account No. 8511074024, for further credit to Account No. 42432012020943, Celgene Corporation, Attn: Lisa Goldhammer, Telephone No. (732) 220-3112. If at the Closing the Company shall fail to tender the Convertible Notes to each Purchaser as provided in this Section 1 or any of the conditions specified in Section 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the representations and warranties set forth on Annex II hereto to the Purchasers. 3. AGREEMENTS OF PURCHASER. Each Purchaser covenants and agrees with the Company that: (a) Such Purchaser will not offer, sell, assign, hypothecate or otherwise transfer the Convertible Notes except (i) pursuant to an effective registration statement under the Securities Act of 1933 (the "Act"), (ii) to a person you reasonably believe to be an "accredited investor" within the meaning of Rule 501 under the Act, pursuant to an available exemption under the Act or (iii) in offshore transactions within the meaning and meeting the requirements of Rule 903 under the Act. (b) Such Purchaser will not offer, sell, assign, hypothecate or otherwise transfer any Shares issued upon conversion of the Convertible Notes except (i) pursuant to an effective registration statement under the Act; (ii) to a person you reasonably believe to be an "accredited investor" within the meaning of Rule 501 under the Act, pursuant to an available exemption under the Act or (iii) in an offshore transaction within the meaning and meeting the requirements of Rule 903 under the Act. (c) Such Purchaser is an "accredited investor" within the meaning of Rule 501 under the Act. (d) During the period that the Company is prohibited from making an optional redemption under Section 1 of the Convertible Note, so long as a Purchaser holds a Convertible Note, such Purchaser shall not undertake any form of short sale, derivative or other transaction which has the effect of taking a "short position" in the Common Stock of the Company to hedge such Purchaser's investment in the Company, provided, however, that no affiliate of any Purchaser shall be subject to the provisions of this subsection 3(d). The covenant contained in this Section 3(d) shall be, subject to the limitations contained herein, binding on any holder of a Convertible Note. (e) Each Purchaser represents that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by such Purchaser to pay the purchase price of the Convertible Notes to be purchased by it hereunder: (i) the Source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no employee benefit plan, treating as a single plan all plans, maintained by the same employer (or affiliate thereof as defined in Section V(a)(1) of PTE 95-60) or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan exceeds ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with such Purchaser's state of domicile; or 2 (ii) the Source is either (a) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption CPTE") 90-1 (issued January 29, 1990), or (b) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (ii), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (iii) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM 'Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5 % or more interest in the Company and (a) the identity of such QPAM and (b) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (iii); or (iv) the Source is a governmental plan; or (v) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (vi) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 3(e), the terms "employee benefit plan", "governmental plan", "party in interest" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. Prior to any holder of this Security transferring this Security, the holder of this Security shall provide a certificate from such proposed subsequent transferee wherein such proposed subsequent transferee shall make the representations made in this Section 3(e) and shall simultaneously deliver any disclosure letter required under Section 3(e)(iii). Such subsequent transferee's failure to deliver such a certificate shall not relieve the Company from any of the terms, covenants or conditions of this Security. 3 4. AGREEMENTS OF THE COMPANY. From and after the date of this Agreement, and thereafter so long as any of the Convertible Notes remain outstanding, the Company will duly perform and observe, for the benefit of the holders of the Convertible Notes, each and all of the covenants and agreements hereinafter set forth: (a) The Company shall deliver to each holder of a Convertible Note: i. Quarterly Statements -- upon the earlier of (x) when the Company files its Form 10-Q with the Securities and Exchange Commission for a fiscal period and (y) 50 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (1) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (2) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 4(a)(i); ii. Annual Statements -- upon the earlier of(x) when the Company files its Form 10-K with the Securities and Exchange Commission for a fiscal period and (y) 105 days after the end of each fiscal year of the Company, duplicate copies of, (1) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (2) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied 4 (A) by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that suchfinancial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 4(a)(ii); iii. SEC and Other Reports -- promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement that shall have become effective (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and statements in the nature thereof made available generally by the Company or any Subsidiary to the public concerning developments that are Material; iv. Notice of Default or Event of Default -- promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default under any of the Convertible Notes or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 5 4(a)(7) of the Convertible Notes, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; v. ERISA Matters -- promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (1) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or (2) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (3) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; vi. Notices from Governmental Authority -- promptly, and in any event within thirty days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and vii. Requested Information -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Convertible Notes as from time to time may be reasonably requested by any such holder of Convertible Notes. (b) The Company shall permit the representatives of each. holder of Convertible Notes: 6 i. No Default -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and ii. Default -- if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. (c) The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (d) The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. (e) The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 7 (f) The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect. (g) The Company will at all times preserve and keep in full force and effect its corporate existence. The Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. (h) The Company will promptly notify the holders in the event the Company discovers or determines that any computer application (including those of its suppliers, vendors and customers) that is Material to its or any of its Subsidiaries' business and operations will not be Year 2000 compliant, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. (i) The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon terms determined by the Company's Board of Directors, in its good faith judgment, to be fair and reasonable terms and no less favorable to the Company or such Subsidiary than would be obtainable in a comparable transaction with a Person not an Affiliate. 5. CONDITIONS. The obligations of the Purchasers under this Agreement shall be subject to the condition that all representations and warranties and other statements of the Company herein are true and correct at and as of the closing of the purchase and sale of the Convertible Notes, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: 8 (a) Counsel for the Company specified in Annex III hereto shall have furnished to you its written opinion, dated the date of such closing, in form and substance satisfactory to each Purchaser, to the effect set forth in Annex III hereto. (b) On the date of such closing, the Company shall have furnished to each Purchaser such appropriate further information, certificates and documents as such Purchaser may reasonably request. (c) The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. (d) The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Convertible Notes, no Default or Event of Default shall have occurred and be continuing. (e) The Company shall have delivered to each Purchaser an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 5(c), 5(d) and 5(k) have been fulfilled. (f) The Company shall have delivered to each Purchaser a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Convertible Notes and the Agreements. (g) On the date of the Closing the purchase of Convertible Notes by each Purchaser shall (i) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation U, T or X of the Board of Governors of the Federal Reserve System) and (iii) not Subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by any Purchaser, such Purchaser shall have received an Officer's Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted. (h) The Company shall sell the entire principal amount of the Convertible Notes scheduled to be sold at the Closing as specified in Schedule I hereto. (i) Without limiting the provisions of Section 6(f), the Company shall have paid on or before the Closing the fees, charges and disbursements of the Purchasers' special counsel. 9 (j) A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Convertible Notes. (k) The Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recently filed Exchange Act Report (defined below). (1) All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to each Purchaser and its special counsel, and each Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser or it may reasonably request. 6. MISCELLANEOUS. (a) This Agreement shall be binding upon, and inure solely to the benefit of, the Purchasers and the Company and the respective successors and assigns thereof, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of the Convertible Notes from a Purchaser shall be deemed a successor or assign by reason merely of such purchase. (b) Any notice or other communication required or permitted to be given hereunder shall be deemed effectively given when personally delivered, telexed, transmitted by facsimile or mailed by pre-paid certified mail, return receipt requested, or by telephone when confirmed in writing by one of the preceding methods addressed as follows (as applicable): If to the Company, to: Celgene Corporation 7 Powder Horn Drive Warren, NJ 07059 Attention: John W. Jackson Telephone Number: (732) 271-1001 Facsimile Transmission Number: (732) 805-3931 with a copy to: Proskauer Rose LLP 1585 Broadway New York, NY 10036 10 Attention: Robert A. Cantone, Esq. Telephone Number: (212) 969-3000 Facsimile Transmission Number: (212) 969-2900 If to Purchaser: at the address and to the Person appearing on Schedule I to this Agreement with a copy to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109 Attention: Frank B. Porter, Jr. Telephone Number: (617) 248-5000 Facsimile Transmission Number: (617) 248-4000 or to such other address or number and to the attention of such other person as either party may designate by written notice to the other party. Notice shall be effective upon actual receipt. (c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (d) Time shall be of the essence in the performance of this Agreement. (e) This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. (f) Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel) incurred by each Purchaser or holder of a Convertible Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Convertible Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (3) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Convertible Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Convertible Notes, or by reason of being a holder of any Convertible Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the 11 transactions contemplated hereby and by the Convertible Notes. The Company will pay, and will save each Purchaser and each other holder of a Convertible Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). (g) Anything in this Agreement or the Convertible Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Convertible Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. (h) This Agreement and the Convertible Notes may be amended, and the observance of any term hereof or of the Convertible Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and each of the holders. (i) From time to time hereafter, the Company will execute and deliver, or will cause to be executed and delivered, such additional agreements, documents and instruments and will take all such other actions as any holder or holders of the Convertible Notes may reasonably request [END OF PAGE] 12 for the purpose of implementing or effectuating the provisions contained herein, in the Convertible Notes or in the Registration Rights Agreement. Very truly yours, CELGENE CORPORATION By: /s/Robert J. Hugin -------------------------------- Name: Robert J. Hugin Title: Senior Voice President & CFO Accepted as of the date hereof: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: By: /s/ Stephen J. Blewitt --------------------------------------- Name: Stephen J. Blewitt ------------------------------------ Title: Senior Investment Officer ------------------------------------ JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: By: /s/ Stephen J. Blewitt --------------------------------------- Name: Stephen J. Blewitt ------------------------------------ Title: Senior Investment Officer ------------------------------------ By: /s/ Stephen J. Blewitt --------------------------------------- Name: Stephen J. Blewitt ------------------------------------ Title: Senior Investment Officer ------------------------------------ 13 SCHEDULE I JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY $3,500,000 GENERAL ACCOUNT $6,000,000 GUARANTEED BENEFIT SUB ACCOUNT $200,000 SEPARATE ACCOUNT 12 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: BankBoston ABA No. 011000390 Boston, Massachusetts 02110 Account of: John Hancock Mutual Life Insurance Company Private Placement Collection Account Account Number: 541-55417 On Order of: Celgene Corporation (PPN: 151020 A@3) Celgene Corporation 9.00% Senior Convertible Notes due June 30, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Convertible Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager 1 of 6 Investment Accounting Division, B-3 Fax: 617-572-0628 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. All securities shall be registered in the name of: John Hancock Mutual Life Insurance Company 7. Tax I.D. No. 04-1414660 2 of 6 JOHN HANCOCK VARIABLE HFE INSURANCE COMPANY $300,000 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: BankBoston ABA No. 011000390 Boston, Massachusetts 02110 Account of: John Hancock Mutual Life Insurance Company Private Placement Collection Account Account Number: 541-55417 On Order of: Celgene Corporation (PPN: 151020 A@ 3) Celgene Corporation 9.00% Senior Convertible Notes due June 30, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Convertible Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of Bank (or Trustee) from which wire transfer was sent shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3 of 6 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. All securities shall be registered in the name of: John Hancock Variable Life Insurance Company 7. Tax I.D. No. 04-2664016 4 of 6 HANCOCK MEZZANINE PARTNERS L.P. $5,000,000 1. All payments on account of the Convertible Notes or other obligations in accordance with the provisions thereof shall be made by bank wire transfer of immediately available funds for credit, not later than 12 noon, Boston time, to: Investors Bank & Trust Company Boston, Massachusetts 02110 ABA No. 011001438 Account Number: 58215013 for further credit to Hancock Mezzanine Partners L.P., Account 99274 On Order of: Celgene Corporation (PPN: 151020 A@ 3) Celgene Corporation 9.00% Senior Convertible Notes due June 30, 2004 2. Contemporaneous with the above wire transfer, advice setting forth: (1) the full name, interest rate and maturity date of the Notes or other obligations; (2) allocation of payment between principal and interest and any special payment; and (3) name and address of bank (or Trustee) from which wire transfer was sent shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 3. All notices with respect to prepayments, both scheduled and unscheduled, whether partial or in full, and notice of maturity shall be delivered or faxed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Manager Investment Accounting Division, B-3 Fax: 617-572-0628 4. All other communications which shall include, but not be limited to, financial statements and certificates of compliance with financial covenants, shall be delivered or faxed and mailed to: 5 of 6 John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Bond and Corporate Finance Group, T-57 Fax: 617-572-1605 5. A copy of any notices relating to change in issuer's name, address or principal place of business or location of collateral and a copy of any legal opinions shall be delivered or fixed and mailed to: John Hancock Mutual Life Insurance Company 200 Clarendon Street Boston, MA 02117 Attention: Investment Law Division, T-50 Fax: 617-572-9268 6. Execution documents shall be executed as follows: Hancock Mezzanine Partners L.P. By: Hancock Mezzanine Investments LLC, its General Partner By: John Hancock Mutual Life Insurance Company. as Investment Manager By: ------------------------------------- [authorized John Hancock Officer] 7. All securities shall be registered in the name of: Hancock Mezzanine Partners L.P. 8. Tax I.D. No. 04-3428544 6 of 6 EXHIBIT A THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. CELGENE CORPORATION 9.00% SENIOR CONVERTIBLE NOTE DUE JUNE --, 2004 PPN No.: No. R- $ ---------- CELGENE CORPORATION, a corporation duly organized and existing under the laws of Delaware (the "Company") for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars ($. )on June, 2004 and to pay interest thereon, from , 1999, or from the most recent interest payment date to which interest has been paid or duly provided for, semi-annually on June ---- and December in each year, commencing December ---,1999, at the rate of 9.00% per annum, until the principal hereof is due, and at the rate of 11.00% per annum on any overdue principal and premium, if any, and, to the extent permitted by law, on any overdue interest. The interest so payable, and punctually paid or duly provided for, on any interest payment date will be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the regular record date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such interest payment date. Payment of the principal of(and premium, if any, on) this Security shall be made upon the surrender of this Security to the Company, at its office at 7 Powder Horn Drive, Warren, NJ 07059 (or such other office within the United States as shall be notified by the Company to the holder hereof) (the "Designated Office"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, by transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America. Payment of interest on this Security shall be made by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America, provided that if the holder shall not have furnished wire instructions in writing to the Company no later than the record date relating to an interest payment date, such payment may be made by U.S. dollar check mailed to the address of the Person entitled thereto as such address shall appear This Security is one of the Company's 9.00% Senior Convertible Notes due June 30, 2004, limited to $15,000,000.00 aggregate principal amount, issued pursuant to that certain Note Purchase Agreement dated July 6, 1999 (such agreements, as amended, modified and supplemented from time to time, the "Note Purchase Agreement") between the Company and the Purchasers named therein, and the holder hereof is entitled to the benefits of the Note Purchase Agreement, and may enforce the agreements contained herein and therein and exercise the remedies provided for hereby and thereby or otherwise available in respect hereof and thereof, all in accordance with the terms hereof and thereof. 1. Optional Redemption With Premium. This Security is subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time on or after July 6, 2001, as a whole or in part, (in any amount that is an integral multiple of $1000) at the election of the Company, at a redemption price of 103% the principal amount thereof, together with accrued interest to the redemption date, but interest installments whose stated maturity is on or prior to such redemption date will be payable to the holder of this Security, or one or more predecessor Securities, of record at the close of business on the relevant record dates referred to on the face hereof; provided, however, that the Company may not redeem this Security on or prior to July 6, 2002 unless the Closing Price of the Common Stock exceeds 225% of the Conversion Price for each Trading Day in a period of 20 Consecutive Trading Days commencing not earlier than July 6, 2001. The term "Conversion Price" on any day shall equal $1,000 divided by the Conversion Rate in effect on each such day. 2. Conversion. (a) The holder of this Security is entitled at any time on or after July 6, 2000 and before the close of business on June 30, 2004 (or, in case this Security or a portion hereof is called for redemption or the holder hereof has exercised its right to require the Company to repurchase this Security or a portion hereof, then in respect of this Security or such portion hereof, as the case may be, until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the redemption date or the Repurchase Date, as the case may be) to convert this Security (or any portion of the principal amount hereof that is an integral multiple of $1,000), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at the rate of 52.63 shares of Common Stock for each $1,000 principal amount of Security (or at the current adjusted rate if an adjustment has been made as provided below) (the "Conversion Rate") by surrender of this Security, duly endorsed or assigned to the Company or in blank to the Company at the Designated Office, accompanied by written notice to the Company that the holder hereof elects to convert this Security (or if less than the entire principal amount hereof is to be converted, specifying the portion hereof to be converted). Upon surrender of this Security for conversion, the holder will be entitled to receive the interest accruing on the principal amount of this Security then being converted from the interest payment date next preceding the date of such conversion to such date of conversion. No payment or adjustment is to be made on conversion for dividends on the Common Stock issued on conversion hereof. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest, the Company shall pay a cash adjustment, 2 computed on the basis of the Closing Price of the Common Stock on the date of conversion, or, at its option, the Company shall round up to the next higher whole share. This Security shall be deemed to have been converted immediately prior to the close of business on the day of surrender hereof for conversion, in accordance with the foregoing provisions, and at such time the rights of the holder hereof, as a holder hereof, shall cease, and the Person or Persons entitled to receive the Common Stock issuable on conversion shall be treated by all Persons as the holder or holders of such Common Stock at such time. Upon any partial conversion of this Security, the Company, at its expense, will forthwith issue and deliver to, or upon the order of the holder hereof, a new Convertible Note or Convertible Notes in principal amount equal to the unconverted principal amount of such surrendered Convertible Note, such new Convertible Note or Convertible Notes to be dated and to bear interest from the date to which interest has been paid on such surrendered Convertible Note. As promptly as possible after the conversion of this Security, in whole or in part, and in any event within ten (10) days thereafter, the Company, at its expense, will issue and deliver a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion. (b) The Conversion Rate shall be subject to adjustments from time to time as follows: (1) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company payable in shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the Determination Date for such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following such Determination Date. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall issue rights, options, warrants or convertible securities entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on the Determination Date for such distribution, the Conversion Rate in effect at the opening of business on the day following such Determination Date, shall be increased by dividing such Conversion Rate by a fraction of 3 which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock which the aggregate amount received by the Company upon the issuance of such rights, options, warrants or convertible securities plus the aggregate amount receivable by the Company upon the exercise or conversion of such rights, options, warrants or convertible securities would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock so offered for subscription or purchase, such increase to become effective immediately after the opening of business on the day following such Determination Date provided, that no such adjustment need to be made in the case of the granting by the Company to employees or directors of the Company or consultants to the Company of Common Stock and/or options to purchase Common Stock and the issuance of Common Stock upon the exercise of such options. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights, options, warrants or convertible securities in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall each be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall, by dividend or otherwise, distribute evidences of its indebtedness, shares of any class of capital stock, or other property (including securities, but excluding (i) any rights, options, warrants or convertible security referred to in paragraph (2) of this Section 2(b) (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (1) of this Section 2(b) and (iv) any merger or consolidation to which Section 2(h) applies), the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, shares or evidences of 4 indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following such Determination Date provided, that no such adjustment need be made in the case of an underwritten public offering of Common Stock in which the shares of Common Stock are sold to the public at a price per share equal to or in excess of 95% of the market price per share of the Common Stock as of the date of the pricing of such underwritten public offering. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section 2(b). (5) In case the Company shall, by dividend or otherwise, make a Cash Distribution, then, and in each such case, immediately after the close of business on the Determination Date for such Cash Distribution, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on such Determination Date by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of(l) the amount of such Cash Distribution divided by (2) the number of shares of Common Stock outstanding on such Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date. (6) In case the Company or any Subsidiary shall make an Excess Purchase Payment, then, and in each such case, immediately prior to the opening of business on the day after the tender offer in respect of which such Excess Purchase Payment is to be made expires, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such tender offer by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of (A) the Excess Purchase Payment divided by (B) the number of shares of Common Stock outstanding (including any tendered shares) as of the Determination Date less the number of all shares validly tendered and not withdrawn as of the Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock as of such Determination Date. (7) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 2(h) 5 applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be the Determination Date), and (b) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (3) of this Section 2(b)). Rights, options, warrants or convertible securities issued by the Company entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights, options, warrants or convertible securities (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 2(b) not be deemed issued until the occurrence of the earliest Trigger Event. (8) Except as otherwise provided in the last sentence of this subsection (8) of Section 2(b) for the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 2(b) the current market price per share of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Prices for the five (5) consecutive Trading Days selected by the Company commencing not more than ten (10) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "ex date", when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way in the applicable securities market or on the applicable securities exchange without the fight to receive such issuance or distribution. The current market price with respect to any option issued to any employee or director of the Company or consultant to the Company shall be the fair market value on the date of grant determined by reference to the market price on the day of the grant of such option or to the market price at the close of business on the Trading Day immediately preceding such grant. (9) No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (9)) would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (9) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (10) The Company may make such increases in the Conversion Rate, for the remaining term of the Securities or any shorter term, in addition to those required by 6 paragraphs (1), (2), (3), (4), (5) and (6) of this Section 2(b) as it considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights, options, warrants or convertible securities to purchase or subscribe for stock or from any event treated as such for income tax purposes. (c) Whenever the Conversion Rate is adjusted as provided in Section 2(b), the Company shall compute the adjusted Conversion Rate in accordance with Section 2(b) and shall prepare a certificate (the "Conversion Rate Certificate") signed by the Senior Financial Officer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and shall promptly deliver such certificate to the holder of this Security. If the holders of the Convertible Notes and the Company cannot agree in writing as to the adjusted Conversion Rate in accordance with Section 2(b), the holders of the Convertible Notes and the Company shall determine the adjusted Conversion Rate in accordance with the following procedure. The holders of the Convertible Notes and the Company shall each appoint one registered securities broker, licensed with the Securities and Exchange Commission to sell securities to the public, which broker shall be a senior vice president, managing director or equivalent of a major securities brokerage company with offices in New York, New York. Each of such brokers shall have no less than ten (10) years experience in such field, shall be unaffiliated with, and their employer securities brokerage company shall be unaffiliated with, the holders of the Convertible Notes and the Company and shall not have previously participated in any underwriting of the Company's Common Stock in any public offering or provided any Material investment banking or corporate advisory services to the Company. The holders of the Convertible Notes and the Company shall make their appointments promptly and, in any event, within thirty (30) days from the date of the Conversion Rate Certificate. The two brokers shall meet and shall be instructed to render a determination of the adjusted Conversion Rate to the holders of the Convertible Notes and the Company within sixty (60) days of the date of the Conversion Rate Certificate. If the two brokers cannot agree, then each broker shall render their independent determination and the two brokers shall simultaneously therewith provide the name of a third broker acceptable to the two brokers meeting the criteria set forth above. The third broker shall be instructed to render a determination of the adjusted Conversion Rate within thirty (30) days of his or her appointment. The two closest determinations of the adjusted Conversion Rate shall be averaged mad shall constitute the adjusted Conversion Rate. If the two brokers cannot agree upon a third broker, the selection of a third broker shaI1 be submitted to binding arbitration in New York, New York under the rules of the American Arbitration Association. In the event that the difference between the Company's calculation of the adjusted Conversion Rate and the calculation of the adjusted Conversion Rate determined by the foregoing process is five percent (5%) or greater then the costs and expenses of the brokers and any arbitration shall be paid by and be the obligation of the Company and in the event that such difference is less than five percent (5O/o) the holders of the Convertible Notes (as a group) shall each pay its pro rata share of 50% of such costs and expenses and the Company shall pay 50% of such costs and expenses. (d) In case: 7 (1) the Company shall declare a dividend or other distribution on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 2(b); or (2) the Company shall authorize the granting to the holders of its Common Stock of rights, options, warrants or convertible securities to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) of any reclassification of the Common Stock of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or (4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (5) the Company or any Subsidiary shall commence a tender offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender offer); then the Company shall cause to be delivered to the holder of this Security, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options, warrants or convertible securities or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options, warrants or convertible securities are to be determined, (y) the date on which the right to make tenders under such tender offer expires or (z) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the dale as 0f which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (5) of this Section 2(d). (e) The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Security, the full number of shares of Common Stock then issuable upon the conversion of this Security. 8 (f) Except as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of this Security. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of this Security, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. (g) The Company agrees that all shares of Common Stock which may be delivered upon conversion of the Security, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable (and shall be issued out of the Company's authorized but unissued Common Stock) and, except as provided in the second sentence of Section 2(0, the Company will pay all taxes, liens and charges with respect to the issue thereof. (h) In case of any consolidation of the Company with any other Person, any merger of the Company into another Person or of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company) or any conveyance, sale, transfer or lease of all or substantially all of the properties and assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such properties and assets, as the case may be, shall execute and deliver to the holder of this Security a supplemental agreement providing that such holder has the right, during the period this Security shall be convertible as specified in Section 2(a), to convert this Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (including any Common Stock retainable) by a holder of the number of shares of Common Stock of the Company into which this Security might have been converted immediately prior to such consolidation, merger, conveyance, sale, transfer or lease, assuming such holder of Common Stock of the Company (i) is not a Person with which the Company consolidated, into which the Company merged or which merged into the Company or to which such conveyance, sale, transfer or lease was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise its fights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer, or lease is not the same for each share of Common Stock of the Company held immediately prior to such consolidation, merger, conveyance, sale, transfer or lease by others than a Constituent Person or an Affiliate of a Constituent Person and in respect of which such fights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 2(h) the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease by the holders of each Non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares). Such supplemental agreement shall provide for adjustments which, for events subsequent to the effective date of such 9 supplemental agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2. The above provisions of this Section 2(h) shall similarly apply to successive consolidations, mergers, conveyances, sales, transfers or leases. In this paragraph, "securities of the kind receivable" upon such consolidation, merger, conveyance, transfer, sale or lease by a holder of Common Stock means securities that, among other things, are registered and freely transferable under the Securities Act, and listed and approved for quotation in all securities markets, in each case to the same extent as such securities so receivable by a holder of Common Stock. (i) The Company (i) will effect all registrations with, and obtain all approvals by, all governmental authorities that may be necessary under any United States Federal or state law (including the Securities Act, the Exchange Act arid state securities and Blue Sky laws) for the shares of Common Stock issuable upon conversion of this Security to be lawfully issued and delivered as provided herein, and thereafter publicly traded (if permissible under the Securities Act) and qualified or listed as contemplated by clause (ii) (it being understood that the Company shall not be required to register the Common Stock issuable on conversion hereof under the Securities Act, except pursuant to the Registration Rights Agreement between the Company and the initial holder of this Security); and (ii) will list the shares of Common Stock required to be issued and delivered upon conversion of Securities, prior to such issuance or delivery, on each national securities exchange on which outstanding Common Stock is listed or quoted at the time of such delivery, or if the Common Stock is not then listed On any securities exchange, to qualify the Common Stock for quotation on the Nasdaq National Market or such other inter-dealer quotation system, if any, on which the Common Stock is then quoted. (j) For purposes hereof: (references to Sections shall mean Sections of this Security unless otherwise specified) "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day other than a Saturday, a Sunday or other day which shall be in Boston, Massachusetts or New York, New York or a legal holiday or a day on which commercial banks in Boston, Massachusetts or New York, New York are required or authorized to be closed. "Cash Distribution" means the distribution by the Company to holders of its Common Stock of cash, other than any cash that is distributed upon a merger or consolidation to which Section 2(h) applies or as part of a distribution referred to in paragraph (4) of Section 2(b). 10 "Change of Control" is defined in Section 3(0(2). "Closing" is defined in Section 1 of the Note Purchase Agreement. "Closing Price" means, with respect to the Common Stock of the Company, for any day, the reported last sale price per share on the Nasdaq National Market, or, if the Common Stock is not admitted to trading on the Nasdaq National Market, on the principal national securities exchange or inter-dealer quotation system on which the Common Stock is listed or admitted to trading, or if not admitted to trading on the Nasdaq National Market, or listed or admitted to trading on any national securities exchange or inter-dealer quotation system, the average of the closing bid and asked prices per share in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Common Stock" means the Common Stock, par value $.01 per share, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 2(h), shares issuable on conversion or repurchase of this Security shall include only shares of Common Stock or shares of any class or classes of common stock resulting from any reclassification or reclassifications thereof; provided, however, that if at any time there shall be more than one such resulting class, the shares so issuable on conversion of this Security shall include shares of all such classes, and the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Convertible Note(s)"shall mean one or more of the Company's 9.00% Senior Convertible Notes due June ---, 2004. "Conversion Price" is defined in Section 1. "Conversion Rate" is defined in Section 2(a). "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Designated Office" is defined in the Preamble. "Determination Date" means, in the case of a dividend or other distribution, including the issuance of rights, options, warrants or convertible securities, to the date fixed for the determination of those entitled to receive such dividend or other distribution, and in the case of a tender offer, the last time that tenders could have been made pursuant to such tender offer. 11 "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, licenses, written agreements or written governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "Excess Purchase Payment" means the product of (A) the excess, if any, of (i) the amount of cash plus the fair market value (as determined in good faith by the Company's Board of Directors) of any non-cash consideration required to be paid with respect to one share of Common Stock acquired or to be acquired in a tender offer made by the Company or any Subsidiary of the Company for all or any portion of the Common Stock over (ii) the current market price per share as of the last time that tenders could have been made pursuant to such tender offer and (B) the number of shares validly tendered and not withdrawn as of the Determination Date in respect of such tender offer. "Event of Default" is defined in the preamble to Section 4. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Hazardous Materials" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the remediation of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is restricted, prohibited or penalized by any applicable Environmental Law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "holder" means, with respect to this Security or any other Convertible Note, the Person in whose name it is registered in the register maintained by the Company pursuant to Section 6(d). 12 "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease (as defined by GAAP), upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Make-Whole Amount" is defined in Section 4(g). "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under the Note Purchase Agreement, the Registration Rights Agreement and the Convertible Notes, or (c) the validity or enforceability of this Agreement or the Convertible Notes. "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Note Purchase Agreement" is defined in the Preamble. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "Purchaser(s)" JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY; JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY and HANCOCK MEZZANINE PARTNERS "Registration Rights Agreement" means the Registration Rights Agreement dated as of the date hereof among the Purchasers and the Company. 13 "Repurchase Date" is defined in Section 3(a). "Repurchase Price" is defined in Section 3(a). "Responsible Officer" means any Senior Financial Officer and any other senior officer of the Company with responsibility for the administration of the relevant covenants in this Security or in the Note Purchase Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "Senior Financial Officer" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Trading Day" means (i) if the Common Stock is admitted to trading on the Nasdaq National Market or any other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq National Market or listed or admitted for trading on any national securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the over-the-counter market and for which a closing bid and a closing asked price for the Common Stock are available. 3. Right to Require Repurchase. (a) In the event that a Change in Control shall occur, then the holder of this Security shall have the right, at such holder's option, to require the Company to repurchase, and upon the exercise of such fight the Company shall repurchase, this Security, or any portion of the principal amount hereof that is equal to $1,000 or any integral multiple thereof, on the date (the "Repurchase Date") that is thirty (30) Trading Days after the date on which the Company gives notice thereof to the holder of this Security, at a purchase price equal to 100% of the principal amount of this Security to be repurchased plus interest accrued to 14 the Repurchase Date (the "Repurchase Price"); provided, however, that installments of interest on this Security whose stated maturity is on or prior to the Repurchase Date shall be payable to the holder of this Security, or one or more predecessor Securities, registered as such on the relevant Record Date according to their terms. 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 each of Section 5 and Section 6 and subject to the limitations set forth in each of Section 5 and Section 6, by delivery of shares of Common Stock or in common stock of any Person which succeeds the Company up to a maximum amount often percent (10%) of the then issued and outstanding Common Stock or common stock of such Person following any Change in Control, provided, however, the cash plus the fair market value of such shares shall equal the Repurchase Price. The Company agrees to give the holder of this Security notice of any Change in Control, by facsimile transmission confirmed in writing by overnight courier service, promptly and in any event within two (2) Trading Days of the occurrence thereof. (b) To exercise a repurchase right, the holder shall deliver to the Company on or before the 10th Trading Day prior to the Repurchase Date, together with this Security, written notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the number of shares of Common Stock then owned by such holder and its affiliates, the principal amount of this Security to be repurchased (and, if this Security is to be repurchased in part, the portion of the principal amount thereof to be repurchased and the name of the person in which the portion thereof to remain outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase right is being made thereby and, in the event that the Repurchase Price shall be paid in whole or in part by the delivery of shares, as provided above, the name or names (and the addresses) in which the certificates for shares shall be issued. Such written notice shall be irrevocable, except that the fight of the holder to convert this Security (or the portion hereof with respect to which the repurchase right is being exercised) shall continue until the close of business on the Repurchase Date (or if the Company elects to pay the Repurchase Price by delivery of shares as provided above, until the close of business on the Trading Day immediately preceding the first delivery of shares with respect thereto). (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the holder the Repurchase Price in cash or shares, as provided above, together with accrued and unpaid interest to the Repurchase Date; provided, however, that installments of interest that mature on or prior to the Repurchase Date shall be payable in cash, to the holders of this Security, or one or more predecessor Securities, registered as such at the close of business on the relevant regular record date. (d) If this Security (or portion thereof) is surrendered for repurchase and is not so paid on or prior to the Repurchase Date, the principal amount of this Security (or such portion hereof, as the case may be) shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at eleven percent (11%) per annum, and shall remain convertible into Common Stock until the principal of this Security (or portion thereof, as the case may be) shall have been paid or duly provided for. 15 (e) If this Security is to be repurchased only in part, it shall be surrendered to the Company at the Designated Office (with, if the Company so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing), and the Company shall execute and make available for delivery to the holder without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. (f) For purposes of this Section 3. (1) the term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission pursuant to the Exchange Act; and (2) a "Change in Control" shall be deemed to have occurred at the time, after the original issuance of this Security, of: (i) the acquisition by any Person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the election of directors (any shares of voting stock of which such Person is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any such acquisition by the Company or any employee benefit plan of the Company; or (ii) any consolidation or merger of the Company with or into, any other Person, any merger of another Person with or into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the assets of the Company to another Person (other than (a) any such transaction (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock and (y) pursuant to which holders of Common Stock immediately prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving Person immediately after such transaction and (b) any merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock into solely shares of common stock, 4. Events of Default. (a) "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, 16 decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) (A) default in the payment of any principal or premium, if any, upon this Security when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise or (B) default in the payment of any interest upon this Security when it becomes due and payable, and continuance of such default for a period of five (5) days; or (2) default by the Company in the performance of its obligations in respect of any conversion of this Security (or any portion hereof) in accordance with Section 2; or (3) failure by the Company to give any notice of a Change of Control required to be delivered in accordance with Section 3(a); or (4) default in the performance, or breach, of any material covenant or warranty of the Company herein, in the Note Purchase Agreement, or in the Registration Rights Agreements (other than a covenant or warranty a default in the performance or breach of which is specifically dealt with elsewhere in this Section 4(a)) and continuance of such default or breach for a period of 30 days after the earlier to occur of(A) the Company's obtaining knowledge of such default or (B) the Company's receiving written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (6) a final judgment or judgments for the payment of money aggregating in excess of $250,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (7) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company, or under any agreement, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company, with a principal amount then outstanding in excess of $1,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of such indebtedness (in whole or in any part greater than $1,000,000) when due and payable or shall have resulted in such indebtedness (in whole or in any part greater than $1,000,000) becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable; or 17 (8) if (i) any Plan other than a Multiemployer Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan other than a Multiemployer Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan other than a Multiemployer Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan other than a Multiemployer Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans other than a Multiemployer Plan, determined in accordance with Title IV of ERISA, shall exceed $250,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. (As used in this Section 4(a)(8), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA.); or (9) if, as a result of any Change of Control or any other consolidation or merger, the holding by the Purchasers or any assignees thereof of this Security or the holding of any Common Stock or common stock of any Person succeeding the Company, issued to the Purchasers or any assignees thereof after conversion of this Security would constitute, with respect to any Plan (other than a Multiemployer Plan) a prohibited transaction which would violate the prohibitions of section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975 (c)(1)(A)-(D) of the Code; or (10) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or 18 (11) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or similar relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or not paying its debts as they become due or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. (b) If an Event of Default (other than an Event of Default specified in Section 4(a)(10) or 4(a)(11)) occurs and is continuing, then in every such case the holder of this Security may declare the principal hereof to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal and all accrued interest hereon shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security (i) the entire principal of and interest accrued on this Security, and (ii) in addition, to the extent permitted by applicable law, an amount equal to the Make Whole Amount, as liquidated damages and not as a penalty; and, in case of the occurrence of an Event of Default of the character described in subdivisions 4(a)(10) or 4(a)(11) the principal of and accrued interest on this Security, ipso facto shall become immediately due and payable without any declaration or other act of the holder of this Security and without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security (x) the entire principal of and interest accrued on this Security and (y) in addition, if such Event of Default is "Voluntary" (as hereinafter defined), to the extent permitted by applicable law, an amount equal to the Make-Whole Amount, as liquidated damages and not as a penalty. For purposes of this section 4(a), "Voluntary" shall mean an Event of Default of the character described in subdivisions 4(a)(10) or 4(a)(11) which shall have been (x) procured by the Company or any officer, director, stockholder or Affiliate of the Company or (y) primarily the result of action or inaction by the Company or by any officer, director, stockholder or Affiliate of the Company. (c) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, and irrespective of whether this Security has become or has been declared immediately due and payable under section 4(a), the holder of this Security may proceed to protect and enforce its rights either by suit in equity or by action at law, or both. The Company stipulates that the remedies at law of the holder of this Security in the event of any Default or threatened Default by the Company in the performance of or compliance with any covenant or agreement in 19 this Security, the Note Purchase Agreement or the Registration Rights Agreement are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance thereof, whether by an injunction against a violation thereof or otherwise. (d) No remedy conferred in this Security, the Note Purchase Agreement or the Registration Rights Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or thereunder or now or hereafter existing at law or in equity or by statute or otherwise. (e) No course of dealing between the Company and any of its Subsidiaries, on the one hand, and the holder of this Security, on the other hand, and no delay by any such holder in exercising any rights hereunder or under the Note Purchase Agreement or the Registration Rights Agreement shall operate as a waiver of any rights of such holder. (f) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, all amounts to be applied to the prepayment or payment of this Security shall be applied, after the payment of all related costs and expenses incurred by the holder of this Security (including, without limitation, compensation to any and all trustees, liquidators, receivers or similar officials and reasonable fees, expenses and disbursements of counsel) in such order of priority as is determined by the holder of this Security. (g) The term "Make-Whole Amount" means, with respect to this Security, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of this Security over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "Called Principal" means, with respect to this Security, the principal of this Security that has become or is declared to be immediately due and payable pursuant to Section 4(b). "Discounted Value" means, with respect to the Called Principal of this Security, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on this Security is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of this Security, 150 basis points over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "PX-I" of the Bloomberg Financial Markets Services Screen for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such 20 Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H. 15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payment" means, with respect to the Called Principal of this Security, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of this Security, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date. "Settlement Date" means, with respect to the Called Principal of this Security, the date on which such Called Principal or has become or is declared to be immediately due and payable pursuant to Section 4(b). 5. Consolidation, Merger, Etc. (a) The Company shall not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or sale, or which leases, all or substantially all the properties and assets of the Company shall be a corporation, limited 21 liability company, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, executed and delivered to the holder of this Security in form satisfactory to the holder, the due and punctual payment of the principal of(and premium, if any) and interest on this Security and the performance or observance of every covenant of this Security on the part of the Company to be performed or observed, including the conversion rights provided herein (which shall thereafter relate to common stock of such successor, on a basis reasonably designed to preserve the economic value to the holder of this Security of such conversion rights); (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary of the Company as a result of such transaction as having been incurred by the Company or such Subsidiary of the Company at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (3) the Company has delivered to the holder of this Security an officers' certificate stating that such consolidation, merger, conveyance, transfer, sale or lease and, if a supplemental agreement is required in connection with such transaction, such supplemental agreement, comply with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with; and (4) counsel for the Company has delivered to the holder of this Security an opinion of such counsel with respect to such consolidation, merger, conveyance, transfer, sale or lease, and if a supplemental agreement is required in connection with such transaction, such supplemental agreement, which opinion shall be, in form and substance, reasonably acceptable to such holder and its counsel. (b) Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer, sale or lease of all or substantially all of the properties and assets of the Company in accordance with Section 5(a), the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer, sale or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Security with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Security. 6. Payment in Stock. (a) The Company may elect to pay some or all of the Repurchase Price by delivery of shares of Common Stock or shares of common stock in any Person succeeding the Company, if and only if, each of the following conditions shall be satisfied (without limiting any other conditions contained herein): (1) Any such payment shall be made in five equal installments, on each of the five consecutive Trading Days ending on and including the third Trading Day immediately preceding 22 the date when any cash payment would otherwise be due, and the shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of each such installment shall have a fair market value as of the date of such installment of not less than 20% of the amount of such payment due hereunder which is payable in shares of stock. For purposes of this Section 6, the fair market value of shares of Common Stock shall be equal to 95% of the Closing Price for the immediately preceding Trading Day; (2) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder 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 of 1933 upon issuance, such registration shall have been completed and shall have become effective prior to the date of the first such installment; (3) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder 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 issuance or transferred freely, such registration shall have been completed or have become effective and such approval shall have been obtained, in each case, prior to the date of the first such installment; (4) The shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall have been approved for quotation in the Nasdaq National Market immediately prior to the date of the first such installment or, if at the time its shares of Common Stock or shares of common stock of any Person succeeding the Company are listed or admitted for trading on any national securities exchange, the shares of Common Stock or common stock in any Person succeeding the Company and deliverable shall have been so listed or admitted for trading. (5) All shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall, upon issue, be duly and validly issued and fully paid and non-assessable and free of any preemptive rights; (6) In respect of each such payment date, the Company shall have given the holder of this Security not less than 10 nor more than 15 Trading Days' notice of its election to effect payment in respect of such payment date by delivery of shares of Common Stock; provided that any such notice shall accompany the Company's notice of a Change of Control relating thereto; and (7) The Company shall deliver, or cause to be delivered a certificate from the Person succeeding the Company which states, that after giving effect to any Change of Control that the holding by the Purchasers or any assignees thereof of this Security, or the holding of any Common Stock or common stock of any Person succeeding the Company after conversion of this Security would not constitute a prohibited transaction which would violate the prohibition of 23 section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975 (c)(1)(A)-(D) of the Code. If all of the conditions set forth in this Section 6(a) are not satisfied in accordance with the terms hereof, any such amount due hereunder shall be paid by the Company only in cash. (b) Any issuance of shares of Common Stock or shares of common stock of any Person succeeding the Company in respect of any installment due hereunder pursuant to this Section 6 shall be deemed to have been effected immediately prior to the close of business on the date of delivery of such installment and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such delivery shall be deemed to have become on such date the holder or holders of record of the shares represented thereby; provided, however, that in case any installment shall be due on a date when the stock transfer books of the Company shall be closed, the person or persons in whose name or names the certificate or certificates for such shares are to be issued shall be deemed to have become 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 pursuant to this Section 6 declared prior to the relevant delivery date; and (c) Any issuance and delivery of certificates for shares of common stock or shares of common stock of any Person succeeding the Company pursuant to this Section 6 shall be made without charge to the holder of this Security for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the securities represented thereby. 7. Other. (a) No provision of this Security shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security in cash at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Security as herein provided. (b) The Company will give prompt written notice to the holder of Security of any change in the location of the Designated Office. (c) The transfer of this Security is registrable on the Security Register of the Company upon surrender of this Security for registration of transfer at the Designated Office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Such Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service charge shall be made for any such registration of transfer, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this Security for registration of transfer, the Company and any agent of the Company may treat the Person in whose name this 24 Security is registered as the owner thereof for all purposes, whether or not this Security be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. (d) The Company shall keep at the Designated Office a register for the registration and registration of transfers of Convertible Notes. The name and address of each holder of one or more Convertible Notes, each transfer thereof and the name and address of each transferee of one or more Convertible Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Convertible Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Convertible Note promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Convertible Notes. (e) Upon surrender of any Convertible Note at the Designated Office for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Convertible Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Convertible Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Convertible Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Convertible Note. Each such new Convertible Note shall be payable to such Person as such holder may request and shall be substantially in the form of this Security. Each such new Convertible Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Convertible Note or dated the date of the surrendered Convertible Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of this Security. Convertible Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Convertible Notes, one Convertible Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Convertible Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 3 of the Note Purchase Agreement. (f) Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Security (which evidence shall be notice from such holder of such ownership and such loss, theft, destruction or mutilation), and (i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of this Security is, or is a nominee for, an original holder or another institutional investor holder of this Security, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (ii) in the case of mutilation, upon surrender and cancellation thereof, 25 the Company at its own expense shall execute and deliver, in lieu thereof, a new Convertible Note. dated and bearing interest from the date to which interest shall have been paid on such lost, stolen. destroyed or mutilated Convertible Note or dated the date of such lost, stolen, destroyed or mutilated Convertible Note if no interest shall have been paid thereon. (G) THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. (h) So long as you or your nominee shall be holder of this Security and notwithstanding anything in this Security to the contrary, the Company will pay all sums becoming due hereunder for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule I of the Note Purchase Agreement, or by such other method provided in the Preamble or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of this Security, or the making of any notation hereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment in full of this Security, you shall surrender this Security for cancellation, reasonably promptly after any such request to the Company at its principal executive office or at the place of payment most recently designated by the Company. Prior to any sale or other disposition of this Security you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender this Security to the Company in exchange for a new Convertible Note pursuant to the terms hereof. The Company will afford the benefits of this Section to any institutional investor that is the direct or indirect transferee of this Security. [END OF PAGE - SIGNATURE PAGE FOLLOWS] 26 1N WITNESS WHEREOF, the Company has caused this Security to be duly executed under its corporate seal. Dated: ,1999 CELGENE CORPORATION By: ---------------------- Name: Title: Attest: - ----------------------------------- Name: Title: 27 EX-10.26 12 EXHIBIT 10.26 EXHIBIT 10.26 THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. CELGENE CORPORATION 9.00% SENIOR CONVERTIBLE NOTE DUE JUNE 30, 2004 PPN No.: 151020 A@ 3 $3,500,000 No. R-1 July 6, 1999 CELGENE CORPORATION, a corporation duly organized and existing under the laws of Delaware (the "Company") for value received, hereby promises to pay to John Hancock Mutual Life Insurance Company, or registered assigns, the principal sum of Three Million Five Hundred Thousand Dollars ($3,500,000) on June 30, 2004 and to pay interest thereon, from July 6, 1999, or from the most recent interest payment date to which interest has been paid or duly provided for, semi-annually on June 30 and December 31 in each year, commencing December 31, 1999, at the rate of 9.00% per annum, until the principal hereof is due, and at the rate of 11.00% per annum on any overdue principal and premium, if any, and, to the extent permitted by law, on any overdue interest. The interest so payable, and punctually paid or duly provided for, on any interest payment date will be paid to the person in whose name this Security (or one or more predecessor Securities) is registered at the close of business on the regular record date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such interest payment date. Payment of the principal of (and premium, if any, on) this Security shall be made upon the surrender of this Security to the Company, at its office at 7 Powder Horn Drive, Warren, NJ 07059 (or such other office within the United States as shall be notified by the Company to the holder hereof) (the "Designated Office"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, by transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America. Payment of interest on this Security shall be made by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States of America, provided that if the holder shall not have furnished wire instructions in writing to the Company no later than the record date relating to an interest payment date, such payment may be made by U.S. dollar check mailed to the address of the Person entitled thereto as such address shall appear in the Company security register. This Security will rank pari passu with all existing and future senior debt of the Company. This Security is one of the Company's 9.00% Senior Convertible Notes due June 30, 2004, limited to $15,000,000.00 aggregate principal amount, issued pursuant to that certain Note Purchase Agreement dated July 6, 1999 (such agreements, as amended, modified and supplemented from time to time, the "Note Purchase Agreement") between the Company and the Purchasers named therein, and the holder hereof is entitled to the benefits of the Note Purchase Agreement, and may enforce the agreements contained herein and therein and exercise the remedies provided for hereby and thereby or otherwise available in respect hereof and thereof, all in accordance with the terms hereof and thereof. 1. Optional Redemption With Premium. This Security is subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time on or after July 6, 2001, as a whole or in part, (in any amount that is an integral multiple of $1000) at the election of the Company, at a redemption price of 103% the principal amount thereof, together with accrued interest to the redemption date, but interest installments whose stated maturity is on or prior to such redemption date will be payable to the holder of this Security, or one or more predecessor Securities, of record at the close of business on the relevant record dates referred to on the face hereof; provided, however, that the Company may not redeem this Security on or prior to July 6, 2002 unless the Closing Price of the Common Stock exceeds 225% of the Conversion Price for each Trading Day in a period of 20 Consecutive Trading Days commencing not earlier than July 6, 2001. The term "Conversion Price" on any day shall equal $1,000 divided by the Conversion Rate in effect on each such day. 2. Conversion. (a) The holder of this Security is entitled at any time on or after July 6, 2000 and before the close of business on June 30, 2004 (or, in case this Security or a portion hereof is called for redemption or the holder hereof has exercised its fight to require the Company to repurchase this Security or a portion hereof, then in respect of this Security or such portion hereof, as the case may be, until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the redemption date or the Repurchase Date, as the case may be) to convert this Security (or any portion of the principal amount hereof that is an integral multiple of $1,000), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at the rate of 52.63 shares of Common Stock for each $1,000 principal amount of Security (or at the current adjusted rate if an adjustment has been made as provided below) (the "Conversion Rate") by surrender of this Security, duly endorsed or assigned to the Company or in blank to the Company at the Designated Office, accompanied by written notice to the Company that the holder hereof elects to convert this Security (or if less than the entire principal amount hereof is to be converted, specifying the portion hereof to be converted). Upon surrender of this Security for conversion, the holder will be entitled to receive the interest accruing on the principal amount of this Security then being converted from the interest payment date next preceding the date of such conversion to such date of conversion. No payment or adjustment is to be made on conversion for dividends on the Common Stock issued on conversion hereof. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest, the Company shall pay a cash adjustment, 2 computed on the basis of the Closing Price of the Common Stock on the date of conversion, or, at its option, the Company shall round up to the next higher whole share. This Security shall be deemed to have been converted immediately prior to the close of business on the day of surrender hereof for conversion, in accordance with the foregoing provisions, and at such time the rights of the holder hereof, as a holder hereof, shall cease, and the Person or Persons entitled to receive the Common Stock issuable on conversion shall be treated by all Persons as the holder or holders of such Common Stock at such time. Upon any partial conversion of this Security, the Company, at its expense, will forthwith issue and deliver to, or upon the order of the holder hereof, a new Convertible Note or Convertible Notes in principal amount equal to the unconverted principal amount of such surrendered Convertible Note, such new Convertible Note or Convertible Notes to be dated and to bear interest from the date to which interest has been paid on such surrendered Convertible Note. As promptly as possible after the conversion of this Security, in whole or in part, and in any event within ten (10) days thereafter, the Company, at its expense, will issue and deliver a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion. (b) The Conversion Rate shall be subject to adjustments from time to time as follows: (1) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company payable in shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the Determination Date for such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following such Determination Date. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall issue rights, options, warrants or convertible securities entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (8) of this Section 2(o)) of the Common Stock on the Determination Date for such distribution, the Conversion Rate in effect at the opening of business on the day following such Determination Date, shall be increased by dividing such Conversion Rate by a fraction of 3 which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock which the aggregate amount received by the Company upon the issuance of such rights, options, warrants or convertible securities plus the aggregate amount receivable by the Company upon the exercise or conversion of such rights, options, warrants or convertible securities would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock so offered for subscription or purchase, such increase to become effective immediately after the opening of business on the day following such Determination Date provided, that no such adjustment need to be made in the case of the granting by the Company to employees or directors of the Company or consultants to the Company of Common Stock and/or options to purchase Common Stock and the issuance of Common Stock upon the exercise of such options. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights, options, warrants or convertible securities in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall each be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of paragraph (7) of this Section 2(b), in case the Company shall, by dividend or otherwise, distribute evidences of its indebtedness, shares of any class of capital stock, or other property (including securities, but excluding (i) any rights, options, warrants or convertible security referred to in paragraph (2) of this Section 2(b) (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (1) of this Section 2(b) and (iv) any merger or consolidation to which Section 2(h) applies), the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less the then fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, shares or evidences of 4 indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following such Determination Date provided, that no such adjustment need be made in the case of an underwritten public offering of Common Stock in which the shares of Common Stock are sold to the public at a price per share equal to or in excess of 95% of the market price per share of the Common Stock as of the date of the pricing of such underwritten public offering. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section 2(b). (5) In case the Company shall, by dividend or otherwise, make a Cash Distribution, then, and in each such case, immediately after the close of business on the Determination Date for such Cash Distribution, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on such Determination Date by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of(l) the amount of such Cash Distribution divided by (2) the number of shares of Common Stock outstanding on such Determination Date and (b) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date. (6) In case the Company or any Subsidiary shall make an Excess Purchase Payment, then, and in each such case, immediately prior to the opening of business on the day after the tender offer in respect of which such Excess Purchase Payment is to be made expires, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such tender offer by a fraction (a) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less an amount equal to the quotient of (A) the Excess Purchase Payment divided by (B) the number of shares of Common Stock outstanding (including any tendered shares) as of the Determination Date less the number of all shares validly tendered and not withdrawn as of the Determination Date and (b)the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock as of such Determination Date. (7) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 2(h) 5 applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be the Determination Date), and (b) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (3) of this Section 2(b)). Rights, options, warrants or convertible securities issued by the Company entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights, options, warrants or convertible securities (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 2(b) not be deemed issued until the occurrence of the earliest Trigger Event. (8) Except as otherwise provided in the last sentence of this subsection (8) of Section 2(0) for the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 2(b) the current market price per share of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Prices for the five (5) consecutive Trading Days selected by the Company commencing not more than ten (10) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "ex date", when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way in the applicable securities market or on the applicable securities exchange without the fight to receive such issuance or distribution. The current market price with respect to any option issued to any employee or director of the Company or consultant to the Company shall be the fair market value on the date of grant determined by reference to the market price on the day of the grant of such option or to the market price at the close of business on the Trading Day immediately preceding such grant. (9) No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (9)) would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (9) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (10) The Company may make such increases in the Conversion Rate, for the remaining term of the Securities or any shorter term, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section 2(b) as it considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights, options, warrants or convertible securities to purchase or subscribe for stock or from any event treated as such for income tax purposes. (c) Whenever the Conversion Rate is adjusted as provided in Section 2(b), the Company shall compute the adjusted Conversion Rate in accordance with Section 2(b) and shall prepare a certificate (the "Conversion Rate Certificate") signed by the Senior Financial Officer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and shall promptly deliver such certificate to the holder of this Security. If the holders of the Convertible Notes and the Company cannot agree in writing as to the adjusted Conversion Rate in accordance with Section 2(b), the holders of the Convertible Notes and the Company shall determine the adjusted Conversion Rate in accordance with the following procedure. The holders of the Convertible Notes and the Company shall each appoint one registered securities broker, licensed with the Securities and Exchange Commission to sell securities to the public, which broker shall be a senior vice president, managing director or equivalent of a major securities brokerage company with offices in New York, New York. Each of such brokers shall have no less than ten (10) years experience in such field, shall be unaffiliated with, and their employer securities brokerage company shall be unaffiliated with, the holders of the Convertible Notes and the Company and shall not have previously participated in any underwriting of the Company's Common Stock in any public offering or provided any Material investment banking or corporate advisory services to the Company. The holders of the Convertible Notes and the Company shall make their appointments promptly and, in any event, within thirty (30) days from the date of the Conversion Rate Certificate. The two brokers shall meet and shall be instructed to render a determination of the adjusted Conversion Rate to the holders of the Convertible Notes and the Company within sixty (60) days of the date of the Conversion Rate Certificate. If the two brokers cannot agree, then each broker shall render their independent determination and the two brokers shall simultaneously therewith provide the name of a third broker acceptable to the two brokers meeting the criteria set forth above. The third broker shall be instructed to render a determination of the adjusted Conversion Rate within thirty (30) days of his or her appointment. The two closest determinations of the adjusted Conversion Rate shall be averaged and shall constitute the adjusted Conversion Rate. If the two brokers cannot agree upon a third broker, the selection of a third broker shall be submitted to binding arbitration in New York, New York under the rules of the American Arbitration Association. In the event that the difference between the Company's calculation of the adjusted Conversion Rate and the calculation of the adjusted Conversion Rate determined by the foregoing process is five percent (5%) or greater then the costs and expenses of the brokers and any arbitration shall be paid by and be the obligation of the Company and in the event that such difference is less than five percent (5%) the holders of the Convertible Notes (as a group) shall each pay its pro rata share of 50% of such costs and expenses and the Company shall pay 50% of such costs and expenses. (d) In case: 7 (1) the Company shall declare a dividend or other distribution on its Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any adjustment pursuant to Section 2(b); or (2) the Company shall authorize the granting to the holders of its Common Stock of rights, options, warrants or convertible securities to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) of any reclassification of the Common Stock of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or (4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (5) the Company or any Subsidiary shall commence a tender offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender offer); then the Company shall cause to be delivered to the holder of this Security, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options, warrants or convertible securities or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options, warrants or convertible securities are to be determined, (y) the date on which the right to make tenders under such tender offer expires or (z) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (5) of this Section 2(d). (e) The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Security, the full number of shares of Common Stock then issuable upon the conversion of this Security. 8 (f) Except as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of this Security. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of this Security, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid. (g) The Company agrees that all shares of Common Stock which may be delivered upon conversion of the Security, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable (and shall be issued out of the Company's authorized but unissued Common Stock) and, except as provided in the second sentence of Section 2(f), the Company will pay all taxes, liens and charges with respect to the issue thereof. (h) In case of any consolidation of the Company with any other Person, any merger of the Company into another Person or of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company) or any conveyance, sale, transfer or lease of all or substantially all of the properties and assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such properties and assets, as the case may be, shall execute and deliver to the holder of this Security a supplemental agreement providing that such holder has the right, during the period this Security shall be convertible as specified in Section 2(a), to convert this Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (including any Common Stock retainable) by a holder of the number of shares of Common Stock of the Company into which this Security might have been converted immediately prior to such consolidation, merger, conveyance, sale, transfer or lease, assuming such holder of Common Stock of the Company (i) is not a Person with which the Company consolidated, into which the Company merged or which merged into the Company or to which such conveyance, sale, transfer or lease was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise its rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer, or lease is not the same for each share of Common Stock of the Company held immediately prior to such consolidation, merger, conveyance, sale, transfer or lease by others than a Constituent Person or an Affiliate of a Constituent Person and in respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this Section 2(h) the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance, sale, transfer or lease by the holders of each Non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-electing Shares). Such supplemental agreement shall provide for adjustments which, for events subsequent to the effective date of such 9 supplemental agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2. The above provisions of this Section 2(h) shall similarly apply to successive consolidations, mergers, conveyances, sales, transfers or leases. In this paragraph, "securities of the kind receivable" upon such consolidation, merger, conveyance, transfer, sale or lease by a holder of Common Stock means securities that, among other things, are registered and freely transferable under the Securities Act, and listed and approved for quotation in all securities markets, in each case to the same extent as such securities so receivable by a holder of Common Stock. (i) The Company (i) will effect all registrations with, and obtain all approvals by, all governmental authorities that may be necessary under any United States Federal or state law (including the Securities Act, the Exchange Act and state securities and Blue Sky laws) for the shares of Common Stock issuable upon conversion of this Security to be lawfully issued and delivered as provided herein, and thereafter publicly traded (if permissible under the Securities Act) and qualified or listed as contemplated by clause (ii) (it being understood that the Company shall not be required to register the Common Stock issuable on conversion hereof under the Securities Act, except pursuant to the Registration Rights Agreement between the Company and the initial holder of this Security); and (ii) will list the shares of Common Stock required to be issued and delivered upon conversion of Securities, prior to such issuance or delivery, on each national securities exchange on which outstanding Common Stock is listed or quoted at the time of such delivery, or if the Common Stock is not then listed on any securities exchange, to qualify the Common Stock for quotation on the Nasdaq National Market or such other inter-dealer quotation system, if any, on which the Common Stock is then quoted. (j) For purposes hereof: (references to Sections shall mean Sections of this Security unless otherwise specified) "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day other than a Saturday, a Sunday or other day which shall be in Boston, Massachusetts or New York, New York or a legal holiday or a day on which commercial banks in Boston, Massachusetts or New York, New York are required or authorized to be closed. "Cash Distribution" means the distribution by the Company to holders of its Common Stock of cash, other than any cash that is distributed upon a merger or consolidation to which Section 2(h) applies or as part of a distribution referred to in paragraph (4) of Section 2(b). 10 "Change of Control" is defined in Section 3(f)(2). "Closing" is defined in Section 1 of the Note Purchase Agreement. "Closing Price" means, with respect to the Common Stock of the Company, for any day, the reported last sale price per share on the Nasdaq National Market, or, if the Common Stock is not admitted to trading on the Nasdaq National Market, on the principal national securities exchange or inter-dealer quotation system on which the Common Stock is listed or admitted to trading, or if not admitted to trading on the Nasdaq National Market, or listed or admitted to trading on any national securities exchange or inter-dealer quotation system, the average of the closing bid and asked prices per share in the over-the-counter market as furnished by any New York Stock Exchange member from selected from time to time by the Company for that purpose. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Common Stock" means the Common Stock, par value $.01 per share, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of Section 20a), shares issuable on conversion or repurchase of this Security shall include only shares of Common Stock or shares of any class or classes of common stock resulting from any reclassification or reclassifications thereof; provided, however, that if at any time there shall be more than one such resulting class, the shares so issuable on conversion of this Security shall include shares of all such classes, and the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Convertible Note(s)"shall mean one or more of the Company's 9.00% Senior Convertible Notes due June 30, 2004. "Conversion Price" is defined in Section 1. "Conversion Rate" is defined in Section 2(a). "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Designated Office" is defined in the Preamble. "Determination Date" means, in the case of a dividend or other distribution, including the issuance of rights, options, warrants or convertible securities, to the date fixed for the determination of those entitled to receive such dividend or other distribution, and in the case of a tender offer, the last time that tenders could have been made pursuant to such tender offer. 11 "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, licenses, written agreements or written governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "Excess Purchase Payment" means the product of(A) the excess, if any, of(i) the amount of cash plus the fair market value (as determined in good faith by the Company's Board of Directors) of any non-cash consideration required to be paid with respect to one share of Common Stock acquired or to be acquired in a tender offer made by the Company or any Subsidiary of the Company for all or any portion of the Common Stock over (ii) the current market price per share as of the last time that tenders could have been made pursuant to such tender offer and (B) the number of shares validly tendered and not withdrawn as of the Determination Date in respect of such tender offer. "Event of Default" is defined in the preamble to Section 4. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Hazardous Materials" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the remediate, on of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is restricted, prohibited or penalized by any applicable Environmental Law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "holder" means, with respect to this Security or any other Convertible Note, the Person in whose name it is registered in the register maintained by the Company pursuant to Section 6(d). 12 "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease (as defined by GAAP), upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Make-Whole Amount" is defined in Section 4(g). "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under the Note Purchase Agreement, the Registration Rights Agreement and the Convertible Notes, or (c) the validity or enforceability of this Agreement or the Convertible Notes. "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Note Purchase Agreement" is defined in the Preamble. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "Purchaser(s)" JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY; JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY and HANCOCK MEZZANINE PARTNERS "Registration Rights Agreement" means the Registration Rights Agreement dated as of the date hereof among the Purchasers and the Company. 13 "Repurchase Date" is defined in Section 3(a). "Repurchase Price" is defined in Section 3(a). "Responsible Officer" means any Senior Financial Officer and any other senior officer of the Company with responsibility for the administration of the relevant covenants in this Security or in the Note Purchase Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as the same shall be in effect from time to time. "Senior Financial Officer" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Trading Day" means (i) if the Common Stock is admitted to trading on the Nasdaq National Market or any other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq National Market or listed or admitted for trading on any national securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the over-the-counter market and for which a closing bid and a closing asked price for the Common Stock are available. 3. Right to Require Repurchase. (a) In the event that a Change in Control shall occur, then the holder of this Security shall have the right, at such holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, this Security, or any portion of the principal amount hereof that is equal to $1,000 or any integral multiple thereof, on the date (the "Repurchase Date") that is thirty (30) Trading Days after the date on which the Company gives notice thereof to the holder of this Security, at a purchase price equal to 100% of the principal amount of this Security to be repurchased plus interest accrued to 14 the Repurchase Date (the "Repurchase Price"); provided, however, that installments of interest on this Security whose stated maturity is on or prior to the Repurchase Date shall be payable to the holder of this Security, or one or more predecessor Securities, registered as such on the relevant Record Date according to their terms. 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 each of Section 5 and Section 6 and subject to the limitations set forth in each of Section 5 and Section 6, by delivery of shares of Common Stock or in common stock of any Person which succeeds the Company up to a maximum amount often percent (10%) of the then issued and outstanding Common Stock or common stock of such Person following any Change in Control, provided, however, the cash plus the fair market value of such shares shall equal the Repurchase Price. The Company agrees to give the holder of this Security notice of any Change in Control, by facsimile transmission confirmed in writing by overnight courier service, promptly and in any event within two (2) Trading Days of the occurrence thereof. (b) To exercise a repurchase right, the holder shall deliver to the Company on or before the 10th Trading Day prior to the Repurchase Date, together with this Security, written notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the number of shares of Common Stock then owned by such holder and its affiliates, the principal amount of this Security to be repurchased (and, if this Security is to be repurchased in part, the portion of the principal amount thereof to be repurchased and the name of the person in which the portion thereof to remain outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase right is being made thereby and, in the event that the Repurchase Price shall be paid in whole or in pan by the delivery of shares, as provided above, the name or names (and the addresses) in which the certificates for shares shall be issued. Such written notice shall be irrevocable, except that the right of the holder to convert this Security (or the portion hereof with respect to which the repurchase fight is being exercised) shall continue until the close of business on the Repurchase Date (or if the Company elects to pay the Repurchase Price by delivery of shares as provided above, until the close of business on the Trading Day immediately preceding the first delivery of shares with respect thereto). (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the holder the Repurchase Price in cash or shares, as provided above, together with accrued and unpaid interest to the Repurchase Date; provided, however, that installments of interest that mature on or prior to the Repurchase Date shall be payable in cash, to the holders of this Security, or one or more predecessor Securities, registered as such at the close of business on the relevant regular record date. (d) If this Security (or portion thereof) is surrendered for repurchase and is not so paid on or prior to the Repurchase Date, the principal amount of this Security (or such portion hereof, as the case may be) shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at eleven percent (11%) per annum, and shall remain convertible into Common Stock until the principal of this Security (or portion thereof, as the case may be) shall have been paid or duly provided for. 15 (e) If this Security is to be repurchased only in part, it shall be surrendered to the Company at the Designated Office (with, if the Company so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing), and the Company shall execute and make available for delivery to the holder without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. (f) For purposes of this Section 3. (1) the term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission pursuant to the Exchange Act; and (2) a "Change in Control" shall be deemed to have occurred at the time, after the original issuance of this Security, of: (i) the acquisition by any Person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the election of directors (any shares of voting stock of which such Person is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any such acquisition by the Company or any employee benefit plan of the Company; or (ii) any consolidation or merger of the Company with or into, any other Person, any merger of another Person with or into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the assets of the Company to another Person (other than (a) any such transaction (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock and (y) pursuant to which holders of Common Stock immediately prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving Person immediately after such transaction and (b) any merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock into solely shares of common stock, 4. Events of Default. (a) "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, 16 decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) (A) default in the payment of any principal or premium, if any, upon this Security when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise or (B) default in the payment of any interest upon this Security when it becomes due and payable, and continuance of such default for a period of five (5) days; or (2) default by the Company in the performance of its obligations in respect of any conversion of this Security (or any portion hereof) in accordance with Section 2; or (3) failure by the Company to give any notice of a Change of Control required to be delivered in accordance with Section 3(a); or (4) default in the performance, or breach, of any material covenant or warranty of the Company herein, in the Note Purchase Agreement, or in the Registration Rights Agreements (other than a covenant or warranty a default in the performance or breach of which is specifically dealt with elsewhere in this Section 4(a)) and continuance of such default or breach for a period of 30 days after the earlier to occur of(A) the Company's obtaining knowledge of such default or (B) the Company's receiving written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (6) a final judgment or judgments for the payment of money aggregating in excess of $250,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (7) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company, or under any agreement, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company, with a principal amount then outstanding in excess of $1,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of such indebtedness (in whole or in any pan greater than $1,000,000) when due and payable or shall have resulted in such indebtedness (in whole or in any part greater than $1,000,000) becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable; or 17 (8) if(i) any Plan other than a Multiemployer Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan other than a Multiemployer Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan other than a Multiemployer Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan other than a Multiemployer Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans other than a Multiemployer Plan, determined in accordance with Title IV of ERISA, shall exceed $250,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. (As used in this Section 4(a)(8), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA.); or (9) if, as a result of any Change of Control or any other consolidation or merger, the holding by the Purchasers or any assignees thereof of this Security or the holding of any Common Stock or common stock of any Person succeeding the Company, issued to the Purchasers or any assignees thereof after conversion of this Security would constitute, with respect to any Plan (other than a Multiemployer Plan) a prohibited transaction which would violate the prohibitions of section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975(c)(1)(A)-(D) of the Code; or (10) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or 18 (11) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or similar relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or not paying its debts as they become due or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. b) If an Event of Default (other than an Event of Default specified in Section 4(a)(10) or 4(a)(11)) occurs and is continuing, then in every such case the holder of this Security may declare the principal hereof to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal and all accrued interest hereon shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security (i) the entire principal of and interest accrued on this Security, and (ii) in addition, to the extent permitted by applicable law, an amount equal to the Make Whole Amount, as liquidated damages and not as a penalty; and, in case of the occurrence of an Event of Default of the character described in subdivisions 4(a)(10) or 4(a)(11) the principal of and accrued interest on this Security, ipso facto shall become immediately due and payable without any declaration or other act of the holder of this Security and without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith upon any such acceleration pay to the holder of this Security (x) the entire principal of and interest accrued on this Security and (y) in addition, if such Event of Default is "Voluntary" (as hereinafter defined), to the extent permitted by applicable law, an amount equal to the Make-Whole Amount, as liquidated damages and not as a penalty. For purposes of this section 4(a), "Voluntary" shall mean an Event of Default of the character described in subdivisions 4(a)(10) or 4(a)(11) which shall have been (X) procured by the Company or any officer, director, stockholder or Affiliate of the Company or (y) primarily the result of action or inaction by the Company or by any officer, director, stockholder or Affiliate of the Company. (c) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, and irrespective of whether this Security has become or has been declared immediately due and payable under section 4(a), the holder of this Security may proceed to protect and enforce its rights either by suit in equity or by action at law, or both. The Company stipulates that the remedies at law of the holder of this Security in the event of any Default or threatened Default by the Company in the performance of or compliance with any covenant or agreement in 19 this Security, the Note Purchase Agreement or the Registration Rights Agreement are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance thereof, whether by an injunction against a violation thereof or otherwise. (d) No remedy conferred in this Security, the Note Purchase Agreement or the Registration Rights Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or thereunder or now or hereafter existing at law or in equity or by statute or otherwise. (e) No course of dealing between the Company and any of its Subsidiaries, on the one hand, and the holder of this Security, on the other hand, and no delay by any such holder in exercising any rights hereunder or under the Note Purchase Agreement or the Registration Rights Agreement shall operate as a waiver of any rights of such holder. (f) In case any one or more of the Events of Default specified in section 4(a) shall have occurred, all amounts to be applied to the prepayment or payment of this Security shall be applied, after the payment of all related costs and expenses incurred by the holder of this Security (including, without limitation, compensation to any and all trustees, liquidators, receivers or similar officials and reasonable fees, expenses and disbursements of counsel) in such order of priority as is determined by the holder of this Security. (g) The term "Make-Whole Amount" means, with respect to this Security, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of this Security over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "Called Principal" means, with respect to this Security, the principal of this Security that has become or is declared to be immediately due and payable pursuant to Section 4(b). "Discounted Value" means, with respect to the Called Principal of this Security, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on this Security is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of this Security, 150 basis points over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "PX-I" of the Bloomberg Financial Markets Services Screen for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such 20 Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H. 15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payment" means, with respect to the Called Principal of this Security, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of this Security, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date. "Settlement Date" means, with respect to the Called Principal of this Security, the date on which such Called Principal or has become or is declared to be immediately due and payable pursuant to Section 4(b). 5. Consolidation, Merger, Etc. (a) The Company shall not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or sale, or which leases, all or substantially all the properties and assets of the Company shall be a corporation, limited 21 liability company, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, executed and delivered to the holder of this Security in form satisfactory to the holder, the due and punctual payment of the principal of (and premium, if any) and interest on this Security and the performance or observance of every covenant of this Security on the part of the Company to be performed or observed, including the conversion rights provided herein (which shall thereafter relate to common stock of such successor, on a basis reasonably designed to preserve the economic value to the holder of this Security of such conversion rights); (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary of the Company as a result of such transaction as having been incurred by the Company or such Subsidiary of the Company at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; (3) the Company has delivered to the holder of this Security an officers' certificate stating that such consolidation, merger, conveyance, transfer, sale or lease and, if a supplemental agreement is required in connection with such transaction, such supplemental agreement, comply with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with; and (4) counsel for the Company has delivered to the holder of this Security an opinion of such counsel with respect to such consolidation, merger, conveyance, transfer, sale or lease, and if a supplemental agreement is required in connection with such transaction, such supplemental agreement, which opinion shall be, in form and substance, reasonably acceptable to such holder and its counsel. (b) Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer, sale or lease of all or substantially all of the properties and assets of the Company in accordance with Section 5(a), the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer, sale or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Security with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Security. 6. payment in Stock. (a) The Company may elect to pay some or all of the Repurchase Price by delivery of shares of Common Stock or shares of common stock in any Person succeeding the Company, if and only if, each of the following conditions shall be satisfied (without limiting any other conditions contained herein): (1) Any such payment shall be made in five equal installments, on each of the five consecutive Trading Days ending on and including the third Trading Day immediately preceding 22 the date when any cash payment would otherwise be due, and the shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of each such installment shall have a fair market value as of the date of such installment of not less than 20% of the amount of such payment due hereunder which is payable in shares of stock. For purposes of this Section 6, the fair market value of shares of Common Stock shall be equal to 95% of the Closing Price for the immediately preceding Trading Day; (2) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder 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 of 1933 upon issuance, such registration shall have been completed and shall have become effective prior to the date of the first such installment; (3) In the event any shares of Common Stock or common stock of any Person succeeding the Company to be issued in respect of any amount due hereunder 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 issuance or transferred freely, such registration shall have been completed or have become effective and such approval shall have been obtained, in each case, prior to the date of the first such installment; (4) The shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall have been approved for quotation in the Nasdaq National Market immediately prior to the date of the first such installment or, if at the time its shares of Common Stock or shares of common stock of any Person succeeding the Company are listed or admitted for trading on any national securities exchange, the shares of Common Stock or common stock in any Person succeeding the Company and deliverable shall have been so listed or admitted for trading. (5) All shares of Common Stock or common stock of any Person succeeding the Company deliverable in payment of such amount due hereunder shall, upon issue, be duly and validly issued and fully paid and non-assessable and free of any preemptive rights; (6) In respect of each such payment date, the Company shall have given the holder of this Security not less than 10 nor more than 15 Trading Days' notice of its election to effect payment in respect of such payment date by delivery of shares of Common Stock; provided that any such notice shall accompany the Company's notice of a Change of Control relating thereto; and (7) The Company shall deliver, or cause to be delivered a certificate from the Person succeeding the Company which states, that after giving effect to any Change of Control that the holding by the Purchasers or any assignees thereof of this Security, or the holding of any Common Stock or common stock of any Person succeeding the Company after conversion of this Security would not constitute a prohibited transaction which would violate the prohibition of 23 section 406 of ERISA or which would subject any "disqualified person" (as defined in section 4975(e)(2) of the Code) to a tax pursuant to section 4975 (c)(1)(A)-(D) of the Code. If all of the conditions set forth in this Section 6(a) are not satisfied in accordance with the terms hereof, any such amount due hereunder shall be paid by the Company only in cash. (b) Any issuance of shares of Common Stock or shares of common stock of any Person succeeding the Company in respect of any installment due hereunder pursuant to this Section 6 shall be deemed to have been effected immediately prior to the close of business on the date of delivery of such installment and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such delivery shall be deemed to have become on such date the holder or holders of record of the shares represented thereby; provided, however, that in case any installment shall be due on a date when the stock transfer books of the Company shall be closed, the person or persons in whose name or names the certificate or certificates for such shares are to be issued shall be deemed to have become 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 pursuant to this Section 6 declared prior to the relevant delivery date; and (c) Any issuance and delivery of certificates for shares of common stock or shares of common stock of any Person succeeding the Company pursuant to this Section 6 shall be made without charge to the holder of this Security for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the securities represented thereby. 7. Other. (a) No provision of this Security shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security in cash at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Security as herein provided. (b) The Company will give prompt written notice to the holder of Security of any change in the location of the Designated Office. (c) The transfer of this Security is registrable on the Security Register of the Company upon surrender of this Security for registration of transfer at the Designated Office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Such Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service Charge shall be made for any such registration of transfer, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this Security for registration of transfer, the Company and any agent of the Company may treat the Person in whose name this 24 Security is registered as the owner thereof for all purposes, whether or not this Security be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. (d) The Company shall keep at the Designated Office a register for the registration and registration of transfers of Convertible Notes. The name and address of each holder of one or more Convertible Notes, each transfer thereof and the name and address of each transferee of one or more Convertible Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Convertible Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company Shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Convertible Note promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Convertible Notes. (e) Upon surrender of any Convertible Note at the Designated Office for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Convertible Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Convertible Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Convertible Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Convertible Note. Each such new Convertible Note shall be payable to such Person as such holder may request and shall be substantially in the form of this Security. Each such new Convertible Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Convertible Note or dated the date of the surrendered Convertible Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of this Security. Convertible Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Convertible Notes, one Convertible Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Convertible Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 3 of the Note Purchase Agreement. (f) Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Security (which evidence shall be notice from such holder of such ownership and such loss, theft, destruction or mutilation), and (i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of this Security is, or is a nominee for, an original holder or another institutional investor holder of this Security, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (ii) in the case of mutilation, upon surrender and cancellation thereof, 25 the Company at its own expense shall execute and deliver, in lieu thereof, a new Convertible Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Convertible Note or dated the date of such lost, stolen, destroyed or mutilated Convertible Note if no interest shall have been paid thereon. (G) THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. (h) So long as you or your nominee shall be holder of this Security and notwithstanding anything in this Security to the contrary, the Company will pay all sums becoming due hereunder for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule I of the Note Purchase Agreement, or by such other method provided in the Preamble or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of this Security, or the making of any notation hereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment in full of this Security, you shall surrender this Security for cancellation, reasonably promptly after any such request to the Company at its principal executive office or at the place of payment most recently designated by the Company. Prior to any sale or other disposition of this Security you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender this Security to the Company in exchange for a new Convertible Note pursuant to the terms hereof. The Company will afford the benefits of this Section to any institutional investor that is the direct or indirect transferee of this Security. [END OF PAGE - SIGNATURE PAGE FOLLOWS] 26 IN WITNESS WHEREOF. the Company has caused this Security to be duly executed under its corporate seal. Dated: July 6, ,1999 --------------------- CELGENE CORPORATION By: -------------------------- Name: Robert J. Hugin Title: Senior Vice President CFO Attest - ------------------------------ Name: Sanford Kaston Title: Treasurer; CIO 27 ELECTION OF HOLDER TO REQUIRE REPURCHASE 1. Pursuant to Section 3(a) of this Security, the undersigned hereby elects to have all or a portion of this Security repurchased by the Company. 2. The undersigned hereby directs the Company to pay [choose one] (a) it or (b) Name: ; address: ; Social Security or Other Taxpayer Identification Number, if any: , an amount in cash or equal to 100% of the principal amount to be repurchased (as set forth below), plus interest accrued to the Repurchase Date, as provided herein. CONVERSION NOTICE The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security, or any portion of the principal amount hereof (which is an integral multiple of $1,000) below designated, into shares of Common Stock (subject to the limitation set forth in the second paragraph of Section 2(a) of the Security) in accordance with the terms of this Security, and directs that such shares, together with a check in payment for any fractional share and any Security representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If shares of Common Stock or Securities are to be registered in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated: --------------------------- ------------------------- Signature EX-10.27 13 EXHIBIT 10.27 EXHIBIT 10.27 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of July 6, 1999, by and between Celgene Corporation, a Delaware corporation (the "Company"), and John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, and Hancock Mezzanine Partners L.P. (collectively, the "Purchasers" and singly, each "Purchaser") entered into in connection with the issuance of a Convertible Note due June 30, 2004 convertible into shares of Common Stock, par value $.01 per share ("Common Stock") of the Company. 1. Certain Definitions. For purposes of this Registration Rights Agreement, the following terms shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Exchange Act or the Securities Act, whichever is the relevant statute for the particular purpose. (b) Convertible Note" shall mean the Convertible Note due June 30, 2004, of the Company to be issued and sold to the Purchaser, and any Convertible Note issued in exchange therefor or in lieu thereof. (c) "Effective Time" shall mean the date on which the Commission declares the Shelf Registration effective or on which the Shelf Registration otherwise becomes effective. (d) "Exchange Act" shall mean the Securities Exchange Act of 1934, or any successor thereto and the rules and regulations promulgated thereunder, as the same shall be amended from time to time. (e) "Issue Date" shall mean the date on which a Convertible Note is initially issued. (f) The term "person" shall mean a corporation, association, partnership, organization, business, individual, government or political subdivision thereof or governmental agency. (g) ";Registration Expenses" shall have the meaning assigned thereto in Section 4 hereof. (h) ".Securities Act" shall mean the Securities Act of 1933, or any successor thereto and the rules and regulations promulgated thereunder, as the same shall be amended from time to time. (i) "Shares" means the shares of Common Stock issuable upon exercise of the Convertible Note. (j) "Shelf Registration" shall have the meaning assigned thereto in Section 2 hereof. In addition, capitalized terms not defined herein shall have the meaning ascribed in the Convertible Note. 2. Shelf Registration of Shares. (a) Not later than July 6, 2000, the Company shall file under the Securities Act a "shelf" registration statement providing for the registration of, and the sale on a continuous or delayed basis by the Purchasers of, all shares issuable upon conversion of the Convertible Notes, pursuant to Rule 415 under the Securities Act and/or any similar rule that may be adopted by the Commission (the "Shelf Registration"). The Company agrees to use its best efforts to cause the Shelf Registration to become or be declared effective no later than 45 calendar days after the filing thereof and to keep such Shelf Registration continuously effective for a period ending on the earliest to occur of (i) the second anniversary of the Issue Date, (ii) notification to the Company by each Purchaser that it has sold all Shares issuable upon conversion of the Convertible Notes so owned by it, or (iii) such time as the Purchasers may sell all of such shares pursuant to Rule 144(k) under the Securities Act. The Company further agrees, if necessary, to supplement or make amendments to the Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration or by the Securities Act or rules and regulations thereunder for shelf registration, and the Company agrees to furnish to each Purchaser copies of any such supplement or amendment prior to its being used and/or filed with the Commission, and will not file any such supplement or amendment to which any Purchaser reasonably objects. (b) Notwithstanding the foregoing, following the effectiveness of the Shelf Registration, the Company many, at any time, suspend the effectiveness of such Shelf Registration for up to 60 days, as appropriate (a "Suspension Period"), by giving notice to each Purchaser, if the Company shall have determined that the Company may be required to disclose any material corporate development which disclosure may jeopardize a material transaction or otherwise have a material adverse effect on the Company. The Company will use its best efforts to minimize the length of any Suspension Period. Notwithstanding the foregoing, no more than one Suspension Period may occur within any 180 day period, and no Suspension Period shall be effective at any time the Company or any affiliate of the Company is publicly selling shares of the capital stock of the Company (other than pursuant to a registration statement on the Securities and Exchange Commission Form S-8). The period of any such suspension of registration statement shall be added to the period of time the Company agrees to keep the Shelf Registration effective as provided in Section 2(a). Each Purchaser agrees that, upon receipt of any notice from the Company of a Suspension Period, such Purchaser shall forthwith discontinue disposition of shares covered by the Shelf Registration until such Purchaser (i) is advised in writing by the Company that the use of the 2 applicable prospectus may be resumed, (ii) has received copies of a supplemental or amended prospectus, if applicable, and (iii) has received copies of any additional or supplemental filings which are incorporation or deemed to be incorporated by reference in such prospectus. 3. Registration Procedures. (a) In connection with any obligation of the Company to register Shares, the Company shall use its best efforts to effect or cause such registration to permit the sale of the Shares by the Purchasers in accordance with the intended method or methods of distribution thereof described in the applicable registration statement. In connection therewith, the Company shall, within the time specified in Section 2 above: (i) prepare and file with the Commission a registration statement on any form which may be utilized by the Company and which shall permit the disposition of the Shares in accordance with the intended method or methods thereof, as specified in writing by each Purchaser; (ii) comply with the provisions of the Securities Act with respect to the disposition of all of the Shares covered by such registration statement in accordance with the intended methods of disposition by each Purchaser set forth in such registration statements; (iii) provide (A) each Purchaser, (B) the underwriters (which term, for purposes of these Registration Rights, shall include a person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, thereof, (C) the sales or placement agent, if any, therefor, (D) counsel for such underwriters or agent, and (E) counsel for the Purchasers the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment or supplement thereto; (iv) for a reasonable period prior to the filing of such registration statement, and throughout the period specified in Section 2 hereof, make available for inspection by the parties referred to in Section 3(a)(iii) above who shall certify to the Company that they have a current intention to sell the Shares pursuant to the registration statement such financial and other information and books and records of the Company, and cause the officers, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to in such Section, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that each such party shall be required to maintain in confidence and not to disclose to any other person any information or records provided by the Company and clearly marked or otherwise adequately identified by the Company as being confidential until such time as (A) such information becomes a matter of public record (whether by virtue of its inclusion in 3 such registration statement or otherwise), or (B) such person shall be required so to disclose such information pursuant to the subpoena or order of any court or other governmental agency or body having jurisdiction over the matter or over such party (subject to the requirements of such order, and only after such person shall have given the Company prompt prior written notice of such requirement), or (C) such information is required to be set forth in .such registration statement or the prospectus included therein or in an amendment to such registration statement or an amendment or supplement to such prospectus in order that such registration statement, prospectus, amendment or supplement, as the case may be, does not contain an untrue statement of a material fact or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (v) promptly notify each Purchaser, the sales or placement agent, if any, therefor and the managing underwriter or underwriters, if any, thereof and confirm such advice in writing, (A) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (B) of any comments by the Commission and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or any request by the Commission for amendments or supplements to such registration statement or prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation or overt threatening of any proceedings for that purpose, (D) if at any time the representations and warranties of the Company contemplated by Section 5 hereof cease to be true and correct in all material respects, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or overt threatening of any proceeding for such purpose, or (F) at any time when a prospectus is required to be delivered under the Securities Act, if such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (vi) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement or any post-effective amendment thereto at the earliest practicable date; (vii) if requested by any managing underwriter or underwriters, any placement or sales agent or any Purchaser, promptly incorporate in a prospectus supplement or post-effective amendment such information as is required by the applicable rules and regulations of the Commission that such managing underwriter or underwriters, such agent or such Purchaser specify should be included therein 4 relating to the terms of the sale of such Shares, including, without limitation, information with respect to the number of Shares being sold by such Purchaser or agent or to any underwriters, the name and description of such Purchaser, agent or underwriter, the offering price of such Shares and any discount, commission or other compensation payable in respect thereof, the purchase price being paid therefor by such underwriters and with respect to any other terms of the offering of the Shares to be sold by such Purchaser or agent or to such underwriters; and make all required filings of such prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus supplement or post-effective amendment; (viii) furnish to each Purchaser, each placement or sales agent, if any, therefor, each underwriter, if any, thereof and the respective counsel referred to in Section 3(a)(iii) a copy of such registration statement in the form in which it became effective, each such amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and such number of copies of such registration statement (excluding exhibits thereto and documents incorporated by reference therein unless specifically so requested by any Purchaser, agent or underwriter, as the case may be) and of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as any Purchaser, agent, if any, and underwriter, if any, may reasonably request in order to facilitate the offering and disposition of the Shares owned by such Purchaser, offered or sold by such agent or underwritten by such underwriter and to permit such Purchaser, agent and underwriter to satisfy the prospectus delivery requirements of the Securities Act; and the Company hereby consents to the use of such prospectus (including such preliminary and summary prospectus) and any amendment or supplement thereto by any Purchaser and by any such agent and underwriter, in each case in the form most recently provided to such party by the Company, in connection with the offering and sale of the Shares covered by the prospectus (including such preliminary and summary prospectus) or any supplement or amendment thereto; (ix) use its best efforts to (A) register or qualify the Shares to be included in such registration statement under such securities laws or blue sky laws of such jurisdictions as each Purchaser and each placement or sales agent, if any, therefor and underwriter, if any, thereof shall reasonably request, (B) keep such registrations or qualifications in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein in such jurisdictions during the respective periods such registration statements are required to remain effective under Section 2 above and for so long as may be necessary to enable each Purchaser or any agent or underwriter to complete its distribution of Shares pursuant to such registration statement and (C) take any and all other actions as may be reasonably necessary or advisable to enable each Purchaser, agent, if any, and underwriter, if any, to 5 consummate the disposition in such jurisdictions of such Shares; provided, however, that the Company shall not be required for any such purpose to (I) qualify as a foreign corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 3(a)(ix) or (II) consent to general service of process in any such jurisdiction; (x) use its best efforts to obtain the consent or approval of each governmental agency or authority, whether federal, state or local, which may be required to effect the Shelf Registration or the offering or sale in connection therewith or to enable the Purchaser to offer, or to consummate the disposition of, its Shares; (xi) cooperate with each Purchaser and the managing underwriters, if any, to facilitate the timely preparation and delivery of any certificates representing Shares to be sold, which certificates shall be printed, lithographed or engraved, or produced by any combination of such methods, and which shall not, once sold under the Shelf Registration, bear any restrictive legends; and, in the case of an underwritten offering, enable such Shares to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of the Shares; (xii) enter into one or more underwriting agreements, engagement letters, agency agreements or similar agreements, as appropriate, including (without limitation) customary provisions relating to indemnification and contribution, and take such other actions in connections therewith as any Purchaser shall reasonably request in order to expedite or facilitate the disposition of the Shares; (xiii) notify each Purchaser in writing of any proposal by the Company to amend or waive any provision of these Registration Rights pursuant to Section 7(g) hereof and of any amendment or waiver effected pursuant thereto, each of which notices shall contain the text of the amendment or waiver proposed or effected, as the case may be; (xiv) in the event that any broker-dealer registered under the Exchange Act shall underwrite any Shares or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Rules of Fair Practice and the By-Laws of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, assist such broker-dealer in complying with the requirements of such Rules and By-Laws, including, without limitation, by providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules of Fair Practice of the NASD; 6 (xv) comply with all applicable rules and regulations of the Commission, and make generally available to its security holders as soon as practicable but in any event not later than eighteen months after the effective date of such registration statement, an earning statement of the Company and in subsidiaries complying with Section 11(a) of the Securities Act (including, at the option of the Company, Rule 158 thereunder); and (xvi) use its best efforts to have the Shares approved for trading on the Nasdaq National Market. (b) In the event that the Company would be required, pursuant to Section 3(a)(v)(F) above, to notify each Purchaser, the placement or sales agent, if any, therefor and the managing underwriters, if any, thereof, the Company shall without delay prepare and furnish to each Purchaser, to each placement or sales agent, if any, and to each underwriter, if any, a reasonable number of copies of a prospectus supplemented or amended in form and substance reasonably satisfactory to them, so that, as thereafter delivered to purchasers of Shares, such prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each Purchaser agrees that upon receipt of any notice from the Company pursuant to Section 3(a)(v)(F) hereof, such Purchaser shall forthwith discontinue the disposition of Shares pursuant to the registration statement applicable to such Shares until such Purchaser shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, such Purchaser shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Purchaser's possession of the prospectus covering such Shares at the time of receipt of such notice. (c) The Company may require any Purchaser to furnish to the Company such information regarding such Purchaser and such Purchaser's intended method of distribution of the Shares as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Securities Act. Each Purchaser agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Purchaser to the Company or of the occurrence of any event in either case as a result of which any prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding such Purchaser or such Purchaser's intended method of distribution of such Shares or omits to state any material fact regarding such Purchaser or such Purchaser's intended method of distribution of such Shares required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such prospectus shall not contain, with respect to such Purchaser or the distribution of such Shares, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each Purchaser agrees that upon delivering any notice to the Company pursuant to this Section 3(c), such Purchaser shall forthwith discontinue the disposition of Shares pursuant to the registration statement applicable to such Shares until such 7 Purchaser shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, such Purchaser shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Purchaser's possession of the prospectus covering such Shares at the time of receipt of such notice. 4. Registration Expenses. The Company agrees to bear and to pay or cause to be paid promptly upon request being made therefor all expenses incident to the Company's performance of or compliance with these Registration Rights as they relate to the Shelf Registration, including, without limitation, (i) all Commission and any NASD registration and filing fees and expenses, (ii) all fees and expenses in connection with the qualification of the Shares for offering and sale under the State securities and blue sky laws referred to in Section 3(a)(ix) hereof, including reasonable fees and disbursements of counsel for the placement or sales agent or underwriters in connection with such qualifications, (iii) all fees and expenses in connection with the approval for trading of the Shares on the Nasdaq National Market, (iv) all expenses relating to the preparation, printing, distribution and reproduction of each registration statement required to be filed hereunder, each prospectus included therein or prepared for distribution pursuant hereto, each amendment or supplement to the foregoing, the certificates representing the Shares and all other documents relating hereto, (v) internal expenses (including, without limitation, all salaries and expenses of the Company's officers and employees performing legal or accounting duties), and (vi) fees, disbursements and expenses of counsel and independent certified public accountants of the Company (including the expenses of any opinions or "cold comfort" letters required by or incident to such performance and compliance) (collectively, the "Registration Expenses"). Notwithstanding the foregoing, such Purchaser shall pay all agency fees and commissions and underwriting discounts and commissions attributable to the sale of the Shares and the fees and disbursements of any counsel or other advisors or experts retained by such Purchaser in connection with the sale of its shares. 5. Representations and Warranties. The Company represents and warrants to, and agrees with, each Purchaser that: (a) Each registration statement covering Shares and each prospectus (including any preliminary or summary prospectus) contained therein or furnished pursuant to Section 3(a)(viii) hereof and any further amendments or supplements to any such registration statement or prospectus, when it becomes effective or is filed with the Commission, as the case may be, and, in the case of an underwritten offering of Shares, at the time of the closing under the underwriting agreement relating thereto will conform in all material respects to the requirements of the Securities Act, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at all times subsequent to the Effective Time when a prospectus would be required to be delivered under the Securities Act, other than from (i) such time as a notice has been give to such Purchaser pursuant to Section 3(a)(v)F) hereof until (ii) such time as the Company furnishes an amended or supplemented prospectus pursuant to Section 3(b) hereof, each such registration statement, and each prospectus 8 (including any summary prospectus) contained therein or furnished pursuant to Section 3(a)(viii) hereof, as then amended or supplemented, will conform in all material respects to the requirements of the Securities Act, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by such Purchaser expressly for use therein. (b) Any documents incorporated by reference in any prospectus referred to in Section 5(a) hereof, when they become or became effective or are or were filed with the Commission, or if amended, when amended, as the case may be, will conform or conformed in all material respects to the requirements of the Exchange Act, and none of such documents will contain or contained an untrue statement of a material fact or will omit or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by such Purchaser expressly for use therein. 6. Indemnification. (a) Indemnification by the Company. Upon the registration of Shares pursuant to Section 2 hereof, and in consideration of the agreements of the Purchasers contained herein, and as an inducement to the Purchasers to purchase the Convertible Notes, the Company shall, and it hereby agrees to, indemnify and hold harmless each Purchaser and each person who participates as a placement or sales agent or as an underwriter in any offering or sale of such Shares against any losses, claims, damages or liabilities, joint or several, to which such Purchaser or any such agent or underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Shares were registered under the Securities Act, or any preliminary, final or summary prospectus contained therein or furnished by the Company to such Purchaser, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company shall, and it hereby agrees to, reimburse such Purchaser, such agent and such underwriter for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable to any such Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or preliminary, final or summary prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Person expressly for use therein; provided further, however, that the Company shall not be liable to any such Person if such Person failed to deliver a prospectus in the form most recently provided by the Company (including any amendments or supplements thereto previously provided by the 9 Company), in any such case to the extent that any loss, claim, damage or liability arises out of or is based upon an untrue statement or an omission which was corrected in such most recently furnished prospectus (including any such amendments or supplements). (b) Indemnification by the Purchaser and any Agents and Underwriters. The Company may require, as a condition to including any Shares in any registration statement filed pursuant to Section 2 hereof and to entering into an underwriting agreement, if any, with respect thereto, that the Company shall have received an undertaking reasonably satisfactory to it from each participating Purchaser and from each underwriter, if any, named in any such underwriting agreement, severally and not jointly or jointly and severally, to (i) indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such registration statement, or any preliminary, final or summary prospectus contained therein or furnished by the Company to any Purchaser, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Purchaser or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. Notwithstanding the above, the obligation of such Purchaser for indemnity shall be limited to an amount equal to the net proceeds received by such Purchaser in the applicable underwriting. (c) Notices of Claims, Etc. Promptly after receipt by an indemnified party under subsection (a) or (b) above of written notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party pursuant to the indemnification provisions of or contemplated by this Section 6, notify such indemnifying party in writing of the commencement of such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under the indemnification provisions of or contemplated by Section 6(a) or 6(b) hereof. In case any such action shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, such indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, such indemnifying party shall not be liable to such indemnified party for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation unless, in the case of an indemnification obligation arising under Section (a), (i) the employment of such additional counsel has been authorized in writing by the Company in connection with defending such action, 10 or (ii) the Company and the Purchaser are advised by such additional counsel that the Purchaser has available defenses involving a potential conflict with the interests of the Company, in which event, the fees and expenses of such additional counsel shall be borne by the Company. No indemnifying party shall consent to entry of any judgment or enter into any settlement of a claim against an indemnified party without the consent of the indemnified party which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of an unconditional release from all liability in respect to such claim or litigation. (d) Contribution. Each party hereto agrees that, if for any reason the indemnification provisions contemplated by Section 6(a) or Section 6Co) are unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by indemnified party on the one hand and the indemnifying party on the other from any offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and each Purchaser on the other shall be deemed to be in the same proportion as the total purchase price received by the Company upon issuance of the Convertible Note bears to the difference between the proceeds from the offering of the Shares received by such Purchaser and such purchase price. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were determined by pro rata allocation (even if any Purchaser or any agents or underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), no Purchaser shall be required to contribute any amounts in excess of the amount by which the dollar amount of the proceeds received by such Purchaser from the sale of any Shares (after deducting any fees, discounts and commissions applicable thereto) exceeds the amount of any damages which such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no underwriter shall be required to contribute any amount in excess of the amount by 11 which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribute from any person who was not guilty of such fraudulent misrepresentation. Any underwriters' obligations in this Section 6(d) to contribute shall be several in proportion to the principal amount of Shares underwritten by them and not joint. (e) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have and shall emend, upon the same terms and conditions, to each officer, director and partner of each Purchaser, any agent and any underwriter and each person, if any, who controls such Purchaser or any agent or underwriter within the meaning of the Securities Act; and the obligations of each Purchaser and any agents and underwriters contemplated by this Section 6 shall be in addition to any liability which such Purchaser or any such agent or underwriter, respectively, may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his consent, is named in any registration statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Securities Act. 7. Miscellaneous (a) No Inconsistent Agreements. The Company represents, warrants, covenants and agrees that it has not granted, and shall not grant, registration rights with respect to Shares or any other securities which would conflict with the terms contained in these Registration Rights. (b) Specific Performance. The parties hereto acknowledge that there may be no adequate remedy at law if any party fails to perform any of its obligations hereunder and that each party may be irreparably harmed by any such failure, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under the Registration Rights in accordance with the terms and conditions of these Registration Rights, in any court of the United States or any State thereof having jurisdiction. (c) Notices. Any notice or other communication required or permitted to be given hereunder shall be deemed effectively given when personally delivered, telexed, transmitted by facsimile or mailed by pre-paid certified mail, return receipt requested, or by telephone when confirmed in writing by one of the preceding methods addressed as follows (as applicable): If to the Company, to: Celgene Corporation 7 Powder Horn Drive Warren, NJ 07059 12 Attention: John W. Jackson Telephone Number: (732) 271-1001 Facsimile Transmission Number: (732) 805-3931 with a copy to: Proskauer Rose LLP 1585 Broadway New York, NY 10036 Attention: Robert A. Cantone, Esq. Telephone Number: (212) 969-3000 Facsimile Transmission Number: (212) 969-2900 If to Purchasers, to the Person designated by Purchaser and at the address as set forth on Schedule I in the Note Purchase Agreement dated the date hereof between the Purchasers and the Company with a copy to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109 Attention: Frank B. Porter, Jr. Telephone Number: (617) 248-5000 Facsimile Transmission Number: (617) 248-4000 or to such other address or number and to the attention of such other person as either party may designate by written notice to the other party. Notice shall be effective upon actual receipt. (d) Survival. The respective indemnities, agreements, representations, warranties and each other provision set forth in these Registration Rights or made pursuant hereto shall remain in full force and effect regardless of any investigation (or statement as to the results thereof) made by or on behalf of each Purchaser, any director, officer or partner of such Purchaser, any agent or underwriter or any director, officer or partner thereof, or any controlling person of any of the foregoing and shall survive the transfer of the Shares by such Purchaser. (e) Law Governing. These Registration Rights shall be governed by and construed in accordance with the laws of the State of New York. (f) Headings. The descriptive headings of the several Sections and paragraphs of these Registration Rights are inserted for convenience only, do not constitute a part of these 13 Registration Rights and shall not affect in any way the meaning or interpretation of these Registration Rights. (g) Entire Agreement; Amendments. These Registration Rights and the other writings referred to herein or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. These Registration Rights supersede all prior agreements and understandings between the parties with respect to its subject matter. These Registration Rights may be amended and the observance of any term of these Registration Rights may be waived (either generally or in a particular instance and either retroactively or prospectively) only be a written instrument duly executed by the Company and each Purchaser. (h) Assignment. In connection with any permitted transfer of the Convertible Note or any portion thereof in a principal amount of not less than $100,000 any Purchaser may assign its rights hereunder in respect of such Convertible Note to the transferee. Upon such assignment the transferee shall, insofar as the transferred Convertible Notes are concerned, be entitled to all of the rights, and be subject to all of the obligations, of a Purchaser under these Registration Rights, and all references to such "Purchaser" herein shall thereafter be deemed to refer to the Purchaser, or such transferee, or both, as the circumstances warrant. (i) Counterparts. This agreement may be executed by the parties counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. [the remainder of this page is intentionally left blank] 14 [Signature Page of Registration Rights Agreement] Agreed to and accepted as of the date referred to above. CELGENE CORPORATION By: --------------------------------- Name: Robert J. Hugin ------------------------------- Title: Senior Vice President & CFO ------------------------------ JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: --------------------------------- Name:. Stephen J. Blewitt ------------------------------- Title: Senior Investment Officer ------------------------------ JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: --------------------------------- Name: Stephen J. Blewitt ------------------------------- Title: Senior Investment Officer ------------------------------ HANCOCK MEZZANINE PARTNERS L.P. By: Hancock Mezzanine Investments LLC, its General Partner By: John Hancock Mutual Life Insurance Company. as Investment Manager By: --------------------------------- Name: Stephen J. Blewitt -------------------------------- Title: Senior Investment Officer ------------------------------- Exchange.3019985.2 15 EX-23.1 14 EXHIBIT 23.1 EXHIBIT 23.1 Accountants' Consent The Board of Directors Celgene Corporation: We consent to incorporation by reference in the registration statements (No. 333-70083, 33-21462, 33-38296, 33-62510 and 333-91977) on Form S-8 and (No. 333-02517, 333-32115, 333-38861, 333-52963, 333-87197, 333-93759 and 333-94915) on Form S-3 of Celgene Corporation of our report dated January 27, 2000, except as to note 14, which is as of February 16, 2000, relating to the consolidated balance sheets of Celgene Corporation and subsidiary as of December 31, 1998 and 1999, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, and the related schedule, which report appears in the December 31, 1999 Annual Report on Form 10-K of Celgene Corporation. KPMG LLP Short Hills, New Jersey March 30, 2000 EX-27 15 FDS
5 0000816284 CELGENE CORPORATION 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 15,255,422 4,271,221 5,049,909 121,437 2,456,059 895,602 10,979,837 8,643,595 32,333,670 9,300,337 38,494,795 0 0 177,036 (15,886,423) 32,333,670 24,052,124 26,209,624 2,982,713 48,864,644 0 0 2,838,480 (24,799,110) 3,017,910 (21,781,200) 0 0 0 (21,781,200) (1.28) (1.28)
-----END PRIVACY-ENHANCED MESSAGE-----