Long-Term Obligations and Commitments

12 Months Ended

Dec. 31, 2011

Long-Term Obligations and Commitments

Long-Term Obligations and Commitments

5. Long-Term Obligations and Commitments

Long-term obligations consisted of the following (in thousands):

	December 31,
	2011			2010
25/8 percent convertible subordinated notes	$	141,448		$	132,895
Long-term financing liability for leased facility	69,877			10,147
Equipment financing arrangement	5,325			9,440
Leases and other obligations	2,190			1,925
Total	$	218,840		$	154,407
Less: current portion	(3,390		)	(5,645		)
Total Long-Term Obligations	$	215,450		$	148,762

Convertible Subordinated Notes

In January 2007, we completed a $162.5 million convertible debt offering, which raised proceeds of approximately $157.1 million, net of $5.4 million in issuance costs. We included the issuance costs in our balance sheet and are amortizing these costs to interest expense over the life of the debt. The $162.5 million convertible subordinated notes mature in 2027 and bear interest at 25/8 percent, which is payable in cash semi-annually. The 25/8 percent notes are convertible, at the option of the note holders, into approximately 11.1 million shares of our common stock at a conversion price of $14.63 per share. At December 31, 2011 and 2010, the principal and accrued interest payable on the notes was $162.5 million and $1.6 million, respectively.  The fair value based on quoted market prices was $151.1 million and $162.3 million, at December 31, 2011 and 2010, respectively.  We did not include the effect of the conversion of the note into our common stock in the computation of diluted net loss from continuing operations per share because the effect would have been anti-dilutive.

We will be able to redeem the 25/8 percent notes at a redemption price equal to 100.75 percent of the principal amount between February 15, 2012 and February 14, 2013; 100.375 percent of the principal amount between February 15, 2013 and February 14, 2014; and 100 percent of the principal amount thereafter. Holders of the 25/8percent notes may also require us to repurchase these notes on February 15, 2014, February 15, 2017 and February 15, 2022, and upon the occurrence of certain defined conditions, at 100 percent of the principal amount of the 25/8 percent notes being repurchased plus unpaid interest.

We account for the 25/8 percent notes using an accounting standard which requires us to assign a value to our convertible debt equal to the estimated fair value of a similar debt instrument without the conversion feature that results in us recording our convertible debt at a discount.  We are amortizing the resulting debt discount over the expected life of the debt as additional non-cash interest expense.  Using a combination of the present value of the debt’s cash flows and a Black-Scholes valuation model, we determined that our nonconvertible debt borrowing rate for the 25/8 percent notes was 9.3 percent. Interest expense for the year ended December 31, 2011, 2010 and 2009 included $8.6 million, $7.8 million and $7.1 million, respectively, of non-cash interest expense related to the amortization of the debt discount.

Equipment Financing Arrangement

In October 2008, we entered into a loan agreement related to an equipment financing and in September 2009, we amended the loan agreement to increase the aggregate maximum amount of principal we could draw under the agreement.  Under the amended loan agreement, we could borrow up to $18.4 million in principal to finance the purchase of equipment until July 2011.  Each draw down under the loan agreement has a term of three years, with principal and interest payable monthly.  We calculated interest on amounts we borrowed under the loan agreement based upon the three year interest rate swap at the time we made each draw down plus four percent.  We are using the equipment purchased under the loan agreement as collateral.  In 2011, we drew down an additional $1.6 million in principal under the loan agreement.  As of December 31, 2011, we had drawn down $18.3 million in principal under this loan agreement at a weighted average interest rate of 6.19 percent.  The carrying balance under this loan agreement at December 31, 2011 and 2010 was $5.3 million and $9.4 million, respectively.

Capital Lease

In 2010, we entered into a lease agreement associated with the purchase of certain office equipment.  Since the lease contains a bargain purchase option, we classified it as a capital lease.  At December 31, 2011 and 2010 we had approximately $656,000 and $773,000, respectively, outstanding under the lease.  The lease bears interest at a rate of 5.14 percent and has a term of five years.  We include the office equipment related to this capital lease in our property, plant and equipment.  At December 31, 2011 and 2010, this equipment had a net book value of $585,000 and $705,000, respectively, which included $228,000 and $65,000, respectively, of accumulated depreciation.

Maturity Schedules

Annual debt and other obligation maturities, including fixed and determinable interest, at December 31, 2011 are as follows (in thousands):

2012	$	7,938
2013	6,325
2014	163,087
2015	230
2016	60
Thereafter	1,140
Subtotal	$	178,780
Less: current portion	(3,390		)
Less: fixed and determinable interest	(9,941		)
Less: debt discount	(21,051		)
Deferred rent	1,175
Total	$	145,573

Operating Leases

We lease certain office equipment as well as office and laboratory space under non-cancelable operating leases with terms through December 2031.  We are located in three buildings in Carlsbad, California, including a 176,000 square foot leased facility that is accounted for as a financing obligation discussed below. We currently occupy approximately 231,000 square feet of laboratory and office space, including a 28,704 square foot facility, which houses our manufacturing suites for our drug development business built to meet Good Manufacturing Practices, and a 25,792 square foot building adjacent to our manufacturing facility which we use for laboratory and office space and to support our manufacturing activities.  The lease for our 28,704 square foot manufacturing facility expires in 2031 and has four five-year options to extend.  Under the lease agreement we have the option to purchase the facility at the end of each year from 2016 through 2020, and at the end of 2026 and 2031. The lease for the 25,792 square foot facility has an initial term ending in June 2021 with an option to extend the lease for up to two five-year periods.

Annual future minimum payments under operating leases as of December 31, 2011 are as follows (in thousands):

	Operating Leases
2012	$	1,406
2013	1,423
2014	1,389
2015	1,332
2016	1,380
Thereafter	21,979
Total minimum payments	$	28,909

Rent expense for the years ended December 31, 2011, 2010 and 2009 was $4.6 million, $4.3 million and $4.6 million, respectively.  In connection with certain of our leases, we recognize rent expense on a straight line basis over the lease term resulting in a deferred rent balance of $1.2 million and $793,000 at December 31, 2011 and 2010, respectively.

New Facility Lease Obligation

The leases on our former primary research and development facilities expired at the end of 2011. Rather than invest in costly renovations to these facilities, we chose to consolidate the majority of our operations in a new 176,000 square foot leased facility that BioMed Realty, L.P. constructed. To make our move to the new facility as efficient as possible, we requested access to the new facility prior to the completion of construction. To gain early access, we agreed to modify our lease with BioMed to accept additional responsibility. As a result, we recorded the costs for the facility as a fixed asset and we also recorded a corresponding liability. In July 2011, we took possession of the new facility. Therefore beginning in the third quarter of 2011, we began depreciating the cost of the facility over its economic useful life. At December 31, 2011, the facility and associated parcel of land had a net book value of $71.5 million, which included $945,000 of accumulated depreciation. Our rent payments began on January 1, 2012 and will decrease the liability over the term of the lease.

In conjunction with the lease agreement with BioMed, we purchased a parcel of land for $10.1 million and subsequently sold it to BioMed.  Since we have the option to purchase the facility, including the land, we have continuing involvement in the land, which requires us to account for the purchase and sale of the land as a financing transaction.  As such, our property, plant and equipment at December 31, 2011 and 2010 included the value of the land.  Additionally, we have recorded a corresponding amount in our non-current liabilities as a long-term financing obligation.  Since land is not a depreciable asset, the value of the land and financing obligation we recorded will not change until we exercise our purchase option or the lease terminates.

The lease on this new facility expires in 2031 and has four five-year options to extend.  Under the lease agreement we have the option to purchase the facility and land at the end of each year from 2016 through 2020, and at the end of 2026 and 2031.

Annual future rent payments for the new facility as of December 31, 2011 are as follows (in thousands):

	New Facility Lease
2012	$	5,829
2013	5,829
2014	6,179
2015	6,179
2016	6,551
Thereafter	119,000
Total minimum payments	$	149,567