Non-Recourse Secured Notes Payable

In February 2008, the Company's wholly-owned subsidiary, Azithromycin Royalty Sub, LLC completed a private placement of $60.0 million in aggregate principal amount of non-convertible, non-recourse promissory notes due in 2019. Net proceeds from the financing were approximately $55.3 million after transaction costs of approximately $4.7 million. In addition, $5.0 million of the proceeds was set aside for interest reserves. The annual interest rate on the notes is 16% with interest payable quarterly in arrears beginning May 15, 2008. The notes are secured by, and will be repaid from, royalties to be paid to the Company by Merck from net sales of AzaSite in the United States and Canada. The secured notes payable are non-recourse to InSite Vision Incorporated. When the AzaSite royalties received for any quarter exceed the interest payments and certain expenses due that quarter, the excess will be applied to the repayment of principal of the notes until the notes have been paid in full. As of December 31, 2011, no balance remained in the interest reserve. Further shortfalls, if any, can be paid by the Company at its option to avoid default under the agreement. The notes may be redeemed at the Company's option, subject to the payment of a redemption premium through May 2012. As of December 31, 2011, $52.3 million of secured notes payable was classified as long-term and $6.3 million was classified as current.

At December 31, 2011, the estimated future principal payments on the notes, based on minimum royalty income covered by the agreement and future projected sales, were as follows (in thousands):


Year Ending December 31,
2012	$	6,286
2013		9,344
2014		—
2015		—
2016		—
Thereafter		42,928

Total secured notes payable	$	58,558