<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________.
Commission File Number: 0-22788
ARRIS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2969941
- -------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices)
(650) 829-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[x] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 15,164,260 as of October 31, 1997.
1
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ARRIS PHARMACEUTICAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) *
Consolidated Balance Sheets - September 30, 1997 and December 31,1996........ 3
Consolidated Statements of Operations - Three and nine months
ended September 30, 1997 and 1996.................................. 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996........................................ 5
Notes to Consolidated Financial Statements - September 30, 1997.............. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 9
PART II: OTHER INFORMATION .................................................15
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES...................................................................16
</TABLE>
* The financial information contained herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Report on Form 10-K for the year ended December 31, 1996, filed on
March 31, 1997.
2
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ARRIS PHARMACEUTICAL CORPORATION
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(unaudited) (1)
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,638 $ 10,822
Short-term marketable investments 23,681 37,021
Prepaid expenses and other current assets 2,064 2,217
---------- ----------
Total current assets 57,383 50,060
Long-term marketable investments 995 11,627
Restricted investments - 7,250
Property and equipment, net 12,759 10,446
Other assets 1,715 1,449
---------- ----------
TOTAL ASSETS $ 72,852 $ 80,832
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,201 $ 1,439
Accrued compensation 1,570 1,480
Other accrued liabilities 1,686 1,570
Current portion of deferred revenue 6,886 10,783
Current portion of capital lease and debt obligations 1,519 1,984
---------- ----------
Total current liabilities 12,862 17,256
Deferred revenue, noncurrent 83 1,973
Capital lease and debt obligations, net of current portion 13,255 8,703
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000
shares authorized, none issued or outstanding - -
Common stock, $.001 par value; 30,000,000 shares
authorized, 15,164,260 shares and 14,831,975 shares
issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 117,410 115,904
Note receivable from officer (200) (200)
Accumulated deficit (70,558) (62,804)
---------- ----------
Total stockholders' equity 46,652 52,900
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,852 $ 80,832
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
(1) The balance sheet at December 31, 1996 has been derived from the audited
financial statement at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 5,548 $ 5,161 $ 18,413 $ 16,195
Operating expenses:
Research and development 7,527 5,615 22,841 18,126
General and administrative 1,930 1,289 5,132 3,879
Acquired in-process
research and development - 230 - 230
---------- ---------- ----------- -----------
Total operating expenses 9,457 7,134 27,973 22,235
---------- ---------- ----------- -----------
Operating loss (3,909) (1,973) (9,560) ( 6,040)
Interest income 745 879 2,513 2,198
Interest expense (325) (208) (707) (486)
---------- ---------- ----------- -----------
Net loss $ (3,489) $ (1,302) $ (7,754) $ (4,328)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net loss per share $ (0.23) $ (0.09) $ (0.52) $ (0.34)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Shares used in computing net loss per share 15,070 14,136 14,978 12,803
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1997 1996
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,754) $ (4,328)
Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 3,212 2,981
Stock grants issuable to employees - 21
Loss on disposal of fixed assets - 184
Acquired in-process research and development - 230
Changes in assets and liabilities:
Prepaid expenses and other current assets 602 (1,665)
Other assets (398) (15)
Accounts payable, accrued liabilities and
deferred revenue (6,269) (2,821)
----------- ----------
Net cash and cash equivalents used in operating activities (10,607) (5,413)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases (4,999) (10,915)
Maturities 749 -
Purchase of held-to-maturity securities:
Purchases (9,683) (59,323)
Maturities 37,906 17,653
Purchase of restricted cash (4,000) -
Release of restrictions on cash 11,250 -
Note receivable from officer - (750)
Purchase of property and equipment (5,394) (3,765)
----------- ----------
Net cash and cash equivalents provided by (used in)
investing activities 25,829 (57,100)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,506 43,043
Proceeds from notes payable and lease financing 16,150 6,164
Principal payments on notes payable and capital leases (12,062) (3,993)
----------- ----------
Net cash and cash equivalents provided by financing
activities 5,594 45,214
----------- ----------
Net increase (decrease) in cash and cash equivalents 20,816 (17,299)
Cash and cash equivalents, beginning of period 10,822 21,706
----------- ----------
Cash and cash equivalents, end of period $ 31,638 $ 4,407
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Arris Pharmaceutical Corporation, a Delaware corporation ("Arris" or the
"Company"), uses an integrated drug discovery approach combining
structure-based drug design, combinatorial chemistry and its proprietary
Delta Technology to discover and develop a number of diverse synthetic small
molecule therapeutics for commercially important disease categories where
existing therapies have significant limitations. Arris' product development
programs include protease discovery programs targeting the inhibition of
enzymes implicated in asthma, inflammatory disease, osteoporosis, cancer and
autoimmune disease. The Company's technology platform also includes
receptor-based discovery programs designed to discover small molecule drugs
that mimic important therapeutic proteins that are already successful
products.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Arris Protease, Inc., and Arris
Pharmaceuticals Canada, Inc. ("Arris Canada"). All significant intercompany
accounts and transactions have been eliminated.
BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by the Company according to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in complete financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. The financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to state fairly the financial
position and results of operations as of and for the periods indicated. The
results of operations for the three- and nine-month periods ended September
30, 1997 are not necessarily indicative of the results to be expected for
subsequent quarters or the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 1996
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
6
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTE PAYABLE
On September 29, 1997, the Company replaced its Bank of America line of
credit with a new credit agreement with Sumitomo Bank, Limited and Silicon
Valley Bank jointly to provide up to $20 million dollars in debt financing.
Interest only payments are due quarterly until September 30, 1998, at which
time principal and interest is payable in 48 monthly installments. Interest
is computed on a Eurodollar rate, which was approximately 7.7% on September
30, 1997. The loan is subject to certain financial covenants over the course
of the agreement. The Company was in compliance with all covenants at
September 30, 1997. The balance outstanding on this loan at September 30, 1997
was $11.8 million.
3. STOCK OPTION PLANS
On May 21, 1997, stockholders approved the Company's 1989 stock option plan,
as amended to increase the aggregate number of shares of common stock
authorized for issuance under such plan by 750,000 shares, to 3,417,500
shares.
On August 31, 1997, the Company adopted the 1997 Non-Officer Equity Incentive
Stock Option Plan, whereby non-officer employees and consultants may be
issued nonqualified stock options to purchase the Company's common stock at
the discretion of the board of directors. All options granted under this
plan become exercisable pursuant to the applicable terms of the grant.
Generally the exercise price of the options are granted at fair market value,
vest ratably over four years and expire ten years from the date of grant.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The
requirement is expected to have no effect on earnings per share for the nine
months ended September 30, 1997 and 1996. The impact of Statement 128 on the
calculation of diluted earnings per share for these periods is also expected
to have no effect.
7
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER RECENT PRONOUNCEMENTS
In 1997, Statement of Financial Accounting Standard No. 130 (SFAS 130)
"Reporting Comprehensive Income" and Statement of Financial Accounting
Standard No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information" were issued and are effective for fiscal years
commencing after December 15, 1997. The Company will comply with the
requirements of SFAS 130 and SFAS 131 in fiscal year 1998.
6. SUBSEQUENT EVENT
On November 2, 1997, the Company signed a definitive agreement with Sequana
Therapeutics, Inc. ("Sequana"), pursuant to which the Company will acquire
all of the outstanding Common Stock of Sequana based on an exchange ratio of
1.35 shares of the Company's Common Stock for each share of Sequana. The
acquisition will be accounted for as a "purchase" and is valued at
approximately $166 million.
8
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER "CERTAIN BUSINESS RISKS" BELOW AS WELL AS ELSEWHERE HEREIN,
TOGETHER WITH THOSE DISCUSSED IN "ITEM 1. BUSINESS" AND "BUSINESS RISKS" IN
THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, FILED
MARCH 31, 1997.
OVERVIEW
Since its inception in April 1989, the Company has devoted substantially all
of its resources to its research and development programs. To date, the
Company's only source of revenue has been its corporate collaborations with
Pharmacia & Upjohn, Inc. and its predecessors ("PNU"), Amgen, Inc. ("Amgen"),
Bayer AG ("Bayer"), SmithKline Beecham Corporation ("SB"), Merck & Co.
("Merck") and Abbott Laboratories ("Abbott"). Its collaborations have taken
a variety of forms including, in each case, certain of the following
elements: payments to the Company of an up-front commitment fee, purchase of
the Company's common stock (PNU human growth hormone collaboration only),
research funding payments, purchase of compounds produced, milestone payments
when milestones are achieved, and royalties upon the sale of any resulting
products. Where appropriate, the up-front commitment fees have been recorded
as deferred revenue until earned.
In September 1997, the Company announced the results of the third in a series
of Phase IIa studies of APC-366, a tryptase inhibitor for the treatment of
asthma. The results of this crossover study of bronchial hyperresponsiveness
showed improvement over the placebo control in two-thirds of the trial's
asthmatic patients, however, did not reach statistical significance as
measured by the amount of histamine (PD-20) required to produce a drop of 20
percent or more in FEV-1, a measure of lung function.
The Company has not been profitable since inception and expects to incur
substantial losses for at least the next several years, primarily due to the
cost of its research and development programs, including preclinical studies
and human clinical trials. The Company expects that losses will fluctuate
from quarter to quarter, that such fluctuations may be substantial, and that
results from prior quarters may not be indicative of future operating
results. As of September 30, 1997, the Company's accumulated deficit was
approximately $70.6 million.
RESULTS OF OPERATIONS
Revenue
The Company's revenues increased to $5.5 million and $18.4 million for the
three- and nine-month periods ended September 30, 1997, respectively,
compared to $5.2 million and $16.2 million, respectively, for the comparable
periods in 1996. All of the Company's revenues presently are attributable to
collaborations with PNU, Amgen, Bayer, SB, Merck and Abbott. The increases in
1997 were primarily due to: (i) the full effects of the research funding for
the
9
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
collaboration with SB to develop inhibitors using Arris' Delta technology
targeting intracellular viral proteases, which commenced in June 1996 and
expanded in July 1997; (ii) the research funding for the collaboration
with Merck to develop small molecule inhibitors of proteases involved in
osteoporosis, which commenced in November 1996; (iii) the shipment of small
molecule synthetic organic compounds under the combinatorial chemistry
collaboration with PNU (250,000 total compounds are due under the three-year
agreement), which commenced in March 1996; and (iv) the recognition of a
portion of a license fee from Abbott for the transfer of technology, which
commenced in June 1997. These increases were partially offset by lower
revenues recognized under the erythropoeitin collaboration with Amgen, in
which the research funded portion ended during the first quarter of 1997 and
the human growth hormone collaboration with PNU, in which the research funded
portion will end in 1997.
Research and development
Research and development expenses increased to $7.5 million and $22.8 million
for the three- and nine-month periods ended September 30, 1997, respectively,
from $5.6 and $18.1 million in the comparable periods in 1996. This increase
was primarily due to the higher expenditures associated with the clinical
trials of APC-366 and investments in proprietary research programs. Research
and development expenses as a percentage of total expenses has remained
relatively constant at approximately 80% and 82% of total expenses for the
three- and nine-months ended September 30, 1997 and approximately 79% and 82%
for the comparable periods in 1996. The Company expects its research and
development costs will increase for the remainder of 1997 in absolute dollars
when compared to 1996 as a result of further expansion of its proprietary
research programs, conduct of preclinical studies, and clinical trials.
General and administrative
The Company's general and administrative expenses increased to $1.9 million
and $5.1 million for the three- and nine-month periods ended September 30,
1997, from $1.3 and $3.9 million in the comparable periods in 1996. The
increase in expenses for the three- and nine-month periods was primarily due
to additional headcount in Business Development and Finance, as well as costs
associated with additional facility space. In spite of the overall increase,
general and administrative expenses as a percentage of total expenses
remained relatively constant at approximately 20% and 18% for the three- and
nine-month periods ended September 30, 1997 and approximately 18% and 17% for
the comparable periods in 1996. The Company expects its general and
administrative costs will increase for the remainder of 1997 in absolute
dollars when compared to 1996 in order to provide corporate support for
expanding research and development efforts.
10
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest income and expense
Interest income decreased to $745,000 for the three-months ended September
30, 1997, from $879,000 for the same period in 1996 and increased to $2.5
million for the nine-months ended September 30, 1997 from $2.2 million for
the same period in 1996. The decrease for the three-months ended September
30, 1997 compared to the same period in 1996 was primarily due to the
decrease in average cash balances between the periods. The increase for the
nine-months ended September 30, 1997 compared to the same period in 1996 was
primarily due to the increase in average cash balances between the periods,
resulting from receipt of net proceeds of approximately $36 million from the
public offering of 3,000,000 shares of the Company's Common Stock which
closed on March 27, 1996, and approximately $5.5 million from the exercise on
April 24, 1996 by the underwriters of the over allotment option of 450,000
shares in the public offering. The receipt of up-front fees collected under
new collaborations, proceeds from research funding and collection of revenues
from the shipment of compounds under the collaboration with PNU have helped
to sustain the cash levels. Interest expense increased to $325,000 for the
three-month period ended September 30, 1997, from $208,000 for the same
period in 1996, and increased to $707,000 for the nine-months ended September
30, 1997, from $486,000 for the same period in 1996. The increase for the
three- and nine-month periods ended September 30, 1997 was the result of
higher debt balances primarily from the previous line of credit with Bank of
America. The Company has only used draw downs from that line for capital
acquisitions during the nine-months ended September 30, 1997. The Company
expects interest expense to fluctuate as financing needs change for further
expansion of the Company's facilities and acquisition of lab equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private and public offerings of its Capital Stock and through corporate
collaborations. As of September 30, 1997, the Company had realized
approximately $92.5 million in net proceeds from offerings of its Capital
Stock. In addition, the Company has realized $75 million from its corporate
collaborations (excluding the $5.4 million equity investment in the Company
made by PNU).
The Company's principal sources of liquidity are its cash and investments,
which totaled $56.3 million as of September 30, 1997. In September 1997, the
Company entered into a new credit agreement with Sumitomo Bank, Limited and
Silicon Valley Bank jointly, for borrowings up to $20 million. As of
September 30, 1997 the Company had borrowed $11.8 million and had $8.2
million remaining available under this agreement.
Net cash used in operating activities during the nine-month period ended
September 30, 1997 was $10.6 million compared to $6.2 million in the same
period in 1996. The increase was primarily due to the increase in net loss
for the nine months ended September 30, 1997 and the timing of cash received
under the Company's collaboration agreements. Cash used in operating
activities is expected to fluctuate from quarter to quarter depending, in
part, upon the
11
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
timing and amounts, if any, of cash received from existing and any new
collaboration agreements.
The Company also spent approximately $5.4 million for the purchase of
property, plant and equipment during the nine months ended September 30,
1997. Additional equipment will be needed as the Company increases its
research and development activities. The Company received net financing of
$4.1 million, which was comprised of borrowings under existing credit
instruments and payments under lease agreements, during the nine-months ended
September 30, 1997.
The Company's revenues presently are attributable to collaborations with PNU,
Amgen, Bayer SB, Merck and Abbott. The research phase of the Amgen
erythropoeitin collaboration ended in February 1997. The proof of concept
phase of the SB collaboration has been extended through the end of 1997 and
can be extended by SB for an additional six month period, at which time it
may enter into a research phase. The human growth hormone collaboration with
PNU and research support of the Bayer collaboration for an oral tryptase
inhibitor extends through the fourth quarter of 1997. The research support
for the Factor Xa program with PNU and the osteoporosis program with Merck
extends through third and fourth quarters of 1998, respectively. The
Combinatorial Chemistry collaboration with PNU extends beyond the next 12
months. If the Company is unable to renew or replace any of these
collaborations or extend the SB collaboration into the research phase, such
events may have a material adverse effect on the Company's business and
financial condition.
The Company expects that its existing capital resources, including research
and development revenues from existing collaborations, will enable the
Company to maintain current and planned operations through at least the next
42 months. The Company may need to raise substantial additional capital to
fund its operations beyond the end of such period. The Company expects that
it will seek such additional funding through new collaborations, through the
extension of existing collaborations or through public or private equity or
debt financing.
There can be no assurance that additional financing will be available on
acceptable terms or at all. Any additional funds raised by issuing equity
securities, may result in further dilution to stockholders. If adequate
funds are not available, the Company may be required to delay, to reduce the
scope of or to eliminate one or more of its research or development programs
or to obtain funds through arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies or products that the Company would otherwise seek to develop or
commercialize itself.
RECENT EVENTS
On November 3, 1997 the Company announced that it had signed a definitive
agreement with Sequana Therapeutics, Inc. ("Sequana"), pursuant to which the
Company will acquire all
12
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of the outstanding stock of Sequana based on an exchange ratio of 1.35 shares
of the Company's common stock for each share of Sequana. The combined
Company is proposed to be renamed AxyS Pharmaceuticals, Inc. and will trade
on the Nasdaq National Market System. The acquisition is valued at
approximately $166 million, will be accounted for as a "purchase" and is
expected to result in a substantial charge related to "in-process" technology
when the transaction is completed, which is currently expected to take place
in early 1998. The transaction is expected to qualify as a tax-free
reorganization and has been approved by the Boards of Directors of both
corporations. The transaction must be approved by the stockholders of each
company. Certain stockholders owning approximately 19% of the outstanding
Common Stock of Sequana have agreed to vote their shares in favor of the
transaction. The completion of the transaction is subject to certain risks,
including, but not limited to, the potential inability to complete the merger
as scheduled, or at all, potential problems associated with integrating the
two companies, including the risk that key employees will choose to leave,
acceptance of the combined companies by corporate partners of each company,
some of whom will have the right to terminate their collaborations as the
result of the merger, acceptance of the merger by the stockholders of each
company and by the market, as well as those associated with the ongoing
businesses of each company as discussed in their respective SEC filings.
CERTAIN BUSINESS RISKS
The Company is at an early stage of development. The Company's technologies
are, in many cases, new and all are still under development. All of the
Company's proposed products are in research or development and will require
significant additional research and development efforts prior to any
commercial use, including extensive preclinical and clinical testing as well
as lengthy regulatory approval. There can be no assurance that the Company's
research and development efforts will be successful, that any of its proposed
products will prove to be safe and efficacious in the clinical trials or that
any commercially successful products will ultimately be developed by the
Company. In addition, many of the Company's currently proposed products are
subject to development and licensing arrangements with the Company's
collaborators. Therefore, the Company is dependent on the research and
development efforts of these collaborators. Moreover, the Company is
entitled only to a portion of the revenues, if any, realized from the
commercial sale of any of the proposed products covered by the
collaborations. The Company has experienced significant operating losses
since its inception and expects to incur significant operating losses over at
least the next several years. The development of the Company's technology
and proposed products will require a commitment of substantial funds to
conduct these costly and time consuming activities. All of the Company's
revenues to date have been received pursuant to the Company's collaborations.
13
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Should the Company or its collaborators fail to perform in accordance with
the terms of their agreements, any consequent loss of revenue under the
agreements could have a material adverse effect on the Company's results of
operations. The proposed products under development by the Company have never
been manufactured on a commercial scale and there can be no assurance that
such products can be manufactured at a cost or in quantities necessary to
make them commercially viable. The Company has no sales, marketing or
distribution capability. If any of its products subject to collaborative
agreements are successfully developed, the Company must rely on its
collaborators to market such products.
If the Company develops any products which are not subject to collaborative
agreements, it must either rely on other pharmaceutical companies to market
such products or must develop a marketing and sales force with technical
expertise and supporting distribution capability in order to market such
products directly.
The foregoing risks reflect the Company's early stage of development and the
nature of the Company's industry and products. Also inherent in the
Company's stage of development is a range of additional risks, including
competition, uncertainties regarding protection of patents and proprietary
rights, government regulation and uncertainties regarding health care reform.
These risks and uncertainties are discussed further in "Item 1. - Business -
Business Risks" on Form 10-K for the year ended December 31, 1996, filed by
the Company March 31, 1997.
14
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ARRIS PHARMACEUTICAL CORPORATION
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.47 Loan agreement among the registrant and Sumitomo
Bank, Limited and Silicon Valley Bank, dated September 29, 1997.
27 Financial Data Schedule.
b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter
ended September 30, 1997.
15
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ARRIS PHARMACEUTICAL CORPORATION
SIGNATURES
Pursuant to the requirements 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.
ARRIS PHARMACEUTICAL CORPORATION
Date: November 14, 1997 By: /S/ JOHN P. WALKER
-------------------------------------------
John P. Walker
President, Chief Executive Officer and
Director
Date: November 14, 1997 By: /S/ FREDERICK J. RUEGSEGGER
-------------------------------------------
Frederick J. Ruegsegger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
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Exhibit 10.47
LOAN AGREEMENT
AMONG
ARRIS PHARMACEUTICAL CORPORATION, AS BORROWER
AND
THE SUMITOMO BANK, LIMITED AND
SILICON VALLEY BANK, AS LENDER
AND
THE SUMITOMO BANK, LIMITED, AS AGENT
SEPTEMBER 29, 1997
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TABLE OF CONTENTS
Page
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ARTICLE I. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Definitional Provisions . . . . . . . . . . . . . . . . 1
ARTICLE II. LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.1. Term Notes. . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.2. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 4
Section 2.3. Payments. . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.4. Prepayments . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.5. Indemnification; Increased Costs. . . . . . . . . . . . 6
Section 2.6. Investment Account and Custodian Account. . . . . . . . 8
Section 2.7. Change In Legality. . . . . . . . . . . . . . . . . . . 9
ARTICLE III. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 9
Section 3.1. Organization. . . . . . . . . . . . . . . . . . . . . . 9
Section 3.2. Power, Authority, Consents. . . . . . . . . . . . . . . 10
Section 3.3. No Violation of Law or Agreements . . . . . . . . . . . 10
Section 3.4. Due Execution, Validity, Enforceability . . . . . . . . 10
Section 3.5. Judgments, Actions, Proceedings . . . . . . . . . . . . 10
Section 3.6. No Defaults, Compliance With Laws . . . . . . . . . . . 11
Section 3.7. No Materially Adverse Contracts, Etc. . . . . . . . . . 11
Section 3.8. Financial Statements. . . . . . . . . . . . . . . . . . 11
Section 3.9. Title to Properties; Leases . . . . . . . . . . . . . . 11
Section 3.10. Priority of Liens . . . . . . . . . . . . . . . . . . . 12
Section 3.11. Patents, Copyrights, Licenses, Etc. . . . . . . . . . . 12
Section 3.12. Tax Returns . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.13. Regulation U; Margin Stock. . . . . . . . . . . . . . . 12
Section 3.14. Full Disclosure . . . . . . . . . . . . . . . . . . . . 12
Section 3.15. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.16. Environmental Compliance. . . . . . . . . . . . . . . . 13
Section 3.17. Other Regulations . . . . . . . . . . . . . . . . . . . 15
Section 3.18. Compliance with Securities Laws . . . . . . . . . . . . 15
Section 3.19. Solvency. . . . . . . . . . . . . . . . . . . . . . . . 15
Section 3.20. Subsidiaries or Affiliates. . . . . . . . . . . . . . . 15
Section 3.21. Pending Litigation. . . . . . . . . . . . . . . . . . . 15
Section 3.22. Compliance with Investment Policy . . . . . . . . . . . 15
1
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(continuation) TABLE OF CONTENTS
Page
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ARTICLE IV. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . 15
Section 4.1. Conditions Precedent to the Effectiveness
of this Agreement . . . . . . . . . . . . . . . . . . . 15
Section 4.2. Conditions Precedent to Additional Disbursement . . . . 17
ARTICLE V. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . 17
Section 5.1. Books and Records . . . . . . . . . . . . . . . . . . . 17
Section 5.2. Inspections and Audits. . . . . . . . . . . . . . . . . 18
Section 5.3. Perform Obligations . . . . . . . . . . . . . . . . . . 18
Section 5.4. Fees and Expenses . . . . . . . . . . . . . . . . . . . 18
Section 5.5. Maintenance of Existence; Conduct of Business . . . . . 18
Section 5.6. Insurance . . . . . . . . . . . . . . . . . . . . . . . 19
Section 5.7. Certain Taxes . . . . . . . . . . . . . . . . . . . . . 19
Section 5.8. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 19
Section 5.9. Further Assurances With Respect To Accounts . . . . . . 20
Section 5.10. Financial Covenants . . . . . . . . . . . . . . . . . . 20
Section 5.11. Deposits Into Custodian Account . . . . . . . . . . . . 20
Section 5.12. Investment Policy . . . . . . . . . . . . . . . . . . . 21
Section 5.13. Deposit Relationship with Silicon Valley Bank . . . . . 21
ARTICLE VI. DELIVERY OF FINANCIAL REPORTS,
DOCUMENTS AND OTHER INFORMATION. . . . . . . . . . . . . . . 21
Section 6.1. Annual Financial Statements . . . . . . . . . . . . . . 21
Section 6.2. Quarterly Financial Statements. . . . . . . . . . . . . 21
Section 6.3. 10Q and 10K Filings . . . . . . . . . . . . . . . . . . 21
Section 6.4. Cash and Covenant Reports . . . . . . . . . . . . . . . 22
Section 6.5. Other Information . . . . . . . . . . . . . . . . . . . 22
Section 6.6. No Trigger Event/Default Certificate. . . . . . . . . . 22
Section 6.7. Notices . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VII. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 23
Section 7.1. Liens . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.2. Changes in Business; Merger or Consolidation;
Disposition of Assets . . . . . . . . . . . . . . . . . 25
Section 7.3. Change of Office Address. . . . . . . . . . . . . . . . 25
Section 7.4. Violation of Agreement. . . . . . . . . . . . . . . . . 25
2
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(continuation) TABLE OF CONTENTS
Page
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ARTICLE VIII. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . 26
Section 8.1. Events of Default . . . . . . . . . . . . . . . . . . . 26
ARTICLE IX. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . 28
Section 9.1. Indemnity; Additional Fees. . . . . . . . . . . . . . . 28
Section 9.2. Survival of Agreements and Representations. . . . . . . 28
Section 9.3. Modifications, Consents and Waivers . . . . . . . . . . 28
Section 9.4. Entire Agreement. . . . . . . . . . . . . . . . . . . . 29
Section 9.5. Remedies Cumulative . . . . . . . . . . . . . . . . . . 29
Section 9.6. Further Assurances. . . . . . . . . . . . . . . . . . . 29
Section 9.7. Notices . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 9.8. Construction; Governing Law . . . . . . . . . . . . . . 30
Section 9.9. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . 30
Section 9.10. Jurisdiction. . . . . . . . . . . . . . . . . . . . . . 31
Section 9.11. Relationship of the Borrower and the Lenders. . . . . . 31
Section 9.12. Severability. . . . . . . . . . . . . . . . . . . . . . 31
Section 9.13. Binding Effect; Assignment. . . . . . . . . . . . . . . 32
Section 9.14. Counterparts. . . . . . . . . . . . . . . . . . . . . . 32
Section 9.15. Confidentiality . . . . . . . . . . . . . . . . . . . . 32
Section 9.16. Right of Set-off. . . . . . . . . . . . . . . . . . . . 32
APPENDIX A TO LOAN AGREEMENT -- DEFINITIONS............................... A-1
EXHIBITS
Exhibit 2.1(a) - Form Note
Exhibit 2.1(b) - Disbursement Request Form
Exhibit 2.6(a) - Irrevocable Instructions and Power of Attorney"
SCHEDULES
2.1(a) Election Notice
3.5 Judgements, Actions and Proceedings
3.11 Patents, Copyrights, Licenses, etc.
3.15 ERISA
3.16 Environmental Compliance
3.20 Subsidiaries and Affiliates
3
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(continuation) TABLE OF CONTENTS
Page
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3.21 Pending Litigation
3.22 Investment Policy
5.6 Insurance
7.1 Security Deposits
4
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LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made as of September 29, 1997 by
and among ARRIS PHARMACEUTICAL CORPORATION, a Delaware corporation (the
"Borrower'), THE SUMITOMO BANK, LIMITED, a Japanese banking corporation, and
SILICON VALLEY BANK, a California banking corporation (collectively the
"Lenders" and individually a "Lender"), and THE SUMITOMO BANK, LIMITED, as agent
for the Lenders (in such capacity, the "Agent").
The parties hereto hereby agree as follows:
AI. DEFINITIONS
S1. DEFINITIONAL PROVISIONS.
(a) Capitalized terms used in this Agreement and defined in
APPENDIX A hereto, which APPENDIX A is attached to this Agreement and by this
reference made a part hereof, shall have the respective meanings specified in
such APPENDIX A.
(b) All terms defined in APPENDIX A shall have such defined
meanings when used in any certificate or any other document made or delivered
pursuant to this Agreement unless otherwise defined in such other document or
certificate.
(c) All accounting terms not specifically defined in this
Agreement or in APPENDIX A hereto shall be construed in accordance with
generally accepted accounting principles as in effect in the United States of
America.
AI. LOAN
S1. TERM NOTES.
(a) On the terms and subject to the conditions of this
Agreement, each Lender hereby agrees, severally and not jointly, to loan to the
Borrower an aggregate principal amount equal to its Pro Rata Share of Twenty
Million Dollars ($20,000,000) (the "Loan"), provided that in no event shall the
principal amount outstanding to any Lender exceed such Lender's Commitment. The
Lenders will make an initial Disbursement to the Borrower on the Closing Date in
the amount of Eleven Million Eight Hundred Thousand and No/100 Dollars
($11,800,000.00). During the Availability Period, the Lenders will make
subsequent Disbursements to the Borrower subject to the conditions set forth in
Subsection 2.1(b) and Section 4.2. The obligation of the Borrower to repay the
Loan and to pay interest and all other costs and charges payable hereunder will
be evidenced by promissory notes in the form of EXHIBIT 2.1(a) (individually a
"Note,"
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collectively the "Notes") dated as of date of each disbursement and payable to
the order of the Agent on behalf of the Lenders in the original principal amount
of such disbursement.
(b) The Borrower shall submit a written request or a
telephonic request to the Agent (provided that such telephonic request is
confirmed in a written notice by Borrower to Agent on the same Business Day in
the form attached hereto as Schedule 2.1(a) (the "Election Notice") or such
other form provided from time to time by Agent to Borrower) for each
Disbursement at least four (4) Business Days prior to the desired funding date
in the case of any borrowing consisting of a Eurodollar Rate Loan Portion, and
not later than 12:00 Noon (Chicago time) at least one (1) Business Day prior to
the desired funding date in the case of any borrowing consisting of a Prime Rate
Loan Portion. The minimum amount for any Disbursement shall be Two Million
Dollars ($2,000,000). There shall be a maximum of five (5) Disbursements
(inclusive of the initial Disbursement made on the Closing Date). No
Disbursement shall be made after the occurrence of a Default or an Event of
Default. No Disbursement shall be made after the expiration of the Availability
Period. Provided that Borrower has timely complied with the provisions of this
Section 2.1(b) and Section 4.2, then on each funding date by no later than 12:00
Noon (Chicago time) each Lender shall deposit with the Agent same day funds in
an amount equal to such Lender's Pro Rata Share of the Disbursement requested by
Borrower. Such deposit will be made to an account which the Agent shall specify
from time to time by notice to each Lender. To the extent funds are received
from the Lenders, the Agent shall make such funds available to the Borrower by
wire-transfer to the accounts specified in the applicable Disbursement request
from Borrower. Neither Lender's obligation to make any Disbursement shall be
affected by the other Lender's failure to make any Disbursement. Neither Lender
shall have any liability to Borrower for the failure of the other Lender to fund
its Pro Rata Share of a Disbursement and Borrower shall have the right to a
Disbursement from each Lender only in the amount of such Lender's Pro Rata Share
of a Disbursement.
(c) The Loan shall bear interest, and the Borrower shall
pay interest on the outstanding principal balance of the Loan, from the date of
the initial Disbursement to the Borrower until the Maturity Date, at the
following rates per annum:
(i) with respect to any portion of such Loan which is
a Eurodollar Rate Loan Portion, interest at a rate per annum on such
Eurodollar Rate Loan Portion equal (at all times during each
applicable Interest Period) to the Reserve Adjusted Eurodollar Rate
for the applicable Interest Period plus the Applicable Margin; and
(ii) with respect to each portion of such Loan which is
not a Eurodollar Rate Loan Portion, interest at a rate per annum on
each such Loan Portion equal to the Prime Rate.
Not later than 2:00 p.m. (Chicago time) on the fourth Business Day prior to the
initial funding of the
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Loan, the Borrower may provide written notice ("Initial Notice") to the Agent of
the dollar amount of the initial Disbursement which will be a Eurodollar Rate
Loan Portion for the initial Interest Period. In the event that the Borrower
fails to provide the Initial Notice in accordance with the preceding sentence,
then the outstanding principal balance of the Loan shall bear interest at the
Prime Rate until such time as Borrower has given an Election Notice in
accordance with Section 2.1(d) below. Computations of interest will be on the
basis of a 360 day year, for the actual number of days elapsed.
(a) The Borrower may elect by the Election Notice given to
the Agent:
(i) by not later than 2:00 p.m. (Chicago time) on
the fourth Business Day prior to the expiration of the
Interest Period for any Eurodollar Rate Loan Portion, to
continue such Loan Portion or any part thereof as a
Eurodollar Rate Loan Portion for the next succeeding
Interest Period. In the absence of a timely effective
Election Notice to continue the applicable Loan Portion as a
Eurodollar Rate Loan Portion, the Borrower shall be deemed
to have elected to convert such Eurodollar Rate Loan Portion
to a Prime Rate Loan Portion, effective as of the last day
of the preceding Interest Period.
(ii) by not later than 2:00 p.m. (Chicago time) on
the fourth Business Day prior to the proposed date for the
conversion of a Prime Rate Loan Portion or any part thereof
to a Eurodollar Rate Loan Portion, to convert such Prime
Rate Loan Portion or any part thereof to a Eurodollar Rate
Loan Portion.
(b) If the Borrower fails to draw down, to continue or to
convert to, a Eurodollar Rate Loan Portion after giving an Initial Notice or
Election Notice with respect thereto, the Borrower agrees to reimburse each
Lender for the sum of:
(i) The principal amount of each such Eurodollar
Rate Loan Portion times (([number of days between the date
of failure to draw down, continue or convert and the last
day in the applicable Interest Period] divided by 360),
times the applicable Interest Differential); plus
(ii) All actual out-of-pocket expenses (other than
those taken into account in the calculation of the Interest
Differential) incurred by the Lender (excluding allocations
of any expense internal to the Lender) and reasonably
attributable to such failure to continue or convert.
Notwithstanding the foregoing, no reimbursement shall be payable (and no credit
or rebate shall be
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required) if the sum of the foregoing clauses (i) and (ii) is not a positive
number.
(a) Notwithstanding anything herein to the contrary, if a
Default or an Event of Default has occurred and is continuing, then the Borrower
shall have no right to give an Election Notice, and the Agent may ignore any
attempt by the Borrower to give an Election Notice.
1 An Election Notice with respect to any Eurodollar Rate
Loan Portion shall contain the following information:
1 the dollar amount which is to be continued as, or
converted to, a Eurodollar Rate Loan Portion; and
2 the duration of the new Interest Period.
Notwithstanding anything herein to the contrary, the outstanding Loan balance
may not at any time be comprised of more than seven (7) Eurodollar Rate Loan
Portions at the same time without the Agent's consent, which shall be in the
Agent's sole and absolute discretion. Once received by the Agent, any Initial
Notice or Election Notice will be irrevocable for the applicable Eurodollar Rate
Loan Portion for the applicable Interest Period.
1 In the event that on the date for determining the
Reserve Adjusted Eurodollar Rate to be paid by the Borrower in respect of any
Interest Period, the Agent determines in good faith (which determination will be
conclusive and binding on the Borrower) that by reason of circumstances
affecting the London interbank Eurodollar market, either Eurodollar rates are
not offered in the London interbank Eurodollar market or adequate and fair means
do not exist for ascertaining the Reserve Adjusted Eurodollar Rate for such
Interest Period, the Agent shall promptly give to the Borrower telephonic notice
(confirmed as soon as practicable in writing) of such determination. During the
existence of such circumstances, any existing Eurodollar Rate Loan Portion in
respect of which such circumstances exist will convert to a Prime Rate Loan
Portion at the end of the applicable Interest Period.
1 USE OF PROCEEDS. The proceeds of the Loan shall be used by the
Borrower for the purpose of funding, or replenishing working capital reserves
used to fund, capital expenditures for enhancement of research and development
facilities, manufacturing facilities, acquisition of laboratory equipment or
other equipment and for general corporate purposes.
2 PAYMENTS.
1 Interest only shall be payable on each Interest Payment
Date during the period commencing on the date of the initial Disbursement and
continuing through and including August 31, 1998. Thereafter, the Borrower will
repay the principal amount of the Loan in forty-eight
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(48) equal consecutive monthly installments of principal (each installment being
in an amount sufficient to amortize the outstanding principal balance of the
Loan over a period of forty-eight (48) months; i.e., each installment of
principal shall be equal to 2.0833% of the principal balance of the Loan on
August 31, 1998), payable on the last Business Day of each calendar month
commencing with the first such payment due on September 30, 1998 and continuing
until the Maturity Date, on which date the Borrower shall make a final payment
in an amount equal to all the then unpaid principal of the Loan and all unpaid
interest thereon. In addition, the Borrower shall pay interest on each Interest
Payment Date during the period commencing on October 1, 1998, and continuing
through and including the Maturity Date. Notwithstanding the foregoing,
repayment of the Loan and all accrued and unpaid interest thereon may be
accelerated upon the occurrence and during the continuance of an Event of
Default.
(a) The Borrower shall make all payments hereunder in U.S.
Dollars and in immediately available funds at the Agent's office at 233 South
Wacker Drive, Suite 5400, Chicago, Illinois 60606 (or at such other office as
the Agent may notify the Borrower in writing) via wire transfer to The Sumitomo
Bank, Limited, Chicago Branch, ABA 071001850, through the Federal Reserve Bank
of Chicago, Reference: Arris. Payments not made prior to 12:00 noon (Chicago
time) on the date of payment will be deemed paid on the next Business Day.
Payments which fall due on a day which is not a Business Day will be payable on
the next Business Day, with interest to accrue to such date of payment, provided
that, with respect to any payment of principal or interest relating to a
Eurodollar Rate Loan Portion, if the next succeeding Business Day is in the next
calendar month, such payment shall be made on the next preceding Business Day.
All payments hereunder and under the Note shall be made without set-off or
counterclaim and in such amounts as may be necessary in order that all such
payments shall not be less than the amounts otherwise specified to be paid under
this Agreement or the Note, as the case may be.
(b) Any installment of interest only or of principal and
interest, or any other amount payable hereunder, which is not paid when due,
will bear (and the Borrower shall pay) interest (to the extent permitted by law)
from such due date until such unpaid amount has been paid in full (whether
before or after judgment) at a rate per annum equal to (i) in the case of each
Eurodollar Rate Loan Portion, **-------------------------------------- in excess
of the rate then applicable to such Loan Portion until the end of the Interest
Period then applicable to such Loan Portion and thereafter at a rate per annum
equal to **------------------------------------- in excess of the Prime Rate,
and (ii) in the case of each Prime Rate Loan Portion, **---------------------
in excess of the Prime Rate (the "Default Rate").
(c) In partial consideration for the Lenders making the
Loan to the Borrower, the Borrower shall pay to the Agent for the account of the
Lenders:
**------------------------------------------------------------------------------
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- -----------------------------------------------------------------------
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- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
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- ---------------------------.
S1. PREPAYMENTS. Subject to this Section 2.4, the Borrower may, upon
three (3) Business Days' prior notice to the Agent, prepay the outstanding
amount of the Loan in whole or in part without penalty or premium but subject to
the provisions of the following sentence. In the event that the Borrower
prepays or is required to prepay any Eurodollar Rate Loan Portion, the Borrower
agrees to reimburse each Lender for the sum of:
(a) The principal amount of each such Eurodollar Rate Loan
Portion times (([number of days between the date of prepayment and the
last day in the applicable Interest Period] divided by 360), times the
applicable Interest Differential); plus
(b) All actual out-of-pocket expenses (other than those
taken into account in the calculation of the Interest Differential)
incurred by the Lenders (excluding allocations of any expense internal
to the Lenders) and reasonably attributable to such payment or
prepayment.
Notwithstanding the foregoing, no prepayment fee shall be payable (and no credit
or rebate shall be required) if the sum of the foregoing subparagraphs (a) and
(b) is not a positive number. The Loan is not in a nature of a revolving loan;
therefore, amounts prepaid or repaid under the Note may not be reborrowed.
S1. INDEMNIFICATION; INCREASED COSTS.
(a) If after the date of this Agreement the Agent
reasonably determines that any Regulatory Change, or compliance by any
of the Lenders with any request or directive (whether or not having
the force of law) of any governmental authority, central bank or
comparable agency charged with the interpretation or administration of
any applicable law, rule or regulation which is effective or issued
after the date hereof:
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(i) Subjects any Lender to any tax, duty or other
charge with respect to the Loan or the Note, or changes the basis of
taxation of payments to any Lender of the principal of or interest on
the Loan or any other amounts due under this Agreement in respect of
the Loan except for changes in the rate of tax on the overall net
income of any Lender or such Lender's lending office imposed by the
State of California or the jurisdictions in which such Lender's
principal executive office or applicable lending office is located)
(such non-excluded amounts, "Taxes"); or
(ii) Imposes, modifies or deems applicable any reserve
(including, without limitation, any reserve imposed by the Board of
Governors of the Federal Reserve System), special deposit, liquidity,
capital maintenance, capital adequacy, capital ratio (including, but
without limitation thereto, any request by or requirement of any
regulatory body or official which affects the manner in which any
Lender allocates capital resources to its obligations hereunder), for
the account of, or credit extended by, any such Lender or imposes on
any Lender any other condition affecting the Loan, or the Note;
and the result of any of the foregoing is to (A) impose a cost on or
increase the cost to any Lender of making or maintaining the Loan, or
(B) cause an increase in any capital requirement arising out of the
making or maintenance of the Loan or any obligation to the Borrower
hereunder or (C) reduce the amount of any sum received or receivable
by any Lender under this Agreement or under the Note, by an amount
reasonably deemed by the Agent to be material, then, within ten (10)
days after demand by the Agent, the Borrower shall pay the Agent for
the account of the Lenders such additional amount or amounts as will
compensate the Lenders for such increased cost or reduction as such
cost or reduction is incurred by any of the Lenders. If the Agent
makes any claim for compensation to the Lenders under this Section
2.5, the Borrower may immediately elect by written notice (or
telephonic notice confirmed as soon as practicable in writing) to the
Agent to prepay the Loan (but subject to payment of any other amounts
due under Section 2.4 and this Section 2.5, including any increased
cost or reduction incurred through the date of such prepayment or
conversion). The Agent shall promptly notify the Borrower of any
event of which it has knowledge, occurring after the date hereof,
which will entitle the Lenders to compensation pursuant to this
Section 2.5. The Agent shall provide to the Borrower a certificate
claiming compensation under this Section 2.5, setting forth the
additional amount or amounts to be paid to it hereunder and showing in
reasonable detail the Agent's calculation thereof which shall be
presumed to be correct absent manifest error. In determining such
amount, the Agent may use any reasonable averaging and attribution
methods. The Agent shall exercise reasonable efforts to promptly
provide the Borrower with notice of the imposition, or overtly
threatened exercise of, any Regulatory Change set forth in this
Section 2.5 of which the
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Agent has actual knowledge, provided, however, that the failure by the
Agent to so provide such notice will not relieve the Borrower of any
of its obligations hereunder.
(a) Each Lender agrees that it will use reasonable efforts
to reduce or eliminate any claim for compensation pursuant to this
Section 2.5, including designating a different lending office for the
Loans, if such designation will avoid the need for or reduce the
amount of any such compensation, PROVIDED that a Lender will not be
obligated to take any actions that would, in the sole opinion of such
Lender, be disadvantageous to such Lender in any material respect (it
being understood that the incurrence of any unreimbursed cost or
expense by such Lender that would not have been incurred but for such
action is material).
(b) Notwithstanding anything to the contrary contained in this
Section 2.5, Borrower shall not be obligated to indemnify or reimburse
any Lender for any reduction in such Lender's rate of return on its
capital as a consequence of such Lender's obligations hereunder that
arose or was incurred during or is otherwise attributable to any
period of time more than 180 days prior to the date on which such
Lender delivered its written statement for indemnification or
reimbursement for such reduction.
S1. INVESTMENT ACCOUNT AND CUSTODIAN ACCOUNT.
(a) Prior to the occurrence of a Trigger Event, the
Borrower shall hold at all times a minimum balance consisting of Cash and Cash
Equivalents, which are not subject to any Lien (other than General Tax Liens) or
claim of any Person, in the sum of (i) the outstanding principal balance of the
Loan plus the Interest Reserve plus (ii) restricted cash (if any) and amounts
which may be restricted in the future pursuant to agreements between the
Borrower and third parties, in an investment account (the "Investment Account")
with an institution approved by Agent (such institution being referred to herein
as the "Account Holder"). The initial Account Holder will be Smith Barney, Inc.
The amounts held in the Investment Account shall be subject to the investment
control of the Borrower. The Account Holder in respect of the Investment
Account cannot be changed or a new Investment Account opened without the Agent's
prior written approval, which approval shall not be unreasonably withheld. The
Borrower shall deliver to the Account Holder the Irrevocable Instructions and
Power of Attorney in the form of EXHIBIT 2.6.a (the "Irrevocable Instructions
and Power of Attorney").
(b) On or before the Closing Date, the Borrower, for the
benefit and on behalf of the Agent and the Lenders, shall establish and maintain
or cause to be established and maintained in the name of the Borrower an account
(the "Custodian Account") with Sumitomo Bank of New York Trust Company (the
"Bailee") under the Custodian Agreement and the Collateral Bailment Agreement.
Pursuant to the Restricted Account and Security Agreement by and among the
Agent, the Bailee and the Borrower, the Borrower has granted to the Agent on
behalf of the
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Lenders a security interest in all of its right, title and interest in the
Custodian Account, all deposits or investments held therein and all proceeds
thereof to secure payment and performance of the Borrower's obligations
hereunder. On or before the Closing Date, the Borrower shall cause to be
deposited in the Custodian Account the sum of
**----------------------------------------. So long as the Borrower is indebted
to the Lenders hereunder and until payment in full of the Note and the
Borrower's full and complete performance of its obligations hereunder, the
Custodian Account shall at all times have a Restricted Account Balance of not
less than the greater of (i) **---------------------------------------- minus
the amount of any fees payable to the Bailee and deducted from the Custodian
Account; and (ii) **---------------------------. The terms and conditions of
the Restricted Account and Security Agreement, the Collateral Bailment
Agreement, and the Custodian Agreement are incorporated herein by reference.
S1. CHANGE IN LEGALITY.
(a) In the event that at any time the Agent shall have
reasonably determined (which determination shall be presumed to be correct until
the contrary shall have been established) that by reason of a change in any law
or regulation or in the interpretation thereof by any governmental authority
charged with the interpretation thereof affecting any of the Lenders or the
Eurodollar market and applicable to any Eurodollar Rate Loan Portion, the making
or continuation of a loan at the applicable Reserve Adjusted Eurodollar Rate
plus the Applicable Margin has become unlawful, the Agent shall forthwith give
written notice (or telephonic notice, confirmed as soon as practicable in
writing) to the Borrower and the obligation of the Lenders to make or maintain
such Eurodollar Rate Portion at the applicable Reserve Adjusted Eurodollar Rate
plus the Applicable Margin shall terminate and the Borrower shall forthwith upon
receipt of notice of such determination prepay such Eurodollar Rate Loan Portion
without premium or penalty (subject to Sections 2.4 and 2.5), together with all
interest accrued on the amount prepaid to the date of prepayment. A
certificate, setting forth (x) each event which the Agent shall have determined
makes the continuation of such Eurodollar Rate Loan Portion unlawful and (y) any
additional amounts payable by the Borrower under Sections 2.4 and 2.5 (and the
basis therefor and the Agent's computation thereof) upon prepayment of such
Eurodollar Rate Loan Portion, shall be furnished to the Borrower by the Agent
and shall be presumed correct absent manifest error.
(b) In the event that the Borrower is obligated to prepay a
Eurodollar Rate Loan Portion pursuant to clause (a) of this Section 2.7, the
Borrower shall have the right, upon written notice (or telephonic notice
confirmed as soon as practicable in writing) to the Agent, in lieu of such
prepayment, to elect to convert such Eurodollar Rate Portion to a Prime Rate
Loan Portion, effective on the date on which such prepayment would otherwise be
required to have been made, provided that on the effective date of conversion
the Borrower also shall pay all interest accrued on the amount converted to the
date of conversion and such additional amounts, if any, payable by the Borrower
under Section 2.4, as specified in the certificate furnished the Borrower
pursuant to said clause (a).
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AI. REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Agent and the Lenders
that:
S1. ORGANIZATION. Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware; Borrower
has the power to own its assets, to transact the business in which it is
presently engaged and in which it proposes to be engaged and is duly qualified
and in good standing in each jurisdiction in which the failure to qualify to do
business is reasonably likely to affect materially and adversely its financial
condition and business operations.
S1. POWER, AUTHORITY, CONSENTS.
(a) Borrower has the power to execute, deliver and to
perform its obligations under the Loan Documents.
(b) Borrower has the power to borrow hereunder and has
taken all necessary action to authorize the borrowing hereunder on the terms and
conditions of this Agreement.
(c) Borrower has taken all necessary corporate action to
authorize the execution, delivery and performance of the Loan Documents.
(d) No consent or approval of any Person, no waiver of any
Lien or right of distraint or other similar right and no consent, license,
approval, authorization or declaration of any governmental authority, bureau or
agency is or will be required in connection with the execution and delivery of
the Loan Documents by Borrower, or the performance by Borrower of its
obligations thereunder or the validity, enforcement or priority of the Loan
Documents, or any Lien created and granted thereunder, except such consents as
have been obtained and copies of which have been delivered to the Lenders.
S2. NO VIOLATION OF LAW OR AGREEMENTS. The execution and delivery of the
Loan Documents and the performance by Borrower of its obligations thereunder,
will not violate any provision of law and will not conflict with or result in a
breach of any order, writ, injunction, ordinance, resolution, decree, or other
similar document or instrument of any court or governmental authority, bureau or
agency, domestic or foreign, Borrower's charter or bylaws or create (with or
without the giving of notice or lapse of time, or both) a default under or
material breach of any agreement, bond, note or indenture to which Borrower is a
party, or by which it is bound or any of its properties or assets is affected,
or result in the imposition of any Lien (other than the Lien that results in
favor of Agent on behalf of the Lenders) of any nature whatsoever upon any of
the
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properties or assets owned by or used in connection with the business of
Borrower.
S3. DUE EXECUTION, VALIDITY, ENFORCEABILITY. This Agreement and each of
the other Loan Documents has been, or upon the execution and delivery thereof,
will be, duly executed and delivered by Borrower, and each constitutes, or, upon
the execution and delivery thereof, will constitute, the valid and legally
binding obligation of Borrower, enforceable in accordance with its terms, except
to the extent that the enforcement thereof may be limited by applicable
bankruptcy, moratorium, insolvency, reorganization, or other similar laws or
equitable principles relating to the enforcement of creditors' rights generally.
S4. JUDGMENTS, ACTIONS, PROCEEDINGS. Except as set forth in SCHEDULE 3.5,
there are no outstanding judgments, actions (including, without limitation,
derivative actions), suits or proceedings pending before any court or
governmental authority, bureau or agency, having a claim or amount in
controversy that exceeds $50,000 in any one instance or $100,000 in the
aggregate at any one time with respect to or, to the best of the Borrower's
knowledge, threatened against or affecting Borrower.
S5. NO DEFAULTS, COMPLIANCE WITH LAWS. Borrower is not in material
default under any agreement, ordinance, resolution, decree, bond, note,
indenture, order or judgment to which it is a party or by which it is bound, or
its charter documents or bylaws, or any other agreement or other instrument by
which any of the properties or assets owned by it or used in the conduct of its
business is affected or evidencing, guaranteeing or relating to any outstanding
indebtedness, liability or obligation for borrowed money or lease obligations,
which default is reasonably likely to have a material adverse effect on the
business, operations, financial condition or properties of Borrower, or on
Borrower's ability to perform its obligations under the Loan Documents.
Borrower has complied and is in compliance in all material respects with all
applicable laws, ordinances and regulations, the non-compliance with which could
have a material adverse effect on the business, operations, financial condition
or properties of Borrower, or on the ability of Borrower to perform its
obligations under the Loan Documents.
S6. NO MATERIALLY ADVERSE CONTRACTS, ETC. Borrower is not subject to any
charter, corporate or other legal restriction, or any judgment, decree, order,
rule or regulation that has, or is expected in the judgment of the Borrower, to
have a materially adverse effect on the business, assets or financial condition
of the Borrower. Borrower is not a party to any contract or agreement that has
or is expected, in the judgment of the officers of the Borrower, to have any
materially adverse effect on the business of the Borrower.
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S7. FINANCIAL STATEMENTS.
(a) Borrower has furnished to the Lenders its most recent
audited Financial Statements and all subsequent unaudited Financial Statements
which are available to the public. Each of the Financial Statements is correct
and complete in all material respects and presents fairly the financial
condition of the Borrower, at its date or for the respective period, and has
been prepared in accordance with generally accepted accounting principles,
except that the unaudited Financial Statements do not contain all footnotes
required by generally accepted accounting principles.
(b) The Borrower has no material obligation, liability or
commitment, direct or contingent, which is not reflected in the Financial
Statements or in any notes thereto in accordance with generally accepted
accounting principles.
(c) There has been no material adverse change in the
financial position or operations of the Borrower since the date of the Financial
Statement for the fiscal quarter ending June 30, 1997.
(d) The Borrower's fiscal year is the twelve (12) month
period ending on December 31 in each year.
S8. TITLE TO PROPERTIES; LEASES. Except as disclosed in the footnotes to
the Financial Statements, Borrower owns all of the material assets reflected in
the most recent balance sheet or acquired since that date (except property and
assets leased, sold or otherwise disposed of in the ordinary course of business
since that date), subject to no rights of others other than Permitted Liens,
including any mortgages, ordinary or capital leases, conditional sales
agreements, title retention agreements, liens or other encumbrances.
S9. PRIORITY OF LIENS. The Liens which have been or will be created and
granted by the Loan Documents upon the execution and delivery thereof
constitute, or will constitute upon such execution and delivery, valid first
priority Liens on the properties and assets covered by the Loan Documents,
subject to no other liens.
S10. PATENTS, COPYRIGHTS, LICENSES, ETC. Borrower owns or has a valid right
to use all material patents, copyrights, trademarks, trade names, licenses,
franchises, and rights in respect of the foregoing ("Intellectual Property
Rights"), adequate for the conduct of its business substantially as now
conducted without conflict with any rights of others, and there are no suits
or claims for infringement with respect to the Intellectual Property Rights
except as set forth in SCHEDULE 3.11. SCHEDULE 3.11 lists all pending suits
or claims for infringement with respect to Intellectual Property Rights.
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S11. TAX RETURNS.
(a) The Borrower has filed all federal and state income tax
returns and all other tax returns, reports, and declarations required to be
filed by it and has not failed to pay any taxes, or interest and penalties
relating thereto, on or before the due dates thereof except for returns, taxes,
interest or penalties with respect to which it has duly filed extensions or is
contesting the validity thereof by appropriate proceedings diligently conducted
in good faith. No audits of the federal income tax returns of the Borrower are
pending.
(b) Except to the extent that reserves therefor are
reflected in the Financial Statements, (i) there are no material federal, state
or local tax liabilities of the Borrower due or to become due for any tax year
ended on or prior to the date of the most recent balance sheet included in the
Financial Statements, whether incurred in respect of or measured by the income
of such entity, which are not properly reflected in such balance sheet, and (ii)
there are no material claims pending or, to the knowledge of the Borrower
proposed or threatened against the Borrower for past federal, state or local
taxes.
S12. REGULATION U; MARGIN STOCK. No part of the proceeds received by the
Borrower from the Loan will be used directly or indirectly for the purpose of
purchasing or carrying, or for payment in full or in part of indebtedness which
was incurred for the purposes of purchasing or carrying, any margin stock as
such term is defined in Regulation U of the Board of Governors of the Federal
Reserve System, 12 C.F.R., Chapter II, Part 221. The Borrower does not own
margin stock which would, in the aggregate, constitute a substantial part of the
assets of the Borrower.
S13. FULL DISCLOSURE. Neither the Financial Statements nor any
certificate, opinion, or any other statement made or furnished in writing to the
Lenders by or on behalf of the Borrower in connection with this Agreement or the
transactions contemplated herein, contains any untrue statement of a material
fact, or omits to state a material fact necessary to make the statements
contained therein or herein, in light of the circumstances under which they were
made, not misleading.
S14. ERISA.
(a) Except as set forth in SCHEDULE 3.15, none of the
Borrower or any of its Affiliates has pension or other employee benefit plans
which are subject to the provisions of Title IV of ERISA (any such plans which
have been or may hereafter be adopted or assumed by the Borrower are hereinafter
referred to individually as a "Plan" and, collectively, as the "Plans"). In
connection with the Plans, Borrower does not have, or know of any likely event
which will give rise to, any direct or contingent material liabilities of the
Borrower to the Pension Benefit Guaranty Corporation ("PBGC"), the Department of
Labor or the Internal Revenue Service ("IRS").
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(b) None of the Borrower or any of its Affiliates is a
participating employer in any Plan under which more than one employer makes
contributions as described in Sections 4063 and 4064 of ERISA.
(c) None of the Borrower or any of its Affiliates is a
participating employer in a multiemployer plan as defined in Section 4001(a) of
ERISA, which participation could give rise to material withdrawal liability on
the part of the Borrower, as the case may be under Subtitle E of Title IV of
ERISA.
For purposes of this Agreement, all references to "ERISA" shall
be deemed to refer to the Employee Retirement Income Security Act of 1974
(including any sections of the Code) as heretofore amended and as it may
hereafter be amended or modified, and all regulations promulgated thereunder,
and all references to the Borrower in this Section 3.15, or in any other Section
of this Agreement relating to ERISA, shall be deemed to refer to the Borrower
and all other entities which are part of a Controlled Group with respect to the
Borrower.
S1. ENVIRONMENTAL COMPLIANCE. Except as set forth in SCHEDULE 3.16, the
Borrower has taken all necessary steps to comply in all material respects with
Environmental Laws (as hereinafter defined) and has determined that:
(a) Borrower is not in violation, or alleged violation, of
any judgment, decree, order, law, license, rule or regulation
pertaining to environmental matters, including without limitation,
those arising under the Resource Conservation and Recovery Act
("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments
and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act,
the Federal Clean Air Act, the Toxic Substances Control Act, each as
amended as of the date hereof, or any other federal, state or local
statute, regulation, ordinance, order or decree relating to health,
safety or the environment (hereinafter "Environmental Laws");
(b) The Borrower has not received notice from any third
party including, without limitation, any federal, state or local
governmental authority, (i) that it has been identified by the United
States Environmental Protection Agency ("EPA") as a potentially
responsible party under CERCLA with respect to a site listed on the
National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii)
that any hazardous waste, as defined by 42 U.S.C. Section 9601(5), any
hazardous substances as defined by 42 U.S.C. Section 9601(14), any
pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) and
any toxic substances, oil or hazardous materials or other chemicals or
substances regulated by any Environmental Laws ("Hazardous
Substances") which it has generated, transported or disposed of has
been found at any site at which a federal, state or local agency or
other third party has conducted or has ordered that it conduct a
remedial investigation,
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removal or other response action pursuant to any Environmental Law; or
(iii) that it is or shall be a named party to any claim, action, cause
of action, complaint, or legal or administrative proceeding (in each
case, contingent or otherwise) arising out of any third party's
incurrence of costs, expenses, losses or damages of any kind
whatsoever in connection with the release of Hazardous Substances;
(c) To the Borrower's knowledge: (i) the properties on
which the Borrower conducts its business have not been used by the
Borrower for the handling, processing, storage or Disposal of
Hazardous Substances except in accordance with applicable
Environmental Laws; (ii) in the course of any activities conducted by
the Borrower, no Hazardous Substances have been generated or are being
used on property leased by the Borrower on which the Borrower conducts
its business except in accordance with applicable Environmental Laws;
(iii) there has been no Release or threatened Release of Hazardous
Substances by the Borrower on, upon, into or from the properties on
which the Borrower operates its business, which Release would have a
material adverse effect on the Borrower's business; (iv) there have
been no Releases on, upon, from or into any real property in the
vicinity of any of the properties on which the Borrower conducts its
business, through soil or groundwater contamination, which may have
come to be located on, and which would have a material adverse effect
on the Borrower's business; and (v) in addition, any Hazardous
Substances that have been generated by the Borrower on the properties
on which the Borrower conducts its business have been transported
off-site only by carriers having an identification number issued by
the EPA, treated or Disposed of only by treatment or disposal
facilities maintaining valid permits as required under applicable
Environmental Laws, which transporters and facilities have been and
are, to the best of the Borrower's knowledge, operating in compliance
with such permits and applicable Environmental Laws; and
(d) none of the properties on which the Borrower conducts
its business is or is expected to be in violation of any applicable
environmental clean-up responsibility law or regulation or
environmental restrictive transfer law or regulation, in regard to
which failure to comply would have a material adverse effect on the
environment or the business, assets or financial condition of the
Borrower.
S2. OTHER REGULATIONS. The Borrower is not subject to regulation under
the Investment Company Act of 1940, the Public Utility Holding Company Act of
1935, the Federal Power Act, the Interstate Commerce Act, any state public
utilities code or any federal or state statute or regulations limiting its
ability to incur Indebtedness.
S3. COMPLIANCE WITH SECURITIES LAWS. All offers and sales of securities
of the Borrower have been made in material compliance with all applicable
federal and state securities laws, including without limitation the Securities
Act of 1933 and the Securities Exchange Act of 1934,
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both as amended.
S4. SOLVENCY. The Borrower is solvent and is not the subject of
bankruptcy or insolvency proceedings.
S5. SUBSIDIARIES OR AFFILIATES. The Borrower does not have any Subsidiary
or Affiliate (other than as set forth in SCHEDULE 3.20).
S6. PENDING LITIGATION. Except as set forth in SCHEDULE 3.21, there are
no lawsuits or claims pending against Borrower which could have a material
adverse affect on the Borrower's financial condition.
S7. COMPLIANCE WITH INVESTMENT POLICY. The Borrower is in compliance with
its Investment Policy for investment of Cash and Cash Equivalents (the
"Investment Policy"). A true and correct copy of such Investment Policy is
attached as SCHEDULE 3.22.
AI. CONDITIONS PRECEDENT
S1. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT. The
effectiveness of this Agreement and the obligations of the Agent and the Lenders
hereunder shall be subject to the following conditions precedent:
(a) The Borrower will have executed and delivered to the
Agent a Note in the amount of the initial Disbursement, the Collateral
Bailment Agreement, the Restricted Account and Security Agreement, the
Irrevocable Instructions and Power of Attorney, the Custodian
Agreement, the Financing Statement and two original counterparts of
this Agreement.
(b) The Bailee will have executed and delivered the
Collateral Bailment Agreement, the Custodian Agreement and the
Restricted Account and Security Agreement;
(c) The initial Account Holder will have executed and
delivered its consent to the Irrevocable Instructions and Power of
Attorney to the Agent;
(d) The Borrower shall have deposited
**-------------------------------- into the Custodian Account;
(e) The Borrower will have otherwise fully complied with
all of the terms
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and conditions of the Loan Documents;
(f) The Borrower will have delivered to the Agent the
following, in form and substance acceptable to the Agent:
(i) a copy of the Certificate of Incorporation of
Borrower certified by the Secretary of State of Delaware;
(ii) a copy of the by-laws of the Borrower certified by
its Secretary;
(iii) a copy of resolutions of the Board of
Directors of the Borrower authorizing the execution, delivery and
performance by the Borrower of this Agreement, the Note, the Loan
Documents and all instruments and documents provided for herein
or therein, certified by the Secretary of the Borrower;
(iv) a good standing certificate for the Borrower,
dated as of a date not more than ten (10) days prior to the
Closing Date from the Secretary of State of the State of
Delaware;
(v) an incumbency certificate with respect to the
officers of the Borrower, certified by its Secretary; and
(vi) evidence that Borrower is qualified to do business
in the State of California and is in good standing as a foreign
corporation;
(g) The legal counsel of the Borrower will have delivered
to the Agent, for the benefit of the Agent and the Lenders, such legal
counsel's legal opinion as to the due organization, existence,
qualification to do business, and good standing of the Borrower, the
due authorization, execution and enforceability of this Agreement and
the other Loan Documents, the absence of pending and threatened
litigation, the non-contravention of other documents evidencing or
relating to material Indebtedness to any party, instruments, laws, and
regulations, and such other matters as the Agent may reasonably
require, in form and substance reasonably satisfactory to the Agent;
(h) The Agent shall have received the portion of the
Initiation Fee which is due on the Closing Date, the Funding Fee for
the initial Disbursement made on the Closing Date and all other fees
and expenses (including, without limitation, the Agent's and the
Lenders' legal fees and expenses incurred in the negotiation and
preparation of the Loan Documents and any other fees and expenses of
the Agent or the Lenders for UCC searches or filing fees) required to
be paid to Agent or the Lenders on or before the Closing Date; and
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(i) All representations and warranties of the Borrower
contained herein are true and correct in all material respects as of
the Closing Date and Borrower will have executed and delivered to the
Agent such certificates with respect thereto as the Agent may
reasonably require.
S2. CONDITIONS PRECEDENT TO ADDITIONAL DISBURSEMENTS. The obligations of
the Agent and the Lenders to make Disbursements after the initial Disbursement
shall be subject to the following conditions precedent:
(a) The Borrower shall have executed and delivered to the
Agent a Note in the amount of the proposed Disbursement;
(b) The Agent shall have received the Funding Fee for the
proposed Disbursement;
(c) All representations and warranties of the Borrower
contained herein shall be true and correct in all material respects as
of the proposed date of Disbursement and the Borrower shall have
executed and delivered to the Agent such certificates with respect
thereto as the Agent may reasonably require; and
(d) The Borrower shall have complied with each and every
condition and covenant set forth in this Agreement, including, without
limitation, those set forth in Section 2.1(b).
AI. AFFIRMATIVE COVENANTS
So long as the Borrower is indebted to the Lenders hereunder, and until
payment in full of the Note and full and complete performance of all of its
other obligations arising hereunder (except for the Borrower's obligations under
Section 5.7 or Section 9.1 to indemnify the Agent and the Lenders under certain
circumstances following the payment of the Note), the Borrower shall in all
material respects:
S1. BOOKS AND RECORDS. Borrower shall keep and shall cause its
Subsidiaries to keep adequate books and records of account, in which entries,
true and complete in all material respects, will be made reflecting all of its
business and financial transactions, and such entries will be made in accordance
with generally accepted accounting principles consistently applied and
applicable law.
S2. INSPECTIONS AND AUDITS. Permit the Agent or any Lender to make or
cause to be made
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reasonable inspections and audits of any books, records and papers of the
Borrower and to make extracts therefrom and copies thereof at all such
reasonable times and upon reasonable notice, provided, however, that certain
areas of the Borrower's facilities may be restricted for reasons of health and
safety and the neither the Agent nor the Lenders will be permitted access to
such restricted areas.
S3. PERFORM OBLIGATIONS. Pay and discharge all of its obligations and
liabilities including, without limitation, all taxes, assessments and
governmental charges upon its income and properties, when due, unless and to the
extent only that such obligations, liabilities, taxes, assessments and
governmental charges are contested in good faith and by appropriate proceedings
and that, to the extent required by generally accepted accounting principles
then in effect, proper and adequate book reserves relating thereto are
established by the Borrower, and provided that the Agent is reasonably satisfied
that the Accounts are not in danger of being the subject of a Lien (except to
the extent permitted by Section 7.1) or sold, forfeited or lost as a result
thereof and the Borrower has provided such security or other assurances with
respect thereto as the Agent reasonably requests.
S4. FEES AND EXPENSES. Pay on demand: (i) all costs and expenses
(including, without limitation, reasonable legal fees, filing fees and UCC
search fees) of the Agent or the Lenders in connection with the preparation,
execution and delivery of this Agreement, and the other Loan Documents; (ii) all
costs and expenses of the Agent or the Lenders in enforcing the Borrower's
performance of and compliance with all agreements and conditions contained in
the Loan Documents on its part to be performed or complied with or in connection
with the negotiation, preparation and execution and delivery of any amendment,
modification or supplement of or to, or any consent or waiver under, any such
document (or any such instrument which is proposed but not executed and
delivered) or relating to any claim or action threatened, made or brought
against the Agent or the Lenders arising out of or relating to any extent to the
Loan Documents, or the transactions contemplated hereby or thereby; (iii) all
costs and expenses (including, without limitation, reasonable fees and
disbursements of counsel) suffered or incurred by the Agent or the Lenders in
connection with the enforcement or the payment of the Note or any other sum due
to it under any of the other Loan Documents or any of its other rights hereunder
or thereunder; and (iv) any and all costs and expenses incurred by Agent or the
Lenders in conducting lien searches, UCC searches or other due diligence
investigations which the Agent or the Lenders determine are necessary to monitor
the Borrower's performance hereunder and which are incurred after the Closing
Date.
S5. MAINTENANCE OF EXISTENCE; CONDUCT OF BUSINESS. Preserve and maintain
its corporate existence and all of its rights, privileges and franchises
necessary in the normal conduct of its business except for transfers (including,
without limitation, transfers in the form of paid-up licenses) for reasonably
equivalent value in the normal course of its business. The Borrower shall
comply in all material respects with all applicable laws, rules, regulations,
orders, writs, decrees and judgments and its charter and bylaws, and with the
material terms of all mortgages, indentures, leases, contracts
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and other agreements and instruments binding upon the Borrower. The Borrower
will continue to engage in business of the same general type as now conducted by
the Borrower.
S6. INSURANCE. Maintain with financially sound and reputable insurers
insurance with respect to its properties and business against such liabilities,
casualties and contingencies and of such types and in such amounts as shall be
customary for businesses engaged in similar activities in similar geographic
areas. Without limiting the foregoing, the Borrower will (i) keep all of its
physical property insured against fire and extended coverage risks in amounts
and with deductibles equal to those generally maintained by businesses engaged
in similar activities in similar geographic areas (provided, however, that
Borrower shall not be required to obtain earthquake coverage), (ii) maintain all
such workers' compensation or similar insurance as may be required by law, and
(iii) maintain, in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar geographic
areas, general public liability insurance against claims for bodily injury,
death or property damage occurring on, in or about the properties of the
Borrower, business interruption insurance and product liability insurance.
SCHEDULE 5.6 lists insurance of the Borrower currently in effect. The Borrower
shall furnish to the Agent, from time to time upon the Agent's request,
certificates or other evidence reasonably satisfactory to the Agent of
compliance with the foregoing.
S7. CERTAIN TAXES.
(a) If, under any law in effect on the date hereof, or
under any law subsequently enacted, it is determined that any U.S. federal,
state or local tax (other than a tax based on the net income of Agent and/or the
Lenders) is payable in respect of the issuance of the Note, or in connection
with the filing or recording of any assignments, mortgages, financing
statements, or other documents (whether measured by the amount of indebtedness
secured or otherwise) as contemplated by this Agreement, then the Borrower shall
pay any such tax and all interest and penalties thereon, if any, and shall
indemnify the Agent and the Lenders against and save them harmless from any loss
or damage resulting from or arising out of the nonpayment or delay in payment of
any such tax.
(b) If any such tax or taxes shall be assessed or levied
against any of the Agent, the Lenders or any other holder of the Note, the
Agent, or such other holder, as the case may be, may notify the Borrower and
make immediate payment thereof, together with interest or penalties in
connection therewith, and will thereupon be entitled to and shall receive
immediate reimbursement therefor from the Borrower.
(c) Notwithstanding any other provision contained in this
Agreement, the covenants and agreements of the Borrower in this Section 5.7 will
survive for two (2) years following the payment of the Note and the termination
of this Agreement.
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S8. USE OF PROCEEDS. Use the proceeds of all Disbursements made by the
Lenders hereunder only for the purpose specified in Section 2.2 -- "Use of
Proceeds." The Borrower will not use any of the proceeds of such Loans,
directly or indirectly, for the purpose of purchasing or carrying any margin
stock or for the purpose of purchasing or carrying or trading in any securities
under such circumstances as to involve the Borrower or the Lenders in a
violation of Regulation G, T, U or X issued by the Federal Reserve Board.
S9. FURTHER ASSURANCES WITH RESPECT TO ACCOUNTS. Promptly supply the
Agent with such information concerning the Investment Account as the Agent may
reasonably request from time to time hereafter, including, without limitation,
Account statements which shall be delivered not less frequently than quarterly
(or more frequently if required pursuant to Section 6.4), which account
statements will summarize the value of deposits and investments in the Accounts.
S10. FINANCIAL COVENANTS. The Borrower on a consolidated basis shall
maintain at all times:
(i) **-----------------------------------------------
- ---------------------------------------;
(ii) **-----------------------------------------------
- ----------------------;
(iii) **-----------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------; and
(iv) **-----------------------------------------------
- ----------------------------------------------------------------------.
The failure of the Borrower to maintain any of the covenants set forth in this
Section 5.10(i)-(iv) and/or the occurrence of an Event of Default under Section
8.1 of this Agreement shall be a "Trigger Event."
S1. DEPOSITS INTO CUSTODIAN ACCOUNT. Upon the occurrence of a Trigger
Event, the Borrower will make, or, the Agent may direct the Account Holder
pursuant to the Irrevocable Instructions and Power of Attorney to make, payments
or deposits to the Custodian Account such that after giving effect to such
payments or deposits the Restricted Account Balance equals or exceeds the
Required Restricted Account Balance. At the time of each such payment, the
Borrower will submit to the Agent a statement setting forth the market values of
marketable securities and the Restricted Account Balance as of the date of
deposit (after giving effect to any deposits made on or before such day).
Notwithstanding anything in this Agreement to the contrary, after the occurrence
of a Trigger Event and Borrower's again thereafter coming into full compliance
with each of the financial covenants set forth in Section 5.10 (i) through (iv)
and provided that no Default or Event
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of Default has occurred and is continuing, the Agent, with the consent of the
Lenders, may instruct the Baliee to return to the Account Holder for deposit in
the Investment Account such amount as is agreed to by the Lenders in their sole
and absolute discretion, provided, however, that on the occurrence thereafter of
another Trigger Event, a Default or an Event of Default, the Agent and the
Lenders will have the rights granted under this Agreement with respect to such
other Trigger Event, Default or Event of Default.
S2. INVESTMENT POLICY. The Borrower shall at all times comply with the
Investment Policy.
S3. DEPOSIT RELATIONSHIP WITH SILICON VALLEY BANK. Borrower agrees to
initiate a banking relationship with Silicon Valley Bank which may take the form
of either (a) establishing Borrower's core operating account at Silicon Valley
Bank or (b) **-----------------------------------------------------------------
- --------------------------------------.
AI. DELIVERY OF FINANCIAL REPORTS,
DOCUMENTS AND OTHER INFORMATION
So long as the Borrower is indebted to the Lenders hereunder and until
payment in full of the Note and full and complete performance of all of its
other obligations arising hereunder, the Borrower shall deliver to the Lenders:
S1. ANNUAL FINANCIAL STATEMENTS. Annually, as soon as available, but in
any event within one hundred (100) days after the last day of the fiscal year,
the balance sheet of the Borrower as of such last day of the fiscal year and
statements of operations, stockholders' equity and cash flows, for such fiscal
year, on a consolidated basis, prepared in accordance with generally accepted
accounting principles consistently applied, in reasonable detail, audited and
opined on by independent public accountants reasonably satisfactory to the Agent
(which audit opinion shall contain no qualification unsatisfactory to the
Agent), to present fairly the financial position and the results of operations
of the Borrower as of the end of such fiscal year and to have been prepared in
accordance with generally accepted accounting principles.
S2. QUARTERLY FINANCIAL STATEMENTS. As soon as available, but in any
event within fifty (50) days after the end of each fiscal quarter ended on the
last day of each March, June and September, balance sheets for the Borrower as
of the last day of each such quarter and statements of operations, and cash
flows, for such quarter, all in reasonable detail and on a consolidated basis.
Each such statement shall be certified on behalf of the Borrower by the
Borrower's controller, director of finance or chief financial officer as fairly
presenting the financial position and the results of operations of the Borrower
as of the end of such fiscal quarter and as having been prepared in accordance
with generally accepted accounting principles consistently applied (subject to
normal
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<PAGE>
adjustments).
S3. 10Q AND 10K FILINGS. At the time its Form 10-Q is released to the
public (which in all events shall be within fifty (50) days after the end of the
fiscal quarters ended March, June and September or, if later, the date of the
filing of the Form 10-Q with the Securities and Exchange Commission), a copy of
each Form 10-Q; and, each year at the time its Form 10K is released to the
public (which in all events shall be within one hundred (100) days after the end
of the Borrower's fiscal year), a copy of its Annual Report to Stockholders
along with its Form 10K.
S4. CASH AND COVENANT REPORTS. The following reports, statements or
certificates: (i) at the same time as it delivers the Financial Statements
required under the provisions of Sections 6.1 -- "Annual Financial Statements"
and 6.2 -- "Quarterly Financial Statements", a report as to the calculations
with respect to, and compliance with, the financial covenants set forth in
Section 5.10(i) through 5.10(v); and (ii) within fifteen (15) days of the end of
each calendar quarter, a statement listing (A) the Borrower's Net Cash Level at
the end of such calendar quarter and the domicile of such cash and investments
and (B) the cash balances and Cash Equivalent Balances of the Investment Account
as of the end of such calendar quarter, provided that during any period when the
Borrower's Net Cash Level is less than an amount equal to **-------------------
- -----------------------------, the Borrower shall submit to the Lenders, within
fifteen (15) days of the end of each calendar month, a compliance statement
indicating the Borrower's actual Net Cash Level and listing all of the
Borrower's cash balances and Cash Equivalent Balances as of month end wherever
domiciled, accompanied by confirming statements of the custodians of such cash
balances and Cash Equivalent Balances; and (iii) within twenty (20) days of the
end of each calendar month, in order for the Lenders to monitor Borrower's
compliance with the financial covenant set forth in Section 5.10(iii), a
certificate of the Actual Cash Burn for the preceding six (6) month period.
S5. OTHER INFORMATION. Promptly after a written request therefor, such
other financial data or information evidencing compliance with the requirements
of this Agreement and the other Loan Documents as the Agent may reasonably
request from time to time.
S6. NO TRIGGER EVENT/DEFAULT CERTIFICATE. At the same time as it delivers
the Financial Statements required under the provisions of Sections 6.1 --
"Annual Financial Statements" and 6.2 -- "Quarterly Financial Statements," a
certificate of the Borrower signed on its behalf by an Authorized Signatory or
its controller, chief financial officer or director of finance, to the effect
that, to the best of the Borrower's knowledge, no Trigger Event or Default
hereunder has occurred or, if such cannot be so certified, specifying in
reasonable detail the exceptions, if any, to such statement.
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S7. NOTICES.
(a) DEFAULTS. As soon as possible and in any event within
seven (7) days after the Borrower has knowledge of the occurrence or existence
of a Trigger Event or any event which with the giving of notice or passage of
time or both, would constitute either an Event of Default or Trigger Event, the
statement of the Borrower setting forth details of such Trigger Event or event
and the action which the Borrower proposes to take with respect thereto.
(b) LITIGATION AND JUDGMENTS. Promptly after obtaining
knowledge thereof, written notification of any litigation or legal proceedings
instituted against the Borrower, regardless of the subject matter thereof,
having claims or amounts in controversy of more than -------- in any one
instance or **------- in the aggregate at any one time, or of one or more
judgment(s) not covered by insurance, final or otherwise, in an aggregate amount
of **--------- or more.
(c) ENVIRONMENTAL EVENTS. Promptly after obtaining
knowledge or receipt thereof, written notice of any of the following which has
the potential to materially adversely affect the assets, liabilities, financial
condition or operations of the Borrower: (i) any violation of any Environmental
Laws regarding the Borrower's operations; (ii) any potential or known Release,
or threat of Release, of any Hazardous Substances at, from or into the
Borrower's place of business which the Borrower reports in writing or is
reportable in writing (or for which any written report supplemental to any oral
report is made) to any federal, state, or local environmental agency; (iii) any
notice of violation of any Environmental Laws or of any release or threatened
release of Hazardous Substances, including a notice or claim of liability or
potential responsibility from any third party (including without limitation any
federal, state or local governmental officials) and including notice of any
formal inquiry, proceeding, demand, investigation or other action with regard to
the Borrower's business operation; or (iv) any expense or loss that has been
identified by such governmental authority in connection with the assessment,
containment, removal or remediation of any Hazardous Substances with respect to
which the Borrower may be liable.
AI. NEGATIVE COVENANTS
So long as the Borrower is indebted to the Lenders hereunder, and until
payment in full of the Note and full and complete performance of all of its
other obligations arising hereunder (except for the Borrower's obligations under
Sections 5.7 or Section 9.1 to indemnify the Agent and the Lenders under certain
circumstances following the payment of the Note), the Borrower shall not do, or
permit to be done, any of the following:
S1. LIENS. Without the Agent's consent, create or assume or permit to
exist, any Lien upon or with respect to any of its assets, or assign or
otherwise convey any right to receive income except
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the following Liens ("Permitted Liens"):
(a) Liens in favor of the Agent on behalf of Lenders;
(b) Liens for taxes, assessments or governmental charges or
levies on property of the Borrower if the same shall not at the time
be delinquent or thereafter can be paid without interest or penalty or
are being contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and as to
which adequate reserves have been made ("General Tax Liens");
(c) Liens imposed by law, such as carrier's, warehousemen's
and mechanic's liens and other similar Liens arising in the ordinary
course of business for sums not yet due or which are being contested
in good faith and by appropriate proceedings which serve as a matter
of law to stay the enforcement thereof and as to which adequate
reserves have been made;
(d) Liens arising out of pledgor deposits under workers'
compensation laws, unemployment insurance, social security, retirement
benefits or similar legislation;
(e) Permitted Purchase Money Liens (including, without
limitation, Liens arising in connection with equipment leases);
(f) Rights of other parties under technology licenses from
the Borrower granted in connection with the development, manufacture
or marketing of pharmaceutical or other products, or otherwise in the
ordinary course of business;
(g) Rights of the United States government in certain
technology, the development of which is or was funded in whole or in
part by the United States government; and
(h) Security deposits under leases of the Borrower's
premises set forth on SCHEDULE 7.1 hereto;
(i) Liens on equipment leased by Borrower or any Subsidiary
pursuant to an operating lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely
for the purpose of financing the lease of such equipment (including
Liens arising from UCC financing statements regarding leases permitted
by this Agreement);
(j) Liens securing capital lease obligations on assets
subject to such capital leases;
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<PAGE>
(k) Liens arising from judgments, decrees or attachments to
the extent and only so long as such judgment, decree or attachment has
not caused or resulted in an Event of Default;
(l) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in
connection with the importation of goods;
(m) Liens that are not prior to the Lien of Lenders but
that arise solely by virtue of any statutory or common law provision
relating to banker's liens, rights of setoff or similar rights and
remedies as to deposit accounts or other funds maintained with a
creditor depository institution; and
(n) Liens, not otherwise permitted, which Liens do not in
the aggregate exceed $50,000 at any time.
S2. CHANGES IN BUSINESS; MERGER OR CONSOLIDATION; DISPOSITION OF ASSETS.
Without the Agent's consent:
(a) Consolidate with, merge into or convey or transfer its
properties substantially as an entirety to, any Person, except that
the Borrower may participate in any merger in which the Borrower is
the surviving entity so long as after giving effect to such merger the
Borrower remains in compliance with all covenants and conditions of
this Agreement.
(b) Make any material change in the nature of its
business, or in the nature of its operations, or liquidate or dissolve
itself (or suffer any liquidation or dissolution).
(c) Effect any disposition of all or a material portion of
its assets (whether in one or more transactions) except that (i) the
Borrower may dispose of obsolete or worn out equipment, (ii) the
Borrower may replace equipment with upgraded equipment and may
thereafter dispose of the equipment so upgraded and replaced, (iii)
the Borrower may engage in research and development transactions
(each, an "R&D Transaction") involving the licensing of the Borrower's
rights in certain technology to other persons, provided that Borrower
receives fair market consideration for such licensing and, provided
that after giving effect to each such R&D Transaction, the Borrower
remains in compliance with all covenants and conditions of this
Agreement; (iv) the Borrower may dispose of other assets in the
ordinary course of Borrower's business provided that Borrower receives
equivalent value on such disposition of assets; (v) the Borrower may,
for adequate and fair market consideration, (A) grant exclusive
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<PAGE>
licenses and similar arrangements for the use of the property of
Borrower or its Subsidiaries within certain geographic regions, or (B)
transfer any exclusive licenses and similar arrangements that are no
longer material to the business of the Borrower; and (vi) the Borrower
may make other transfers not in excess of ** the aggregate during
the term of this Agreement.
S3. CHANGE OF OFFICE ADDRESS. Except upon five (5) days' prior written
notice to the Agent, change the address of its principal office or place of
business or the place where it maintains its records with respect to the
Accounts.
S4. VIOLATION OF AGREEMENT. Take any action the effect of which would
constitute a breach or violation of any material provision of this Agreement.
AI. EVENTS OF DEFAULT
S1. EVENTS OF DEFAULT. If any one or more of the following events ("Event
of Default") shall occur and be continuing, the entire unpaid balance of the
principal of and interest on the Note and all other obligations and Indebtedness
of the Borrower to the Lenders arising hereunder and under the other Loan
Documents will (i) in the case of any Event of Default of the types referred to
in subparagraph (f) hereinbelow, immediately become due and payable without
notice and (ii) in the case of any other Event of Default, immediately become
due and payable upon written notice to that effect given to the Borrower by the
Agent, without presentment or demand for payment, notice of non-payment, protest
or further notice or demand of any kind, all of which are expressly waived by
the Borrower. Upon an Event of Default, the Agent and/or the Lenders shall have
the rights and remedies provided for herein and in the other Loan Documents and
under applicable law and in equity, and the rights and remedies provided for
herein shall be cumulative and in addition to the rights and remedies provided
for therein. Each of the following shall constitute an Event of Default:
(a) Failure by the Borrower to make any payment within **
of when due of any amount payable under the Loan Documents.
(b) Failure by the Borrower to make any mandatory payments
under any borrowing agreement (other than the Loan Documents) to which
the Borrower is a party within any applicable grace period provided in
such agreement or any other default by the Borrower under any such
borrowing agreement and the failure of the Borrower to cure such
default within any applicable grace period, provided that no Event of
Default will be deemed to have occurred under this paragraph (b) with
respect to any indebtedness under any borrowing agreement if payment
of such indebtedness, after notice thereof having been given to the
Agent, is being contested by the Borrower in
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<PAGE>
good faith and by appropriate proceedings and such contest operates to
prevent the other party to such agreement from exercising its remedies
against the Borrower or any of its properties, or if such other party
has agreed in writing not to exercise its remedies against the
Borrower or any of its properties, and, in any case, the amount in
dispute is in the aggregate less than **.
(c) Failure by the Borrower to perform or observe any term,
condition or covenant set forth in Section 2.6.
(d) Failure by the Borrower to perform or observe any
material term, condition or covenant of this Agreement or of any of
the Loan Documents (other than the covenants set forth in Section
5.10(i) through 5.10(iv) which shall constitute a Trigger Event and
not an Event of Default) which failure (other than a failure which by
its nature is not capable of cure and other than a failure to perform
or observe any term, condition or covenant referred to or set forth in
Subparagraphs (a), (b) and (c) hereinabove) is not cured within **
days of the occurrence thereof.
(e) Any representation or warranty made in writing in any
of the Loan Documents or in connection with the making of the Loan or
a certificate, statement or report made or delivered in compliance
with this Agreement, will have been false or misleading in any
material respect when made or delivered.
(f) The Borrower makes an assignment for the benefit of
creditors, files a petition for bankruptcy, petitions or applies to
any tribunal for the appointment of a receiver, custodian, or any
trustee for it or a substantial part of its assets, or commences any
proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or there will have
been filed any such petition or application, or any such proceeding
has been commenced against it, which remains undismissed for a period
of ** days or more; or any order for relief is entered in any such
proceeding; or the Borrower by any act or omission indicates its
consent to, approval of or acquiescence in any such petition,
application or proceeding or the appointment of a custodian, receiver
or any trustee for it or any substantial part of any of its
properties; or the Borrower suffers any custodianship, receivership or
trusteeship to continue undischarged for a period of ** days or more.
(g) Any single judgment of ** or more or a combination of
unsecured judgments aggregating ** or more against the Borrower not
covered by insurance or any attachment or levy of execution against
any substantial part of the Borrower's properties for any amount (not
covered by insurance) remains unpaid, unstayed on appeal,
undischarged, unbonded or undismissed for a period of ** days or more.
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(h) Any Loan Document ceases to be in full force and effect
in all material respects for any reason (other than due to the payment
in full of all amounts secured or evidenced thereby or due to
discharge in writing by the Agent).
(i) After the occurrence of a Trigger Event under Section
5.10, the failure of the Borrower and/or the Account Holder to make
the requisite transfer to the Custodian Account as provided in Section
5.11 such that, not later than 5:00 P.M. in New York, New York on the
first Business Day following the occurrence of the Trigger Event, the
Restricted Account Balance equals or exceeds the Required Restricted
Account Balance.
(j) Upon the occurrence of a Trigger Event under Section
5.10, the failure of the Borrower to execute and deliver, or cause to
be executed and delivered, any additional documents reasonably
requested by the Agent in connection with the transfer by the Borrower
and/or Account Holder to the Custodian Account as provided in Section
5.11 (including without limitation any additional documents reasonably
requested by the Agent in order to further implement or perfect the
pledge of assets held in the Custodian Account).
(k) Failure by the Borrower in any material respect to
comply with the Investment Policy, for investment of all Cash and Cash
Equivalents or the Borrower's making a material change to the
Investment Policy without the Agent's prior written approval, which
approval shall not be unreasonably withheld.
(l) After the occurrence of a Trigger Event and the initial
transfer to the Custodian Account as provided in Section 5.11, the
failure of the Borrower and/or the Account Holder to make, within two
Business Days following the request of the Agent, such additional
transfers to the Custodian Account as may be necessary, from time to
time, to increase the Restricted Account Balance so that it equals the
Required Restricted Account Balance.
(m) The failure by the Borrower, at any time, to maintain a
Net Cash Level equal to the sum of (i) the then outstanding principal
balance under the Note plus (ii) the greater of ** Actual Cash Burn.
(n) After the Closing Date, a material adverse change in
the business or financial condition of the Borrower occurs.
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AI. MISCELLANEOUS PROVISIONS
S1. INDEMNITY; ADDITIONAL FEES. The Borrower shall indemnify the Agent
and each of the Lenders against, and hold each of them harmless from, any loss,
liabilities, damages, claims, and reasonable costs and expenses (including
reasonable attorneys' fees and disbursements) suffered or incurred by the Agent
or any Lender arising out of, resulting from or in any manner connected with,
the Loan Documents, or any transaction related hereto or thereto, except an
indemnified party shall not be entitled to indemnification for any such loss
arising solely from such indemnified party's own gross negligence or willful
misconduct. The provisions of this Section 9.1 will survive for a period of
three (3) years following the repayment of the Note and the termination of this
Agreement.
S1. SURVIVAL OF AGREEMENTS AND REPRESENTATIONS. All agreements,
representations and warranties made herein will survive the delivery of the Loan
Documents and shall be in full force and effect during the term of this
Agreement.
S2. MODIFICATIONS, CONSENTS AND WAIVERS. No modification, amendment or
waiver of or with respect to any provision of the Loan Documents, nor consent to
any departure by a party from any of the terms or conditions thereof shall in
any event be effective unless it is in writing and signed by the party against
whom such modification, amendment, waiver or consent is sought to be enforced.
Any such waiver or consent will be effective only in the specific instance and
for the purpose for which given. No consent to or demand on the Borrower in any
case will, of itself, entitle it to any other or further notice or demand in
similar or other circumstances.
S3. ENTIRE AGREEMENT. This Agreement and the other Loan Documents embody
the entire agreement and understanding among the Agent, the Lenders and the
Borrower and supersede all prior agreements and understandings relating to the
subject matter hereof.
S4. REMEDIES CUMULATIVE. Each and every right granted to the Agent or
the Lenders hereunder or under any other document delivered hereunder or in
connection herewith, or allowed it by law or equity, is cumulative and may be
exercised from time to time. No failure on the part of the Agent, the Lenders
or the holder of the Note to exercise, and no delay in exercising, any right
shall operate as a waiver thereof, nor will any single or partial exercise of
any right preclude any other or future exercise thereof or the exercise of any
other right.
S5. FURTHER ASSURANCES. At any time and from time to time, upon the
request of the Agent, the Borrower shall execute, deliver and acknowledge or
cause to be executed, delivered and acknowledged such further documents and
instruments and do such other acts and things as the Agent may reasonably
request to fully effect the purposes of the Loan Documents and any other
agreements, instruments and documents delivered pursuant to the Loan Documents
or in connection with the Loan.
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S6. NOTICES. All notices, requests, reports and other communications
pursuant to this Agreement must be in writing, either by letter (delivered by
hand or commercial delivery service or sent by certified mail, return receipt
requested, except for routine reports which may be by ordinary first class mail)
or facsimile or telecopier, addressed as follows:
If to Borrower: Arris Pharmaceutical Corporation
180 Kimball Way
South San Francisco, CA 94020
Attention: Chief Financial Officer
Telephone: 415-829-1000
Facsimile: 415-829-1001
If to Borrower's counsel: Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Julie Robinson, Esq.
Telephone: 415-843-5092
Facsimile: 415-857-0663
If to the Agent or The Sumitomo Bank, Limited
the Lenders, Pine Street Representative Office
to the Agent: 100 Pine Street, Suite 3300
San Francisco, CA 94111-5219
Attn: Anthony B. Kwee, Vice President
Telephone: (415) 394-0873
Facsimile: (415) 394-9797
If to the Freed & Heinemann LLP
Agent's Counsel: One Jackson Place
633 Battery Street, Suite 620
San Francisco, CA 94111
Attn: Peter M. Heinemann, Esq.
Telephone: (415) 986-0707
Facsimile: (415) 986-0999
Any notice, request or communication hereunder will be deemed to have been given
(i) on the day on which it is delivered by hand to such party at its address
specified above, (ii) if sent by mail, on
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the third (3rd) Business Day following the day it was deposited in the mail,
postage prepaid, or (iii) if sent by telecopy, when transmitted addressed as
aforesaid on a Business Day during normal business hours and receipt is
confirmed, on such Business Day. Any party may change the person or address to
whom or which notices are to be given hereunder, by notice duly given hereunder,
provided, however, that any such notice will be deemed to have been given
hereunder only when actually received by the party to which it is addressed.
S1. CONSTRUCTION; GOVERNING LAW.
(a) The headings used in this Agreement and the table of
contents are for convenience only and will not be deemed to constitute a part
hereof. All uses herein of the masculine gender or of singular or plural terms
will be deemed to include uses of the feminine or neuter gender or plural or
singular terms, as the context may require. All references herein (including
the definitions set out in APPENDIX A hereto) to any agreements shall be to such
agreement as amended or modified to the date of reference. All references to a
particular entity shall include a reference to such entity's successors and
permitted assigns. The words "herein," "hereof" and "hereunder" refer to this
Agreement as a whole and not to any particular section or subsection of this
Agreement. "Including" means "including, without limitation".
(b) THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA WITHOUT
REFERENCE TO ITS CONFLICT OF LAWS RULES.
S2. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE LENDERS
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT
OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, ANY LOAN DOCUMENT OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR
ACTIONS OF THE BORROWER, THE AGENT OR THE LENDERS. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE LENDERS PROVIDING THE LOAN DESCRIBED HEREIN.
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S3. JURISDICTION.
(a) Each of the Borrower, the Agent and the Lenders hereby
irrevocably and unconditionally submits, for itself and its property, to service
of process (directly or on an agent) in California to the nonexclusive
jurisdiction of any California state court or Federal court of the United States
of America in each case sitting in San Francisco, and any appellate court
handling an appeal from any thereof, in any action or proceeding arising out of
or relating to this Agreement or any other Loan Agreement, or for recognition or
enforcement of any judgment, and the Borrower, the Agent and the Lenders hereby
irrevocably and unconditionally agree that all claims in respect of any such
action or proceeding may be heard and determined in such California state or, to
the extent permitted by law, in such Federal court. Each of the Borrower, the
Agent and the Lenders agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. Nothing in this
Agreement shall affect any right that a party may otherwise have to bring any
action or proceeding relating to this Agreement or any other Loan Agreement
against any other party or its respective properties in the court of any
jurisdiction.
(b) Each of the Borrower, the Agent and the Lenders hereby
irrevocably and unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection which it may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to
this Agreement in any such California state or Federal court. Each of the
Borrower, the Agent and the Lenders hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
S4. RELATIONSHIP OF THE BORROWER AND THE LENDERS. The Borrower, the Agent
and the Lenders agree that nothing contained in this Agreement or any other
document executed in connection with the Loan is intended or shall be construed
to establish the Borrower and the Lenders and/or the Agent as joint venturers or
partners; and the Borrower hereby indemnifies and agrees to hold each of the
Agent, the Lenders and their respective officers, directors, agents and
employees, harmless from any and all damages resulting from such a construction
of the relationship of the parties hereto, except any such damage arising solely
from the indemnified person's own gross negligence or willful misconduct.
S5. SEVERABILITY. The provisions of this Agreement are severable, and if
any clause or provision hereof shall be held invalid or unenforceable in whole
or in part in any jurisdiction, then such invalidity or unenforceability will
affect only such clause or provision, or part thereof, in such jurisdiction and
will not in any manner affect such clause or provision in any other
jurisdiction, or any other clause or provision in this Agreement in any
jurisdiction. Each of the covenants, agreements and conditions contained in this
Agreement is independent and compliance by the Borrower with any of them will
not excuse noncompliance by the Borrower with any other.
33
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1 BINDING EFFECT; ASSIGNMENT.
1 This Agreement will be binding upon and inure to the
benefit of the Borrower and its successors and its assigns as permitted herein
and to the benefit of the Agent, the Lenders and their respective successors and
assigns.
2 Except as set forth in Section 7.2(a), the rights and
obligations of the Borrower under this Agreement may not be assigned or
delegated without the prior written consent of the Agent, and any purported
assignment or delegation without such consent shall be void.
3 Each Lender, without the consent of the Borrower, may
at any time assign or grant participations to any other Person in all or part of
its rights and obligations under the Loan Documents; PROVIDED, HOWEVER, that no
such assignment or participation may be made or shall be effective unless such
Lender shall have delivered prior notice thereof to the Borrower of the proposed
effective date and amount of such assignment or participation and the identity
of the proposed assignee or participant. The Agent shall be the agent of any
participants for the purpose of the receipt and delivery of funds and notices
under the Loan Documents.
2 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original, but all of which will constitute one and the
same document.
3 CONFIDENTIALITY. The Agent and each Lender (each a "Lending Party")
agree to keep confidential any information furnished or made available to it by
the Borrower pursuant to this Agreement that is marked confidential, PROVIDED
that nothing herein shall prevent any Lending Party from disclosing such
information (a) to any other Lending Party or any affiliate of any Lending
Party, or any officer, director, employee, agent, or advisor of any Lending
Party or any affiliate of any Lending Party, (b) to any other Person if
reasonably incidental to the administration of the credit facility provided
herein, (c) as required by any law, rule, or regulation, (d) upon the order of
any court or administrative agency, (e) upon the request or demand of any
regulatory agency or authority, (f) that is or becomes available to the public
or that is or becomes available to any Lending Party other than as a result of a
disclosure by any Lending Party prohibited by this Agreement, (g) in connection
with any litigation to which such Lending Party or any of its affiliates may be
a party, (h) to the extent necessary in connection with the exercise of any
remedy under this Agreement or any other Loan Document, and (i) subject to
provisions substantially similar to those contained in this Section, to any
actual or proposed participant or assignee. Notwithstanding any other provision
contained in this Agreement, the covenants and agreements of each Lending Party
in this Section 9.15 will survive for two (2) years following the payment of the
Note and the termination of this Agreement.
4 RIGHT OF SET-OFF. Upon the occurrence and during the continuance of
any Event of
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Default, each Lender (and each of its Affiliates) is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by such
Lender (or any of its Affiliates) to or for the credit or the account of the
Borrower against any and all of the obligations of the Borrower now or hereafter
existing under this Agreement and the Note or Notes held by Agent on behalf of
such Lender, irrespective of whether Agent, on behalf of such Lender, shall have
made any demand under this Agreement or such Note or Notes and although such
obligations may be unmatured. Each Lender agrees promptly to notify the Agent
and the Borrower after any such set-off and application made by such Lender,
PROVIDED, HOWEVER, that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of each Lender under this
Section 9.16 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) that such Lender may have.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
THE SUMITOMO BANK, LIMITED, ARRIS PHARMACEUTICAL
as Agent and as a Lender CORPORATION, as Borrower
By: By:
-------------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
----------------------------- -----------------------------
By: SILICON VALLEY BANK,
-------------------------------- as a Lender
Name:
------------------------------
Title:
-----------------------------
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
35
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36
<PAGE>
APPENDIX A TO LOAN AGREEMENT -- DEFINITIONS
The following words shall have the meanings specified below in the Section
of the Agreement referred to below.
"ACCOUNT HOLDER" -- is defined in Subsection 2.6(a).
"ACCOUNTS" -- the Investment Account and the Custodian Account.
"ACTUAL CASH BURN" -- the amount of the actual change in the Borrower's
Cash and Cash Equivalents (including short-term and long-term investments)
excluding Extraordinary Transactions, as calculated on the last day of each
calendar month for the preceding one month period and as set forth in a written
certificate prepared by Borrower and delivered to the Agent and the Lenders not
later than the 20th day of each month for the preceding month.
"AFFILIATE" -- as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") shall mean possession
directly or indirectly, of power to direct or cause the direction of management
or policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise). The term "Affiliate" shall not
include any Person who controls another Person solely by virtue of such Person's
position as a corporate officer or director of such other Person.
"AGENT" -- is defined in the Preamble.
"AGREEMENT" -- is defined in the Preamble.
"APPLICABLE MARGIN" -- means **.
"AUTHORIZED SIGNATORY" -- with respect to a corporation, any officer of
such corporation.
"AVAILABILITY PERIOD" -- the period commencing on the Closing Date and
ending on
August 31, 1998.
"BAILEE" -- is defined in Subsection 2.6(b).
"BORROWER" -- is defined in the Preamble.
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"BUSINESS DAY" -- a day when commercial banks in both San Francisco,
California and Chicago, Illinois and, in the case of setting the Reserve
Adjusted Eurodollar Rate, London, England, are open for business with respect to
transactions of the kind contemplated in this Agreement.
"CERCLA" -- is defined in Subsection 3.16(a).
"CASH AND CASH EQUIVALENTS" -- liquid investments, consisting of cash and
cash equivalents and other investments in investment grade securities, that are
classified on the Borrower's consolidated balance sheet as current, noncurrent,
long-term or restricted.
"CASH EQUIVALENT BALANCES" -- the aggregate amount of Cash and Cash
Equivalents, as reported in the Financial Statements in accordance with GAAP.
"CLOSING DATE" -- September 30, 1997.
"CODE" -- the Internal Revenue Code of 1986, as amended.
"COLLATERAL BAILMENT AGREEMENT" -- the Collateral Bailment Agreement of
even date herewith by and among the Borrower, the Agent and the Bailee.
"COMMITMENT" means, for each Lender, $10,000,000.
"COMMITMENT FEE" -- is defined in Subsection 2.3(d)
"CONTROLLED GROUP" -- all members of a controlled group of corporations and
all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower, are treated as a single employer under
Section 414(b), 414(c) or 414(m) of the Code and Section 4001(a)(2) of ERISA.
"CURRENT RATIO" -- the ratio of total current assets to total current
liabilities. For purposes of calculating the Current Ratio, the deferred
revenue amounts shown on Borrower's balance sheet under current liabilities
shall not be included in such the calculation of total current liabilities to
the extent there are no contingencies which might require the return of such
amounts.
"CUSTODIAN ACCOUNT" -- is defined in Subsection 2.6(b).
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"CUSTODIAN AGREEMENT" -- Custodian Agreement of even date herewith by and
between the Borrower and the Bailee.
"DEFAULT" means an event which with the passage of time or the giving of
notice or both would constitute an Event of Default.
"DEFAULT RATE" -- is defined in Subsection 2.3(c).
"DISBURSEMENT" -- a disbursement of available proceeds of the Loan.
"DISPOSAL," "DISPOSE(d)" -- as specified in RCRA and in the regulations
promulgated thereunder.
"ELECTION NOTICE" -- is defined in Subsection 2.1(g).
"EPA" -- is defined in Subsection 3.16(b).
"ENVIRONMENTAL LAWS" -- is defined in Subsection 3.16(a).
"ERISA" -- is defined in Section 3.15.
"EUROCURRENCY RESERVE PERCENTAGE" -- with respect to each Interest Period,
a percentage (expressed as a decimal) equal to the percentage (if any) in effect
two Business Days prior to the first day of such Interest Period, as prescribed
by the F.R.S. Board, for determining reserve requirements applicable to
"Eurocurrency liabilities" pursuant to Regulation D or any other then applicable
regulation of the F.R.S. Board which prescribes reserve requirements applicable
to "Eurocurrency liabilities," as presently defined in said Regulation D. For
purposes of this definition, Eurodollar Rate Loan Portions hereunder shall be
deemed to be "Eurocurrency liabilities" as defined in said Regulation D.
"EURODOLLAR RATE" -- for any Eurodollar Rate Loan Portion, with respect to
the applicable Interest Period relating to such Eurodollar Rate Loan Portion,
the rate per annum (rounded up to the next whole multiple of 1/16 of 1%) equal
to the rate at which United States dollar deposits are offered to The Sumitomo
Bank, Limited in the London interbank Eurodollar market as of approximately
11:00 a.m., London, England time, on the second Business Day prior to the first
day of such Interest Period for delivery in immediately available funds on the
first day of such Interest Period for the number of days in such Interest Period
and in an amount equal to the amount of the Eurodollar Rate Loan Portion.
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"EURODOLLAR RATE LOAN PORTION -- any portion of the Loan which bears
interest calculated on the basis of the Reserve Adjusted Eurodollar Rate.
"EVENT OF DEFAULT" -- is defined in Section 8.1.
"EXTRAORDINARY TRANSACTIONS" -- transactions that are outside the normal
course of Borrower's operations as determined by Agent in Agent's reasonable
discretion.
"FEDERAL FUNDS RATE" means, for any day, the weighted average of the rates
on overnight Federal funds transactions between members of the Federal Reserve
System arranged by Federal funds brokers, as published on the next succeeding
Business Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the quotations for
such transactions on such day obtained by The Sumitomo Bank, Limited from three
Federal funds brokers of recognized standing selected by it.
"FINANCIAL STATEMENTS" -- (a) the audited consolidated balance sheet and
consolidated statements of operations, shareholders' equity and cash flows of
Borrower for the fiscal year then ended, together with the unqualified opinion
of the independent public accountants preparing such statements; and (b) the
quarterly unaudited consolidated balance sheet and unaudited consolidated
statements of operations, and cash flows for Borrower for the fiscal quarters
ended March, June, September and December, certified as to accuracy by the Chief
Financial Officer or director of finance of Borrower.
"FINANCING STATEMENT" -- a financing statement or statements on form UCC-1,
signed by the Borrower and describing the property in which the Agent on behalf
of Lenders has a security interest under the Restricted Account and Security
Agreement, all in form and substance suitable for filing as a financing
statement under Article 9 of the Uniform Commercial Code as enacted in
California and/or New York.
"FUNDING FEE" -- is defined in Subsection 2.3(d).
"GAAP" -- generally accepted accounting principles.
"GENERAL TAX LIENS" -- is defined in Subsection 7.1(b).
"HAZARDOUS SUBSTANCES" -- is defined in Subsection 3.16(b).
"INDEBTEDNESS" -- with respect to any Person, all:
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(a) indebtedness, liabilities or other obligations of such Person for
borrowed money or for the deferred purchase price of property or services
(excluding all operating lease obligations and trade accounts payable and
accrued obligations incurred in the ordinary course of business) as
determined in accordance with generally accepted accounting principles
consistently applied and any other contingent liabilities of such Person;
(b) indebtedness, liabilities or obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets
or businesses;
(c) reimbursement and other obligations of such Person in respect of
letters of credit and bankers acceptance and all net obligations in respect
of interest rate swaps, caps, floors and collars, currency swaps, and other
similar financial products;
(d) indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person;
(e) obligations under leases which shall have been or should be, in
accordance with GAAP, recorded as capital leases; and
(f) indebtedness of another Person of the types referred to in
clauses (a) through (e) guaranteed directly or indirectly in any manner by
the Person for whom Indebtedness is being determined, or in effect
guaranteed directly or indirectly by such Person through an agreement to
purchase or acquire such indebtedness, to advance or supply funds for the
payment or purchase of such indebtedness or otherwise assure a creditor
against loss, or secured by any Lien upon or in property owned by the
Person for whom Indebtedness is being determined, whether or not such
Person has assumed or become liable for the payment of such indebtedness of
such other Person;
provided, however, that in no event shall Indebtedness include any deferred
revenue.
"INITIAL NOTICE" -- is defined is Subsection 2.1(c).
"INITIATION FEE" -- is defined in Subsection 2.3(d).
"INTELLECTUAL PROPERTY RIGHTS" -- is defined in Section 3.11.
"INTEREST DIFFERENTIAL" -- with respect to (i) any prepayment of a
Eurodollar Rate Loan
A-5
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Portion on a day other than the last day of the applicable Interest Period or
(ii) the failure to draw down, continue or convert to a Eurodollar Rate Loan
Portion on the first day of the applicable Interest Period identified in an
Initial Notice or Election Notice, the difference between (a) the per annum
interest rate payable with respect to such Eurodollar Rate Loan Portion as of
the date of such prepayment or failure and (b) the Reserve Adjusted Eurodollar
Rate plus the Applicable Margin which the Agent determines would be payable with
respect to such Eurodollar Rate Loan Portion on, or as near as practicable to,
the date of such prepayment or failure. The determination of the Interest
Differential by the Agent shall be conclusive in the absence of manifest error.
"INTEREST PAYMENT DATE" -- (a) with respect to any Prime Rate Loan Portion,
the last Business Day of each calendar month; (b) with respect to any Eurodollar
Rate Loan Portion, the last day of each applicable Interest Period and, if such
Interest Period is longer than three (3) months, also on the last day of each
three (3) month period during such Interest Period (with the first such three
month period commencing on the first day of the applicable Interest Period); and
(c) for any Loan Portion, the date that the Loan Portion is due by either the
occurrence of Maturity Date or an Event of Default having occurred and the
maturity of the Loan having been accelerated pursuant to the terms of the Loan
Documents.
"INTEREST PERIOD" -- as to any Eurodollar Rate Loan Portion, the period
commencing on the date of the initial funding of such Eurodollar Rate Loan
Portion or the last day of the immediately preceding Interest Period for any
Eurodollar Rate Loan Portion that is to be continued as a Eurodollar Rate Loan
Portion and ending, with respect to such Eurodollar Rate Loan Portion, on the
numerically corresponding day (or if there is no numerically corresponding day,
on the last day), in the calendar month that is one, two, three, six or, if
available, twelve months thereafter, in each case as the Borrower may elect in
the Election Notice; provided however, that (a) no Interest Period with respect
to any Eurodollar Rate Loan Portion shall end later than the Maturity Date, (b)
if an Interest Period would end on a day that it is not a Business Day, such
Interest Period shall be extended to the next succeeding Business Day unless
such next succeeding Business Day would fall in the next calendar month, in
which case, such Interest Period shall end on the immediately preceding Business
Day, and (c) interest shall accrue from and including the first day of an
Interest Period to but excluding the last Business Day of such Interest Period.
"INTEREST RESERVE" -- on any date of determination means an amount equal to
the interest that would accrue over the next three months on an amount equal to
the principal balance of the Loan outstanding on such date of determination,
calculated on the basis of the interest rate or rates in effect on such date of
determination.
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"INVESTMENT ACCOUNT" -- is defined in Subsection 2.6(a).
"INVESTMENT POLICY" -- is defined in Section 3.22.
"IRREVOCABLE INSTRUCTIONS AND POWER OF ATTORNEY" -- is defined in
Subsection 2.6(a).
"IRS" -- is defined in Subsection 3.15(a).
"LENDER" -- is defined in the Preamble.
"LIEN" -- any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement and any
lease in the nature of a security interest or lien).
"LOAN" -- is defined in Section 2.1.
"LOAN DOCUMENTS" -- this Agreement, the Notes, the Restricted Account and
Security Agreement, the Collateral Bailment Agreement, the Irrevocable
Instructions and Power of Attorney, the Custodian Agreement, and all other
documents executed and delivered in connection herewith or therewith, including
all amendments, modifications and supplements of or all such documents.
"LOAN PORTION" -- as the circumstances or context warrants, the portion of
the Loan which is a Eurodollar Rate Loan Portion, or Prime Rate Loan Portion.
"MATURITY DATE" -- September 1, 2002.
"NET CASH LEVEL" -- the aggregate amount of the market value of Cash and
Cash Equivalents less (i) restricted cash (but not including any amounts in the
Custodian Account which are restricted or pledged for the benefit of the
Lenders), (ii) amounts pledged pursuant to agreements between the Borrower and
third parties, and (iii) the outstanding principal balance of the Loan.
"NET WORTH" -- an amount equal to the Total Assets minus Total Liabilities.
"NOTE(S)" -- is defined in Section 2.1.
"PBGC" -- is defined in Subsection 3.15(a).
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"PERMITTED LIENS" -- is defined in Section 7.1.
"PERMITTED PURCHASE MONEY LIENS" -- purchase money security interests in
personal property acquired after the date hereof to secure purchase money
Indebtedness, to the extent that the amount of money borrowed does not exceed
the value of the personal property purchased, and the security interest granted
does not extend beyond the personal property purchased.
"PERSON" -- an individual, a corporation, a partnership, a joint venture, a
trust or unincorporated organization, a joint stock company or other similar
organization, a government or any political subdivision thereof, a court, or any
other legal entity, whether acting in an individual, fiduciary or other
capacity.
"PLAN(S)" -- is defined in Subsection 3.15(a) hereof.
"PRIME RATE" means the higher of (i) the sum of the Federal Funds Rate plus
.50% and (ii) the prime rate of The Sumitomo Bank, Limited as announced by The
Sumitomo Bank, Limited from time to time, such prime rate being the rate of
interest used as a reference point from which the cost of credit to customers
may be calculated and which is subject to change from time to time, with The
Sumitomo Bank, Limited making loans bearing interest below, at or above its
prime rate. The Prime Rate may change from time to time, and the interest
payable on the Loan when calculated with reference to the Prime Rate shall
fluctuate with changes in the Prime Rate. Any changes in the Prime Rate shall
become effective, without prior notice, on the date on which the Prime Rate
changes.
"PRIME RATE LOAN PORTION" -- any portion of the Loan which bears interest
calculated on the basis of the Prime Rate.
"PRO RATA SHARE" -- means, for each Lender, fifty percent (50%).
"RCRA" -- is defined in Subsection 3.16(a).
"R&D TRANSACTION" -- is defined in Subsection 7.2(c).
"RATIO OF TOTAL DEBT TO NET WORTH" -- the ratio of Total Debt to Net Worth.
For purposes of calculating the Ratio of Total Debt to Net Worth, the deferred
revenue amounts shown on Borrower's balance sheet under current and long term
liabilities shall not be included in the calculation of Total Debt to the extent
there are no contingencies which might require the return of such amounts.
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"REGULATORY CHANGE" -- any change after the date of this Agreement in
United States federal, state or local laws or regulations or the adoption or
making after such date of any interpretations, directives or requests applying
to a class of banks including the Lenders of or under any United States federal,
state, or local laws or regulations (whether or not having the force of law) by
any court or governmental or monetary authority charged with the interpretation
or administration thereof.
"RELEASE" -- as specified in CERCLA.
"REPORTING PERIOD" -- a fiscal quarter of the Borrower.
"REQUIRED RESTRICTED ACCOUNT BALANCE" -- (a) prior to the occurrence of a
Trigger Event, the sum of **, and (b) on and after a Trigger Event has
occurred, the sum of the Borrower's then outstanding principal balance of the
Loan PLUS the Interest Reserve.
"RESERVE ADJUSTED EURODOLLAR RATE" -- with respect to any Eurodollar Rate
Loan Portion for any Interest Period, a rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) determined pursuant to the following
formula:
Reserve Adjusted = Eurodollar Rate
---------------
Eurodollar Rate 1 - Eurocurrency Reserve Percentage
"RESTRICTED ACCOUNT AND SECURITY AGREEMENT" -- the Restricted Account and
Security Agreement of even date herewith by and among the Agent, the Borrower
and the Bailee.
"RESTRICTED ACCOUNT BALANCE" -- the sum of all Cash and Cash Equivalents
and any other investments on deposit in the Custodian Account, the amount of
such Cash Equivalents or investments to be calculated at the lower of cost or
market value as required by generally accepted accounting principles.
"SARA" -- is defined in Subsection 3.16(a).
"SUBSIDIARY" -- any person of which the Borrower owns directly or
indirectly: (i) sufficient capital stock to enable it to elect at least a
majority of the board of directors or similar managing body of such person, or
(ii) capital stock with rights under the charter documents of such Person to
elect a director or similar managing official with the power to veto material
business decisions and organizational changes.
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"TAXES" -- is defined in Subsection 2.5(a).
"TOTAL ASSETS" -- total assets as determined in accordance with generally
accepted accounting principles, consistently applied, provided, however, that
Total Assets shall be reduced by the amount (if any) of intangible assets.
"TOTAL DEBT" -- the aggregate amount of the Borrower's Indebtedness.
"TOTAL LIABILITIES" -- the sum of (a) Borrower's Indebtedness and (b) all
operating lease obligations and trade accounts payable and accrued obligations
incurred in the ordinary course of business.
"TRIGGER EVENT" -- is defined in Section 5.10.
"UCC" -- the Uniform Commercial Code in effect from time to time in the
relevant jurisdiction.
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NOTE
$11,800,000.00 San Francisco,California
September 29, 1997
FOR VALUE RECEIVED, ARRIS PHARMACEUTICAL CORPORATION, a Delaware
corporation ("Borrower"), hereby promises to pay to the order of THE SUMITOMO
BANK, LIMITED, a Japanese banking corporation, as agent (the "Agent") for The
Sumitomo Bank, Limited and Silicon Valley Bank (the "Lenders"), without
counterclaim, offset or deduction, the principal sum of ELEVEN MILLION EIGHT
HUNDRED THOUSAND AND NO/100 DOLLARS ($11,800,000.00), in accordance with the
terms of the Loan Agreement (referred to below) and to pay interest on the
outstanding principal balance in accordance with the terms of the Loan
Agreement. This Note is one of the Notes referred to in the Loan Agreement,
dated September 29, 1997, by and among Borrower, the Lenders and the Agent, and
is subject to all of the terms and conditions of the Loan Agreement (which are
incorporated herein by reference), including the rights of acceleration of
maturity. Terms used herein have the meanings assigned to those terms in the
Loan Agreement, unless otherwise defined herein.
Borrower shall make all payments hereunder in lawful money of the
United States and in immediately available funds to Agent's account by means of
wire transfer addressed as follows: The Sumitomo Bank, Limited, Chicago Branch,
ABA 071001850, through the Federal Reserve Bank of Chicago, Reference: Arris.
All agreements among the Borrower, the Lenders and the Agent, whether
now existing or hereafter arising, are hereby limited so that in no event shall
the interest charged hereunder or under the Loan Agreement or any other charges
hereunder or under the Loan Agreement which may at any time be deemed to be
interest exceed the maximum amount permissible under applicable law. The Agent
shall be entitled to amortize, prorate and spread throughout the full term of
this Note all interest paid or payable so that the interest paid does not exceed
the maximum amount permitted by law. In the event that the total liability for
payments of interest and payments in the nature of interest, including without
limitation, all charges, fees or other sums which may at any time be deemed to
be interest, shall for any reason whatsoever result in an effective rate of
interest that for any interest payment period exceeds the amount which the Agent
may lawfully collect, then the interest rate shall automatically be reduced to
the maximum rate permitted by law and all sums in excess of those lawfully
collectible as interest for the period in question shall, without further notice
to any party hereto, be applied as a reduction of the principal balance.
Borrower shall pay all reasonable fees, costs and expenses, including
reasonable attorneys' fees, incurred by the Agent or the Lenders in the
preparation and negotiation of this Note and the Loan Documents and in the
enforcement or attempt to enforce any of Borrower's
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obligations hereunder not performed when due, whether or not any legal action is
actually filed, litigated or prosecuted to judgment or award. This Note shall
be governed by, construed and interpreted in accordance with the laws of the
State of California.
Time is of the essence in the performance of the obligations evidenced
by this Note. In the event that an Event of Default occurs and is continuing
under the Loan Agreement, the Agent and/or the Lenders shall have all of the
rights and remedies provided for in any of the Loan Documents or at law or in
equity. The remedies of the Agent and/or the Lenders shall be cumulative and
may be exercised from time to time. No failure on the part of the Agent or the
Lenders or the holder of the Note to exercise, and no delay in exercising, any
right shall operate as a waiver thereof, nor will any single or partial exercise
of any right preclude any other or future exercise thereof or the exercise of
any other right. Borrower hereby waives diligence, presentment for payment,
demand, notice of demand, notice of non-payment or dishonor, protest and notice
of protest of this Note, and all other notices in connection with the delivery,
acceptance, performance, default or enforcement of the payment of this Note,
except such notices as are required under the terms of any of the Loan
Documents.
If this Note is destroyed, lost or stolen, Borrower shall deliver a
new note to the Agent on the same terms and conditions as this Note, with all
appropriate schedules annexed thereto, in substitution of the prior Note. The
Agent and the Lenders shall furnish to Borrower reasonable evidence that the
Note was destroyed, lost or stolen, and any indemnity that may be reasonably
required by Borrower in connection with the replacement of the Note.
The Borrower has duly executed this Note as of the date referred to
above.
ARRIS PHARMACEUTICAL CORPORATION
By:
-------------------------------------
Name:
Title:
2
<PAGE>
IRREVOCABLE INSTRUCTIONS AND POWER OF ATTORNEY
September 29, 1997
Smith Barney, Inc.
2775 Sand Hill Road, #120
Menlo Park, CA 94025
Attention: Robert H. Bell,
Branch Manager
Re: Arris Pharmaceutical Corporation
Investment Management Account
No. **_____________ (the "Account")
Gentlemen and Ladies:
We refer you to the above-referenced agency and investment management
account held by Smith Barney, Inc. (the "Account Holder") in the name of Arris
Pharmaceutical Corporation ("Debtor"). Please be advised that Debtor has
entered into a Loan Agreement dated as of September 29, 1997, as it may be
amended from time to time (the "Loan Agreement") with The Sumitomo Bank, Limited
and Silicon Valley Bank as lenders (collectively referred to as the "Lenders"
and individually as a "Lender") and The Sumitomo Bank, Limited in its capacity
as agent for the Lenders (the "Agent"). Debtor acknowledges that during the
term of these Irrevocable Instructions the Account shall be maintained as an
account which is segregated from any other accounts which Debtor maintains with
Account Holder. Account Holder shall not be held responsible for (i) any market
decline in the value of the assets in the Account or (ii) notifying the Agent,
the Lenders or Debtor of any such decline in the market value of the assets in
the Account or (iii) taking any action with regard to such assets in the
Account, except upon the specific written directions contemplated or stated
herein.
Account Holder acknowledges that as of the date hereof it has no
knowledge of any interest, assignment, security interest or lien on the Account
and the deposits therein other than the interest of Debtor. Account Holder
agrees that it will promptly notify the Agent in the event Account Holder
receives any notice that any person other than Agent, on behalf of the Lenders,
has or asserts any security interest or lien on the Account.
Debtor hereby irrevocably authorizes and directs Account Holder upon
Account Holder's receipt of a written demand and certificate in the form annexed
as Exhibit A ("Demand") from the Agent or from either Lender, to make immediate
payment of immediately available funds or delivery of cash equivalents or
marketable investment grade securities on deposit in the Account in the amount
and pursuant to the directions set forth in such Demand to Sumitomo Bank of New
York
<PAGE>
Smith Barney, Inc.
September 29, 1997
Page 2
Trust Company, as custodian of an account bearing Account No. ** (the
"Custodian Account"), to be held by Sumitomo Bank of New York Trust Company as
bailee pursuant to the terms of a Collateral Bailment Agreement ("Collateral
Bailment Agreement") and a Restricted Account and Security Agreement
("Restricted Account and Security Agreement"), whether or not such action will
cause investment income to be lost or fees to be incurred in connection with the
investment or reinvestment of such deposits. Any capitalized terms which are
not defined herein shall have the meaning ascribed to such capitalized terms in
the Loan Agreement, Collateral Bailment Agreement or Restricted Account and
Security Agreement. Account Holder agrees to honor written instructions to
transfer funds or securities received in the form annexed as EXHIBIT A, subject
to the rights of third-party creditors to the Account (if any), including but
not limited to tax levies or restraining notices served upon Account Holder with
respect to the Account prior to Account Holder's receipt of a Demand.
Debtor hereby irrevocably constitutes and appoints the Agent and each
Lender and any of their respective officers or agents, with full power to
substitute for such officers and agents, other officers and agents, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of Debtor without notice to or assent thereof, and in the name
of Debtor or in its own name, from time to time, upon the occurrence of a
Trigger Event as defined in the Loan Agreement, to complete and deliver to
Account Holder the Demand. Contemporaneously with its delivery of the Demand to
Account Holder, the party which has delivered the Demand shall provide Debtor
with a copy of the Demand.
These instructions and this power of attorney are coupled with an
interest and are irrevocable until such time as written notice of termination
has been delivered to Account Holder by the Agent.
Account Holder may rely exclusively upon the Demand. Account Holder
will have no right or duty to inquire as to whether the party issuing the Demand
is entitled to issue the Demand or whether the signers thereof have proper
authority to sign and deliver the Demand. Debtor agrees that Account Holder is
hereby instructed to disregard any instructions provided by Debtor to Account
Holder which are contrary to or inconsistent with instructions provided pursuant
to these Irrevocable Instructions. Debtor agrees to indemnify and hold Account
Holder harmless from any and all losses, liabilities and expenses (including,
without limitation, reasonable attorneys' fees and the allocated costs of
in-house counsel, costs and expenses), claims, actions or demands arising out
of, relating to or in connection with Account Holder's compliance with these
Irrevocable Instructions (including, without limitation, any accounting
treatment or tax consequences which Debtor deems adverse), except to the extent
any such losses, liabilities, expenses, claims, actions or demands are the
result of gross negligence or willful misconduct of Account Holder. In the
event that Account Holder is sued or becomes involved in litigation as a result
of complying with these Irrevocable Instructions, Debtor agrees that Account
Holder shall be entitled to charge all the costs and fees it incurs in
connection with such litigation (including the allocated costs of in-house
counsel) against
<PAGE>
Smith Barney, Inc.
September 29, 1997
Page 3
the assets in any account of Debtor other than the Account and to withdraw such
sums as the costs and charges accrue.
Debtor hereby irrevocably directs the Account Holder, upon receipt of
a Demand, to transfer to the Custodian Account immediately available funds, cash
equivalents or marketable investment grade securities (acceptable to Agent in
its sole discretion) in the amount set forth in the Demand. The Agent may, in
its discretion, deliver a Demand and/or further instructions hereunder to
Account Holder. If Account Holder receives a Demand, it will make the transfer
to the Custodian Account as provided above prior to allowing Debtor to withdraw
any funds from the Account.
In the event that Debtor desires to withdraw any funds from the
Account, then Debtor agrees to send a written request for withdrawal (the
"Withdrawal Notice") addressed to Account Holder with a copy to Account Holder's
legal department at the following address 388 Greenwich Street, New York, New
York 10013, Attention: General Counsel. Debtor acknowledges that it shall have
no right to withdraw funds from the Account unless it has complied with all of
the provisions of this paragraph. Debtor hereby irrevocably directs Account
Holder, and Account Holder agrees to notify the Agent, in the event that Debtor
seeks to withdraw funds from the Account such that the balance in the Account
after such withdrawal would be less than an amount (the "Required Balance") that
Agent advises you in writing from time to time is equal to the sum of (i) the
outstanding principal balance of the Loan plus interest that is likely to accrue
thereon over the next three months, plus (ii) an amount that represents
restricted cash and other amounts in the Account that may be restricted pursuant
to agreements between the Debtor and other persons. Until further written
notice from the Agent, the Required Restricted Account Balance shall be
** . Account Holder agrees that it will not allow Debtor to withdraw
any funds from the Account such that the balance in the Account after such
withdrawal would be less than the Required Balance, unless the Agent has
delivered to Account Holder its written consent (the "Consent Notice") to such
withdrawal (which Consent Notice shall set forth the amount of the permitted
withdrawal). Upon receipt of a Withdrawal Notice, the Agent may, in its
discretion, and regardless of whether a Trigger Event has occurred, deliver a
Demand and/or further instructions hereunder to Account Holder. Account Holder
agrees that it will not allow Debtor to withdraw any funds from the Account, so
that the balance in the Account is less than the Required Balance, without first
making the transfer to the Custodian Account as provided above. Debtor
irrevocably instructs Account Holder to not permit a withdrawal of funds from
the Account and to not honor Debtor's withdrawal request unless and until
Account Holder has complied with the foregoing provisions.
By accepting these Irrevocable Instructions, Account Holder certifies
to Agent that the person executing below on behalf of Account Holder is duly
authorized to execute and receive these Irrevocable Instructions on Account
Holder's behalf, and to bind Account Holder to perform under the terms hereof.
These Irrevocable Instructions constitute the binding obligation of Account
Holder, enforceable in accordance with their terms. The prevailing party in any
action to enforce these Irrevocable Instructions shall be entitled to reasonable
attorneys' fees (including the allocated
<PAGE>
Smith Barney, Inc.
September 29, 1997
Page 4
costs of in-house counsel). The provisions of the preceding sentence, and any
award of attorneys fees to the prevailing party, shall not affect any claim of
Account Holder to indemnification from Debtor pursuant to the indemnification
provisions hereinabove.
<PAGE>
Smith Barney, Inc.
September 29, 1997
Page 5
These Irrevocable Instructions may only be amended or changed by a
writing signed by all the parties below and shall expire only upon the
written agreement of all parties hereto.
Very truly yours,
ACKNOWLEDGED AND AGREED:
SMITH BARNEY, INC. ARRIS PHARMACEUTICAL CORPORATION
By: By:
-------------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
----------------------------- -----------------------------
ACKNOWLEDGED AND AGREED:
THE SUMITOMO BANK, LIMITED, By:
both on behalf of itself as a Lender --------------------------------
and in its capacity as the Agent for Name:
the Lenders ------------------------------
Title:
-----------------------------
By:
--------------------------------
Name: SILICON VALLEY BANK, as a Lender
------------------------------
Title:
-----------------------------
By: By:
-------------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
----------------------------- -----------------------------
<PAGE>
ELECTION NOTICE
TO: THE SUMITOMO BANK, LIMITED
ATTENTION: LOANS ADMINISTRATION
DATE: ____________________ , 19____
RE: ARRIS PHARMACEUTICAL CORPORATION
Gentlemen and Ladies:
This Election Notice is delivered to you pursuant to Section 2.1(a) of the Loan
Agreement, dated as of September 29, 1997 (together with all amendments, if any,
from time to time made thereto, the "Credit Agreement"), among Arris
Pharmaceutical Corporation (the "Borrower"), Silicon Valley Bank and The
Sumitomo Bank, Limited (the "Lenders") and The Sumitomo Bank, Limited, as agent
for the Lenders. Unless otherwise defined herein or the context otherwise
requires, terms used herein have the meanings provided in the Credit Agreement.
The undersigned Borrower hereby gives you irrevocable notice of the activity
specified below:
1. Effective Date:_____________________
2. Activity requested:
a. New Borrowing $__________ Prime ______ LIBOR _____
b. Continuation $__________ LIBOR only
c. Conversion:
Prime to LIBOR $__________ LIBOR to Prime $___________
d. Repayment $__________
3. Duration of interest period for LIBOR rate loans (one, two, three or six
months):
The undersigned hereby certifies that the following statements are true on the
date hereof, and will be true on the proposed Borrowing/Continuation/Conversion
date, before and after giving effect thereto and to the application of the
proceeds therefrom:
<PAGE>
Election Notice
______________, 19_____
Page 2
a. the representation and warranties of the Borrower contained
in Article III of the Agreement are true and correct in all
material respects as though made on and as of the
Borrowing/Continuation/Conversion date (except to the extent
such representations and warranties expressly refer to an
earlier date, in which case they are true and correct as of
such earlier date); and
b. no Default or Event of Default has occurred and is
continuing, or would result from such proposed
Borrowing/Continuation/Conversion.
Please wire transfer the proceeds of the Borrowing to the account(s) at the
financial institution(s) indicated below:
Wire Amount:
------------------------------
Receiving Bank:
------------------------------
City/State:
------------------------------
------------------------------
ABA Number:
------------------------------
For Credit to:
------------------------------
Reference:
------------------------------
ARRIS PHARMACEUTICAL CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
September 29, 1997
Sumitomo Bank of New York Trust Company
Two World Financial Center
Tower B
225 Liberty Street, 35th Floor
New York, New York 10281
Re: Custodian Agreement -- Company Account
--------------------------------------
Dear Sirs:
Arris Pharmaceutical Corporation (the "Company") hereby requests you
to open a custodian account (the "Custodian Account") to hold such securities
and monies owned by the Company as the Company may deliver or cause to be
delivered to you pursuant to this Agreement, and in connection with which you
will perform custodian services as hereinafter described. The Company has
granted to The Sumitomo Bank, Limited in its capacity as agent (the "Agent") for
The Sumitomo Bank, Limited and Silicon Valley Bank (collectively referred to
herein as the "Lenders") under the Loan Agreement (as hereinafter defined), a
security interest in the Custodian Account and no withdrawals may be made from
the Custodian Account except as provided in the Collateral Bailment Agreement of
even date herewith by and among Company, the Agent and Sumitomo Bank of New York
Trust Company and the Restricted Account and Security Agreement of even date
herewith by and among Company, the Agent and Sumitomo Bank of New York Trust
Company.
1. You will hold in custody for safekeeping in the Custodian Account
such cash, cash equivalents or securities owned by the Company as you may from
time to time receive, pursuant to the provisions hereof. With respect to all
securities held in the Custodian Account, you will promptly provide the Company
with a copy of all notices, information statements, reports and other documents
received by you as the holder of record of such securities.
2. You may hold physical securities either on your bank premises or
in your account with any depository institution.
<PAGE>
Sumitomo Bank of New York Trust Company
September 29, 1997
Page 2
3. The Company authorizes you to receive all dividends, interest,
other income, principal and all other amounts becoming due or payable in money
or cash, cash equivalents or securities held in the Custodian Account.
4. The Company authorizes you to receive all stock dividends or any
other securities granted or distributed on account of securities held in the
Custodian Account, and to hold securities so received in the Custodian Account.
5. Prior to your receiving notice from the Agent that an Event of
Default (as defined in the Loan Agreement) has occurred, with regard to the
purchase and sale of securities held or to be held in the Custodian Account:
a. whenever instructed by the Company to receive against
payment securities to be held in the Custodian Account and provided
there are sufficient funds available for this purpose in the Custodian
Account, you will make payment to the bank, broker or other persons
designated by the Company against delivery of such securities by such
person, debiting the Custodian Account for such payment, provided that
prior to your taking such action, either (i) you have received from
the Agent its consent to such action (which consent shall be provided
by the Agent so long as the Borrower's requested action is in
compliance with the Borrower's Investment Policy, as such term is
defined in the Loan Agreement) or (ii) five (5) business days have
elapsed after your delivery to the Agent a copy of the Borrower's
instructions and the Agent has failed to provide you with a written
consent; and
b. whenever instructed by the Company to deliver to a bank,
broker or other person designated by the Company securities from the
Custodian Account against payment by such person, you will make
delivery of such securities as instructed, crediting any payments
received to the Custodian Account, provided that prior to your taking
such action, either (i) you have received from the Agent its consent
to such action (which consent shall be provided by the Agent so long
as the Borrower's requested action is in compliance with the
Borrower's Investment Policy, as such term is defined in the Loan
Agreement) or (ii) five (5) business days have elapsed after your
delivery to the Agent a copy of the Borrower's instructions and the
Agent has failed to provide you with a written consent.
6. With regard to voting rights appertaining to securities held in
the Custodian Account, you will execute proxies and such other forms or
documents as are required to be executed by the holder of record of such
securities in connection with the exercise of such rights and promptly forward
them to the Company together with the proxy statements or other
<PAGE>
Sumitomo Bank of New York Trust Company
September 29, 1997
Page 3
communications received with respect to such proxies or forms. You will make no
decisions as to the exercise of such rights.
7. You will promptly notify the Company of redemptions, conversion
privileges, and issuance of rights pertaining to securities held in the
Custodian Account, and when action is required you will promptly request
instructions from the Company and act upon instructions timely received.
8. You will promptly notify the Company of proposed exchanges of any
securities held in the Custodian Account for other securities or property in
connection with any merger, consolidation, reorganization, recapitalization,
readjustment of debt, stock split, change of par value or conversion, or
otherwise, and if so instructed by the Company, you will surrender or deposit
such securities for exchange in the manner provided.
9. Upon receipt of instructions from the Company, you will deliver
or transfer securities held in or monies credited to the Custodian Account to
such other accounts or other persons as may be designated by the Company.
10. The Company hereby authorizes you to execute, as Custodian, any
necessary declarations, certificates of ownership or other documents required
under any tax laws now or hereafter in effect (provided that you shall promptly
furnish the Company with copies of all such declarations, certificates and other
documents), and to pay any taxes required to be paid in connection with the
Custodian Account.
11. The Company agrees to be responsible for any direct,
out-of-pocket expenses reasonably incurred by you in connection with the
Custodian Account (including without limitation telephone, telex, cable and mail
costs and all costs of transporting securities) and for any taxes and other
charges which you are reasonably required to pay in connection therewith. The
Company authorizes you to deduct such expenses from its income described in
Paragraph 3.
The Company further agrees that any property at any time in the
Custodian Account shall be security for the advance of cash for any purpose made
by you resulting from the Company's written order or instructions.
12. The Company agrees to pay you fees for the services rendered by
you hereunder, on an annual basis in accordance with the schedule attached
hereto as Schedule 1, as such schedule may from time to time be adjusted by you
(with the Company's written approval).
13. You will provide to the Company and the Agent the following
statements with respect to the Custodian Account:
<PAGE>
Sumitomo Bank of New York Trust Company
September 29, 1997
Page 4
a. A monthly statement listing the holdings and cash in the
Custodian Account as of the end of the immediately preceding
(calendar) month;
b. A monthly statement of all expenses incurred by you for
which the Company is responsible pursuant to Paragraph 11.
c. Such other statements as you may be required by law to
furnish or as the Company may (with your approval) request.
14. It is understood and agreed that you are not at any time under
any duty or responsibility to supervise the investment of, or to advise or make
any recommendation for the sale, purchase, or other disposition of, securities
and money held by you in the Custodian Account, and that such securities and
monies are subject at all times to the Company's investment control.
It is further understood and agreed that all directions with
respect to the Custodian Account will be in writing and signed by a person
authorized to sign on behalf of the Company, but that you may, in your
discretion, accept and act upon orders, whether given orally, by telephone or
otherwise, which you reasonably believe to be genuine, and that you will not be
held liable for executing, or failing to execute, or for any mistakes in the
execution of, any such order, except for your own gross negligence or willful
misconduct.
Notwithstanding the foregoing provisions of this Section 14, all
directions by the Company must, subject to Section 5, be accompanied by the
written consent of the Agent. You will inform the Company of any undue delay in
the delivery of securities or of other departure from regular and normal
procedures that you believe should be brought to the attention of the Company.
15. Either party may terminate this Agreement by written notice
delivered to the other not less than ten (10) Business Days prior to the date
upon which such termination shall become effective (the "Termination Date"),
provided, however, that this Agreement may not be terminated without the written
consent and agreement of the Agent prior to the Company's full and final
satisfaction of all of the Company's obligations under that certain Loan
Agreement dated as of September 29, 1997, as it may be amended from time to time
(the "Loan Agreement") among the Company, the Agent and the Lenders.
On the Termination Date, the Company will pay you all fees owing
for services rendered by you under this Agreement to and including the
Termination Date (such fees to be calculated on the basis of a 365-day year for
the number of days actually involved) and will reimburse you for all reasonable
expenses incurred by you pursuant to this Agreement and for which the Company is
responsible pursuant to Paragraph 11 to and including such date. Upon
<PAGE>
Sumitomo Bank of New York Trust Company
September 29, 1997
Page 5
such payment and reimbursement, you will at the Company's expense transfer,
deliver and pay over to the Company or to a person appointed by the Company all
securities and money held by you in the Custodian Account.
16. Singular words herein include the plural and plural the singular
when the sense or circumstances so indicate.
17. All notices to be delivered hereunder shall be in writing,
including telegraphic communications and mailed or telegraphed or delivered to
the other party at its address given herein or such other address as such party
may by notice designate.
18. This Agreement is to be governed by and construed in accordance
with the laws of the State of New York.
Your signature below will indicate your acceptance of this
Agreement as of the date first written above.
Very truly yours,
ARRIS PHARMACEUTICAL CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
ACCEPTED:
SUMITOMO BANK OF NEW YORK
TRUST COMPANY
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
n RESTRICTED ACCOUNT AND SECURITY AGREEMENT
This RESTRICTED ACCOUNT AND SECURITY AGREEMENT (the "Agreement") is made as
of September 29, 1997, by and among ARRIS PHARMACEUTICAL CORPORATION, a Delaware
corporation (the "Borrower"), THE SUMITOMO BANK, LIMITED, a Japanese banking
corporation in its capacity as agent (the "Agent") for the Lenders (as
hereinafter defined), and SUMITOMO BANK OF NEW YORK TRUST COMPANY (the
"Bailee").
BACKGROUND
The Agent is acting in its capacity as agent for The Sumitomo Bank, Limited
and Silicon Valley Bank (collectively referred to as the "Lenders") under a Loan
Agreement of even date herewith (the "Loan Agreement") among the Borrower, the
Agent and the Lenders. Prior to the date hereof, the Borrower established a
custodial and investment account, Account No. **_____________ (the "Investment
Account"), with Smith Barney, Inc. ("Account Holder") in which the Borrower
holds cash and marketable securities.
Pursuant to Section 2.6 of the Loan Agreement and a certain Custodian
Agreement between the Borrower and the Bailee (the "Custodian Agreement"), the
Borrower is concurrently establishing a restricted account (the "Custodian
Account") for the benefit of the Agent on behalf of the Lenders with the Bailee,
a wholly owned subsidiary of The Sumitomo Bank, Limited, on the terms and
conditions set forth in the Collateral Bailment Agreement of even date herewith
by and among the Agent, the Borrower and the Bailee (the "Collateral Bailment
Agreement"). Pursuant to certain Irrevocable Instructions and Power of Attorney
of even date herewith addressed to Account Holder, Account Holder shall upon
certain events transfer cash and securities from the Investment Account and
withdraw or deposit such cash and securities into the Custodian Account for use
and disposition as set forth herein and in the Collateral Bailment Agreement and
the Custodian Agreement.
NOW THEREFORE, in consideration of the premises set forth herein, the
Borrower, the Bailee and the Agent agree as follows:
1. DEFINITIONS.
11. DEFINITIONS. Capitalized terms used but not defined in this Agreement
shall have the meanings specified in the Loan Agreement.
2. ESTABLISHMENT AND MANAGEMENT OF CUSTODIAN ACCOUNT.
21. 22. EXECUTION AND DELIVER OF COLLATERAL BAILMENT AGREEMENT. Concurrently
with the execution and delivery of this Agreement, the Borrower, the Agent and
the Bailee shall execute and deliver the Collateral Bailment Agreement in
substantially the form of EXHIBIT 2.1 to this Agreement.
21. ESTABLISHMENT OF CUSTODIAN ACCOUNT. Pursuant to the Collateral
Bailment
<PAGE>
Agreement, Section 2.6 of the Loan Agreement, and the Custodian Agreement, the
Borrower shall establish the Custodian Account at the Bailee, which Custodian
Account shall be administered in accordance with the terms and conditions of
this Agreement, the Collateral Bailment Agreement, the Custodian Agreement, and
the Loan Agreement. In the event of any inconsistency between this Agreement
and the Collateral Bailment Agreement and/or the Custodian Agreement, the
Collateral Bailment Agreement shall be controlling.
22. AGENT'S SECURITY INTEREST. The Borrower hereby pledges, transfers and
assigns to the Agent, and grants to the Agent a first priority security interest
in and lien upon the Custodian Account and all of the Borrower's right, title
and interest in all tangible and intangible property in the Custodian Account,
including, without limitation, all of the Borrower's rights now or hereafter
existing against the Bailee with respect to the collateral described on
EXHIBIT 2.3 hereof and maintained from time to time in the Custodian Account
(collectively, the "Collateral"), as security for the payment or performance of
all obligations of the Borrower to the Agent under the Loan and the Loan
Documents (collectively, the "Obligations").
23. POSSESSION OF COLLATERAL. Until released by the Agent in writing, the
Bailee shall possess all right, title and interest in all funds on deposit and
all Collateral from time to time in the Custodian Account and in all proceeds
thereof, and the Collateral shall be under the sole dominion and control of
Sumitomo Bank of New York Trust Company as bailee and third party pledgeholder
(and not as agent for Borrower) for the purpose of the perfection of the Agent's
security interest in the Collateral, subject to the Borrower's right to invest
the Collateral pursuant to Section 2.6 hereof and the Borrower's right to
withdraw from the Custodian Account under Section 2.7(a) hereof amounts (the
"Excess Amounts") which are in excess of an amount certified by the Agent in
writing to the Bailee from time to time as being the "Required Restricted
Account Balance" under the Loan Agreement. Until further written notice from
the Agent, the Required Restricted Account Balance shall be ** . The Bailee
shall maintain in trust for the benefit of the Agent possession of certificated
Collateral from the time of purchase thereof until the time of sale or maturity.
The Agent agrees to instruct Bailee to release the Collateral within seven (7)
Business Days of Borrower's full and final satisfaction of Borrower's
obligations under the Loan Agreement.
24. UNCERTIFICATED SECURITIES. As to Collateral which consists of
uncertificated securities or federal book entry securities, the Borrower shall
execute and deliver all such instructions and instruments necessary (i) with
respect to uncertificated securities, to register the pledge of the Collateral
to the Bailee on behalf of the Agent upon the books and records of the issuer, a
clearing corporation, or such other entity which maintains the registrations of
such pledges, or (ii) with respect to federal book entry collateral, to
accomplish a book entry transfer of such collateral to an account maintained by
the Bailee at the Federal Reserve Bank of New York, and the name of the Bailee
shall appear as the owner of all such federal book entry collateral on the books
and records of said Federal Reserve Bank of New York.
25. INVESTMENT OF COLLATERAL. So long as the Agent has not given the
Bailee notice that an Event of Default under the Loan Agreement has occurred and
is continuing (a "Default Notice"),
2
<PAGE>
the Borrower shall have the right, and the Agent hereby grants the Borrower a
license, either directly or through a person designated by the Borrower,
provided that written notice of the identity of such designee has been given to
the Agent and the Bailee, to invest, reinvest, withdraw and substitute all cash,
securities, proceeds and other Collateral maintained from time to time in the
Custodian Account, provided, however, that except as otherwise permitted by
Section 2.7(a), the right to withdraw cash or securities may be exercised only
in connection with the withdrawal of Excess Amounts under Section 2.7(a) or the
purchase and sale of securities and the substitution of such sold securities
with cash or other purchased securities of equal value that are to be maintained
in such Custodian Account in accordance with Section 5 of the Custodian
Agreement. Upon the Bailee's receipt of the Default Notice, the right and
license granted to the Borrower hereunder shall be automatically revoked without
further notice and the Bailee shall accept and act upon the instructions of only
the Agent for the purpose of investing, reinvesting, withdrawing and
substituting the Collateral and the Agent shall have sole and absolute
discretion with respect to such investing and reinvesting to the extent
permitted under applicable law. Agent agrees it shall not send a Default Notice
unless an Event of Default has occurred and is continuing.
26. WITHDRAWALS FROM CUSTODIAN ACCOUNT.
(a) The Borrower shall not cause the transfer, release, distribution,
or withdrawal of any Collateral (other than in connection with the reinvestment
thereof and the concurrent substitution of Collateral of equal value) without
the Agent's prior written approval, provided that, prior to Bailee's receiving a
Default Notice, the Borrower may withdraw any Excess Amounts from the Custodian
Account, provided, further, that there shall be no more than one withdrawal
during any calendar month. Upon the occurrence and during the continuance of a
Default or an Event of Default, the Borrower shall have no right to withdraw
Collateral from the Custodian Account.
(b) The Agent will deliver a copy of any Default Notice to the
Borrower simultaneously with any delivery thereof to the Bailee. It is
understood and agreed that the Bailee shall be and hereby is irrevocably
authorized and directed by the Borrower and the Agent to take any course of
action which the Agent, pursuant to the authority granted under the Loan
Documents, instructs the Bailee to follow, including, without limitation, making
immediate payment or transfer of all Collateral solely and directly to the Agent
whether or not such action will cause investment income to be lost or fees to be
incurred in connection with the investment of the Collateral, upon the
occurrence and during the continuance of an Event of Default, without offset or
deduction of any kind for any obligations or indebtedness of the Borrower to the
Bailee. The Borrower agrees that the Bailee is hereby instructed and authorized
to disregard any instructions which are provided by Borrower to the Bailee that
are contrary to or inconsistent with instructions provided by the Agent to the
Bailee after a Default Notice has been given by the Agent.
1. BORROWER'S COVENANTS.
21. 22. BORROWER'S COVENANTS. The Borrower agrees and covenants that:
3
<PAGE>
(a) In no event shall it do or permit to be done, or omit to do or
permit the omission of, any act or thing, the doing or omission of which would
materially impair the security created by this Agreement;
(b) It shall, except for the lien and security interest created
hereby and the assignment to the Agent as collateral security provided for
herein and General Tax Liens, keep the Collateral free and clear from any and
all liens, claims, encumbrances, obligations, indebtedness or other similar
interests (subject to the provisions of subparagraph (e) below with respect to
taxes, levies or other charges);
(c) It shall not (i) create, incur, assume, or permit to exist any
security agreements, security interests or any legal or beneficial ownership, or
other rights in the Collateral, or (ii) sell, transfer or assign the Collateral
or the Custodian Account or any collateral or deposits therein, except as
permitted by this Agreement;
(d) It shall not take or permit to be taken any other action which
would adversely affect the lien created hereby on the Collateral or the rights,
benefits and remedies available to the Agent hereunder or under the Collateral
Bailment Agreement;
(e) It shall pay and discharge, before they become delinquent, all
taxes, levies and other charges upon it and upon the Collateral and the Accounts
and the investments and deposits therein subject to its right to contest, by
appropriate legal proceedings diligently conducted and in good faith, any such
tax, levy or other charges and provided that such contest shall not impair the
security interest granted to the Agent hereunder; and
(f) It shall at its own expense, execute, and/or deliver, or cause to
be executed and delivered, to the Agent such notices, instruments, agreements,
financing statements, continuation statements, security agreements, assignments,
affidavits, opinions of Borrower's counsel and other documents, and take such
further actions relating to the Collateral, as the Agent in its sole and
absolute discretion deems necessary or reasonably appropriate or advisable (and
so instructs Borrower) to perfect, preserve or protect the Agent's perfected
first priority lien and security interest granted hereby or to enable the Agent
to exercise and enforce its rights and remedies hereunder with respect to any
Collateral at a time when the Agent shall be entitled to so enforce; and it
shall execute and deliver such additional documents as the Agent may reasonably
require or deem advisable to carry into effect the purpose of this Agreement or
to maintain the Agent's interest hereunder.
(g) It shall not change, modify, terminate or amend the Irrevocable
Instructions and Power of Attorney without written consent of the Agent.
31. POWER OF ATTORNEY. The Borrower hereby irrevocably constitutes and
appoints the Agent and any officer or agent thereof, with full power to
substitute other officers and agents for such officers and agents, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of the Borrower without notice to or assent thereof, and in the
name
4
<PAGE>
of the Borrower or in its own name, from time to time, but only upon and during
the continuance of the occurrence of an Event of Default, to take any and all
appropriate action, in the Agent's reasonable discretion, to execute any and all
documents and instruments relating to the Collateral which may be reasonably
necessary or desirable in the judgment of the Agent to protect or preserve the
Agent's interest in the Collateral and to perform any of the Borrower's
obligations hereunder relating to the Custodian Account, in the Borrower's name
or otherwise.
The Borrower hereby ratifies all that said attorneys lawfully do or
cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and is irrevocable for the term of this Agreement. The powers
conferred on the Agent hereunder are solely to protect its interests in the
Custodian Account and will not impose any duty upon the Agent to exercise any
such powers and the Agent will incur no liability to the Borrower or any third
party for failure to exercise any such powers. The Agent will be accountable
only for amounts that it actually receives as a result of the exercise of such
powers and in no event will the Agent or any of its officers, directors,
employees or agents be responsible to the Borrower for any act or failure to
act, except for gross negligence or willful misconduct, unless a higher standard
is imposed by law. The Borrower agrees to reimburse the Agent upon demand for
any reasonable costs and expenses including, without limitation, reasonable
attorneys' fees the Agent may incur while acting as the Borrower's
attorney-in-fact hereunder, with interest thereon at the rate set forth in the
Note or the Loan Agreement. All of such costs, expenses and interest are
included in the Obligations secured by the Collateral.
31. PRINCIPAL EXECUTIVE OFFICE. The Borrower represents and warrants that
its major executive office in the United States is located at 180 Kimball Way,
South San Francisco, CA 94080. The Borrower will deliver notice of any
relocation of its principal executive office in the United States not later than
five (5) days prior to the date of such relocation.
1. AGENT'S RIGHTS AND REMEDIES.
31. 32. RIGHTS OF AGENT.
(a) The Agent may at any time upon the occurrence and during the
continuance of an Event of Default:
(i) Instruct the Bailee to liquidate the collateral and pay the
proceeds of such liquidation to the Agent; and
(ii) Do any other act the Agent, at its reasonable discretion,
may deem proper, provided such action is commercially reasonable and made in the
best business judgment of the Agent.
(b) During the term of this Agreement, except upon the occurrence and
during the continuance of an Event of Default, the Borrower is hereby granted a
license to exercise all rights
5
<PAGE>
and privileges to vote the Collateral, and any other rights appurtenant to
ownership provided that all dividends of Collateral shall be treated as
Collateral. The Borrower agrees to execute and deliver to the Agent on demand
any statement, indorsement (stock or bond power), instruction, or other document
that the Agent in its sole discretion requests as being necessary to create,
preserve, validate, or enforce its security interest in the Collateral.
41. REMEDIES. Upon the occurrence and during the continuance of an Event of
Default, the Agent may, at the Agent's option:
(a) exercise with respect to the Collateral all of the remedies of a
secured party under Article 9 of the Uniform Commercial Code in the applicable
jurisdiction;
(b) exercise any and all remedies available under law or in equity;
and
(c) recover from the Borrower all costs and expenses, including
reasonable attorneys' fees, incurred by the Agent in exercising any right or
remedy provided for hereunder, or under any of the Loan Documents, or by law, or
in equity, which costs and expenses are included in the Obligations secured by
the Collateral.
Without limiting the foregoing, upon the occurrence and during the
continuance of an Event of Default, the Agent shall have the right to sell,
assign, deliver, encumber, or otherwise dispose of any or all of the Collateral
or instruct the Bailee to do so. If any of the Collateral is of a type
customarily sold in a recognized market, it shall be commercially reasonable for
the Agent to dispose of such Collateral in such market within (i) a reasonable
period of time after acquiring possession thereof without further notice to the
Borrower or (ii) a reasonable period of time after receipt of written demand
from the Borrower, and Agent shall not be responsible for the value recognized
in such disposition in a recognized market. In all other events the Agent shall
give the Borrower notice of the time and place of the public sale of the
Collateral or of the time after which any private sale or other intended
disposition is to be made by sending a notice of such sale at least 10 days
before the sale or disposition, which the Borrower agrees shall be reasonable
notice. In the event the Collateral is sold or otherwise disposed of, the
resale price or return shall be applied in the first instance to the reasonable
expenses of retaking, holding, preparing for sale or lease, selling, leasing,
and the like. The proceeds of the disposition of Collateral may also be applied
to the payment of the Agent's reasonable attorneys' fees and legal expenses.
Thereafter, the proceeds of the disposition of Collateral shall be applied by
the Agent to the payment of Borrower's Obligations. The Agent shall have sole
discretion as to the manner of allocating such proceeds of the disposition of
Collateral to the payment of Borrower's Obligations, including without
limitation the allocation to payment of accrued interest, outstanding principal
and/or other amounts due by Borrower under the Loan or Loan Documents. Only
after full payment of all of the Borrower's Obligations under the Loan and the
Loan Documents and any other payments the Borrower may be required to make need
the Agent account for, and pay to the Borrower, any surplus.
The Borrower recognizes that the Agent may be unable to effect a
public sale of the
6
<PAGE>
Collateral by reason of certain prohibitions contained in the Securities Act of
1933, as amended, but may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers who will be obligated to agree,
among other things, to acquire such securities for their own account, for
investment and not with a view to the distribution or resale thereof. The
Borrower agrees that any such private sales may be at prices and on other terms
less favorable to the seller than if sold at public sales and that such private
sales shall not be deemed to have been made in a commercially unreasonable
manner on account of their private character.
No delay or omission to exercise any right or remedy of the Agent upon
a default by the Borrower will waive any right or remedy of the Agent or be
construed as a waiver of any similar default which occurs later. The Borrower
waives any right to require the Agent to proceed against any other person or to
exhaust any Collateral or to pursue any other remedy in the Agent's power.
41. AGENT'S DETERMINATION CONCLUSIVE. The Agent's determination as to when an
Event of Default or Trigger Event has occurred and what course of action to take
upon the occurrence of any of the foregoing events shall be conclusive and
binding upon the Bailee and the Borrower solely insofar as the Bailee's
performance of its duties hereunder, and the Bailee shall have no duty or right
to inquire as to whether the Agent is entitled to give any instruction permitted
to be given under this Agreement. Notwithstanding anything to the contrary
contained herein, the Borrower agrees to indemnify and hold the Bailee harmless
against any and all losses, liabilities, expenses (including, without
limitation, reasonable attorneys' fees, costs and expenses), claims, actions or
demands arising out of, relating to or in connection with the Bailee's
compliance with the Agent's instructions, except to the extent any such losses,
liabilities, expenses, claims, actions or demands are the result of the gross
negligence or willful misconduct of the Bailee. The foregoing indemnities in
this Section 4.3 shall survive the termination of this Agreement for a period of
two years.
42. INDEMNIFICATION. The Borrower hereby agrees to indemnify and hold the
Agent harmless from any and all liability, loss, damage or expense (including,
without limitation, reasonable attorney's fees and disbursements) incurred
hereunder, in the enforcement by the Agent of any of its rights or remedies
hereunder, in any action taken by the Agent hereunder, and/or by reason or in
defense of any and all claims and demands whatsoever that may be asserted
against the Agent arising out of the Collateral or otherwise arising in respect
of the Agent acting in accordance with this Agreement (excluding, however, any
such liability, loss, damage or expense incurred by reason of the willful
misconduct or gross negligence of the Agent); and should the Agent incur any
such liability, loss, damage or expense, the amount thereof shall be payable by
the Borrower, following demand therefor, together with interest which shall
accrue thereon at the interest rate applicable to the Loan in effect at that
time as provided for in the Loan Documents from the date of such demand, and
shall be secured by this Agreement.
43. AGENT EXCULPATIONS. The Agent shall not be responsible for or have
any liability for the form, legal sufficiency, genuineness, or legal effect of
any signature, description, guaranty, instruction, or document related to the
Collateral not provided by the Agent or its representatives. The Borrower
agrees that the Agent will not in any way or manner be liable or responsible for
any
7
<PAGE>
diminution in the value of the Collateral resulting from the release, sale
or other disposition of the Collateral at the Borrower's request, or from the
failure of the Agent to sell or consent to the sale, liquidation, reinvestment
or other disposition of the Collateral after an Event of Default, or for any act
or default by the Bailee, any bailee, forwarding agency, transfer agent or any
person whomsoever, in connection with the Collateral, except that for any
release, sale or disposition of the Collateral not made at the Borrower's
request, the Agent may be liable for the Agent's own gross negligence or willful
misconduct.
44. BAILEE EXCULPATIONS The Bailee will not be responsible for or have
any liability for the form, legal sufficiency, genuineness, or legal effect
of any signature, description, guaranty, instruction, or document related to
the Collateral not provided by the Bailee or its representatives. The
Borrower agrees that the Bailee will not in any way or manner be liable or
responsible for any diminution in the value of the Collateral resulting from
the release, sale or other disposition of the Collateral at the Borrower's
request, or from the failure of the Bailee to sell or consent to the sale,
liquidation, reinvestment or other disposition of the Collateral (provided
that the Bailee has acted in accordance with this Agreement in failing to
sell or failing to consent to the sale), or for any acts taken by Bailee in
its capacity as bailee hereunder or as bailee under the Collateral Bailment
Agreement, except that for any release, sale or disposition of the Collateral
not made at the Borrower's request, the Bailee may be liable for the Bailee's
own gross negligence or willful misconduct.
1. MISCELLANEOUS.
41. 42. AMENDMENT. This Agreement may be amended only by a writing signed by
the parties hereto. Any notice or document required by these instructions may
be signed by the heirs or successors of the Agent and the Borrower.
51. GOVERNING LAW. This Agreement, and the rights of the parties
hereunder, shall be governed by the laws of the State of New York.
52. JURISDICTION.
(a) Each of the Borrower, the Bailee and the Agent hereby irrevocably
and unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California state court or Federal court of the United States
of America in each case sitting in San Francisco, and any appellate court from
any thereof, in any action or proceeding arising out of or relating to this
Agreement, or for recognition or enforcement of any judgment, and each of the
Borrower, the Bailee and the Agent hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such California state or, to the extent permitted by law, in such
Federal court. Each of the Borrower and the Agent agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Agreement shall affect any right that a party may
otherwise have to bring any action or proceeding relating to this Agreement
8
<PAGE>
against any other party or its respective properties in the court of any
jurisdiction.
(b) Each of the Borrower, the Bailee and the Agent hereby irrevocably
and unconditionally waives, to the fullest extent it may legally and effectively
do so, any objection which it may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of or relating to this Agreement
in any such California state or Federal court. Each of the Borrower, the Bailee
and the Agent hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action or
proceeding in any such court.
(c) EACH OF THE BORROWER, THE BAILEE AND THE AGENT HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, THIS AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE BAILEE, THE BORROWER OR
THE AGENT.
53. COUNTERPARTS. This Agreement, and any other documents required to be
signed by the parties hereunder, may be signed in counterparts, each of which
will constitute one and the same instrument.
54. NOTICES. Any notices required or permitted to be given hereunder
shall be delivered in the manner and shall take effect at the times specified in
the Loan Agreement. Notices to the Agent or the Borrower may be sent to the
addresses set forth in the Loan Agreement and notices to the Bailee may be sent
to the address set forth in the Collateral Bailment Agreement.
55. ENTIRE AGREEMENT. This Agreement, the Collateral Bailment Agreement, the
Loan Agreement, the Note, the Custodian Agreement, the Irrevocable Instructions
and Power of Attorney and the other Loan Documents embody the entire agreement
and understanding between the Agent and the Borrower and supersede all prior
agreements and understandings relating to the subject matter hereof.
9
<PAGE>
SECTION HEADINGS. Section headings are for reference only, and shall
not affect the interpretation or meaning of any provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ARRIS PHARMACEUTICAL
CORPORATION, as Borrower
By:
Name:
Title:
THE SUMITOMO BANK, LIMITED,
as Agent on behalf of the Lenders
By:
Name:
Title:
By:
Name:
Title:
SUMITOMO BANK OF NEW YORK
TRUST COMPANY, as Bailee
By:
Name:
Title:
10
<PAGE>
EXHIBIT 2.3
DESCRIPTION OF COLLATERAL
(a) All accounts, money, deposit accounts, certificated securities,
uncertificated securities, chattel paper, documents, instruments, general
intangibles and all other investments or property of any sort now held,
maintained or administered or hereafter held, maintained or administered for the
Borrower by the Bailee under the Custodian Agreement by and between the Borrower
and the Bailee, together with any stock or conversion rights, rights to
subscribe, liquidation dividends or preferences, stock dividends, dividends,
rights to interest, interest payments, dividends paid in stock, distributions
thereon, new securities or other property which the Borrower is or may hereafter
become entitled to receive on account of such property.
(b) All property now owned or hereafter acquired by or for the Borrower of
the type or class described in any schedule supplementary to the Restricted
Account and Security Agreement which is executed by the Agent and the Borrower
or in any financing statement which is executed by the Agent and the Borrower.
(c) All proceeds (including without limitation insurance proceeds from the
Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance
Corporation or the Securities Investor Protection Corporation or any other
insurance company), increase and products of any of the foregoing or
replacements thereof or substitutions therefor.
11
<PAGE>
COLLATERAL BAILMENT AGREEMENT
This COLLATERAL BAILMENT AGREEMENT (the "Agreement") is entered into
as of September 29, 1997, by and among SUMITOMO BANK OF NEW YORK TRUST COMPANY
("Bailee"), THE SUMITOMO BANK, LIMITED, a Japanese banking corporation, in its
capacity as agent (the "Agent") for the Lenders (as hereinafter defined), and
ARRIS PHARMACEUTICAL CORPORATION, a Delaware corporation ("Borrower")
1. RECITALS.
1.1. The Agent is acting in its capacity as agent for The Sumitomo
Bank, Limited and Silicon Valley Bank (collectively referred to herein as the
"Lenders") under a Loan Agreement of even date herewith (the "Loan Agreement")
among the Borrower, the Agent and the Lenders. Capitalized terms used but not
defined in this Agreement shall have the meaning specified in the Loan
Agreement.
1.2. Concurrently with the execution of this Agreement, Bailee and
Borrower are entering into the Custodian Agreement attached hereto as EXHIBIT A
(the "Custodian Agreement") pursuant to which Borrower will establish the
account provided for therein (the "Custodian Account"). The Custodian Account
will be a segregated custodial account with Bailee in which cash and marketable
securities shall be held.
1.3. Borrower has granted Agent a security interest in and lien upon
the Custodian Account and all property now or hereafter in the Custodian Account
and all proceeds thereof, and in all of Borrower's rights now or hereafter
existing against Bailee, including, without limitation all of the property set
forth on EXHIBIT B attached hereto (collectively, the "Collateral"), pursuant to
the Restricted Account and Security Agreement of even date herewith (the
"Security Agreement").
1.4. Agent and Bailee wish to establish a bailment with respect to,
and otherwise provide for, the Collateral and the Custodian Account in
accordance with the terms hereof.
2. BAILMENT.
Bailee will act as bailee for Agent in holding or acting as registered
owner of the Collateral and in administering the Custodian Account subject to
the terms and provisions of this Agreement. Bailee's sole duties and rights in
acting as Borrower's bailee shall be as expressly set forth herein. In
accordance with Uniform Commercial Code sections 8-313 (1) and 9-305 as in
effect in any applicable jurisdiction, and in accordance with Section
9-302(1)(a) of the Uniform Commercial Code as enacted in New York with respect
to any deposit accounts now or hereafter maintained with Bailee that constitute
Collateral, Agent hereby gives, and Bailee hereby acknowledges receipt of,
notice of Borrower's grant to Agent of a security interest in and pledge
1
<PAGE>
of the Collateral. In the event of any inconsistency between this Agreement and
the Security Agreement, and/or the Custodian Agreement, this Agreement shall be
controlling.
3. DUTIES OF BAILEE.
Bailee will, unless Agent waives compliance in writing:
3.1. Maintain on its books accurate records of Borrower's ownership of
and Agent's security interest in the Collateral;
3.2. Not hold or maintain any Collateral in any account other than the
Custodian Account;
3.3. Upon the receipt of written notice from Agent stating that an
Event of Default has occurred and is continuing, and without the need for
further inquiry or investigation by Bailee as to any underlying facts or
circumstances relating thereto, do any of the following as directed by Agent:
(a) disburse any or all of the Collateral to Agent, (b) allow Agent (and not
Borrower) to exercise any rights of Borrower under the Custodian Agreement, and
(c) sell some or all of the Collateral (whether or not such actions will cause
investment income to be lost or fees to be incurred in connection therewith) and
remit the sale proceeds (less Bailee's normal sales charge but without offset or
deduction of any kind for any obligations or indebtedness of the Borrower to the
Bailee) to Agent;
3.4. Not amend or terminate the Custodian Agreement without Agent's
consent;
3.5. Hold or cause to be held any instruments or certificates
representing any Collateral only in the State of New York;
3.6. Concurrently with the acquisition as Collateral of any
uncertificated or book-entry securities issued by any issuer and as to which
ownership is registered in the name of a nominee of Bailee, take such actions as
may be specifically requested in writing by Agent to perfect and maintain the
priority of Agent's security interest in such Collateral;
3.7. In each case, as expressly and specifically requested in writing
from time to time by Agent, take any other actions reasonably required by Agent
to perfect and maintain the priority of its security interest in the Collateral;
3.8. On or before the 30th day of each month, provide Agent with an
account statement itemizing the Collateral;
3.9. Inform Agent of any assignment or interest in the Custodian
Account of which Bailee has notice;
2
<PAGE>
3.10. Not permit any transfer, release, distribution, or withdrawal
of any Collateral without Agent's prior written approval, or as permitted under
Section 2.6 or Section 2.7 of the Security Agreement or Section 5 of the
Custodian Agreement; and
3.11. Waive any banker's lien, right of offset or similar rights with
respect to the Custodian Account.
4. INDEMNIFICATION OF BAILEE.
Borrower agrees that Borrower shall indemnify, defend and hold
harmless Bailee, its successors and assigns and its directors, officers,
employees and agents from and against any and all losses, liabilities, damages,
obligations, deficiencies, payments, costs and expenses (including without
limitation costs and expenses of any and all actions, suits, proceedings,
demands, assessments, judgments, settlements and compromises relating thereto
and reasonable attorneys' fees and disbursements in connection therewith)
sustained or incurred by Bailee or such other indemnitee in any way incidental
or related to Bailee's actions or capacity as bailee hereunder, except such as
are due to Bailee's breach of this Agreement or the Custodian Agreement or the
Security Agreement or Bailee's gross negligence or willful misconduct. In the
event of any conflicting claims, demands, obligations or contentions asserted by
anyone with respect to the Custodian Account or the Collateral, Bailee (a) shall
have no duty to adjudicate such claims, (b) may deliver the Collateral that is
subject to such claims to Agent if Agent offers to indemnify Bailee for such
delivery in a manner that is satisfactory to Bailee, and otherwise may deliver
said Collateral only upon the determination of an arbitration panel or the
instructions of a court of competent jurisdiction, and (c) may initiate an
action in the nature of an interpleader in any court of competent jurisdiction.
5. MISCELLANEOUS.
5.1. Any communications between the parties hereto or notices or
requests provided herein to be given shall be given in writing by mailing the
same, postage prepaid, or by hand or by commercial delivery service or by
telecopier to each party at its address for notices set forth on the signature
page hereof, or to such other addresses as either party may hereafter indicate
in the foregoing manner. Agent shall provide Borrower with copies of such
notices concurrently with its delivery to Bailee of the written notice described
in Section 3.3., provided, however, that Agent shall have no liability to
Borrower for Agent's failure to provide any such written notice to Borrower.
5.2. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns.
5.3. This Agreement shall be governed by, construed and interpreted
under the laws of the State of New York.
5.4. There shall exist no implied obligations on the part of Bailee.
Without limiting the generality of the foregoing, beyond the exercise of
reasonable care to assure the safe custody
3
<PAGE>
of the Collateral while held under this Agreement and the accounting for moneys
actually received by Bailee hereunder, and beyond its obligations and
responsibilities under the Custodian Agreement and the Security Agreement and
the performance of its obligations hereunder, Bailee shall have no duty or
liability to exercise or preserve any rights, privileges or powers pertaining to
the Collateral.
5.5. Section headings are for reference only, and shall not affect the
interpretation or meaning of any provision of this Agreement.
5.6. This Agreement, and any other documents required to be signed by
the parties hereunder, may be signed in counterparts, each of which will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the day and year first above written.
SUMITOMO BANK OF NEW YORK THE SUMITOMO BANK, LIMITED ,
TRUST COMPANY, as Bailee as Agent on behalf of the Lenders
By: By:
--------------------------- --------------------------------
Name: Name:
------------------------- ------------------------------
Title: Title:
------------------------ -----------------------------
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices: Address for Notices:
Two World Financial Center Pine Street Representative Office
Tower B 100 Pine Street, Suite 3300
225 Liberty Street, 35th Floor San Francisco, California 94111-5219
New York, New York 10281 Telephone: (415) 394-0873
Telephone: (212) 224-5400 Facsimile: (415) 394-9797
Facsimile: (212) 224-5444 Attn: Anthony B. Kwee, Vice President
ARRIS PHARMACEUTICAL
CORPORATION, as Borrower
By:
--------------------------------
4
<PAGE>
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
180 Kimball Way
South San Francisco, CA 94080
Attention: Chief Financial Officer
Telephone: (415) 829-1000
Facsimile: (415) 829-1001
5
<PAGE>
SCHEDULE 5.6
INSURANCE
<TABLE>
<CAPTION>
COVERAGE PERIOD OF COVERAGE INSURANCE CO. POLICY NO.
-------- ------------------ ------------- ----------
<S> <C> <C> <C>
Products Liability and Umbrella Liability
Excess Liability
Package (General Liability, Property & Fidelity)
Non-owned & Hired Automobile
Directors & Officers Liability
Worker's Compensation
Foreign Package
Cargo
Fiduciary
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH
FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,638
<SECURITIES> 23,681
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,383
<PP&E> 25,168
<DEPRECIATION> (12,409)
<TOTAL-ASSETS> 72,852
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0
0
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</TABLE>
