<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER , 1997.
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------------
ARRIS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 22-2969941
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or organization)
</TABLE>
------------------------------------
ARRIS PHARMACEUTICAL CORPORATION, 180 KIMBALL WAY, SOUTH SAN FRANCISCO, CA 94080
TELEPHONE: (650) 829-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------------
FREDERICK J. RUEGSEGGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
ARRIS PHARMACEUTICAL CORPORATION
180 KIMBALL WAY, SOUTH SAN FRANCISCO, CA 94080
TELEPHONE: (650) 829-1000
------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
Alan C. Mendelson, Esq. Michael J. O'Donnell, Esq.
Michael R. Jacobson, Esq. Jason B. Wacha, Esq.
Janet Lee, Esq., Cooley Godward LLP Wilson Sonsini Goodrich & Rosati
Five Palo Alto Square, 3000 El Camino Real Professional Corporation
Palo Alto, CA 94306 650 Page Mill Road, Palo Alto, CA 94304
(650) 843-5000 (650) 493-9300
</TABLE>
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this Registration
Statement and the effective time of the proposed merger of Beagle Acquisition
Sub, Inc. with and into Sequana Therapeutics, Inc., as described in the
Agreement and Plan of Merger and Reorganization, dated as of November 2, 1997,
attached as Appendix A to the Joint Proxy Statement/Prospectus forming a part of
this Registration Statement (the "Reorganization Agreement").
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(a) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE(2)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
par value $0.001 per share 15,666,978 $9.19 $144,020,147.30 $43,642.47
-----------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of common stock of the Registrant which may
be issued to the former stockholders of Sequana Therapeutics, Inc.
("Sequana") pursuant to the merger described herein.
(2) Each share of common stock of Sequana will be converted into the right to
receive 1.35 shares of common stock of the Registrant pursuant to the merger
described herein. Pursuant to Rule 457(f) under the Securities Act of 1933,
as amended, the registration fee has been calculated based on the average of
the high and low prices per share of the securities to be received by the
Registrant as reported on the Nasdaq National Market on November 19, 1997.
The registration fee paid herewith has been reduced by $26,892.13, the
amount paid at the time of the filing of the preliminary Joint Proxy
Statement/Prospectus on November 21, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PRELIMINARY JOINT PROXY STATEMENT DECEMBER , 1997
ARRIS PHARMACEUTICAL CORPORATION
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
DEAR STOCKHOLDER:
As you may be aware, Arris Pharmaceutical Corporation, a Delaware
corporation ("Arris"), and Sequana Therapeutics, Inc., a California corporation
("Sequana"), have entered into an Agreement and Plan of Merger and
Reorganization (the "Reorganization Agreement") providing for the acquisition of
Sequana by Arris. Pursuant to the Reorganization Agreement, a special meeting of
the stockholders of Arris (the "Arris Special Meeting") will be held at 180
Kimball Way, South San Francisco, California on [January 7], 1998 at 9:00 a.m.,
local time.
At the Arris Special Meeting you will be asked to consider and vote upon
the issuance of shares of Arris common stock pursuant to the Reorganization
Agreement and a related Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Arris to increase the total number of shares of
capital stock authorized for issuance to 60,000,000 and the number of shares of
common stock authorized for issuance to 50,000,000 and to change the name of the
corporation to AxyS Pharmaceuticals, Inc. Pursuant to the Reorganization
Agreement, a wholly owned subsidiary of Arris will be merged with and into
Sequana (the "Merger") and Sequana will become a wholly owned subsidiary of
Arris. In the Merger, each outstanding share of Sequana common stock will be
converted into the right to receive 1.35 shares of Arris common stock. The
Merger is described more fully in the accompanying Joint Proxy
Statement/Prospectus.
After careful consideration, the Board of Directors of Arris (the "Arris
Board of Directors") has unanimously approved the Reorganization Agreement and
the Merger, and has concluded they are fair to, and in the best interests of,
Arris and its stockholders. The Arris Board of Directors unanimously recommends
that you vote in favor of the issuance of shares of Arris common stock in
connection with the Merger and in favor of the approval of the Certificate of
Amendment.
The Merger will approximately double both the number of outstanding shares
and the number of employees of the combined company. In order to provide
appropriate incentives for the new company's employees, at the Arris Special
Meeting, you will also be asked to consider and vote upon proposals (i) to
approve a new Arris 1997 Equity Incentive Plan, covering 2,500,000 shares of
Arris Common Stock, subject to consummation of the Merger, (ii) to approve the
Arris 1994 Non-Employee Directors' Stock Option Plan, as amended to increase the
number of shares of Arris common stock issuable pursuant to options granted
under such plan by 350,000 shares, and (iii) to approve the Arris Employee Stock
Purchase Plan, as amended to increase the number of shares of Arris Common Stock
issuable under such plan by 400,000 shares.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders to the Arris stockholders, a Joint Proxy
Statement/Prospectus relating to the proposal to be voted upon at the Arris
Special Meeting and a Proxy Card. The Joint Proxy Statement/Prospectus more
fully describes the Merger and the proposals before the stockholders.
All stockholders are cordially invited to attend the Arris Special Meeting
in person. If you attend the Arris Special Meeting, you may vote in person if
you wish even though you have previously returned your completed proxy. WHETHER
OR NOT YOU PLAN TO ATTEND THE ARRIS SPECIAL MEETING, IT IS IMPORTANT THAT YOUR
SHARES BE REPRESENTED AND VOTED, REGARDLESS OF HOW MANY SHARES YOU HOLD.
APPROVAL OF SOME OF THE PROPOSALS REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF ARRIS COMMON STOCK. THEREFORE, PLEASE
COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
On behalf of the Arris Board of Directors, we thank you for your support
and ask you to vote in favor of the issuance of shares, approval of the
Certificate of Amendment and the other proposals before the stockholders.
Sincerely,
John P. Walker
Chief Executive Officer
YOUR VOTE IS IMPORTANT--PLEASE RETURN YOUR PROXY PROMPTLY
<PAGE> 3
PRELIMINARY JOINT PROXY STATEMENT DECEMBER , 1997
SEQUANA THERAPEUTICS, INC.
11099 NORTH TORREY PINES ROAD, SUITE 160
LA JOLLA, CALIFORNIA 92037
DEAR SHAREHOLDER:
As you may be aware, Sequana Therapeutics, Inc., a California corporation
("Sequana"), and Arris Pharmaceutical Corporation, a Delaware corporation
("Arris"), have entered into an Agreement and Plan of Merger and Reorganization
(the "Reorganization Agreement") providing for the acquisition of Sequana by
Arris. The combined company is expected to be named AxyS Pharmaceuticals, Inc.
Pursuant to the Reorganization Agreement, a special meeting of the shareholders
of Sequana (the "Sequana Special Meeting") will be held at the Sheraton Grande
Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California on [January
7], 1998 at 9:00 a.m., local time.
At the Sequana Special Meeting you will be asked to consider and vote upon
a proposal to adopt and approve the Reorganization Agreement which provides for
the merger of a wholly owned subsidiary of Arris with and into Sequana (the
"Merger"). Upon consummation of the Merger, Sequana will become a wholly owned
subsidiary of Arris. As a result of the Merger, each outstanding share of common
stock of Sequana will be converted into the right to receive 1.35 shares of
common stock of Arris. The Merger is described more fully in the accompanying
Joint Proxy Statement/Prospectus.
After careful consideration, the Board of Directors of Sequana (the
"Sequana Board of Directors") has unanimously approved the Reorganization
Agreement and the Merger, and has concluded they are fair to, and in the best
interests of, Sequana and its shareholders. The Sequana Board of Directors
unanimously recommends a vote in favor of the adoption and approval of the
Reorganization Agreement and approval of the Merger.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Shareholders to the Sequana shareholders, a Joint Proxy
Statement/Prospectus relating to the proposal to be voted upon at the Special
Meeting and a Proxy Card. The Joint Proxy Statement/Prospectus more fully
describes the proposed transaction.
All shareholders are cordially invited to attend the Sequana Special
Meeting in person. If you attend the Sequana Special Meeting, you may vote in
person if you wish even though you have previously returned your completed
proxy. WHETHER OR NOT YOU PLAN TO ATTEND THE SEQUANA SPECIAL MEETING, IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED, REGARDLESS OF THE NUMBER OF
SHARES YOU HOLD. APPROVAL OF THE MERGER REQUIRES THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF SEQUANA COMMON STOCK.
THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED
ENVELOPE. PLEASE DO NOT SEND THE STOCK CERTIFICATE(S) REPRESENTING YOUR SEQUANA
COMMON STOCK AT THIS TIME.
On behalf of the Sequana Board of Directors, we thank you for your support
and ask you to vote in favor of the Merger.
Sincerely,
Kevin J. Kinsella
President, Chief Executive Officer
YOUR VOTE IS IMPORTANT--PLEASE RETURN YOUR PROXY PROMPTLY
<PAGE> 4
PRELIMINARY JOINT PROXY STATEMENT
ARRIS PHARMACEUTICAL CORPORATION
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [JANUARY 7], 1998
------------------------
TO THE STOCKHOLDERS OF ARRIS PHARMACEUTICAL CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of ARRIS
PHARMACEUTICAL CORPORATION, a Delaware corporation ("Arris"), will be held on
[Wednesday, January 7], 1998 at 9:00 a.m. local time at 180 Kimball Way, South
San Francisco, California to consider and vote upon the following proposals:
1. To approve the issuance of shares of Arris common stock, $0.001 par
value per share ("Arris Common Stock"), pursuant to the Agreement and
Plan of Merger and Reorganization, dated as of November 2, 1997, by and
among Arris, Sequana Therapeutics, Inc., a California corporation
("Sequana"), and Beagle Acquisition Sub, Inc., a California corporation
and wholly owned subsidiary of Arris ("Merger Sub") (the "Reorganization
Agreement"). Pursuant to the Reorganization Agreement, Merger Sub will
be merged with and into Sequana and Sequana will become a wholly owned
subsidiary of Arris (the "Merger"). A copy of the Reorganization
Agreement is attached as Appendix A to the Joint Proxy
Statement/Prospectus accompanying this Notice.
2. To approve the Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Arris, which provides for (a) a change
in the corporate name of Arris to AxyS Pharmaceuticals, Inc. and (b) an
increase by 20,000,000 shares of the total number of shares of capital
stock authorized for issuance and the number of shares of common stock
authorized for issuance to 60,000,000 shares and to 50,000,000 shares,
respectively. Approval of this amendment is a closing condition to the
Merger.
3. To approve the Arris 1997 Stock Option Plan, covering 2,500,000
shares of Arris common stock shares. This Plan will become effective
only if the Merger is consummated.
4. To approve the Arris 1994 Non-Employee Directors' Stock Option Plan,
as amended to increase the number of shares of Arris common stock
issuable pursuant to options granted under such plan by 350,000 shares,
to 475,000 shares.
5. To approve the Arris Employee Stock Purchase Plan, as amended to
increase the number of shares of common stock issuable under such plan
by 400,000 shares to 650,000 shares.
6. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The proposed Merger and other related matters are more fully described in
the attached Joint Proxy Statement/Prospectus.
Stockholders of record at the close of business on November 24, 1997 are
entitled to notice of, and to vote at, the Special Meeting and any adjournments
or postponements thereof.
All stockholders are cordially invited to attend the Arris Special Meeting
in person. Whether you expect to attend, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Arris Board of
Directors
Alan C. Mendelson
Secretary
South San Francisco, California
December , 1997
<PAGE> 5
PRELIMINARY JOINT PROXY STATEMENT
SEQUANA THERAPEUTICS, INC.
11099 NORTH TORREY PINES ROAD, SUITE 160
LA JOLLA, CALIFORNIA 92037
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [JANUARY 7], 1998
------------------------
TO THE SHAREHOLDERS OF SEQUANA THERAPEUTICS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Sequana
Special Meeting") of Sequana Therapeutics, Inc., a California corporation
("Sequana"), will be held on [January 7], 1998 at 9:00 a.m., local time, at the
Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla,
California to consider and vote upon the following proposal:
1. To (i) adopt and approve the Agreement and Plan of Merger and
Reorganization (the "Reorganization Agreement"), dated as of November 2,
1997, among Sequana, Arris Pharmaceutical Corporation, a Delaware
corporation ("Arris"), and Beagle Acquisition Sub, Inc., a California
corporation and wholly owned subsidiary of Arris ("Merger Sub"), and
(ii) approve the merger of Merger Sub with and into Sequana pursuant to
which Sequana will become a wholly owned subsidiary of Arris. A copy of
the Reorganization Agreement is attached as Appendix A to the Joint
Proxy Statement/Prospectus accompanying this Notice.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The proposed Merger and other related matters are more fully described in
the attached Joint Proxy Statement/Prospectus.
Shareholders of record at the close of business on November 24, 1997 are
entitled to notice of, and to vote at, the Special Meeting and any adjournments
or postponements thereof.
All shareholders are cordially invited to attend the Sequana Special
Meeting in person. Whether you expect to attend, WE URGE YOU TO SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Sequana Board of Directors
Michael J. O'Donnell
Secretary
La Jolla, California
December , 1997
<PAGE> 6
PRELIMINARY JOINT PROXY STATEMENT
ARRIS PHARMACEUTICAL CORPORATION
AND
SEQUANA THERAPEUTICS, INC.
------------------------
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS TO BE HELD ON [JANUARY 7], 1998
------------------------
ARRIS PHARMACEUTICAL CORPORATION
PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, $0.001 par value per share ("Arris Common Stock"), of Arris
Pharmaceutical Corporation, a Delaware corporation ("Arris"), in connection with
the solicitation of proxies by the Board of Directors of Arris (the "Arris Board
of Directors") for use at the Special Meeting of Stockholders of Arris or any
adjournment or postponement thereof (the "Arris Special Meeting"). This Joint
Proxy Statement/Prospectus is also being furnished to holders of common stock,
$0.001 par value per share ("Sequana Common Stock"), of Sequana Therapeutics,
Inc., a California corporation ("Sequana"), in connection with the solicitation
of proxies by the Board of Directors of Sequana (the "Sequana Board of
Directors") for use at the Special Meeting of Shareholders of Sequana or any
adjournment or postponement thereof (the "Sequana Special Meeting"). The Arris
Special Meeting is being called to consider and vote upon a proposal to approve
the increase in the number of shares of Arris Common Stock authorized for
issuance and approve the issuance of shares of Arris Common Stock to the
shareholders of Sequana pursuant to the Agreement and Plan of Merger and
Reorganization, dated as of November 2, 1997, among Arris, Beagle Acquisition
Sub, Inc., a California corporation and a wholly owned subsidiary of Arris
("Merger Sub"), and Sequana (the "Reorganization Agreement"). The Sequana
Special Meeting is being called to consider and vote upon a proposal to adopt
and approve the Reorganization Agreement and approve the merger of Merger Sub
with and into Sequana (the "Merger"). The stockholders of Arris also will
consider and vote upon certain other proposals at the Arris Special Meeting.
Such proposals are discussed more fully in the Joint Proxy Statement/Prospectus.
Upon consummation of the proposed Merger, Sequana will become a wholly
owned subsidiary of Arris and each outstanding share of Sequana Common Stock
will be converted into the right to receive one and thirty-five one-hundredths
(1.35) shares of Arris Common Stock. The multiple of the number of shares of
Arris Common Stock into which each share of Sequana Common Stock will be
converted pursuant to the Reorganization Agreement is referred to as the
"Exchange Ratio."
The obligations of Arris and Sequana to effect the Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction or waiver of various conditions, including the
approval of an increase in the number of shares of Arris Common Stock authorized
for issuance by holders of a majority of the outstanding shares of Arris Common
Stock and the approval of the issuance of Arris Common Stock in connection with
the Merger by holders of a majority of the outstanding shares of Arris Common
Stock present in person or represented by proxy at the Arris Special Meeting and
entitled to vote thereat, and the adoption and approval of the Reorganization
Agreement and of the Merger by holders of a majority of the outstanding shares
of Sequana Common Stock. The Merger is expected to be consummated shortly after
such approvals are obtained and the other conditions to the consummation of the
Merger are satisfied or waived. It is currently anticipated that the Merger will
be consummated in January 1998.
All information contained or incorporated by reference herein concerning
Arris has been furnished by Arris, and all information contained or incorporated
by reference herein concerning Sequana has been furnished by Sequana.
This Joint Proxy Statement/Prospectus and the accompanying form of proxy
are first being mailed to stockholders of Arris and shareholders of Sequana on
or about December , 1997.
------------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. SHAREHOLDERS OF SEQUANA AND STOCKHOLDERS OF ARRIS ARE
STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER
"RISK FACTORS" BEGINNING AT PAGE 21.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Joint Proxy Statement/Prospectus is December , 1997.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 1
SUMMARY............................................................................... 3
The Companies....................................................................... 3
Arris Pharmaceutical Corporation................................................. 3
Sequana Therapeutics, Inc........................................................ 3
Beagle Acquisition Sub, Inc...................................................... 3
The Arris Special Meeting........................................................... 3
Time, Date, Place and Purpose.................................................... 3
Record Date and Vote Required.................................................... 4
The Sequana Special Meeting......................................................... 4
Time, Date, Place and Purpose.................................................... 4
Record Date and Vote Required.................................................... 4
The Merger.......................................................................... 5
General.......................................................................... 5
Effective Time of the Merger; Closing Date....................................... 5
Stock Ownership Following the Merger............................................. 6
Exchange of Sequana Stock Certificates........................................... 6
Sequana's Reasons for the Merger................................................. 6
Recommendation of the Sequana Board of Directors................................. 6
Opinion of Financial Advisor to Sequana.......................................... 6
Arris' Reasons for the Merger.................................................... 7
Recommendation of the Arris Board of Directors................................... 7
Opinion of Financial Advisor to Arris............................................ 7
Non-Solicitation................................................................. 7
Conduct of Business.............................................................. 8
The Composition of the Arris Board of Directors.................................. 8
Conditions to the Merger......................................................... 8
Termination...................................................................... 9
Expenses and Termination Fees.................................................... 10
Interests of Certain Persons in the Merger....................................... 10
Voting Agreements................................................................ 10
Affiliate Agreements............................................................. 11
Registration Rights.............................................................. 11
Certain Federal Income Tax Consequences.......................................... 11
Anticipated Accounting Treatment................................................. 11
Rights of Dissenting Shareholders................................................ 11
Risk Factors........................................................................ 12
Markets and Market Prices........................................................... 12
Selected Historical Financial Information of Arris.................................. 13
Selected Historical Financial Information of Sequana................................ 14
Selected Unaudited Pro Forma Combined Condensed Financial Data...................... 15
Unaudited Pro Forma Combined Condensed Financial Data............................... 16
Comparative Per Share Data.......................................................... 20
</TABLE>
i
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RISK FACTORS.......................................................................... 21
Risks Relating to the Merger........................................................ 21
Risks Relating to the Businesses of Arris and Sequana............................... 22
THE ARRIS SPECIAL MEETING............................................................. 30
Purpose of the Arris Special Meeting................................................ 30
Proxies............................................................................. 30
Date, Time and Place of Meeting..................................................... 30
Voting Rights and Outstanding Shares................................................ 30
Solicitation........................................................................ 30
Vote Required....................................................................... 30
Revocability of Proxies............................................................. 31
THE SEQUANA SPECIAL MEETING........................................................... 32
Purpose of the Sequana Special Meeting.............................................. 32
Proxies............................................................................. 32
Date, Time and Place of Meeting..................................................... 32
Voting Rights and Outstanding Shares................................................ 32
Solicitation........................................................................ 32
Vote Required....................................................................... 32
Revocability of Proxies............................................................. 33
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY........................... 34
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS....................................... 35
Background of the Merger............................................................ 35
Sequana's Reasons for the Merger.................................................... 37
Arris' Reasons for the Merger....................................................... 38
Opinion of Financial Advisor to Sequana............................................. 39
Opinion of Financial Advisor to Arris............................................... 42
Interests of Certain Persons in the Merger.......................................... 46
Voting Agreements................................................................... 47
Affiliate Agreements................................................................ 47
Certain Federal Income Tax Consequences............................................. 47
Anticipated Accounting Treatment.................................................... 49
Regulatory Matters.................................................................. 49
Rights of Dissenting Shareholders................................................... 50
No Arris Appraisal Rights........................................................... 52
Resale of Arris Common Stock........................................................ 52
THE REORGANIZATION AGREEMENT.......................................................... 53
General............................................................................. 53
Merger Consideration................................................................ 53
Stock Options; Employee Stock Purchase Plan; Warrants............................... 53
Stock Ownership Following the Merger................................................ 54
Conversion of Shares; Procedures for Exchange of Certificates....................... 54
Effect on Certificates.............................................................. 54
Corporate Matters................................................................... 55
The Composition of the Arris Board of Directors..................................... 55
Conditions to the Merger............................................................ 55
Representations and Warranties...................................................... 58
Covenants........................................................................... 58
</TABLE>
ii
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Termination......................................................................... 65
Expenses and Termination Fees....................................................... 66
AMENDMENT OF THE ARRIS CERTIFICATE OF INCORPORATION................................... 68
ARRIS PRINCIPAL STOCKHOLDERS.......................................................... 69
SEQUANA PRINCIPAL SHAREHOLDERS........................................................ 71
COMPARISON OF SHAREHOLDERS' RIGHTS.................................................... 73
Size of the Board of Directors...................................................... 73
Classified Board Of Directors....................................................... 73
Cumulative Voting................................................................... 73
Removal of Directors................................................................ 74
Indemnification of Directors and Officers........................................... 74
Amendments to the Certificate of Incorporation and Articles of Incorporation........ 74
Amendment of Bylaws................................................................. 74
Power to Call Special Shareholders' Meeting; Action By Consent...................... 75
Inspection of Shareholders' List.................................................... 75
Dividends and Repurchases of Shares................................................. 75
Approval of Certain Corporate Transactions.......................................... 76
Business Combination Following a Change of Control.................................. 76
Appraisal Rights.................................................................... 76
Dissolution......................................................................... 77
APPROVAL OF THE 1997 EQUITY INCENTIVE PLAN............................................ 78
General............................................................................. 78
Purpose............................................................................. 78
Administration...................................................................... 78
Eligibility......................................................................... 79
Stock Subject to the Equity Incentive Plan.......................................... 79
Terms of Options.................................................................... 79
Terms of Restricted Stock Purchase Rights........................................... 80
Adjustment Provisions............................................................... 80
Effect of Certain Corporate Events.................................................. 80
Duration, Amendment and Termination................................................. 81
Restrictions on Transfer............................................................ 81
Federal Income Tax Information...................................................... 81
Nonstatutory Stock Options.......................................................... 81
Restricted Stock.................................................................... 82
Potential Limitations on Company Deductions......................................... 82
APPROVAL OF THE 1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN, AS AMENDED............ 83
General............................................................................. 83
Administration...................................................................... 83
Eligibility......................................................................... 83
Terms of Options.................................................................... 84
Adjustment Provisions............................................................... 84
Effect of Certain Corporate Events.................................................. 84
Duration, Amendment and Termination................................................. 84
Federal Income Tax Information...................................................... 84
New Plan Benefits................................................................... 85
</TABLE>
iii
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED.................................. 86
General............................................................................. 86
Administration...................................................................... 86
Offerings........................................................................... 86
Eligibility......................................................................... 87
Participation in the Plan........................................................... 87
Purchase Price...................................................................... 87
Accumulation of Purchase Price; Payroll Deductions.................................. 87
Purchase of Stock................................................................... 88
Withdrawal.......................................................................... 88
Termination of Employment........................................................... 88
Restrictions on Transfer............................................................ 88
Duration, Amendment and Termination................................................. 88
Effect of Certain Corporate Events.................................................. 88
Stock Subject to Purchase Plan...................................................... 89
Federal Income Tax Information...................................................... 89
ADDITIONAL INFORMATION................................................................ 89
EXPERTS............................................................................... 90
LEGAL MATTERS......................................................................... 90
REPRESENTATIVES OF INDEPENDENT ACCOUNTANTS............................................ 91
APPENDICES
APPENDIX A - Agreement and Plan of Merger and Reorganization...................... A-1
APPENDIX B - Form of Certificate of Amendment..................................... B-1
APPENDIX C-1 - Fairness Opinion of Morgan Stanley & Co. Incorporated................ C-1
APPENDIX C-2 - Fairness Opinion of Lehman Brothers Inc.............................. C-2
APPENDIX D - California Statutes Regarding Appraisal Rights....................... D-1
APPENDIX E - Form of 1997 Equity Incentive Plan................................... E-1
</TABLE>
iv
<PAGE> 11
AVAILABLE INFORMATION
Arris and Sequana are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith each files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information filed by Arris and Sequana with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Commission's regional offices at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material may also be obtained
from the Commission at prescribed rates by writing to the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Sequana Common Stock and the Arris Common Stock are each quoted on the Nasdaq
National Market and reports and other information concerning Arris and Sequana
may be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Arris has filed with the Commission a Registration Statement on Form S-4
(herein, together with all amendments and exhibits thereto, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Arris Common Stock to be issued in the
Merger. This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted pursuant to the rules and regulations of the Commission and to
which portions reference is hereby made. For further information with respect to
Arris, Sequana, the Merger, the securities offered hereby and related matters,
reference is made to the Registration Statement. The Registration Statement and
the exhibits thereto may be inspected, without charge, at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be
obtained from the Commission at prescribed rates.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by Arris
(Commission File Number 000-22788) pursuant to the Exchange Act are incorporated
by reference into this Proxy Statement/Prospectus:
1. Arris' Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
2. Arris' Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1997, June 30, 1997 and September 30, 1997;
3. Arris' Current Reports on Form 8-K filed with the Commission on
January 2, 1997 and November 12, 1997; and
4. The description of the Arris Common Stock contained in the
Registration Statement on Form 8-A filed with the Commission on November
4, 1993.
The following documents previously filed with the Commission by Sequana
(Commission File Number 000-26244) pursuant to the Exchange Act are incorporated
by reference into this Proxy Statement/Prospectus:
1. Sequana's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. Sequana's Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 1997, June 30, 1997 and September 30, 1997;
3. Sequana's Current Report on Form 8-K filed with the Commission on
November 12, 1997; and
4. The description of the Sequana Common Stock contained in the
Registration Statement on Form 8-A filed with the Commission on June 14,
1995.
1
<PAGE> 12
The information relating to Arris and Sequana contained in this Joint Proxy
Statement/Prospectus does not purport to be comprehensive and should be read
together with the information in the documents incorporated by reference herein.
All documents filed by Arris and Sequana pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the date of the Arris Special Meeting and the
Sequana Special Meeting shall be deemed to be incorporated by reference into
this Joint Proxy Statement/Prospectus and to be a part hereof from the dates of
filing such documents or reports. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which is also incorporated or is deemed to be
incorporated herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Joint Proxy Statement/Prospectus.
------------------------
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE
AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM A COPY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS HAS BEEN DELIVERED UPON WRITTEN OR ORAL REQUEST TO ARRIS
PHARMACEUTICAL CORPORATION, 180 KIMBALL WAY, SOUTH SAN FRANCISCO, CALIFORNIA
94080, ATTENTION: INVESTOR RELATIONS, TELEPHONE (650) 829-1000, WITH RESPECT TO
DOCUMENTS RELATING TO ARRIS, OR TO SEQUANA THERAPEUTICS, INC., 11099 NORTH
TORREY PINES ROAD, SUITE 160, LA JOLLA, CALIFORNIA 9237, ATTENTION: INVESTOR
RELATIONS, TELEPHONE (619) 452-6550, WITH RESPECT TO DOCUMENTS RELATING TO
SEQUANA. IN ORDER TO ENSURE DELIVERY PRIOR TO THE SPECIAL MEETINGS, REQUESTS
SHOULD BE RECEIVED BY [JANUARY 2], 1998.
------------------------
This Joint Proxy Statement/Prospectus is being furnished to Arris'
stockholders in connection with the solicitation of proxies by the Arris Board
of Directors for use at the Arris Special Meeting and to Sequana's shareholders
in connection with the solicitation of proxies by the Sequana Board of Directors
for use at the Sequana Special Meeting. Each copy of this Joint Proxy
Statement/Prospectus mailed to the Arris stockholders is accompanied by a form
of proxy for use at the Arris Special Meeting and each copy of this Joint Proxy
Statement/Prospectus mailed to the Sequana shareholders is accompanied by a form
of proxy for use at the Sequana Special Meeting. This Joint Proxy
Statement/Prospectus is also being furnished by Arris to holders of Sequana
Common Stock as a prospectus in connection with the shares of the Arris Common
Stock to be issued upon consummation of the Merger.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING AND THE SOLICITATION MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY ARRIS, MERGER SUB OR SEQUANA. THIS
JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS NOT BEEN ANY CHANGE
IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF EITHER ARRIS OR SEQUANA
SINCE THE DATE HEREOF.
------------------------
This Joint Proxy Statement/Prospectus contains trademarks of Arris and
Sequana as well as trademarks of other companies.
2
<PAGE> 13
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. This summary is not, and is not intended
to be, complete by itself. This Joint Proxy Statement/Prospectus contains
forward-looking statements that involve risks and uncertainties. Arris' and
Sequana's actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus, and in the documents incorporated herein by reference.
This summary is qualified in its entirety by reference to the more detailed
information contained elsewhere in this Joint Proxy Statement/Prospectus, the
appendices attached hereto and the documents referred to or incorporated by
reference herein. Stockholders of Arris and shareholders of Sequana are urged to
review carefully all of the information contained in this Joint Proxy
Statement/Prospectus, the Reorganization Agreement attached as Appendix A and
the other appendices attached hereto.
THE COMPANIES
ARRIS PHARMACEUTICAL CORPORATION
Arris uses an integrated drug discovery approach combining structure-based
drug design, combinatorial chemistry and its proprietary Delta Technology to
discover and develop small molecule therapeutics for existing markets where
available 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 auto-immune
disease.
Arris was incorporated in Delaware in April 1989. The principal executive
offices of Arris are located at 180 Kimball Way, South San Francisco, California
94080 (the "Arris Principal Offices"). Arris' telephone number is (650)
829-1000.
SEQUANA THERAPEUTICS, INC.
Sequana is a leading genomics company that uses industrial-scale gene
discovery and functional genomics technologies to facilitate the development and
commercialization of prognostic, diagnostic and therapeutic products. Sequana
has ongoing discovery programs in asthma, diabetes, obesity, osteoporosis,
schizophrenia and manic depression, among other important disease areas, and has
scientific collaborations with several major pharmaceutical companies worldwide.
Sequana was incorporated in California in February 1993. The principal
executive offices of Sequana are located at 11099 North Torrey Pines Road, Suite
160, La Jolla, California 92037 (the "Sequana Principal Offices"). Sequana's
telephone number is (619) 452-6550.
BEAGLE ACQUISITION SUB, INC.
Merger Sub is a corporation recently organized as a wholly owned subsidiary
of Arris for the purpose of effecting the Merger. Merger Sub has no material
assets and has not engaged in any activities except in connection with the
Merger.
The principal executive offices of Merger Sub are located at 180 Kimball
Way, South San Francisco, California 94080. Merger Sub's telephone number is
(650) 829-1000.
THE ARRIS SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Arris Special Meeting will be held at the Arris Principal Offices on
[Wednesday, January 7], 1998 at 9:00 a.m. local time. The purpose of the Arris
Special Meeting is to vote upon proposals to: (i) approve the issuance of Arris
Common Stock in connection with the Merger pursuant to the Reorganization
Agreement (the "Share Issuance Proposal") (ii) to approve the Certificate of
Amendment (the "Arris Certificate of Amendment") of the Amended and Restated
Certificate of Incorporation of Arris (collectively with the Arris
3
<PAGE> 14
Certificate of Amendment, the "Arris Certificate of Incorporation"), the form of
which is attached hereto as Appendix B, that provides for (a) a change in Arris'
corporate name to AxyS Pharmaceuticals, Inc. and (b) an increase by 20,000,000
shares in the number of shares of capital stock authorized and in the number of
shares of Arris Common Stock authorized for issuance to 60,000,000 shares and
50,000,00 shares, respectively (the "Certificate Proposal"); (iii) to approve a
new 1997 Equity Incentive Plan (the "Equity Incentive Plan") covering 2,500,000
shares of Arris Common Stock (the "Equity Incentive Plan Proposal"); (iv) to
approve the Arris 1994 Non-Employee Directors' Stock Option Plan, as amended
(the "Directors' Plan") to increase the number of shares of Arris Common Stock
issuable pursuant to options granted under such plan by 350,000 shares, to
475,000 shares (the "Directors' Option Plan Proposal"); and (v) to approve the
Arris Employee Stock Purchase Plan, as amended (the "Purchase Plan") to increase
the number of shares of Arris Common Stock issuable pursuant to rights granted
under such plan by 400,000 shares, to 650,000 shares (the "Purchase Plan
Proposal" and, together with the Equity Incentive Plan Proposal and the
Directors' Option Plan Proposal, the "Plan Proposals"). The Certificate Proposal
and the Equity Incentive Plan Proposal will be implemented only if the Merger is
consummated. Either Arris or Sequana may terminate the Reorganization Agreement
if the Certificate Proposal or the Share Issuance Proposal are not approved.
Holders of Arris Common Stock may also consider and vote upon such other matters
as may be properly brought before the Arris Special Meeting or any postponements
or adjournments thereof.
RECORD DATE AND VOTE REQUIRED
Only Arris stockholders of record at the close of business on November 24,
1997 (the "Arris Record Date") are entitled to vote at the Arris Special
Meeting. Approval of the Share Issuance Proposal and the Plan Proposals will
require approval by the affirmative vote of a majority of the shares present or
represented by proxy and entitled to vote. Approval of the Certificate Proposal
requires the affirmative vote of the holders of a majority of the outstanding
shares of Arris Common Stock entitled to vote.
This Joint Proxy Statement/Prospectus and accompanying Notice of Special
Meeting of Stockholders were mailed to all Arris' stockholders of record as of
the Arris Record Date and constitute notice of the Arris Special Meeting in
conformity with the requirements of the Delaware General Corporation Law (the
"DGCL").
THE SEQUANA SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Sequana Special Meeting will be held at the Sheraton Grande Torrey
Pines, 10950 North Torrey Pines Road, La Jolla, California on [Wednesday,
January 7], 1998 at 9:00 a.m. local time. The purpose of the Sequana Special
Meeting is to vote upon a proposal to adopt and approve the Merger, the
Reorganization Agreement and any action required in furtherance thereof (the
"Merger Proposal").
RECORD DATE AND VOTE REQUIRED
Only Sequana shareholders of record at the close of business on November
24, 1997 (the "Sequana Record Date") are entitled to vote at the Sequana Special
Meeting. The Merger Proposal will require approval by the affirmative vote of
the holders of a majority of the outstanding shares of Sequana Common Stock.
Certain directors, officers and other affiliates of Sequana, who together
hold approximately 19.3% of the Sequana Common Stock outstanding as of the
Sequana Record Date, have entered into voting agreements with Arris (the "Voting
Agreements") pursuant to which such directors, officers and other affiliates of
Sequana have agreed to vote in favor of the Merger Proposal and have granted
Arris an irrevocable proxy to vote their shares of Sequana Common Stock in favor
of the Merger Proposal. See "Approval of the Merger and Related
Transactions--Voting Agreements."
4
<PAGE> 15
This Joint Proxy Statement/Prospectus and accompanying Notice of Special
Meeting of Shareholders were mailed to all Sequana shareholders of record as of
the Sequana Record Date and constitute notice of the Sequana Special Meeting in
conformity with the requirements of the California General Corporation Law
("CGCL").
THE MERGER
GENERAL
At the Effective Time (as defined below), Merger Sub will merge with and
into Sequana, the separate existence of Merger Sub will cease and Sequana will
become a wholly owned subsidiary of Arris. It is currently anticipated that the
Effective Time will occur during January 1998. In addition, the Reorganization
Agreement provides that, subject to the terms and conditions thereof, at the
Effective Time, the following will occur:
Conversion of Sequana Common Stock. Subject to the provisions contained in
the Reorganization Agreement relating to the payment of cash in lieu of
fractional shares and Dissenter's Rights, each share of Sequana Common Stock
then outstanding will be converted into the right to receive one and thirty-five
one-hundredths (1.35) shares of Arris Common Stock (the "Exchange Ratio").
Sequana Stock Options. Contingent upon the closing of the Merger, all
rights with respect to outstanding options to purchase Sequana Common Stock
under the Sequana 1994 Incentive Stock Plan and the Sequana 1995 Director Option
Plan shall be fully exercisable during a period of fifteen days and thirty days,
respectively, prior to the Sequana Special Meeting and shall terminate on the
date of the Sequana Special Meeting. Options initially granted pursuant to an
option plan of NemaPharm, Inc., a wholly owned subsidiary of Sequana
("NemaPharm"), will be similarly treated. Arris has agreed to grant options to
purchase Arris Common Stock to Sequana employees effective upon the first
meeting of the Arris Board of Directors following the Effective Time,
commensurate with option grants to newly hired employees at similar grade
levels. See "The Reorganization Agreement--Stock Options; Employee Stock
Purchase Plan; Warrants."
Sequana Employee Stock Purchase Plan. The Sequana Board of Directors will
shorten the offering periods in progress under Sequana's 1995 Employee Stock
Purchase Plan of Sequana (the "Sequana Purchase Plan") by providing that the
date of the Sequana Special Meeting will be treated as the last day of such
offering periods. The Sequana Board of Directors will not thereafter commence
any offering period under the Sequana Purchase Plan. Subject to the terms of
Arris' Purchase Plan and applicable law, Arris will take all reasonable actions
to allow Sequana employees to participate in Arris' Purchase Plan from the
Effective Time. See "The Reorganization Agreement--Stock Options; Employee Stock
Purchase Plan; Warrants."
Sequana Warrants. Unless otherwise provided by the terms of each
outstanding warrant to purchase securities of Sequana (the "Sequana Warrants"),
all rights with respect to Sequana Common Stock under the Sequana Warrants will
be converted into and become rights with respect to Arris Common Stock, and
Arris will assume each such Sequana Warrant in accordance with its terms
(subject to appropriate adjustments to the exercise price and number of shares
subject thereto based upon the Exchange Ratio). See "The Reorganization
Agreement--Stock Options; Employee Stock Purchase Plan; Warrants."
EFFECTIVE TIME OF THE MERGER; CLOSING DATE
The Merger will become effective upon the filing of an Agreement of Merger
with the Secretary of State of the State of California or at such later time as
may be specified in the Agreement of Merger (the "Effective Time"). The
consummation of the transactions contemplated by the Reorganization Agreement
will take place on a date to be agreed by Arris and Sequana (the "Closing
Date"), which will be no later than the tenth business day after the
satisfaction or waiver of all of the conditions to closing set forth in the
Reorganization Agreement. Assuming that all of the conditions to the Merger are
satisfied or waived, it is anticipated that the Merger will be consummated in
January 1998.
5
<PAGE> 16
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of Sequana Common Stock issued and
outstanding as of November 25, 1997 (assuming the exercise of all outstanding
options and warrants to purchase Sequana Common Stock expiring upon or before
the consummation of the Merger with an exercise price of $12.31 (the closing
price of Sequana Common Stock as reported on the Nasdaq National Market on
November 25, 1997) or less and no exercise of other outstanding rights to
purchase Sequana Common Stock), an aggregate of approximately 14,700,000 shares
of Arris Common Stock will be issued to security holders of Sequana. Based upon
the number of shares of Arris Common Stock issued and outstanding as of November
25, 1997 (assuming no exercise of outstanding options or other rights to
purchase Arris Common Stock), and after giving effect to the additional shares
of Arris Common Stock that are proposed to be issued in the Merger under the
same assumptions, the former holders of Sequana Common Stock would hold
approximately 49.2% of Arris' total issued and outstanding shares after
consummation of the Merger.
EXCHANGE OF SEQUANA STOCK CERTIFICATES
As soon as reasonably practicable after the Effective Time, ChaseMellon
Shareholder Services (the "Exchange Agent") will mail to the holders of Sequana
Common Stock (i) a letter of transmittal (the "Letter of Transmittal") with
respect to the surrender of valid certificates representing shares of Sequana
Common Stock (the "Sequana Stock Certificates") in exchange for certificates
representing Arris Common Stock and (ii) instructions for use of the Letter of
Transmittal. SEQUANA SHAREHOLDERS SHOULD NOT SURRENDER THEIR SEQUANA STOCK
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. See "The
Reorganization Agreement--Conversion of Shares; Procedures for Exchange of
Certificates."
SEQUANA'S REASONS FOR THE MERGER
The Sequana Board of Directors considered a wide variety of information and
a number of factors in connection with its evaluation of the proposed Merger and
the Reorganization Agreement, and determined that the Merger provides an
opportunity that serves the best interests of Sequana and its shareholders. The
Sequana Board of Directors believes that the Merger may result in a number of
benefits to Sequana and its shareholders, including, among other benefits, the
following: (i) the combination of technologies and capabilities of Sequana and
Arris would create a combined company with a broad-based technological platform
and a strategic and market position beyond that achievable by Sequana alone; and
(ii) the greater strategic, financial and personnel resources, including
potential access to a greater number of corporate partners, of the combined
company should result in operational efficiencies and synergies. See "Approval
of the Merger and Related Transactions--Sequana's Reasons for the Merger."
RECOMMENDATION OF THE SEQUANA BOARD OF DIRECTORS
THE SEQUANA BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE FOR ADOPTION AND APPROVAL OF THE
REORGANIZATION AGREEMENT AND APPROVAL OF THE MERGER BY THE SHAREHOLDERS OF
SEQUANA.
OPINION OF FINANCIAL ADVISOR TO SEQUANA
Lehman Brothers Inc. ("Lehman Brothers") delivered its opinion dated
November 2, 1997 (the "Lehman Opinion") to the Sequana Board of Directors on
November 2, 1997 that, as of the date of such opinion and subject to various
considerations set forth therein, the Exchange Ratio was fair from a financial
point of view to the shareholders of Sequana Common Stock. The full text of the
Lehman Opinion, which sets forth, among other things, assumptions made,
procedures followed, matters considered and limitations on the scope of the
review undertaken in connection with the Lehman Opinion, is attached hereto as
Appendix C-2 and is incorporated herein by reference. Holders of Sequana Common
Stock are urged to, and should, read the
6
<PAGE> 17
Lehman Opinion in its entirety. See "Approval of the Merger and Related
Transactions--Opinion of Financial Advisor to Sequana."
ARRIS' REASONS FOR THE MERGER
The Arris Board of Directors considered a wide variety of information and a
number of factors in connection with its evaluation of the proposed Merger and
the Reorganization Agreement, and determined that the Merger provides an
opportunity that serves the best interests of Arris and its stockholders. The
Arris Board of Directors believes that the Merger may result in a number of
benefits to Arris and its stockholders, including, among other benefits, the
following: (i) the combined company's increased pipeline of drug targets is
expected to increase the probability of finding and developing safe and
efficacious drug candidates and improve the combined company's competitive
position; (ii) the strategic fit between Arris and Sequana would create a new
entity that could offer a broad array of discovery technologies to its corporate
partners thereby reducing the number of collaborations necessary for such
partners to take advantage of available drug discovery techniques; and (iii) the
potential access to greater financial resources, more collaborative agreements,
more scientists and more physical plant would provide increased flexibility and
enhance the efficiency of research and development efforts. See "Approval of the
Merger and Related Transactions--Arris' Reasons for the Merger."
RECOMMENDATION OF THE ARRIS BOARD OF DIRECTORS
THE ARRIS BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF
SHARES OF ARRIS COMMON STOCK PURSUANT TO THE REORGANIZATION AGREEMENT BY THE
STOCKHOLDERS OF ARRIS. THE ARRIS BOARD OF DIRECTORS ALSO UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF THE CERTIFICATE OF AMENDMENT, FOR APPROVAL OF THE EQUITY
INCENTIVE PLAN, FOR APPROVAL OF THE DIRECTORS' OPTION PLAN, AS AMENDED AND FOR
APPROVAL OF THE PURCHASE PLAN, AS AMENDED.
OPINION OF FINANCIAL ADVISOR TO ARRIS
Morgan Stanley & Co. Incorporated ("Morgan Stanley") delivered its opinion
dated October 31, 1997 (the "Morgan Stanley Opinion") to the Arris Board of
Directors that, as of the date of such opinion and subject to the various
considerations set forth therein, the Exchange Ratio was fair from a financial
point of view to the holders of Arris Common Stock. The full text of the Morgan
Stanley Opinion, which sets forth, among other things, assumptions made,
procedures followed, matters considered and limitations on the scope of the
review undertaken in connection with the Morgan Stanley Opinion, is attached
hereto as Appendix C-1 and is incorporated herein by reference. Holders of Arris
Common Stock are urged to, and should, read the Morgan Stanley Opinion in its
entirety. See "Approval of the Merger and Related Transactions--Opinion of
Financial Advisor to Arris."
NON-SOLICITATION
Pursuant to the Reorganization Agreement, Sequana and Arris each have
agreed not to directly or indirectly take certain actions that may encourage an
Acquisition Proposal (as defined under "The Reorganization
Agreement--Covenants"). However, Arris and Sequana may each furnish information
and enter into discussions or negotiations in response to a bona fide,
unsolicited acquisition proposal if and only to the extent that the board of
directors of the company receiving the proposal determines in good faith, after
consultation with its financial advisor that the acquisition proposal is
reasonably likely to result in an offer superior to the one proposed in the
Reorganization Agreement, and after consultation with its outside counsel that
such action is required in order for the relevant board of directors to comply
with its fiduciary obligations. See "The Reorganization
Agreement--Covenants--Non-Solicitation."
7
<PAGE> 18
CONDUCT OF BUSINESS
Pursuant to the Reorganization Agreement, Sequana has made certain
covenants regarding the conduct of its business during the period from the date
of the execution of the Reorganization Agreement through the Effective Time,
including, without limitation, covenants to: (i) provide Arris with access to
certain information regarding its business; (ii) conduct its business and
operations (a) in the ordinary course and in accordance with past practices and
(b) in compliance (in all material respects) with legal requirements and
material contracts; (iii) use all reasonable efforts to preserve its business
organization and the services of its current officers and employees and maintain
its relations and goodwill with suppliers, customers, landlords, creditors,
licensors, licensees, employees and other persons; (iv) maintain insurance
policies; (v) provide all reasonable notices, assurances and support required by
any material contract relating to proprietary assets; and (vi) cause its
officers to report regularly to Arris concerning the status of the business of
Sequana. In addition, Sequana has agreed not to take or to agree to take certain
specific actions. Arris has made similar covenants, although its covenants
related to specific actions are different from those of Sequana. See "The
Reorganization Agreement--Covenants--Conduct of Sequana's Business" and
"--Conduct of Arris' Business."
THE COMPOSITION OF THE ARRIS BOARD OF DIRECTORS
Arris must use all reasonable efforts to nominate and elect a board of nine
persons after the Effective Time, to serve until the next annual election of
directors, and to cause each of such directors to be nominated for an additional
one year term. Mr. John Walker, the President and Chief Executive Officer of
Arris and Mr. Irwin Lerner, the Chairman of the Board of Directors of Sequana,
will meet and discuss the selection of the nine persons. If Messrs. Walker and
Lerner are unable to agree on the nine members, then Mr. Walker shall propose
five nominees who must be reasonably acceptable to Sequana and Mr. Lerner shall
propose four nominees who must be reasonably acceptable to Arris. The selection
process must be completed at least 30 days prior to the date of the Arris
Special Meeting and the Sequana Special Meeting. Supplemental information will
be distributed to the Arris stockholders and the Sequana shareholders upon
completion of the selection process.
CONDITIONS TO THE MERGER
The obligations of Arris and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction or waiver of certain conditions relating to, among
other things: (i) the accuracy of the representations and warranties of Sequana
contained in the Reorganization Agreement (subject to certain materiality
limitations); (ii) the performance in all material respects by Sequana of
certain covenants and obligations contained in the Reorganization Agreement;
(iii) the effectiveness of the Registration Statement; (iv) the approval of the
Reorganization Agreement and Merger by the Required Sequana Shareholder Vote and
the approval of the issuance of Arris Common Stock in the Merger and the related
increase in authorized Arris Common Stock by the Required Arris Stockholder
Vote; (v) a vote against approval of the Reorganization Agreement and Merger by
fewer than nine percent of the outstanding shares of Sequana Common Stock; (vi)
receipt of certain consents; (vii) receipt of certain certificates and legal
opinions; (viii) the absence of any material adverse change to Sequana; (ix) the
approval for listing of the Arris Common Stock to be issued in the Merger on the
Nasdaq National Market; (x) the absence of restraining orders, injunctions and
other orders preventing the consummation of the Merger; (xi) the absence of
certain litigation or administrative actions or proceedings; and (xii) amendment
of certain warrants to purchase Sequana Common Stock to allow assumption of such
warrants by Arris.
The obligation of Sequana to effect the Merger and otherwise consummate the
transactions contemplated by the Reorganization Agreement is subject to the
satisfaction of certain conditions relating to: (i) the accuracy of the
representations and warranties of Arris contained in the Reorganization
Agreement (subject to certain materiality limitations); (ii) the performance in
all material respects by Arris of certain covenants and obligations contained in
the Reorganization Agreement; (iii) the effectiveness of the Registration
Statement; (iv) the approval of the Reorganization Agreement and Merger by the
Required Sequana Shareholder Vote and the approval of the issuance of Arris
Common Stock in the Merger and the related
8
<PAGE> 19
increase in authorized Arris Common Stock by the Required Arris Stockholder
Vote; (v) receipt of certain legal opinions and a certificate; (vi) the absence
of any material adverse change to Arris; (vii) the approval for listing of
Arris' Common Stock to be issued in the Merger on the Nasdaq National Market;
(viii) the absence of restraining orders, injunctions and other orders
preventing the consummation of the Merger; and (ix) the taking of all actions
necessary by Arris to cause the Arris Board of Directors to be constituted of
persons selected in accordance with procedures agreed between Arris and Sequana.
See "The Reorganization Agreement -- Conditions to the Merger."
TERMINATION
The Reorganization Agreement may be terminated prior to the Effective Time,
whether before or after approval of the Merger by the stockholders of Arris and
the shareholders of Sequana: (i) by mutual written consent of Arris and Sequana;
(ii) subject to certain exceptions, by either Arris or Sequana if the Merger
shall not have been consummated by March 31, 1998; (iii) by either Arris or
Sequana in connection with certain legal or governmental actions having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; (iv) subject to certain limitations, by Arris or Sequana if the Sequana
Shareholders' Meeting shall have been held and the Reorganization Agreement and
the Merger shall not have been approved by the Required Sequana Shareholder
Vote; (v) subject to certain limitations, by Arris or Sequana if the Arris
Stockholders' Meeting shall have been held and the issuance of Arris Common
Stock in the Merger shall not have been approved by the Required Arris
Stockholder Vote; (vi) by Sequana if (a) the Arris Board of Directors withdraws
or amends in a way adverse to Sequana its unanimous recommendation (among those
directors present) in favor of the Merger and approval of the Reorganization
Agreement, (b) Arris shall have failed to include in this Joint Proxy
Statement/Prospectus such recommendation of its board, (c) the Arris Board of
Directors fails to reaffirm its unanimous recommendation (among those directors
present) within five business days of Sequana's request, (d) the Arris Board of
Directors shall have approved, endorsed or recommended a proposal for, or
entered into a letter of intent or contract relating to, the acquisition of
Arris (as defined in the Reorganization Agreement), (e) Arris shall have failed
to timely hold the Arris Stockholders' Meeting, (f) subject to certain
limitations, a tender or exchange offer for Arris' securities shall have been
commenced and Arris does not within five days recommend rejection of such tender
or exchange offer, or (g) a proposal to acquire Arris is publicly announced and
Arris does not issue a press release announcing its opposition to the proposal
within five days (any such event an "Arris Triggering Event"); (vii) by Arris if
(a) the Sequana Board of Directors withdraws or amends in a way adverse to Arris
its unanimous recommendation in favor of the Merger and approval of the
Reorganization Agreement, (b) Sequana shall have failed to include in this Joint
Proxy Statement/Prospectus such recommendation of its board, (c) the Sequana
Board of Directors fails to reaffirm its unanimous recommendation within five
business days of Arris' request, (d) the Sequana Board of Directors shall have
approved, endorsed or recommended a proposal for, or entered into a letter of
intent or contract relating to, the acquisition of Sequana (as defined in the
Reorganization Agreement), (e) Sequana shall have failed to timely hold the
Sequana Shareholders' Meeting, (f) subject to certain limitations, a tender or
exchange offer for Sequana's securities shall have been commenced and Sequana
does not within five days recommend rejection of such tender or exchange offer,
or (g) a proposal to acquire Sequana is publicly announced and Sequana does not
issue a press release announcing its opposition to the proposal within five days
(any such event a "Sequana Triggering Event"); (viii) by Arris, subject to
certain limitations, if any of Sequana's representations and warranties
contained in the Reorganization Agreement shall be or shall have become
materially inaccurate or if any of Sequana's covenants in the Reorganization
Agreement shall have been breached; (ix) by Sequana, subject to certain
limitations, if any of Arris' representations and warranties contained in the
Reorganization Agreement shall be or shall have become materially inaccurate or
if any of Arris' covenants contained in the Reorganization Agreement shall have
been breached; (x) by Arris if there has been an Arris Triggering Event and the
Arris Board of Directors has approved, endorsed or recommended a proposal (not
from Sequana) to acquire Arris or (xi) by Sequana if there has been a Sequana
Triggering Event and the Sequana Board of Directors has approved, endorsed or
recommended a proposal (not from Arris) to acquire Sequana. See "The
Reorganization Agreement--Termination."
9
<PAGE> 20
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, all fees and expenses incurred in
connection with the Reorganization Agreement and the transactions contemplated
by the Reorganization Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that
Arris and Sequana shall share equally all fees and expenses incurred in
connection with the printing and filing of this Joint Proxy Statement/Prospectus
and the Registration Statement of which this Joint Proxy Statement/Prospectus is
a part. If the Reorganization Agreement is terminated under certain
circumstances, the terminating party will be required to pay the other party
certain nonrefundable fees. See "The Reorganization Agreement--Expenses and
Termination Fee."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Sequana's management and Board of Directors may be
deemed to have certain interests in the Merger that are in addition to their
interests as shareholders of Sequana generally. The Sequana Board of Directors
was aware of these interests and considered them, among other matters, in
approving the Reorganization Agreement and the transactions contemplated
thereby.
Indemnification and Insurance. The Reorganization Agreement provides that
all rights to indemnification existing in favor of the persons serving as
directors and officers of Sequana as of the date of the Reorganization Agreement
for acts or omissions occurring prior to the Effective Time, as provided in the
bylaws of Sequana (the "Sequana Bylaws") and in certain indemnification
agreements between Sequana and such directors and officers, will survive the
Merger, and that Arris will cause the Surviving Corporation to perform its
obligations arising thereunder for at least six years from the Effective Time.
Subject to certain limitations, Arris has also agreed to cause the Surviving
Corporation to maintain in effect for six years after the Effective Time a
policy of directors' and officers' liability insurance in existence at the date
of the Reorganization Agreement for the benefit of persons serving as directors
and officers of Sequana as of such date.
Acceleration of Certain Stock Options. All stock options granted by
Sequana, including those held by officers and directors of Sequana, will become
exercisable (including as to shares not otherwise vested) prior to the Sequana
Special Meeting contingent upon the consummation of the Merger.
Employment/Severance Arrangements. Sequana has entered into certain
employment and severance agreements with certain of its executive officers and
other management. Arris intends to enter into employment agreements with certain
current Sequana officers following consummation of the Merger. See "Approval of
the Merger and Related Transactions--Interests of Certain Persons in the
Merger."
Similarly, certain members of the Arris Board of Directors may have
interests in the Merger that are in addition to their interests as stockholders
in Arris generally. In particular, it is the current intention of Arris to fully
vest all options of those Arris Board members who resign in order to cause the
Arris Board of Directors to consist of those persons selected in accordance with
the procedures set forth in the Reorganization Agreement. See "Approval of the
Merger and Related Transactions -- Interests of Certain Persons in the Merger."
VOTING AGREEMENTS
Pursuant to the Arris Voting Agreements, Sequoia Capital VI, Sequoia
Technology Partners VI, Sequoia XXIII, Sequoia XXIV, Carlyle-Sequana Investors
II, L.P., Carlyle-Sequana Investors, LLC, Kevin J. Kinsella and certain trusts
of which he is trustee and New Enterprise Associates VI (individually, a "Voting
Agreement Shareholder" and, collectively, the "Voting Agreement Shareholders"),
who, as of the Record Date, beneficially owned in the aggregate approximately
19.3% of the outstanding shares of Sequana Common Stock, have agreed that,
subject to certain limitations, they will vote their shares of Sequana Common
Stock in favor of: (i) the Merger, (ii) the execution and delivery by Sequana of
the Reorganization Agreement, (iii) the approval of the terms thereof, and (iv)
each of the other actions contemplated by the Reorganization Agreement and any
action required in furtherance thereof. The Voting Agreement Shareholders have
also delivered to Arris irrevocable proxies with respect to such matters. See
"Approval of the Merger and Related Transactions--Voting Agreements."
10
<PAGE> 21
AFFILIATE AGREEMENTS
Sequana has made a covenant to deliver to Arris prior to the Sequana
Shareholders' Meeting executed agreements that restrict the sale, transfer or
other disposition of Sequana Common Stock received in the Merger from certain
shareholders of Sequana who may be deemed to be affiliates of Sequana for
purposes of Rule 145 under the Securities Act, in order to comply with the
requirements of certain federal securities laws. See "Approval of the Merger and
Related Transactions--Affiliate Agreements" and "--Resale of Arris Common
Stock."
REGISTRATION RIGHTS
Arris must use all reasonable efforts to cause persons who have
registration rights with Sequana to become parties to an existing registration
rights agreement of Arris, provided that Arris shall also use all reasonable
efforts to cause such registration rights agreement to be amended so that it
will not be effective until the earlier of the date 90 days after the first
public offering of Arris Common Stock after the Effective Time and the first
anniversary of the Effective Time. See "Reorganization Agreement -- Covenants --
Registration Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to be a tax-free reorganization for federal income
tax purposes, so that no gain or loss will be recognized by the Sequana
shareholders on the exchange of Sequana Common Stock for Arris Common Stock,
except to the extent that Sequana shareholders receive cash in lieu of
fractional shares. The Reorganization Agreement does not require the parties to
obtain a ruling from the Internal Revenue Service as to the tax consequences of
the Merger. As a condition to the closing of the Merger, Sequana and Arris are
to receive opinions from their respective counsel that, based on certain
assumptions and certifications, the Merger will be treated as a tax-free
reorganization for federal income tax purposes. SEQUANA SHAREHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THESE OF THE MERGER. See "Approval of the Merger and Related
Transactions--Certain Federal Income Tax Consequences."
ANTICIPATED ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a purchase for financial
reporting purposes in accordance with generally accepted accounting principles.
See "Approval of the Merger and Related Transactions--Anticipated Accounting
Treatment."
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of Sequana Common Stock are generally entitled to dissenters'
rights with respect to the Merger under the CGCL, if, and only if, the holders
of 5% or more of the outstanding Sequana Common Stock elect to exercise
dissenters' rights in respect of their shares. If the Merger is approved by the
affirmative vote of the holders of a majority of the outstanding Sequana Common
Stock and is not terminated in accordance with the Merger Agreement, Sequana's
shareholders who vote against the Merger and who have fully complied with all
applicable provisions of the CGCL and whose shares constitute Sequana Dissenting
Shares (as defined below) will have the right to require Sequana to purchase
their shares of Sequana Common Stock held by them for cash at the fair market
value thereof as of the date preceding the public announcement of the Merger,
excluding any appreciation or depreciation resulting from the Merger but
adjusted for any stock split, reverse stock split or share dividend which
becomes effective thereafter. Under the CGCL, no shareholder of Sequana who is
entitled to exercise dissenters' rights has any right at law or in equity to
contest the validity of the Merger or to have the Merger set aside or rescinded,
except in an action to test whether the number of shares required to authorize
or approve the Merger had legally been voted in favor of the Merger. For a more
detailed description the procedures applicable to the exercise of dissenters'
rights, see "Approval of the Merger and Related Transactions--Rights of
Dissenting Shareholders." The full text of the pertinent
11
<PAGE> 22
statutory provisions of the CGCL relating to the proper exercise of such
dissenters' rights is attached hereto as Appendix D and should be read carefully
and in its entirety.
Holders of Arris Common Stock are not entitled to appraisal rights under
the DGCL because Arris is not a constituent corporation to the Merger under the
DGCL.
RISK FACTORS
The Merger and an investment in securities of Arris involve certain risks
and uncertainties, including risks related to the integration of Arris and
Sequana, risks associated with a fixed Exchange Ratio, risks relating to the
respective businesses of Arris and Sequana and other risks and uncertainties
discussed under "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus and in the documents incorporated herein by reference. See
"Risk Factors."
MARKETS AND MARKET PRICES
Arris Common Stock is listed on the Nasdaq National Market under the symbol
"ARRS." On October 31, 1997, the last trading day before the announcement by
Arris and Sequana that they had entered into the Reorganization Agreement, the
closing sale price of Arris Common Stock as reported on the Nasdaq National
Market was $12.00 per share. On November 25, 1997, the closing sale price of
Arris Common Stock as reported on the Nasdaq National Market was $9.56. There
can be no assurance as to the actual price of Arris Common Stock prior to, at or
at any time following the Effective Time.
Sequana Common Stock is traded on the Nasdaq National Market under the
symbol "SQNA." On October 31, 1997, the last trading day before the announcement
by Arris and Sequana that they had entered into the Reorganization Agreement,
the closing sale price of Sequana Common Stock as reported by the Nasdaq
National Market was $11.13 per share. Following the Merger, Sequana Common Stock
will cease to be traded on Nasdaq. On November 25, 1997, the closing sale price
of Sequana Common Stock as reported by the Nasdaq National Market was $12.31.
There can be no assurance as to the actual price of Sequana Common Stock prior
to or at the Effective Time. See "Risk Factors--Risks Relating to the
Merger--Risks Associated with Fixed Exchange Ratio" and "Comparative Per Share
Market Price Data and Dividend Policy."
Following the Merger, assuming necessary approvals, Arris will change its
corporate name to AxyS Pharmaceuticals, Inc. Arris will apply to have the Arris
Common Stock, including the Arris Common Stock issuable upon the exchange for
Sequana Common Stock, approved for quotation on the Nasdaq National Market under
the symbol "AXPH."
12
<PAGE> 23
SELECTED HISTORICAL FINANCIAL INFORMATION OF ARRIS
The following selected historical consolidated financial data of Arris at
December 31, 1995 and 1996 and for the three years ended December 31, 1996
should be read in conjunction with the audited consolidated financial statements
of Arris and related notes thereto, all of which are incorporated by reference
in this Joint Proxy Statement/Prospectus. The selected historical financial
information of Arris as of and for the nine months ended September 30, 1997 has
been derived from the unaudited consolidated financial statements of Arris and,
in the opinion of Arris' management, reflects all adjustments necessary for the
fair presentation of such unaudited interim financial information. The selected
historical financial information as of December 31, 1992, 1993 and 1994 and for
the years ended December 31, 1992 and 1993 has been derived from Arris' audited
consolidated financial statements which are not included or incorporated by
reference herein.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------ SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- ------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ -- $ 2,542 $ 8,304 $ 16,727 $21,560 $18,413
Operating loss.................... (8,525) (8,651) (8,861) (24,723) (8,398) (9,560)
Net loss.......................... (8,593) (8,479) (8,339) (23,733) (5,928) (7,754)
Net loss per share................ $ (2.15) $ (2.10) $ (0.97) $ (2.71) $ (0.45) $ (0.52)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- ------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................... $11,934 $31,063 $34,786 $ 40,293 $80,832 $72,852
Total loans and capital lease
obligations, less current
portion........................ 1,095 1,130 1,645 3,263 8,703 13,255
Total stockholders' equity........ (16,288) 21,654 13,425 7,278 52,900 46,652
</TABLE>
13
<PAGE> 24
SELECTED HISTORICAL FINANCIAL INFORMATION OF SEQUANA
The following selected historical consolidated financial data of Sequana at
December 31, 1995 and 1996 and for the three years ended December 31, 1996
should be read in conjunction with the audited consolidated financial statements
of Sequana and related notes thereto, all of which are incorporated by reference
in this Joint Proxy Statement/Prospectus. The selected historical financial
information of Sequana as of and for the nine months ended September 30, 1997
has been derived from the unaudited consolidated financial statements of Sequana
and, in the opinion of Sequana's management, reflects all adjustments necessary
for the fair presentation of such unaudited interim financial information. The
selected historical financial information as of December 31, 1993 and 1994 and
for the period from February 3, 1993 (inception) through December 31, 1993 has
been derived from Sequana's audited consolidated financial statements which are
not included or incorporated by reference herein.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 3, 1993 NINE
(INCEPTION) MONTHS
THROUGH YEARS ENDED DECEMBER 31, ENDED
DECEMBER 31, -------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997
---------------- ------- ------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues........................ $ -- $ 2,389 $10,762 $ 9,705 $ 12,966
Operating loss.................. (2,374) (6,719) (7,455) (25,063) (13,195)
Net loss........................ (2,379) (6,646) (6,070) (22,219) (12,502)
Net loss per share.............. $ (1.26) $ (2.02) $ (0.92) $ (2.31) $ (1.22)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997
---------------- ------- ------- -------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................... $ 2,728 $21,108 $48,001 $ 66,093 $ 68,290
Total loans and capital lease
obligations, less current
portion...................... -- 2,156 2,804 4,524 7,313
Total shareholders' equity...... 1,039 17,318 38,774 51,849 48,793
</TABLE>
14
<PAGE> 25
ARRIS PHARMACEUTICAL CORPORATION AND SEQUANA THERAPEUTICS, INC.
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The following pages 16 through 19 contain the unaudited pro forma combined
condensed balance sheet as of September 30, 1997, the unaudited pro forma
combined condensed statements of operations for the year ended December 31, 1996
and the nine months ended September 30, 1997 and the notes thereto.
The unaudited pro forma combined condensed balance sheet and the unaudited
pro forma combined condensed statements of operations (collectively, the
"Unaudited Pro Forma Statements") were prepared to give effect to the Merger
accounted for under the purchase method of accounting. The unaudited pro forma
combined condensed balance sheet assumes that the Merger occurred on September
30, 1997. The unaudited pro forma combined condensed statements of operations
assume that the Merger occurred on January 1, 1996. The Unaudited Pro Forma
Statements are based on the historical consolidated financial statements of
Arris and Sequana under the assumptions and adjustments set forth in the
accompanying notes to the Unaudited Pro Forma Statements. The combined condensed
financial information for the fiscal year ended December 31, 1996 has been
obtained from the consolidated financial statements of Arris and Sequana which
have been audited by Ernst & Young LLP, the independent auditors for both Arris
and Sequana. The selected financial data for Arris and Sequana for the
nine-month period ended September 30, 1997 has been obtained from their
respective unaudited financial statements and includes, in the opinion of Arris'
and Sequana's management, all adjustments necessary to present fairly the data
for such period. The Unaudited Pro Forma Statements may not be indicative of the
results that actually would have occurred if the Merger had been in effect on
the dates indicated or which may be obtained in the future.
The pro forma adjustments are based upon available information and upon
certain assumptions as described in the notes to the Unaudited Pro Forma
Statements that Arris' management believes are reasonable in the circumstances.
The purchase price has been allocated to the acquired assets and liabilities
based on a preliminary determination from an independent appraisal of their
respective fair values. In accordance with generally accepted accounting
principles, the amount allocated to in-process technology will be charged to
expense in the quarter in which the Merger is consummated. This adjustment has
been excluded from the unaudited pro forma combined condensed statements of
operations as it is a nonrecurring item. Although Arris believes, based on
available information, that the fair values and allocation of the purchase price
included in the Unaudited Pro Forma Statements are reasonable estimates, final
purchase accounting adjustments will be made on the basis of evaluations and
estimates made after the Merger is consummated. As a result, the final
allocation of costs related to the Merger may differ from that presented herein.
The Unaudited Pro Forma Statements and accompanying notes should be read in
conjunction with the separate consolidated financial statements and notes
thereto of Arris and Sequana which have been incorporated by reference in this
Proxy Statement.
15
<PAGE> 26
ARRIS PHARMACEUTICAL CORPORATION AND SEQUANA THERAPEUTICS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
PRO FORMA REFLECTING
ARRIS SEQUANA ADJUSTMENTS MERGER
------- -------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and short-term
investments................................. $55,319 $ 45,336 $ 100,655
Investment in Aurora Biosciences Corporation... -- 8,588 8,588
Prepaid expenses and other current assets...... 2,064 2,620 4,684
------- -------- ---------
Total current assets................... 57,383 56,544 113,927
Long-term marketable investments................. 995 -- 995
Property and equipment, net...................... 12,759 8,100 20,859
Investment in joint venture...................... -- 2,868 2,868
Other assets..................................... 1,715 778 $ 2,670(b) 5,163
------- -------- --------- ---------
Total Assets........................... $72,852 $ 68,290 $ 2,670 $ 143,812
======= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......... $ 4,457 $ 3,569 $ 4,985(a) $ 14,363
1,352(a)
Current portion of deferred revenue............ 6,886 4,741 11,627
Current portion of capital leases and debt
obligations................................. 1,519 3,874 5,393
------- -------- --------- ---------
Total current liabilities.............. 12,862 12,184 6,337 31,383
------- -------- --------- ---------
Deferred revenue, noncurrent..................... 83 -- 83
Capital lease and debt obligations, net of
current portion................................ 13,255 7,313 20,568
Stockholders' equity:
Common stock................................... 117,410 92,605 163,877(a) 281,287
(92,605)(d)
Note receivable from officer................... (200) (262) 262(d) (200)
Deferred compensation.......................... -- (866) 866(d) --
Unrealized gain on marketable equity
security.................................... -- 7,133 (7,133)(d) --
Accumulated deficit............................ (70,558) (49,817) 49,817(d) (189,309)
(118,751)(e)
------- -------- --------- ---------
Total stockholders' equity............. 46,652 48,793 (3,667) 91,778
------- -------- --------- ---------
Total Liabilities and Stockholders'
Equity............................... $72,852 $ 68,290 $ 2,670 $ 143,812
======= ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
16
<PAGE> 27
ARRIS PHARMACEUTICAL CORPORATION AND SEQUANA THERAPEUTICS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
PRO FORMA REFLECTING
ARRIS SEQUANA ADJUSTMENTS MERGER
------- -------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues..................................... $21,560 $ 9,705 $ 31,265
Operating expenses:
Research and development................... 24,319 26,397 $ 712(c) 51,428
General and administrative................. 5,409 5,005 178(c) 10,592
Acquired in-process research and
development............................. 230 3,366 3,596
------- -------- ------ --------
Total operating expenses........... 29,958 34,768 890 65,616
------- -------- ------ --------
Operating loss............................... (8,398) (25,063) (890) (34,351)
Interest income.............................. 3,140 3,277 6,417
Interest expense............................. (670) (433) (1,103)
------- -------- ------ --------
Net loss..................................... $(5,928) $(22,219) $ 890 $ (29,037)
======= ======== ====== ========
Net loss per share........................... $ (0.45) $ (2.31) $ (1.03)
======= ======== ========
Shares used in computing net loss per
share...................................... 13,177 9,625 28,107(f)
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
17
<PAGE> 28
ARRIS PHARMACEUTICAL CORPORATION AND SEQUANA THERAPEUTICS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
PRO FORMA REFLECTING
ARRIS SEQUANA ADJUSTMENTS MERGER
------- -------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues..................................... $18,413 $ 12,966 $ 31,379
Operating expenses:
Research and development................... 22,841 22,292 $ 534(c) 45,667
General and administrative................. 5,132 3,869 134(c) 9,135
------- -------- ------ --------
Total operating expenses........... 27,973 26,161 668 54,802
------- -------- ------ --------
Operating loss............................... (9,560) (13,195) (668) (23,423)
Equity in net loss of joint venture.......... -- (874) (874)
Interest income.............................. 2,513 2,020 4,533
Interest expense............................. (707) (453) (1,160)
------- -------- ------ --------
Net loss..................................... $(7,754) $(12,502) $ 668 $ (20,924)
======= ======== ====== ========
Net loss per share........................... $ (0.52) $ (1.22) $ (0.70)
======= ======== ========
Shares used in computing net loss per
share...................................... 14,978 10,206 29,908(f)
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
18
<PAGE> 29
ARRIS PHARMACEUTICAL CORPORATION AND SEQUANA THERAPEUTICS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The pro forma information presented is theoretical in nature and not
necessarily indicative of the future consolidated results of operations of the
Company or the consolidated results of operations which would have resulted had
the Merger taken place during the periods presented. The Unaudited Pro Forma
Statements reflect the effects of the Merger, assuming the Merger and related
events occurred as of September 30, 1997 for the purposes of the unaudited pro
forma condensed combined balance sheet and as of January 1, 1996 for the
purposes of the unaudited pro forma condensed combined statements of operations.
2. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT ADJUSTMENTS
(a) The purchase price for the Merger was determined as follows (in
thousands):
<TABLE>
<S> <C>
Arris common stock (approximately 15 million shares at $11.50 per
share, net of consideration received from exercise of
options)........................................................ $163,877
Estimated transaction and other direct acquisition costs.......... 4,985
Estimated severance costs for Sequana employees................... 1,352
--------
$170,214
========
</TABLE>
(b) The actual allocation of the purchase price will be based on the
estimated fair values of the net assets of Sequana at the consummation of the
Merger. For purposes of the pro forma financial statements, such allocation has
been estimated as follows (in thousands):
<TABLE>
<S> <C>
Net assets of Sequana at September 30, 1997....................... $ 48,793
In-process technology............................................. 118,751
Acquired workforce................................................ 2,670
--------
$170,214
========
</TABLE>
(c) Amortization of the acquired workforce will be over the estimated
useful life of three years.
(d) Elimination of Sequana stockholders' equity amounts.
(e) The pro forma combined condensed balance sheet includes a charge of
approximately $119 million for the write-off of purchased in-process technology
which arose from the Merger and is based upon a preliminary determination from
an independent appraisal of the acquired assets and liabilities. This charge is
not reflected in the pro forma combined condensed statements of operations
included herein since it is a non-recurring charge directly attributable to the
transaction.
(f) The shares used in computing the unaudited pro forma combined net loss
per share for the year ended December 31, 1996 and nine months ended September
30, 1997 are based upon the historical weighted average common shares
outstanding adjusted to reflect the issuance, as of January 1, 1996, of
approximately 15 million shares of Arris Common Stock as described in (a) above.
19
<PAGE> 30
ARRIS PHARMACEUTICAL CORPORATION AND SEQUANA THERAPEUTICS, INC.
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Arris
and Sequana and combined per share data on an unaudited pro forma basis after
giving effect to the Merger as a purchase, assuming that 1.35 shares of Arris
Common Stock, are issued in exchange for each share of Sequana Common Stock in
the Merger. The historical per share data of Arris and Sequana presented below
is presented as of and for the nine months ended September 30, 1997 and as of
and for the year ended December 31, 1996. The pro forma per share data presented
below combines Arris' per share data for the nine months ended September 30,
1997 and as of and for the year ended December 31, 1996 with Sequana's per share
data for the same period. This data should be read in conjunction with the
selected historical financial information, the unaudited condensed pro forma
combined financial statements and the separate historical financial statements
of Arris and Sequana and the notes thereto incorporated or included elsewhere in
this Joint Proxy Statement/Prospectus. The unaudited pro forma combined
condensed financial statements are not necessarily indicative of the operating
results or financial position that would have been achieved had the Merger been
consummated at the beginning of the period presented and should not be construed
as representative of future operations.
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR
SEPTEMBER 30, THE YEAR ENDED
1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
HISTORICAL--ARRIS:
Net loss per common share................................ $ (.52) $ (.45)
Book value per common share(1)........................... $ 3.49 $ 3.57
HISTORICAL--SEQUANA:
Net loss per common share................................ $ (1.22) $ (2.31)
Book value per common share(1)........................... $ 4.76 $ 5.13
PRO FORMA COMBINED PER ARRIS SHARE:
Net loss per common share(2)............................. $ (.70) $ (1.03)
Book value per common share(1)........................... $ 3.04 $ 3.29
SEQUANA PER SHARE EQUIVALENTS(3):
Net loss per common share(2)............................. $ (.95) $ (1.39)
Book value per common share(1)........................... $ 4.09 $ 4.44
</TABLE>
- ---------------
(1) The historical book value per common share is computed by dividing total
stockholders' equity by the number of shares of common stock outstanding at
the end of the period. The pro forma book value per share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares of
common stock as of each of the periods presented.
(2) Excludes a charge for in-process technology estimated to be approximately
$119 million which will be charged to combined operations during the period
in which the Merger is consummated.
(3) The Sequana Per Share Equivalents are calculated by multiplying the Arris
combined pro forma per share amounts by the Exchange Ratio.
20
<PAGE> 31
RISK FACTORS
This Joint Proxy Statement/Prospectus contains forward-looking statements
that involve risks and uncertainties. Arris' and Sequana's actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those discussed under this section as
well as those discussed elsewhere in this Joint Proxy Statement/Prospectus and
in the documents incorporated herein by reference. In addition to the other
information in this Joint Proxy Statement/Prospectus, the following risk factors
should be considered carefully by Sequana shareholders in determining whether or
not to vote in favor of the adoption and the approval of the Reorganization
Agreement and approval of the Merger and by Arris stockholders in determining
whether or not to vote in favor of the issuance of shares of Arris Common Stock
in the Merger and the adoption of the Arris Certificate of Amendment.
RISKS RELATING TO THE MERGER
Uncertainty Relating to Integration. The Merger involves the integration
of two companies that have previously operated independently. Such integration
will require significant effort from each company, including the coordination of
their research and development and business development efforts. There can be no
assurance that Arris will integrate the respective operations of Arris and
Sequana without encountering difficulties or experiencing loss of personnel, or
that the benefits expected from such integration will be realized. The diversion
of the attention of management and any difficulties encountered in the
transition process (including the interruption of, or a loss of momentum in,
Sequana's or Arris' activities and problems associated with employee uncertainty
and the potential loss of key personnel) could have an adverse impact on Arris'
ability to realize anticipated benefits from the Merger.
Risks Associated with Fixed Exchange Ratio. As a result of the Merger,
each outstanding share of Sequana Common Stock will be converted into the right
to receive 1.35 shares of Arris Common Stock. Because the Exchange Ratio is
fixed and will not increase or decrease due to fluctuations in the market price
of either Arris or Sequana Common Stock, the specific value of the consideration
to be received by Sequana shareholders in the Merger will depend on the market
price of Arris Common Stock at the Effective Time. In the event that the market
price of Arris Common Stock decreases or increases prior to the Effective Time,
the market value at the Effective Time of Arris Common Stock to be received by
Sequana shareholders in the Merger would correspondingly decrease or increase.
The market prices of Arris Common Stock and Sequana Common Stock as of a recent
date are set forth herein under "Summary--Market Price and Data," and
"Comparative Per Share Market Price Data and Dividend Policy." Sequana
shareholders are advised to obtain recent market quotations for Arris Common
Stock and Sequana Common Stock. Arris Common Stock and Sequana Common Stock
historically have been subject to price volatility. No assurance can be given as
to the market prices of Arris Common Stock or Sequana Common Stock at any time.
See "Comparative Per Share Market Price Data and Dividend Policy" and "--Price
Volatility in Public Market."
Effect of the Merger on Corporate Partners and Existing
Agreements. Certain of Sequana's and Arris' existing corporate partners may
view the Merger as disadvantageous to them. As a consequence, the combined
company's relationship with these strategic partners could be adversely
affected. In addition, the Merger will provide certain corporate partners with
the right to terminate their research and development agreements with Sequana
under certain circumstances. There can be no assurance that these agreements
will not be terminated. Sequana has announced that it is renegotiating the terms
of its agreement with Glaxo Wellcome, Inc. ("Glaxo"), one of the corporate
parties that has certain rights of termination. There can be no assurance that
this renegotiation will be successful or that Glaxo will not exercise its rights
to terminate such agreement. The termination of such agreements could have a
material adverse effect on Sequana's business and operations. The Merger will
require the consent of certain parties who have entered into contracts with
Sequana. There can be no assurance that such consents will be given and, if not
given, that such contracts will not terminate and, in the case of loan
agreements, that amounts outstanding will not accelerate and become immediately
due and payable.
Rights of Holders of Sequana Common Stock Following the Merger. Following
the Merger, holders of Sequana Common Stock outstanding as of the Effective Time
will become holders of Arris Common Stock. Certain material differences exist
between the rights of shareholders of Sequana under California law, the Amended
and Restated Articles of Incorporation of Sequana (the "Sequana Articles of
Incorporation") and
21
<PAGE> 32
the Sequana Bylaws, and the rights of stockholders of Arris under Delaware Law,
the Arris Certificate of Incorporation and the bylaws of Arris (the "Arris
Bylaws"). See "Comparison of Shareholders' Rights."
RISKS RELATING TO THE BUSINESSES OF ARRIS AND SEQUANA
Early Stages of Development. All of the potential products of Arris are in
an early stage of research and development and will require significant
additional research and development efforts prior to any commercial use,
including extensive preclinical and clinical testing and lengthy regulatory
clearance. To date neither Sequana nor its collaborators have discovered any
lead compounds for development as potential products based upon genes identified
by Sequana. The time necessary to achieve market success for any individual
product is long and uncertain. There can be no assurance that Arris' and
Sequana's research or product development efforts or those of their
collaborators will be successfully completed or that interim milestones will be
achieved, that the current research being performed by Sequana will result in
the identification of disease genes, that the identification of disease genes
will facilitate the development of potential products, that the products
currently under development by Arris will be successfully made into commercial
products, that required regulatory clearance can be obtained, that products can
be manufactured in adequate quantities at an acceptable cost and with
appropriate quality or that any approved products can be successfully marketed
or achieve customer acceptance. Commercial availability of any Arris or Sequana
products is not expected for a number of years, if at all.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Products that appear to be promising
at early stages of development may not reach the market for a number of reasons.
Such products may be found to be ineffective or cause harmful side effects
during preclinical testing or clinical trials, may fail to receive necessary
regulatory clearance, may be difficult to manufacture on a large scale, may be
uneconomical, may fail to achieve market acceptance or may be precluded from
commercialization by proprietary rights of third parties.
Dependence on Collaborative Relationships. Arris' and Sequana's strategy
for the development, clinical testing, manufacturing and commercialization of
certain of their potential products includes entering into collaborations with
corporate partners, licensors, licensees and others. To date, Arris has entered
into significant collaborations with Amgen, Inc., Bayer AG, Pharmacia & Upjohn,
Inc., Merck & Co., Inc., SmithKline Beecham Corporation and Abbott Laboratories.
To date, Sequana has entered into significant collaborations with Boehringer
Ingelheim GmbH, Corange International Ltd., Glaxo and Parke-Davis, a division of
the Warner-Lambert Company ("Warner-Lambert"), and has formed a joint venture
with Memorial Sloan-Kettering Cancer Center called Genos BioSciences, Inc.
Substantially all of Arris' and Sequana's revenues to date have resulted from
such collaborations, and Arris and Sequana are dependent on the activities of
their collaborators with respect to the eventual commercialization of the
potential products subject to such collaborations.
The amount and timing of resources to be devoted to research, development,
eventual clinical trials and commercialization activities by the collaborators
are not within the control of Arris and Sequana. There can be no assurance that
such partners will perform their obligations as expected or that Arris and
Sequana will derive additional revenue from such arrangements beyond the minimum
contractual commitments. Moreover, the collaboration agreements may be
terminated under certain circumstances. Sequana and Glaxo are currently
renegotiating the terms of their collaboration. Such collaboration may terminate
as early as the earlier of April 1, 1998 or thirty days after consummation of
the Merger. See "--Effects of Merger on Corporate Partners and Existing
Agreements." In addition, the research funding phase of many of the
collaborations of Arris will come to an end by the end of 1998 pursuant to the
terms of the collaboration agreements unless continued or extended by the
collaborators and certain Sequana collaboration agreements can be terminated in
1998 by the collaborators. The inability of Arris and Sequana to continue or
renew any of these collaborations may have a material adverse effect on Arris'
and Sequana's business, financial condition and results of operations. Finally,
Sequana entered into numerous agreements relating to the provision of tissue
samples, some of which are material to Sequana. The inability of Sequana to
maintain or renew these agreements may adversely affect Sequana in the same
manner as is discussed below for corporate collaborators.
22
<PAGE> 33
If any of Arris' and Sequana's collaborators breach or elect to terminate
their agreements with Arris and Sequana or otherwise fail to conduct their
collaborative activities in a timely manner, the development or
commercialization of potential products or research programs may be delayed, and
Arris and Sequana may be required to devote additional resources to product
development and commercialization, or to terminate certain development programs.
There can be no assurance that disputes will not arise in the future with
respect to the ownership of rights to any technology developed with third
parties. These and other possible disagreements between collaborators (or tissue
sample providers) and each of Arris and Sequana could lead to delays in the
achievement of milestones or receipt of payments therefor, collaborative
research, development and commercialization of certain potential products or
could require or result in litigation or arbitration, which could be
time-consuming and expensive and would have a material adverse effect on Arris'
and Sequana's business, financial condition and results of operations.
Arris' and Sequana's collaborators in some cases are developing, either
alone or with others, products that may compete with the development and
marketing of Arris' and Sequana's potential products. In addition, some of these
collaborators currently derive substantial revenues from products that will
compete with the potential products being developed under the collaborations.
Accordingly, there can be no assurance that the collaborators will not pursue
their existing or alternative technologies in preference to diagnostic or
therapeutic products being developed in collaboration with each of Arris and
Sequana, respectively. In addition, there can be no assurance that Arris' and
Sequana's collaborators will develop and market any potential products under the
collaborations.
Uncertainty Relating to Clinical Trials. Before obtaining regulatory
clearance for the commercial sale of any of their potential products under
development, Arris and Sequana or their respective collaborators must
demonstrate through preclinical studies and clinical trials that the potential
product is safe and efficacious for use in humans for each target indication.
The results from preclinical studies and early clinical trials, however, may not
be predictive of results that will be obtained in large-scale testing, and there
can be no assurance that any clinical trials will demonstrate sufficient safety
and efficacy necessary to obtain the requisite regulatory clearance or will
result in marketable products. A number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant setbacks
in advanced clinical trials, even after promising results in earlier trials. The
failure to adequately demonstrate the safety and efficacy of a potential product
under development could delay or prevent regulatory approval of the potential
product and would have a material adverse effect on Arris' and Sequana's
business, financial condition and results of operations.
Any drug is likely to produce some toxicities or undesirable side effects
in animals and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. There can be no assurance that unacceptable
toxicities or side effects will not occur at any dose level at any time in the
course of toxicological studies or of clinical trials of potential products. The
appearance of any such unacceptable toxicities or side effects in toxicology
studies or in clinical trials could cause Arris or Sequana or their respective
collaborators or regulatory authorities to interrupt, limit, delay or abort the
development of any of potential products and could ultimately prevent clearance
by the FDA or foreign regulatory authorities for any or all targeted
indications. Even after being cleared by the FDA or foreign regulatory
authorities, a product may later be shown to be unsafe or to not have its
purported effect, thereby preventing widespread use or requiring withdrawal from
the market. There can be no assurance that any potential products under
development by Arris and Sequana or their collaborators will be safe or
effective when administered to patients.
Arris currently has one compound, APC 366, in clinical trials. Phase IIa
studies with APC 366 in a liquid aerosol formulation have been completed. APC
366 is being reformulated for administration as a dry powder. Once reformulation
is accomplished, clinical trials are expected to be performed to establish the
safety and efficacy of APC 366. There can be no assurance that Arris will be
able to reformulate APC 366 or to complete clinical trials of APC 366
successfully, or at all. Nor can there be assurances that other drug candidates
entering clinical trials, if any, will successfully complete such trials or that
Arris will be able to demonstrate the safety and efficacy of such drug
candidates. Clinical trial results that show insufficient safety or efficacy
would have a material adverse effect on Arris' business, financial condition and
results of operations. Sequana currently does not have any products in clinical
trials.
23
<PAGE> 34
Uncertainty Relating to Sequana's Ability to Commercialize Gene
Discoveries. There can be no assurance that Sequana's positional cloning
technology and approach to gene discovery will enable it to successfully
identify and characterize the specific genes that cause or predispose
individuals to the complex, polygenic (i.e., associated with more than one gene)
diseases that are the targets of its gene discovery programs. Even if Sequana is
successful in identifying specific genes, there can be no assurance that its
gene discoveries will lead to the development of commercial products. Once
Sequana identifies specific genes, it may rely upon others to complete
characterization of such genes and plans to rely on others to develop and
commercialize products based upon such genes. Sequana's success will depend, in
part, upon its ability to focus its research efforts on diseases that are
suitable candidates for gene-based diagnostic and therapeutic products and that
are associated with genes which may be identified and characterized through the
use of positional cloning techniques. The polygenic diseases targeted by Sequana
generally are believed to be caused by a number of genetic as well as
environmental factors, and there can be no assurance that such diseases can be
successfully addressed through gene-based diagnostic or therapeutic products.
Intense Competition; Rapid Technological Change. The biotechnology and
pharmaceutical industries are intensely competitive. Many companies, including
biotechnology, chemical and pharmaceutical companies, are actively engaged in
the research and development of products in Arris' and Sequana's targeted areas.
Many of these companies have substantially greater financial, technical and
marketing resources than Arris and Sequana. In addition, many of these companies
have considerable experience in research, preclinical testing, clinical trials
and other regulatory approval procedures. Moreover, certain academic
institutions, governmental agencies and other research organizations are
conducting research in areas in which Arris and Sequana are working. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for the use of technology that they have
developed. These institutions also may market competitive commercial products on
their own or through joint ventures and will compete with Arris and Sequana in
recruiting highly qualified scientific personnel.
Arris and Sequana are pursuing areas of product development in which there
is a potential for extensive technological innovation in relatively short
periods of time. Arris' and Sequana's competitors may succeed in developing
technologies or products that are more effective than those of Arris and
Sequana. Rapid technological change or developments by others may result in
Arris' and Sequana's technology or potential products becoming obsolete or
noncompetitive. There can be no assurance that Arris' and Sequana's competitors
will not develop more efficacious or more affordable products, or achieve
earlier product development completion, patent protection, regulatory approval
or product commercialization than Arris and Sequana.
Dependence on Ability to Attract and Retain Professional Staff. Arris and
Sequana are highly dependent on the principal members of their scientific and
management staff. Retaining and attracting qualified personnel, consultants and
advisors are critical to Arris' and Sequana's success. One major challenge
facing the combined company is to integrate Arris and Sequana without losing key
personnel. There can be no assurance that Arris will successfully integrate the
respective operations without experiencing a loss of such personnel. The loss of
key personnel may adversely affect the companies.
To pursue their product research and development plans, Arris and Sequana
will be required, and currently are seeking, to hire additional qualified
scientific personnel to perform research and development. Expansion in product
development and clinical testing also is expected to require the addition of
management personnel and the development of additional expertise by existing
management personnel. Arris and Sequana face intense competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that
Arris and Sequana will be able to attract and retain such individuals on
acceptable terms or at all.
Arris' and Sequana's academic collaborators are not employees of Arris and
Sequana. As a result, Arris and Sequana have limited control over their
activities and can expect that only limited amounts of their time will be
dedicated to the activities of Arris and Sequana. Arris' and Sequana's academic
collaborators may have relationships with other commercial entities, some of
which could compete with Arris and Sequana.
24
<PAGE> 35
Future Capital Needs; Uncertainty of Additional Funding. Arris and Sequana
have experienced significant operating losses since their respective inceptions.
Arris and Sequana have not generated revenues from any products and expect that
they will incur significant operating losses over at least the next several
years as their research and development efforts and preclinical and clinical
testing activities expand. The development of Arris' and Sequana's technology
and potential products will require a commitment of substantial funds to conduct
the costly and time-consuming research and preclinical and clinical testing
activities necessary to develop and optimize such technology and potential
products, Arris' and Sequana's future capital requirements will depend on many
factors, including continued scientific progress in the research and development
of Arris' and Sequana's technology and drug development programs, the ability of
Arris and Sequana to establish new and maintain existing collaborations with
others for product development, and the ability to achieve certain milestones
under such collaborations.
Arris and Sequana expect that their existing capital resources, including
research and development revenues from existing collaborations, will enable
Arris and Sequana to maintain current and planned operations for at least three
years (assuming appropriate adjustments if existing programs cease being
funded). However, Arris and Sequana expect to raise substantial additional
capital to fund their operations before the end of this period and will need to
continue to raise capital until they achieve substantial product or royalty
revenues, if ever. Arris and Sequana expect that they will seek such additional
funding through new collaborations, the extension of existing collaborations, or
through public or private equity or debt financings. There can be no assurance
that additional funding will be available on acceptable terms or at all. If
additional funds are raised by issuing equity securities, further dilution to
stockholders may result. If adequate funds are not available, Arris and Sequana
may be required to delay, reduce the scope of or eliminate one or more of their
research or development programs or to obtain funds through arrangements with
collaborative partners or others that may require Arris and Sequana to
relinquish rights to certain of their technologies or products that Arris and
Sequana would otherwise seek to develop or commercialize itself.
Uncertainty Relating to Intellectual Property Rights. Arris' and Sequana's
success will depend in large part on their ability to obtain patents, maintain
trade secrets and operate without infringing on the proprietary rights of
others, both in the United States and in other countries. The patent positions
of biotechnology and pharmaceutical companies can be highly uncertain and
involve complex legal and factual questions, and therefore the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. There is substantial uncertainty regarding the
patentability of gene fragments or genes without known function. In addition,
Arris' and Sequana's ability to obtain patent protection on genes which Arris
and Sequana identify and characterize, or products based on such genes, is
uncertain. There can be no assurance that any of Arris' and Sequana's patents,
if issued, will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection or competitive
advantages to Arris and Sequana.
The commercial success of Arris and Sequana also will depend, in part, on
Arris and Sequana not infringing patents issued to others and not breaching the
technology licenses upon which any of Arris' and Sequana's potential products
are based. A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in the areas of Arris' and Sequana's programs. In addition,
patent applications relating to Arris' and Sequana's potential products or
technology may currently be pending. Some of these applications or patents may
limit or preclude Arris' and Sequana's applications, or conflict in certain
respects with claims made under Arris' and Sequana's patents, if issued.
Furthermore, Arris has in the past been, and Arris and Sequana may from time to
time in the future be notified of claims that Arris and Sequana may be
infringing patents or other intellectual property rights owned by third parties.
Arris' and Sequana's breach of an existing license or failure to obtain a
license to technology required to commercialize their potential products could
have a material adverse impact on Arris' and Sequana's business, financial
condition or results of operations.
Litigation, which could result in substantial costs to Arris and Sequana,
also may be necessary to enforce any patents issued to Arris and Sequana or to
determine the scope and validity of third-party proprietary rights. If
competitors of Arris and Sequana prepare and file patent applications in the
United States that claim technology also claimed by Arris and Sequana, Arris and
Sequana may have to participate in interference
25
<PAGE> 36
proceedings declared by the Patent and Trademark Office ("PTO") to determine
priority of invention, which could result in substantial cost to Arris and
Sequana, even if the eventual outcome is favorable. An adverse outcome could
subject Arris and Sequana to significant liabilities to third parties and
require Arris and Sequana to license disputed rights from third parties or to
cease using such technology.
Arris and Sequana also rely on trade secrets to protect their technology,
especially where patent protection is not believed to be appropriate or
obtainable. Arris and Sequana protect their proprietary technology and
processes, in part, by confidentiality agreements with their employees,
consultants and certain contractors. There can be no assurance that these
agreements will not be breached, that Arris and Sequana would have adequate
remedies for any breach, or that Arris' and Sequana's trade secrets will not
otherwise become known or be independently discovered by competitors.
Governmental Regulation; No Assurance of Regulatory Clearance. The
manufacturing and marketing of Arris' and Sequana's potential products and their
ongoing research and development activities are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Failure to comply with applicable FDA or other applicable regulatory
requirements could result in criminal prosecution, civil penalties, recall or
seizure of products, total or partial suspension of production or injunction, as
well as other regulatory action against Arris and Sequana or their potential
products.
Prior to marketing in the United States, any diagnostic or therapeutic
product developed by Arris and Sequana or their respective collaborators must
undergo rigorous preclinical and clinical testing and an extensive regulatory
approval process implemented by the FDA under the federal Food, Drug and
Cosmetic Act. Satisfaction of such regulatory requirements, which includes
satisfying the FDA that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product and requires the expenditure of substantial resources. Preclinical
studies must be conducted in conformity with the FDA's good laboratory practice
regulations. Before commencing clinical investigations in humans, Arris and
Sequana or their respective collaborators must submit to and receive approval
from the FDA of an investigational new drug application ("IND"). There can be no
assurance that submission of an IND would result in FDA authorization to
commence clinical trials. Clinical testing must meet requirements for
institutional review board oversight, informed consent and good clinical
practice requirements and is subject to continuing FDA oversight. Arris and
Sequana do not have extensive experience in conducting and managing the clinical
testing necessary to obtain regulatory approval. Clinical trials may require
large numbers of test subjects. Furthermore, Arris, Sequana, their respective
collaborators or the FDA may suspend clinical trials at any time if it is
believed that the subjects participating in such trials are being exposed to
unacceptable health risks or the FDA finds deficiencies in the IND or the
conduct of the investigation. Further, FDA regulations subject sponsors of
clinical investigations to numerous regulatory requirements, including, among
other requirements, selection of qualified investigators, proper monitoring of
the investigations, recordkeeping and record retention, and ensuring that FDA
and all investigators are promptly informed of significant new adverse effects
or risks with respect to the drug, as well as other ongoing reporting
requirements.
Before receiving FDA approval to market a product, Arris and Sequana or
their respective collaborators will have to demonstrate that the product is safe
and effective on the patient population that will be treated. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent regulatory clearance. In addition, delays or
rejections may be encountered based upon additional government regulation from
future legislation or administrative action or changes in FDA policy during the
period of product development, clinical trials and FDA regulatory review.
Similar delays also may be encountered in foreign countries. There can be no
assurance that even after such time and expenditures, regulatory clearance will
be obtained for any products developed by Arris, Sequana and their
collaborators. If regulatory clearance of a product is granted, such clearance
will be limited to those disease states and conditions for which the product is
useful, as demonstrated through clinical studies. Marketing or promoting a drug
for an unapproved indication is prohibited. Furthermore, clearance may entail
ongoing requirements for postmarketing studies. Even if such regulatory
clearance is obtained, the marketed product, the manufacturer and the
manufacturing facilities are subject to continual review and periodic
inspections by the FDA. Discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such product or
manufacturer, including costly recalls or even withdrawal of the product from
the market.
26
<PAGE> 37
There can be no assurance that any product developed by Arris or Sequana alone
or in conjunction with others will prove to be safe and efficacious in clinical
trials and will meet all of the applicable regulatory requirements needed to
receive marketing approval.
Outside the United States, the ability of Arris, Sequana and their
collaborators to market a product is contingent upon receiving a marketing
authorization from the appropriate regulatory authorities. The requirements
governing the conduct of clinical trials, marketing authorization, pricing and
reimbursement vary widely from country to country. At present, foreign marketing
authorizations are applied for at a national level, although within the European
Union ("EU"), certain registration procedures are available to companies wishing
to market a product in more than one EU member state. If the applicable
regulatory authority is satisfied that adequate evidence of safety, quality and
efficacy has been presented, a marketing authorization will be granted. This
foreign regulatory approval process includes all of the risks associated with
FDA clearance set forth above.
Uncertainty of Pharmaceutical Pricing, Health Care Reform and Related
Matters. The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
governmental and third-party payors to contain or reduce the cost of health
care. In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to governmental control. In the United States, there
have been, and Arris and Sequana expect that there will continue to be, a number
of federal and state proposals to implement similar governmental control. In
addition, an increasing emphasis on managed care in the United States has and
will continue to increase the pressure on pharmaceutical pricing. Although Arris
and Sequana cannot predict whether any such legislative or regulatory proposals
will be adopted or the effect such proposals or managed care efforts may have on
their business, the announcement of such proposals or efforts could have a
material adverse effect on Arris' and Sequana's ability to raise capital, and
the adoption of such proposals or efforts could have a material adverse effect
on Arris' business and financial condition. Further, to the extent that such
proposals or efforts have a material adverse effect on other pharmaceutical
companies that are prospective collaborators with Arris and Sequana, Arris' and
Sequana's ability to establish a strategic alliance may be adversely affected.
In both domestic and foreign markets, sales of Arris' and Sequana's
potential products will depend in part on the availability of reimbursement from
third-party payors on such as government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. There can be no assurance that Arris' and
Sequana's potential products will be considered cost-effective or that adequate
third-party reimbursement will be available to enable Arris and Sequana to
maintain price levels sufficient to realize an appropriate return on their
investment in product development.
Lack of Manufacturing Experience; Dependence on Contract
Manufacturers. Arris and Sequana have no manufacturing facilities. Arris' and
Sequana's potential products have never been manufactured on a commercial scale.
Furthermore, Arris and Sequana must rely on their collaborators to manufacture
potential products created by the collaborations. Although Arris and Sequana
believe that they themselves or their collaborators or contract manufacturers
will be able to manufacture their products in a commercially viable manner,
there can be no assurance that such products can be manufactured at a cost or in
quantities necessary to make them commercially viable. If Arris and Sequana and
their collaborators are unable to manufacture or contract with others for a
sufficient supply of their compounds on acceptable terms, or if they should
encounter delays or difficulties in their relationships with third party
manufacturers, the preclinical and clinical testing schedules for such products
would be delayed, resulting in delay in the submission of products for
regulatory approval or the market introduction and subsequent sales of such
products, which would have a material adverse effect on Arris and Sequana.
Moreover, Arris and Sequana and their collaborators and contract manufacturers
must adhere to current good manufacturing practices regulations enforced by the
FDA through their facilities inspection program. If these facilities cannot pass
a pre-approval plant inspection, the FDA pre-market approval of the products
will not be granted.
Lack of Marketing Experience; Dependence on Third Parties. Arris and
Sequana currently have no sales, marketing or distribution capability. Arris and
Sequana will rely on their collaborative relationships to
27
<PAGE> 38
market certain of their potential products, may enter into future collaborations
by which Arris and Sequana will come to rely on the collaboration to market
their products, and may decide to market other potential products directly. To
market any of their potential products directly, Arris and Sequana must develop
a marketing and sales force with technical expertise and with supporting
distribution capability. There can be no assurance that Arris and Sequana will
be able to establish in-house sales and distribution capabilities or
relationships with third parties, or that it will be successful in gaining
market acceptance for their potential products. Under their existing
collaborations, and to the extent that Arris and Sequana enter into future
co-promotion or other licensing arrangements, any revenues received by Arris and
Sequana under those collaborations will depend upon the efforts of third
parties, and there can be no assurance that such efforts will be successful.
No Assurance of Market Acceptance. There can be no assurance that, if
cleared for marketing, any of Arris' and Sequana's potential products will
achieve market acceptance. The degree of market acceptance will depend upon a
number of factors, including the receipt of regulatory approvals, the
establishment and demonstration in the medical community of the clinical
efficacy and safety of Arris' and Sequana's product candidates and their
potential advantages over existing treatment methods and reimbursement policies
of government and third-party payors. There is no assurance that physicians,
patients, payors or the medical community in general will accept and utilize any
products that may be developed by Arris and Sequana.
Risks of Product Liability; Uncertain Availability of Insurance. The use
of any of Arris' and Sequana's potential products in clinical trials,
manufacturing, marketing and the sale of any approved products may expose Arris
and Sequana to liability claims resulting from the use of such products. These
claims might be made directly by consumers, pharmaceutical companies or others.
Arris maintains product liability insurance coverage for claims arising from the
use of their products. However, coverage is becoming increasingly expensive. No
assurance can be given that Arris and Sequana or their strategic alliance
partners will be able to obtain and maintain commercially reasonable product
liability insurance or, if maintained, that insurance can be acquired at a
reasonable cost or in sufficient amounts to protect Arris and Sequana against
losses due to liability. A successful product liability claim or series of
claims brought against Arris and Sequana could have a material adverse effect on
their business, financial condition and results of operations.
Hazardous Materials. Arris' and Sequana's research and development
programs involve the controlled use of hazardous materials, chemicals and
various radioactive compounds. Arris and Sequana may incur substantial costs to
comply with environmental regulations if Arris and Sequana develop manufacturing
capacity. Although Arris and Sequana believe that their safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, Arris and Sequana could be held liable for any damages that result and
any such liability which could have a material adverse effect on Arris' and
Sequana's business, financial condition and results of operations.
Anti-takeover Provisions. The Arris Certificate of Incorporation and the
Arris Bylaws require that any action required or permitted to be taken by
stockholders of Arris must be effected at a duly called annual or special
meeting of stockholders and may not be effected by written consent. Special
meetings of the stockholders of Arris may be called only by the Arris Board of
Directors, the Chairman of the Arris Board of Directors or the President of
Arris. These and other charter provisions may discourage certain types of
transactions involving an actual or potential change in control of Arris,
including transactions in which the stockholders might otherwise receive a
premium for their shares over then current prices, and may limit the ability of
the stockholders to approve transactions they may deem to be in their best
interests. In addition, the Boards of Directors of both Arris and Sequana, each
have the authority, without action by the stockholders, to fix the rights and
preferences of and to issue shares of Preferred Stock, which also may have the
effect of delaying or preventing a change in control of Arris or Sequana. See
"Comparison of Shareholder Rights."
Price Volatility in Public Market. The securities markets have from time
to time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. In addition, the
market price of the common stock of many publicly traded biopharmaceutical
companies has in the past been, and can in the future be expected to be,
especially volatile. Announcements of technological
28
<PAGE> 39
innovations or new products of Arris and Sequana or their competitors,
developments or disputes concerning patents or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by Arris and Sequana or their competitors, regulatory developments
in both the U.S. and foreign countries, public concern as to the safety of
biopharmaceutical products and economic and other external factors, as well as
period-to-period fluctuations in Arris' and Sequana's operating and product
development results, may have a significant impact on the market price of Arris'
Common Stock.
Both Arris' Common Stock and Sequana's Common Stock currently trade on the
Nasdaq National Market. Upon consummation of the Merger, Sequana's Common Stock
will no longer trade on the Nasdaq National Market. Arris' Common Stock will
continue to trade on the Nasdaq National Market. See "Comparative Per Share
Market Price Data and Dividend Policy."
Absence of Dividends. Arris and Sequana have not paid any cash dividends
since their respective inception and do not intend to pay any cash dividends in
the foreseeable future.
29
<PAGE> 40
THE ARRIS SPECIAL MEETING
PURPOSE OF THE ARRIS SPECIAL MEETING
The purpose of the Arris Special Meeting is to consider and vote upon (i)
the Share Issuance Proposal, (ii) the Certificate Proposal and (iii) the Plan
Proposals. The Merger will occur only if the Share Issuance Proposal and the
Certificate Proposal are approved.
THE ARRIS BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE FOR APPROVAL OF THE SHARE
ISSUANCE PROPOSAL, FOR APPROVAL OF THE CERTIFICATE PROPOSAL AND FOR APPROVAL OF
THE PLAN PROPOSALS.
PROXIES
The Arris Proxy accompanying this Joint Proxy Statement/Prospectus is being
solicited on behalf of the Arris Board of Directors for use at the Arris Special
Meeting.
DATE, TIME AND PLACE OF MEETING
The Arris Special Meeting will be held at the Arris Principal Office on
[Wednesday, January 7], 1998, at 9:00 a.m., local time.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Arris Common Stock at the close of business on
November 24, 1997 (the "Arris Record Date") will be entitled to notice of and to
vote at the Arris Special Meeting. At the close of business on November 24, 1997
Arris had outstanding and entitled to vote 15,169,759 shares of Arris Common
Stock. See "Arris Principal Stockholders." Except for the stockholders
identified herein under "Arris Principal Stockholders," as of the Arris Record
Date, to the knowledge of Arris, no other person beneficially owns more than 5%
of the outstanding Arris Common Stock.
Each holder of record of Arris Common Stock on the Arris Record Date will
be entitled to one vote for each share held on all matters to be voted upon at
the Arris Special Meeting.
SOLICITATION
This Joint Proxy Statement/Prospectus was mailed to all Arris stockholders
of record as of the Arris Record Date and constitutes notice of the Arris
Special Meeting in conformity with the requirements of the DGCL.
Regardless of whether the Merger is consummated, each of Arris and Sequana
will pay its own costs and expenses incurred in connection with the
Reorganization Agreement and the transactions contemplated by the Reorganization
Agreement, except that fees and expenses (other than attorneys' fees) incurred
in connection with the printing, filing and mailing of the Registration
Statement and this Joint Proxy Statement/Prospectus will be shared equally by
Arris and Sequana.
Subject to the foregoing, the cost of the solicitation of proxies from
holders of Arris Common Stock and all related costs will be borne by Arris. In
addition, Arris may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitation by
directors, officers or other regular employees of Arris or, at Arris' request,
D. F. King & Co., Inc. No additional compensation will be paid to directors,
officers or other regular employees for such services, but D. F. King & Co.,
Inc. will be paid its customary fee, estimated to be approximately $4,000, if it
renders solicitation services.
VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Arris Common Stock entitled to vote at the
Arris Special Meeting is necessary to constitute a quorum. Abstentions and
broker non-votes will be counted for purposes of determining a quorum.
30
<PAGE> 41
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes on each proposal. Broker non-votes are
counted towards a quorum, but are not counted for any purpose in determining
whether a matter has been approved.
Approval of the Share Issuance Proposal and the Plan Proposals requires the
approval of a majority of the shares present in person or represented by proxy
and entitled to vote at the Arris Special Meeting. Approval of the Certificate
Proposal requires the approval of a majority of the outstanding shares of Arris
Common Stock entitled to vote as of the Record Date. The officers and directors
of Arris have indicated that they intend to arrange to have the approximately
6.7% of outstanding Arris Common Stock voted they own or may be deemed to own in
favor of the Share Issuance Proposal, the Certificate Proposal and the Plan
Proposals.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Corporate Secretary of Arris at Arris' Principal Office, 180 Kimball Way, South
San Francisco, California 94080, a written notice of revocation or a duly
executed proxy bearing a later date, or it may be revoked by attending the
meeting and voting in person. Attendance at the meeting will not, by itself,
revoke a proxy.
31
<PAGE> 42
THE SEQUANA SPECIAL MEETING
PURPOSE OF THE SEQUANA SPECIAL MEETING
The purpose of the Sequana Special Meeting is to consider and vote upon the
approval and adoption of the Reorganization Agreement and approval of the
Merger. The Sequana proxy accompanying this Joint Proxy Statement/Prospectus is
being solicited on behalf of the Sequana Board of Directors for use at the
Sequana Special Meeting.
THE SEQUANA BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE FOR ADOPTION AND APPROVAL OF THE
REORGANIZATION AGREEMENT AND FOR APPROVAL OF THE MERGER.
PROXIES
The Sequana Proxy accompanying this Joint Proxy Statement/Prospectus is
being solicited on behalf of the Sequana Board of Directors for use at the
Sequana Special Meeting.
DATE, TIME AND PLACE OF MEETING
The Sequana Special Meeting will be held at the Sheraton Grande Torrey
Pines, 10950 North Torrey Pines Road, La Jolla, California on [Wednesday,
January 7], 1998, at 9:00 a.m., local time.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Sequana Common Stock at the close of business on
November 24, 1997 (the "Sequana Record Date") will be entitled to notice of and
to vote at the Sequana Special Meeting. At the close of business on November 24,
1997, Sequana had outstanding and entitled to vote 10,499,406 shares of Sequana
Common Stock. See "Sequana Principal Shareholders." Except for the shareholders
identified herein under "Sequana Principal Shareholders," as of the Sequana
Record Date, to the knowledge of Sequana, no other person beneficially owns more
than 5% of the outstanding Sequana Common Stock.
Each holder of record of Sequana Common Stock on the Sequana Record Date
will be entitled to one vote for each share held on all matters to be voted upon
at the Sequana Special Meeting.
SOLICITATION
This Joint Proxy Statement/Prospectus was mailed to all Sequana
shareholders of record as of the Sequana Record Date and constitutes notice of
the Sequana Special Meeting in conformity with the requirements of the CGCL.
Regardless of whether the Merger is consummated, each of Arris and Sequana
will pay its own costs and expenses incurred in connection with the
Reorganization Agreement and the transactions contemplated by the Reorganization
Agreement, except that fees and expenses (other than attorneys' fees) incurred
in connection with the printing, filing and mailing of the Registration
Statement and this Joint Proxy Statement/Prospectus and will be shared equally
by Arris and Sequana.
Subject to the foregoing, the cost of the solicitation of proxies from
holders of Sequana Common Stock and all related costs will be borne by Sequana.
In addition, Sequana may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of Sequana or, at
Sequana's request, Georgeson & Company, Inc. No additional compensation will be
paid to directors, officers or other regular employees for such services, but
Georgeson & Company, Inc. will be paid its customary fee, estimated to be
approximately $7,000, if it renders solicitation services.
VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Sequana Common Stock entitled to vote at
the Sequana Special Meeting is necessary to constitute a quorum. Abstentions
will be counted for purposes of determining a quorum.
32
<PAGE> 43
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on the proposal presented to the shareholders and will
have the same effect as negative votes. Broker non-votes are counted towards a
quorum, but are not counted for any purpose in determining whether the proposal
has been approved.
Pursuant to the Arris Voting Agreements, the Voting Agreement Shareholders,
who, as of the Sequana Record Date, beneficially owned in the aggregate
approximately 19.3% of the outstanding shares of Sequana Common Stock (based
upon the number of shares of Sequana Common Stock issued and outstanding as of
the Record Date), have agreed that, prior to the Expiration Date, they will vote
their shares of Sequana Common Stock in favor of: (i) the adoption and approval
of the Reorganization Agreement, (ii) the approval of the Merger and (iii) each
of the other actions contemplated by the Reorganization Agreement and any action
required in furtherance thereof. The Voting Agreement Shareholders have also
delivered to Arris irrevocable proxies with respect to the matters covered by
the Arris Voting Agreements. In addition, subject to certain exceptions, the
Voting Agreement Shareholders have agreed not to sell, contract to sell, pledge,
grant any option to purchase or otherwise dispose of or transfer ("Transfer")
any of their beneficial ownership of, interest in, or risk relating to, the
Subject Securities (as defined below) unless and until the other party to the
Transfer (the "Transferee") shall have (i) executed a counterpart of the Arris
Voting Agreement and the corresponding irrevocable proxy and (ii) agreed to hold
such Subject Securities (or interest in such Subject Securities) subject to all
of the terms and conditions of the Arris Voting Agreement. For purposes of the
Arris Voting Agreement, the term "Subject Securities" means (i) all securities
of Sequana (including shares of Sequana Common Stock and all options, warrants
and other rights to acquire shares of Sequana Common Stock) owned by the Voting
Agreement Shareholder as of the date of the Arris Voting Agreement; and (ii) all
additional securities of Sequana (including all additional shares of Sequana
Common Stock and all additional options, warrants, and other rights to acquire
shares of Sequana Common Stock) of which the Voting Agreement Shareholder
acquires ownership during the period from the date of the Voting Agreement
through the Expiration Date. See "Approval of the Merger and Related
Transactions--Voting Agreements."
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Corporate Secretary of Sequana at Sequana's Principal Office, 11099 North Torrey
Pines Road, Suite 160, La Jolla, California 92037, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
33
<PAGE> 44
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY
Since November 19, 1993, Arris Common Stock has been quoted on the Nasdaq
National Market under the symbol "ARRS." Since July 31, 1995, the Sequana Common
Stock has been quoted on the Nasdaq National Market under the symbol "SQNA." The
table below sets forth, for the quarters indicated, the reported high and low
sale prices of Arris Common Stock and Sequana Common Stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
ARRIS SEQUANA
COMMON STOCK COMMON STOCK
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1995
First Quarter......................................... $ 7.63 $ 5.72 -- --
Second Quarter........................................ 11.13 7.00 -- --
Third Quarter (for Sequana from July 31, 1995)........ 14.25 8.75 $12.50 $10.25
Fourth Quarter........................................ 15.25 9.25 24.38 10.50
1996
First Quarter......................................... 19.50 12.50 29.50 18.00
Second Quarter........................................ 17.25 11.38 24.25 13.25
Third Quarter......................................... 14.50 9.50 19.00 12.75
Fourth Quarter........................................ 16.25 12.25 19.50 14.00
1997
First Quarter......................................... 15.88 12.13 18.75 12.38
Second Quarter........................................ 14.00 9.50 15.25 10.75
Third Quarter......................................... 15.63 11.38 17.00 8.12
Fourth Quarter (through November 25, 1997)............ 14.00 9.38 14.88 10.00
</TABLE>
As of the Record Date, there were approximately 283 record holders of Arris
Common Stock and approximately 300 record holders of Sequana Common Stock.
Neither Arris nor Sequana has ever paid cash dividends on their respective
common stock. The policies of Arris and Sequana are to retain earnings for use
in their respective businesses.
The following table sets forth the closing sale price per share of Arris
Common Stock as reported on the Nasdaq National Market and the equivalent per
share price (as explained below) of Sequana Common Stock on October 31, 1997,
the business day preceding the public announcement of the Merger, and on
November 20, 1997:
<TABLE>
<CAPTION>
EQUIVALENT
ARRIS SEQUANA
COMMON STOCK PER SHARE PRICE
------------ ---------------
<S> <C> <C>
October 31, 1997.............................................. $12.00 $ 16.20
November 25, 1997............................................. $ 9.56 $ 12.91
</TABLE>
The equivalent per share price of a share of Sequana Common Stock
represents one and thirty-five one-hundredths (1.35) of the price of one share
of Arris Common Stock.
ARRIS STOCKHOLDERS AND SEQUANA SHAREHOLDERS ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR ARRIS COMMON STOCK AND SEQUANA COMMON STOCK.
34
<PAGE> 45
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
In evaluating its strategic direction in the first half of 1997, Arris
determined that expansion of its genomics capabilities, which are used at the
beginning of the drug discovery process, could potentially increase the
"pipeline" of targets for Arris' existing drug discovery capabilities, thereby
increasing the value of Arris' partnered as well as proprietary discovery
programs. Such expansion could take the form of collaborations, acquisitions,
internal expansion or some combination. Similarly, Sequana had determined as
part of its strategic plan that expansion into drug lead discovery, allowing
Sequana to perform research beyond the identification of potential targets
through its genomics capabilities was an important, desirable goal. On July 17,
1997, representatives of each company, including Daniel H. Petree, Arris'
Executive Vice President, Business Development, and Kevin J. Kinsella and M.
Scott Salka, the President and Chief Executive Officer and Vice President,
Operations, respectively, of Sequana met to discuss the possibility of a
collaboration in the cancer area. At a follow-up meeting the following week
among Messrs. Petree, Kinsella, Salka and Arris' Chief Executive Officer, John
P. Walker, the possibility of an acquisition transaction was raised. The
possibilities of such a transaction were further discussed at a meeting later in
July. As a result of these discussions, the parties entered into a mutual
confidentiality agreement dated as of July 28, 1997 and preliminary scientific
and business due diligence took place during the second week of August.
The possibility of a transaction was informally discussed with members of
the Arris Board of Directors in early and mid-August and a formal presentation
relating to the potential combination of the two companies was made at a meeting
of the Arris Board of Directors on August 27, 1997. At that meeting the Arris
Board of Directors authorized management to continue to explore the
possibilities of such a combination and also authorized the engagement of Morgan
Stanley. The Sequana Board of Directors met telephonically on August 20 and on
August 29, 1997 to discuss, among other matters, the advisability of continuing
discussions with Arris with regard to the possible combination of the two
companies in light of the other strategic alternatives which Sequana was
pursuing. At those meetings, the Sequana Board of Directors authorized
management to continue discussions with Arris while allowing sufficient time to
also continue discussions with other interested potential acquirors of Sequana.
As Sequana had previously informally engaged Lehman Brothers to explore the
possibility of the acquisition of Sequana, management of Sequana requested that
Lehman Brothers begin to consider the advisability of a merger with Arris. Arris
requested that its legal counsel draft an Agreement and Plan of Reorganization
which was presented to Sequana's counsel on September 5, 1997. Additional due
diligence commenced in the area of patents and key contracts. Arris at this
point was proposing a rapid timetable. In a series of phone conversations and a
face-to-face meeting among Messrs. Walker, Petree, Kinsella and Salka on
September 11, Sequana indicated that, although it remained very interested in
pursuing the transaction, it was not prepared to do so on the timetable desired
by Arris and that Sequana wished to conclude ongoing discussions with the
Parke-Davis division of Warner-Lambert. Accordingly, although patent due
diligence continued, substantive discussions between the parties did not
recommence until October 13, 1997. In the interim, the Sequana Board of
Directors met on September 17 and 18, and had telephonic meetings on September
26, 29 and 30 to discuss, among other things, the potential combination with
Arris. Mr. Walker made a presentation about Arris and this proposed combination
of the two companies at the Sequana Board of Directors meeting on September 17.
On October 13 and 14, Messrs. Walker and Kinsella and representatives of Lehman
Brothers continued discussion while attending a business conference. The parties
concluded that notwithstanding the continuing negotiations with Warner-Lambert,
it was appropriate to restart substantive negotiations. Each party reiterated
its belief that the proposed transaction made strategic sense for each company
and that, although no price was agreed upon, the range of exchange rates that
might be negotiated was such that a transaction was feasible.
On October 15, 1997, a negotiating session was held among representatives
of each company, including Messrs. Walker and Kinsella, their respective
attorneys, Cooley Godward LLP and Wilson Sonsini Goodrich & Rosati, P. C., and
Morgan Stanley. A substantial number of matters, including price, termination
events, termination fees, and whether voting agreements would be required
remained unresolved after this meeting. Detailed technical due diligence took
place on October 16 and 17. In addition, the exchange of due diligence documents
by each company continued. On October 17, the Sequana Board of Directors met
35
<PAGE> 46
telephonically to discuss the potential transaction. Also on October 17, the
Arris Board of Directors met telephonically and received an update on the status
of the transaction. At this point the ultimate timing of the transaction
remained unclear for several reasons, including Sequana's desire to complete its
negotiations of its collaboration with Warner-Lambert, its continued due
diligence efforts and its consideration of other business alternatives.
Due diligence activities continued throughout this period, including
meetings at Arris on October 20, 23 and 24, 1997 relating to additional
technical and financial due diligence. On October 22, the Arris Board of
Directors met and, in addition to an update, received a financial presentation
by Morgan Stanley and a legal presentation by Arris' counsel, Cooley Godward
LLP. Negotiation of the terms of the transaction and the related documents
continued but there continued to be disagreements about price, treatment of
employee options, termination events and termination fees.
On October 27, 1997, negotiations temporarily broke down over issues of
timing, notification of key partners of the pendency of the transaction, and
price. On October 28, negotiations resumed. The Arris Board of Directors met
telephonically on October 29 to receive a further update on the transaction. The
Sequana Board of Directors also met on October 29 to discuss the transaction and
engaged in financial discussions with representatives of Lehman Brothers and
received a legal presentation from its legal counsel Wilson Sonsini Goodrich &
Rosati, P.C. with regard to the transaction. On October 30, 1997, the parties,
including Messrs. Kinsella and Walker and their advisors, met to attempt to
resolve the remaining major open issues, including price, treatment of employee
options, and termination fees. These discussions successfully resolved these
matters. The Arris Board of Directors met after the market closed on October 31,
1997 with its financial and legal advisors to consider the proposed transaction.
After a discussion of the previous day's resolution of the major open issues,
Morgan Stanley made a presentation to the Arris Board of Directors regarding the
Merger, including the delivery of an oral opinion (which opinion was later
confirmed in writing) regarding the fairness of the exchange ratio from a
financial point of view to Arris, and reviewed certain financial analyses and
similar information with respect to Arris and Sequana. After further discussion,
the Arris Board of Directors voted unanimously (with one member absent) to
approve the Merger, the Reorganization Agreement and related documents as
presented to the Board, with such final changes as might be approved by the
officers of Arris, to recommend issuance of shares in the merger to the
stockholders of Arris, and to take such other actions as might be necessary to
effect the Merger.
The Sequana Board of Directors met telephonically on October 31 and on
November 2 to consider the Merger. At these meetings it heard presentations from
its financial and legal advisors, including a discussion of the analyses
contained under the heading "Opinion of Financial Advisor to Sequana." During
the telephone meeting on November 2, Lehman Brothers made a financial
presentation to the Sequana Board of Directors (including a review of certain
financial analyses and other information with respect to Arris and Sequana) and
gave its oral and written opinion to the effect that the exchange ratio to be
received in the Merger was fair, from a financial point of view, to the
shareholders of Sequana. The Sequana Board of Directors then voted unanimously
to approve the Merger, the Reorganization Agreement and the related documents
necessary to effect the Merger, and to recommend to the Sequana shareholders
that they approve the Merger and the Reorganization Agreement.
On November 1 and 2, 1997, legal counsel and representatives of each of
Arris and Sequana negotiated and finalized the terms of the Reorganization
Agreement. After the November 2, 1997 meeting of the Sequana Board of Directors,
certain shareholders of Sequana entered into voting agreements with Arris and
Mr. Salka entered into a severance arrangement with Sequana. Mr. Kinsella had
previously entered into a severance arrangement with Sequana on October 31,
1997.
The Reorganization Agreement was executed by all parties on November 2,
1997, and a joint public announcement of the proposed transaction was made
before the market opened on November 3, 1997. As of November 10, 1997, the Arris
Board of Directors, by unanimous written consent, approved certain additional
matters to bring before the Arris stockholders, including the amendment to the
Certificate of Incorporation, approval of the 1997 Equity Incentive Plan and
increases to the number of shares reserved under the Arris Non-Employee
Directors Stock Option Plan and Employee Stock Purchase Plan.
36
<PAGE> 47
SEQUANA'S REASONS FOR THE MERGER
The Sequana Board of Directors has determined that the terms of the
Reorganization Agreement and the transactions contemplated thereby are fair to,
and in the best interests of, Sequana's shareholders. Accordingly, the Sequana
Board of Directors has approved the Reorganization Agreement and recommends that
the shareholders of Sequana vote FOR approval and adoption of the Reorganization
Agreement. In reaching its determination, the Sequana Board of Directors
consulted with Sequana's management, as well as its legal counsel and financial
advisor, and gave significant consideration to a number of factors, including,
the factors referred to below.
- - The Technological Compatibility of Sequana and Arris. Sequana believes that
the combination of Sequana's gene discovery technologies and functional
genomic capabilities with Arris' chemistry, high-throughput screening and
drug development capabilities would create a company with a broad based
technological platform extending from genomics to drug development. As
result of this broadened technological platform, Sequana believes that the
combined company's strategic and market position would be enhanced beyond
that achievable by Sequana alone.
- - Operational Synergies. Sequana believes that the greater strategic,
financial and personnel resources of the combined company, including
potential access to a greater number of corporate partners, should result in
operational efficiencies and synergies, enabling the combined company to
more effectively and efficiently compete in its targeted market.
In addition to the factors described above, the Sequana Board of Directors
considered: (i) the detailed financial analyses, pro forma and other information
with respect to Arris and Sequana presented by Lehman and Sequana's management,
as well as the Sequana Board of Directors' own knowledge of Arris, Sequana and
their respective businesses, and the current economic, financial and business
climate; (ii) the state of the biotechnology industry, including current and
future competition, and consolidations within the industry; (iii) financial
presentation made by Lehman Brothers with respect to the Merger, including the
written opinion of Lehman to the effect that, as of November 2, 1997, and based
upon and subject to the various qualifications and assumptions described
therein, the Exchange Ratio was fair to the holders of Sequana Common Stock;
(iv) reports from management concerning due diligence performed by Sequana on
the scientific programs of Arris, (v) reports from management and legal and
financial advisors concerning the specific items of the Reorganization Agreement
and the ancillary documents, and (vi) the effect of the Merger on Sequana's
other constituencies, including its senior management and other employees.
The Sequana Board of Directors also considered a number of potential risks
relating to the Merger, including (i) the risk that the technological
compatibilities, synergies and other benefits expected from the Merger would not
be fully achieved, including the risk that key employees of Sequana may leave as
a result of the Merger, (ii) the risk that the Merger would not be consummated
due to the failure of the parties to satisfy conditions to the Merger, (iii) the
risk that the market price of Arris Common Stock might decline between execution
of the Reorganization Agreement and consummation of the Merger, (iv) the risk
that Sequana's existing management would no longer manage operations of Sequana
following the Merger, (v) the risk that certain competitors of Sequana or Arris
may attempt to hinder consummation of the Merger through the initiation of
litigation or by other means, (vi) the risk that certain collaborative partners
of Sequana and Arris may elect to terminate or fail to renew or extend their
collaborative agreements with Sequana and Arris as a result of the Merger, and
(vii) the other risks described above under "Risk Factors." The Sequana Board of
Directors concluded that the benefits of the transaction to Sequana and its
shareholders outweighed the risks associated with the foregoing factors.
The foregoing discussion of the factors considered by the Sequana Board of
Directors is not intended to be exhaustive but is intended to include all of the
material factors considered by the Sequana Board of Directors. In view of the
complexity and variety of factors considered by the Sequana Board of Directors,
the Sequana Board of Directors did not consider it practical to quantify or
otherwise attempt to assign any relative or specific weights to the specific
factors considered, and individual directors may have given differing weights to
different factors.
37
<PAGE> 48
ARRIS' REASONS FOR THE MERGER
At a meeting on October 31, 1997, the Arris Board of Directors determined
that the terms of the Reorganization Agreement and the transactions contemplated
thereby were in the best interests of Arris and its stockholders, approved the
Reorganization Agreement and the transactions contemplated thereby, and
recommended that the Arris stockholders approve the issuance of Arris Common
Stock in the Merger. In reaching the foregoing conclusions and recommendations,
the Arris Board of Directors considered a number of factors, including the
following:
- - Increased Pipeline of Drug Targets. The merger of Sequana's gene discovery
technologies with the established Arris drug discovery and development
platform is expected to provide a significantly greater number of novel and
proprietary drug targets. Arris believes this expected enrichment of the
combined company's clinical pipeline will increase the probability that safe
and efficacious drug candidates for major therapeutic needs will be found
and developed by the combined company and that the combined company's
competitive position relative to the rest of the biotechnology and
pharmaceutical industries will be enhanced.
- - Improved Attractiveness to Corporate Partners. Arris believes that the
combination of Sequana's gene discovery, functional genomics, and other
capabilities with the combinatorial and medicinal chemistry, molecular and
cellular biology, high-throughput screening and other capabilities of Arris
would create a new entity that could offer a broad array of drug discovery
and development technologies. Arris believes that this broad array of
technologies will offer potential corporate partners the possibility of
reducing the number of collaborations necessary to take advantage of
available drug discovery techniques and will further enable the combined
company to enter into significant new collaborations or to extend or expand
existing collaborations.
- - Potential Access to Greater Resources. The combined company will have
greater financial resources, more collaborative agreements, more scientists
and more physical plant than Arris alone. This increase in resources is
expected to provide the combined company's management with increased
flexibility and enhance the efficiency of its research and development
efforts.
The Arris Board of Directors considered a wide variety of information and
factors in connection with its evaluation of the Merger. In addition to the
factors described above, the Arris Board of Directors considered (i) information
concerning each company's respective business, prospects, financial performance,
financial condition, and operations, (ii) the financial presentation made by
Morgan Stanley with respect to the Merger, including Morgan Stanley's opinion
dated October 31, 1997, that as of such date, the Exchange Ratio was fair, from
a financial point of view, to Arris and its stockholders, (iii) reports from
management concerning due diligence conducted by Arris on the scientific
programs of Sequana, and (iv) reports from management and legal and financial
advisors concerning the specific terms of the Reorganization Agreement and
ancillary documents.
The Arris Board of Directors also considered a number of potentially
negative factors in its deliberations concerning the Merger, including (i) the
possibility that the Merger would not be consummated, (ii) the potential
disruption to the business of both companies following announcement of the
Merger, including the effects of employee uncertainty, the possibility that key
employees may leave Arris or Sequana, and the possibility that key corporate
collaborators may not approve of the Merger or may determine to terminate their
relationship with the combined company, if their agreements permit termination
as the result of the Merger, (iii) the dilutive effects of the issuance of
shares in the Merger and the higher level of expenses that will be borne by the
combined company, and (iv) the possibility that the anticipated benefits of the
Merger will not be realized. The Arris Board of Directors concluded that the
benefits of the transaction to Arris and its stockholders outweighed the risks
associated with the foregoing factors.
The foregoing discussion of the factors considered by the Arris Board of
Directors is not intended to be exhaustive but is intended to include all of the
material factors considered by the Arris Board of Directors. In view of the
complexity and variety of factors considered by the Arris Board of Directors,
the Arris Board of Directors did not consider it practical to quantify or
otherwise attempt to assign any relative or specific weights to the specific
factors considered, and individual directors may have given differing weights to
different factors.
38
<PAGE> 49
OPINION OF FINANCIAL ADVISOR TO SEQUANA
Lehman Brothers has acted as financial advisor to Sequana in connection
with the Merger. As part of its role as financial advisor to Sequana, Lehman
Brothers rendered to the Sequana Board of Directors an opinion as to the
fairness, from a financial point of view, to Sequana's shareholders of the
Exchange Ratio to be offered to such shareholders in the Merger.
The full text of the Lehman Opinion dated November 2, 1997 is attached as
Appendix C-2 to this Joint Proxy Statement/Prospectus and is incorporated herein
by reference. Shareholders may read the Lehman Opinion for a discussion of
assumptions made, matters considered and limitations on the review undertaken by
Lehman Brothers in rendering its opinion. The summary of the Lehman Opinion set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
No limitations were imposed by Sequana on the scope of Lehman Brothers
investigation or the procedures to be followed by Lehman Brothers in rendering
the Lehman Opinion. Lehman Brothers was not requested to and did not make any
recommendation to the Sequana Board of Directors as to the form or amount of the
consideration to be offered to Sequana's shareholders in the Merger, which was
determined through arm's-length negotiations between the parties. In arriving at
the Lehman Opinion, Lehman Brothers did not ascribe a specific range of value to
Sequana, but made its determination as to the fairness, from a financial point
of view, of the Exchange Ratio to be offered to Sequana's shareholders in the
Merger on the basis of the financial and comparative analyses described below.
The Lehman Opinion is for the use and benefit of the Sequana Board of Directors
and was rendered to the Sequana Board of Directors in connection with its
consideration of the Merger. The Lehman Opinion is not intended to be and does
not constitute a recommendation to any Sequana shareholder as to how such
shareholder should vote with respect to the Merger. Lehman Brothers was not
requested to opine to, and the Lehman Opinion does not address, Sequana's
underlying business decision to proceed with or effect the Merger.
In arriving at the Lehman Opinion, Lehman Brothers reviewed and analyzed:
(1) the Reorganization Agreement and the specific terms of the Merger; (2)
publicly available information concerning Sequana and Arris which Lehman
Brothers believed to be relevant to its analysis, including Sequana's and Arris'
Forms 10-K for the year ended December 31, 1996 and Sequana's and Arris' Forms
10-Q for the quarter ended June 30, 1997; (3) financial and operating
information with respect to the business, operations, technology and prospects
of Sequana and Arris furnished to Lehman Brothers by Sequana and Arris; (4) a
trading history of the common stock of Sequana from the date of Sequana's
initial public offering to the present and of Arris from October 1996 to the
present and comparisons of those trading histories with those of other companies
which Lehman Brothers deemed relevant; (5) comparisons of the historical results
and present financial conditions of Sequana and Arris with those of other
companies which Lehman Brothers deemed relevant; (6) a comparison of the
financial terms of the Merger with the financial terms of certain other
transactions which Lehman Brothers deemed relevant; and (7) the results of
Lehman Brothers' efforts to solicit indications of interest and proposals from
third parties with respect to an acquisition of Sequana. In addition, Lehman
Brothers had discussions with the managements of Sequana and Arris concerning
their businesses, operations, assets, technology, financial condition and
prospects and the potential strategic benefits that may result from a
combination of the businesses of Sequana and Arris, and undertook such other
studies, analyses and investigations as Lehman Brothers deemed appropriate.
In arriving at the Lehman Opinion, Lehman Brothers assumed and relied upon
the accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of management of Sequana and
Arris that they were not aware of any facts or circumstances that would make any
such information inaccurate or misleading. With respect to the financial
projections of Sequana and Arris, upon advice of Sequana and Arris, Lehman
Brothers assumed that such projections were reasonably prepared on a basis
reflecting the best then available estimates and judgments of the managements of
Sequana and Arris as to the future financial performance of Sequana and Arris,
and Lehman Brothers relied upon such projections in performing its analysis. In
arriving at the Lehman Opinion, Lehman Brothers did not conduct a physical
inspection of the properties and facilities of Sequana and did not make nor
obtain any evaluations or appraisals
39
<PAGE> 50
of the assets or liabilities of Sequana. The Lehman Opinion was necessarily
based upon market, economic and other conditions as they existed on, and could
be evaluated as of, the date of the Lehman Opinion.
In connection with the preparation and delivery of the Lehman Opinion to
the Sequana Board of Directors, Lehman Brothers performed a variety of financial
and comparative analyses, as described below. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial and comparative analysis and the application of those
methods to the particular circumstances and, therefore, such an opinion is not
readily susceptible to summary description. Furthermore, in arriving at the
Lehman Opinion, Lehman Brothers did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevancy of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors, could create an incomplete or misleading view of the
process underlying the Lehman Opinion. In its analyses, Lehman Brothers made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond Sequana's and
Arris' control. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. Additionally,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
Transaction Terms. The implied value to be received by shareholders of
Sequana in the Merger, based upon the Exchange Ratio and the closing price of
Arris' common stock on October 31, 1997 of $12.00, is $16.20 per share of common
stock of Sequana.
Historical Stock Price Performance of Sequana and of Arris. Lehman
Brothers reviewed Sequana's stock price performance for the twelve months
preceding the Merger and noted that Sequana's stock price had fluctuated over
that period from a high of $18.75 to a low of $8.125, and was trading on October
31, 1997 at a price of $11.25, below where it traded one year earlier. Lehman
Brothers also compared Sequana's stock price performance to a weighted average
of the stock prices of certain publicly traded gene discovery companies and to
the S&P 400 Index for the twelve month period prior to the Merger. The companies
that Lehman Brothers considered included Genset S.A., Microcide Pharmaceuticals,
Inc., Millennium Pharmaceuticals, Inc., Myriad Genetics, Inc. and Progenitor
Inc. (the "Comparable Gene Discovery Companies"). Lehman Brothers noted that
Sequana's stock price had declined 28.1% compared to a decline of 4.3% for the
Comparable Gene Discovery Companies and an increase of 27.3% in the S&P 400
Index over the past twelve months. Lehman Brothers also compared Arris' stock
price performance to a weighted average of the stock prices of certain publicly
traded drug discovery companies and to the S&P 400 Index for the twelve month
period prior to the Merger. The companies that Lehman Brothers considered
included ArQule Inc., Aurora Biosciences Inc., Biocryst Pharmaceuticals, Inc.,
Pharmacopeia, Inc., Trega Biosciences, Inc., and Tripos, Inc. (the "Comparable
Drug Discovery Companies"). Lehman Brothers noted that Arris' stock price had
declined 6.1% compared to an increase of 12.1% for the Comparable Drug Discovery
Companies and an increase of 27.3% in the S&P 400 Index over the past twelve
months.
Comparable Public Company Analysis of Sequana and of Arris. Lehman
Brothers compared the historical, financial and operating performance of the
Comparable Gene Discovery Companies with the historical financial and operating
performance of Sequana and of the Comparable Drug Discovery Companies with that
of Arris, based upon information that was publicly available at that time and
based upon information provided to Lehman Brothers by the managements of Sequana
and Arris. Lehman Brothers examined both the market value of the total
outstanding common equity (the "Market Value") and the Market Value plus Debt
minus Cash (the "Technology Value") of such comparable companies on a primary
and fully-diluted basis. "Debt" equals long- and short-term debt and current
portion of long-term debt and capital lease obligations. "Cash" equals cash and
cash equivalents plus marketable securities. For Sequana, Lehman Brothers noted
that at the Exchange Ratio of 1.35 Arris shares per Sequana share, (which had an
implied value of $16.20 for each Sequana share as of October 31, 1997), the
Market Value for Sequana of $166.2 million was within the range of $58.1 million
to $575.9 million, and was below the mean and median of $275.9 million and
$239.2 million, respectively, for the Comparable Gene Discovery Companies.
Lehman
40
<PAGE> 51
Brothers also noted that at the proposed Exchange Ratio of 1.35 Arris shares per
Sequana share, the Technology Value for Sequana of $123.5 million was within the
range of $38.6 million to $535.2 million for the Comparable Gene Discovery
Companies and was below the mean and median of $228.2 million and $182.3
million, respectively, for the Comparable Gene Discovery Companies. Lehman
Brothers also examined both the latest twelve month net burn rate ("LTM Net Burn
Rate") and the years of cash remaining ("Years of Cash") for such comparable
companies. The LTM Net Burn Rate is calculated as net loss plus depreciation and
amortization expense, less capital expenditures. Years of Cash is calculated as
Cash divided by LTM Net Burn Rate. Lehman Brothers noted that the LTM Net Burn
Rate for Sequana was $18.5 million, higher than the range of $5.8 million to
$17.3 million and the mean and median of $13.0 million and $14.1 million,
respectively, for the Comparable Gene Discovery Companies, and that Sequana's
Years of Cash was 2.9 years, at the low end of the range of 1.5 years to 7.6
years and lower than the mean and median of 4.6 years and 4.1 years,
respectively, for the Comparable Gene Discovery Companies.
For Arris, Lehman Brothers noted that the Market Value for Arris of $182.0
million was within the range of $50.6 million to $254.7 million, and higher than
the mean and median of $149.6 million and $152.7 million, respectively, for the
Comparable Drug Discovery Companies. Lehman Brothers also noted that the
Technology Value for Arris of $141.4 million was within the range of $37.4
million to $204.7 million for the Comparable Drug Discovery Companies and was
higher than the mean and median of $111.3 million and $100.9 million,
respectively, for the Comparable Drug Discovery Companies. Lehman Brothers also
noted that the LTM Net Burn Rate for Arris was $13.8 million, higher than the
range of $3.5 million to $11.9 million and the mean and median of $7.8 million
and $9.7 million, respectively, for the Comparable Drug Discovery Companies, and
that Arris' Years of Cash was 4.0 years, within the range of 2.0 years to 15.3
years and lower than the mean and median of 8.1 years and 8.0 years,
respectively, for the Comparable Drug Discovery Companies.
However, because of the inherent differences between the business,
operations and prospects of Sequana and Arris and the businesses, operations,
technology and prospects of the Comparable Gene Discovery Companies or
Comparable Drug Discovery Companies, as the case may be, Lehman Brothers
believed that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis but rather also made qualitative judgments
concerning differences between the financial and operating characteristics and
prospects of Sequana and Arris and the Comparable Gene Discovery Companies or
Comparable Drug Discovery Companies, as the case may be, that would affect the
public trading values of each.
Discounted Cash Flow Analysis for Sequana. Lehman Brothers performed a
discounted cash flow analysis based upon Sequana's projected financial
performance. This analysis was based upon information and projections provided
by Sequana's management. Lehman Brothers discounted to present value the
projected stream of after-tax cash flows and the terminal year value (the
"Terminal Value") of the business. Terminal Value was based upon different
ranges of multiples of projected fiscal 2001 earnings before interest and taxes
("EBIT"). In performing this analysis, Lehman Brothers used a range of discount
rates from 30% to 40%, which were chosen based on several assumptions regarding
factors such as the inflation rate, interest rates, the inherent business risk
in Sequana's operations as well as in the gene discovery and biotechnology
industry as a whole, and the cost of capital to Sequana. The imputed value per
share of Sequana's common stock resulting from these analyses ranged from $9.14
to $13.48.
Comparable Transaction Analysis for Sequana. Lehman Brothers compared the
financial terms of certain recent stock-for-stock merger transactions which
Lehman Brothers considered relevant with the financial terms of the Merger,
based upon information that was publicly available at the time and based upon
information provided to Lehman Brothers by Sequana's management. The
transactions that Lehman Brothers considered comparable to the Merger included
42 stock-for-stock merger transactions that occurred in the biotechnology
industry since 1988 (the "Comparable Transactions"). Lehman Brothers calculated
the transaction value per share imputed by the exchange ratio for shares
purchased directly from the target company (the "Merger Purchase Price Per
Share"). The mean, median, high and low Merger Purchase Price Per Share for
these transactions was then compared to the target's stock price one day and one
month prior to the announcement of the transaction and to the target's latest
twelve month high and low stock price to calculate the premium over such stock
prices (the "Premium"). The mean, median, high and low Premiums
41
<PAGE> 52
one day prior to the transaction announcement were 25.4%, 15.8%, 126.3% and
(17.9%), respectively, in the Comparable Transactions. Lehman Brothers noted
that the Exchange Ratio represented a 44.0% Premium over Sequana's stock price
of $11.25 one day prior to the announcement of the Merger and was within the
range of the Comparable Transactions and above the mean and median of the
Comparable Transactions. The mean, median, high and low Premiums one month prior
to the transaction announcement were 30.7%, 26.3%, 220.0% and (31.5%),
respectively, in the Comparable Transactions. Lehman Brothers noted that the
Exchange Ratio represented a 17.8% Premium over Sequana's stock price of $13.75
one month prior to the announcement of the Merger and was within the range of
the Comparable Transactions and below the mean and median of the Comparable
Transactions.
However, because the reasons for and the circumstances surrounding each of
the transactions analyzed were specific to each transaction and because of the
inherent differences between the businesses, operations, technology and the
prospects of Sequana and the business, operations, technology and prospects of
the selected acquired companies analyzed, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis, but rather also made qualitative judgments concerning
differences between the characteristics of these transactions and the Merger
that would affect the acquisition values of Sequana and such acquired companies.
Exchange Ratio Analysis. Lehman Brothers compared the exchange ratios
implied by average historical prices of Sequana's and Arris' stock to the
Exchange Ratio. Lehman Brothers reviewed the ratios of the closing stock prices
of Sequana and Arris over various time periods during the twelve month period
ended October 31, 1997 and computed the premiums represented by the Exchange
Ratio over the averages of these daily ratios over various periods. The averages
of these daily ratios of the closing prices of Sequana and Arris were 1.02 for
the previous 10 calendar days, 1.03 for the previous 30 calendar days, 0.93 for
the previous 60 calendar days, 0.87 for the previous 90 calendar days, 0.89 for
the previous 180 calendar days, and 1.01 for the previous 52 weeks ending
October 31, 1997. Lehman Brothers noted that the Exchange Ratio was higher than
the above range of historical exchange ratios of 0.87 times to 1.03 times. The
Exchange Ratio represented premiums of 32.4%, 31.1%, 45.2%, 55.2%, 51.7% and
33.7%, respectively, over the aforementioned average exchange ratios of
Sequana's and Arris' stock prices.
Relative Contribution Analysis. Lehman Brothers analyzed the pro forma
historical and projected financial contribution of Sequana and Arris to the
combined company assuming consummation of the Merger. This analysis, among other
things, showed that Sequana would contribute 47% of cumulative revenue and 73%
of the cumulative operating loss of the combined company for the cumulative
period 1997-1999. Lehman Brothers noted that Sequana's shareholders would own
48% of the combined company's common stock.
Lehman Brothers is an internationally recognized investment banking firm
and in connection with its investment banking activities is regularly engaged in
the evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities and private placements, and in
valuations for corporate and other purposes. The Sequana Board of Directors
selected Lehman Brothers because of Lehman Brothers' expertise, reputation and
familiarity with biotechnology and pharmaceutical companies and because its
investment banking professionals have substantial experience in transactions
similar to the Merger.
As compensation for its services in connection with the Merger, Sequana has
agreed to pay Lehman Brothers fees of (i) $375,000, payable upon delivery of the
Lehman Opinion, and (ii) $1,125,000 contingent upon the consummation of the
Merger. Sequana will also reimburse Lehman Brothers for its reasonable out-
of-pocket expenses, up to a maximum of $100,000, and has agreed to indemnify
Lehman Brothers against certain liabilities that may arise in connection with
its engagement. In the ordinary course of its business, Lehman Brothers may
trade in the securities of Sequana and Arris for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
OPINION OF FINANCIAL ADVISOR TO ARRIS
Pursuant to a letter agreement dated as of September 15, 1997 (the
"Engagement Letter"), Morgan Stanley was engaged to provide financial advisory
services including the provision of a financial fairness opinion in connection
with the Merger. Morgan Stanley was selected by the Arris Board of Directors to
act as
42
<PAGE> 53
its financial advisor based on Morgan Stanley's qualifications, expertise and
reputation and its knowledge of the business and affairs of Arris. At the
meeting of the Arris Board of Directors on October 31, 1997, Morgan Stanley
rendered its oral opinion, subsequently confirmed in writing, that, as of such
date, based upon and subject to the various considerations set forth in the
opinion, the Exchange Ratio pursuant to the Reorganization Agreement was fair
from a financial point of view to Arris.
The full text of the Morgan Stanley Opinion dated October 31, 1997, which
sets forth, among other things, assumptions made, procedures followed, matters
considered and limitations on the scope of the review undertaken by Morgan
Stanley in rendering its opinion, is attached to this Joint Proxy
Statement/Prospectus. Arris stockholders are urged to, and should, read the
opinion carefully and in its entirety. The Morgan Stanley Opinion is directed to
the Arris Board of Directors and addresses only the fairness of the Exchange
Ratio pursuant to the Reorganization Agreement from a financial point of view as
of the date of the opinion, and does not constitute a recommendation to any
holder of Arris Common Stock as to how to vote at the Arris Special Meeting. The
summary of the Morgan Stanley Opinion set forth in this Joint Proxy Statement/
Prospectus is qualified in its entirety by reference to the full text of such
opinion.
In rendering its opinion, Morgan Stanley, among other things: (i) reviewed
certain publicly available financial statements and other information of Arris
and Sequana; (ii) reviewed certain internal financial statements and other
financial and operating data concerning Arris and Sequana prepared by the
managements of Arris and Sequana; (iii) reviewed certain financial projections
prepared by the managements of Arris and Sequana; (iv) discussed the past and
current operations and financial condition and the prospects of Arris, including
information relating to certain strategic, financial and operational benefits
anticipated from the Merger, with senior executives of Arris; (v) discussed the
past and current operations and financial condition and the prospects of
Sequana, including information relating to certain strategic, financial and
operational benefits anticipated from the Merger, with senior executives of
Sequana; (vi) reviewed the pro forma impact of the Merger on Arris' consolidated
capitalization; (vii) reviewed the reported prices and trading activity for the
Arris Common Stock and the Sequana Common Stock; (viii) compared the financial
performance of Arris and Sequana and the prices and trading activity of the
Arris Common Stock and the Sequana Common Stock with that of certain
publicly-traded companies and their securities; (ix) reviewed the financial
terms, to the extent publicly available, of certain comparable acquisition
transactions; (x) reviewed and discussed with the senior managements of Arris
and Sequana the strategic rationale for the Merger and certain alternatives to
the Merger; (xi) participated in discussions and negotiations among
representatives of Arris and Sequana and their financial and legal advisors;
(xii) reviewed the Reorganization Agreement and certain related agreements; and
(xiii) performed such other analyses and considered such other factors as it
deemed appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the purposes
of its opinion. With respect to the internal financial projections and other
financial and operating data and discussions relating to the strategic,
financial and operational benefits anticipated from the Merger provided by Arris
and Sequana, Morgan Stanley assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the prospects
of Arris and Sequana. Morgan Stanley relied upon the assessment by the
managements of Arris and Sequana of their ability to retain key employees of
both Arris and Sequana. Morgan Stanley also relied upon, without independent
verification, the assessment by the managements of Arris and Sequana of Arris'
and Sequana's technologies and potential future products, the timing and risks
associated with the integration of Arris with Sequana, and the validity of, and
risks associated with, Arris' and Sequana's existing and future products and
technologies. Morgan Stanley did not make any independent valuation or appraisal
of the assets, liabilities or technology of Arris or Sequana, nor was Morgan
Stanley furnished with any such appraisals. Morgan Stanley assumed that the
Merger will be accounted for as a "purchase" business combination in accordance
with U.S. Generally Accepted Accounting Principles, will be treated as a
tax-free reorganization and/or exchange pursuant to the Internal Revenue Code of
1986, as amended, and will be consummated in accordance with the terms set forth
in the Reorganization Agreement. Morgan Stanley's opinion was necessarily based
on economic, market and other conditions as in effect on, and the information
made available to it as of, the date of the opinion.
43
<PAGE> 54
The following is a brief summary of the analysis performed by Morgan
Stanley in connection with its oral opinion and the preparation of its opinion
letter dated October 31, 1997.
Comparative Stock Price Performance. As part of its analysis, Morgan
Stanley reviewed the recent stock price performance of Arris and Sequana and
compared such performance with that of two groups of genomic companies. The
first group included Cadus Pharmaceutical Corp., Genome Therapeutics Corp.,
Myriad Genetics Inc., Oncogene Science Inc., and Synaptic Pharmaceutical Corp.
(collectively, the "Small Cap Genomics Companies"). The second group included
Affymetrix Inc., Human Genome Sciences Inc., Incyte Pharmaceuticals Inc.,
Millennium Pharmaceuticals, Inc., and Genset SA (collectively, the "Large Cap
Genomics Companies"). Morgan Stanley observed that over the period from August
1, 1995 to October 30, 1997, the market price of Arris Common Stock appreciated
16.3%, compared with an appreciation of 12.2% for Sequana, an appreciation of
85.9% and 138.5% for indices of the Small Cap Genomics Companies and Large Cap
Genomics Companies, respectively and 52.3% for the S&P Industrial Average.
Peer Group Comparison. Morgan Stanley compared certain financial
information of Arris with that of a group of drug discovery companies including
Sugen Inc., Pharmacopoeia Inc., Cell Therapeutics Inc., Biocryst Pharmaceuticals
Inc., Geron Corp., Ariad Pharmaceuticals Inc., Onyx Pharmaceuticals Inc., Sibia
Neurosciences Inc., and Trega Biosciences Inc. (collectively, the "Small Cap
Structure-Based Drug Design/Discovery Companies") and that of a group of drug
discovery companies including Agouron Pharmaceuticals Inc., Vertex
Pharmaceuticals Inc., and NeXstar Pharmaceuticals Inc. (collectively, the "Large
Cap Structure-Based Drug Design/Discovery Companies"). Morgan Stanley also
compared certain financial information of Sequana with that of the Small Cap
Genomic Companies and that of the Large Cap Genomics Companies. Such financial
information included, among other things, market value and technology value
(defined as market value less cash) as multiples of cash. In particular, such
analysis showed that as of October 30, 1997, Arris' market value traded at a
multiple of 2.9 times cash and its technology value traded at a multiple of 1.9
times cash, compared to a median of 2.7 times and 1.7 times, respectively, for
the Small Cap Structure-Based Drug Design/Discovery Companies and a median of
13.1 times and 12.1 times, respectively, for the Large Cap Structure-Based Drug
Design/Discovery Companies. Sequana's market value traded at a multiple of 2.3
times cash and its technology value traded at 1.3 times cash, compared to a
median of 3.6 times and 2.6 times, respectively, for the Small Cap Genomics
Companies and a median of 9.3 times and 8.3 times, respectively, for the Large
Cap Genomics Companies. No company used in the peer group comparison is
identical to Arris or Sequana.
Analysis of Selected Precedent Transactions. As part of its analysis,
Morgan Stanley reviewed eleven biotechnology transactions: PerSeptive Biosystems
Inc./Perkin-Elmer Corp., Somatix Therapy Corp./Cell Genesys Inc., Athena Medical
Corp./Elan Corporation PLC, Univax Biologics Inc./North American Biologicals,
Genetic Therapy Inc./Sandoz Corporation, Viagene Inc./Chiron Corp., Glycomed
Inc./Ligand Pharmaceuticals Inc., Affymax N.V./Glaxo Wellcome PLC, Synergen
Inc./Amgen Inc., Vestar Inc./Nexagen, and Sphinx Pharmaceuticals Corp./Eli Lilly
& Co. (collectively, the "Biotechnology Transaction Universe"). Morgan Stanley
compared certain statistics for the Biotechnology Transaction Universe to the
relevant financial statistics for Sequana based on the value of Sequana assuming
the closing price for Arris Common Stock as of October 30, 1997 and the Exchange
Ratio. The analysis showed multiples of technology values (defined as equity
value less cash plus debt) ranging from 1.0 times to 5.7 times the preceding 90
day average technology value and multiples of technology values ranging from 1.1
times to 4.3 times the preceding 30 day average technology value, multiples of
technology value ranging from 0.9 times to 12.5 times cash and
premiums/(discounts) paid to closing stock prices ranging from (3.5%) to 113.7%
for the average price over the 90 days prior to transaction announcement, 1.0%
to 117.2% for the average price over the one month prior to transaction
announcement and (64.0%) to 53.8% to the highest trading price over the
preceding twelve month period. These compared to multiples of technology values
of 1.9 times and 1.5 times for the preceding 90 day and 30 day average
technology values, respectively, technology value multiple of 2.3 times cash,
premiums to average stock prices of 37.4% for the 90 days prior to transaction
announcement and 19.3% for one month prior to transaction announcement and
discount to the highest trading price over the preceding twelve month period of
16.3%. No transaction used in the analysis of selected precedent transactions is
identical to the Merger.
44
<PAGE> 55
Relative Contribution Analysis. Morgan Stanley analyzed the pro forma
contribution of each of Arris and Sequana to the Combined Company assuming
consummation of the Merger. This analysis, among other things, showed that in
terms of revenue, Arris would contribute 60.2% in the twelve month period ending
June 30, 1997, would contribute 50.3% in terms of book value and would
contribute 53.4% in terms of cash. These figures, adjusted to reflect each
company's respective capital structure, were compared to the pro forma ownership
of the Combined Company by Arris stockholders of 51.6% on a fully diluted basis
based on the Exchange Ratio.
Exchange Ratio Analysis. Morgan Stanley compared the exchange ratios
implied by average historical exchange ratios to the Exchange Ratio. Morgan
Stanley reviewed the ratios of the closing stock prices of Sequana to Arris over
various periods during the twelve month period ending October 30, 1997 and
computed the premiums represented by the Exchange Ratio over the averages of
these daily ratios over various periods. The averages of these daily ratios of
the closing prices of Sequana and Arris were 1.042 for the previous 10 calendar
days, 1.032 for the previous 30 calendar days, 0.929 for the previous 60
calendar days and 1.014 for the latest twelve month period ending October 30,
1997. The Exchange Ratio represented premiums of 29.6%, 30.8%, 45.4% and 33.1%,
respectively, over the aforementioned average exchange ratios of the Sequana and
Arris stock prices.
In connection with the review of the Merger by the Arris Board of
Directors, Morgan Stanley performed a variety of financial and comparative
analyses for purposes of its opinion given in connection therewith. While the
foregoing summary describes the analyses and factors reviewed by Morgan Stanley
in connection with its opinion, it does not purport to be a complete description
of all the analyses performed by Morgan Stanley in arriving at its opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a whole
and did not attribute any particular weight to any analysis or factor considered
by it. Furthermore, selecting any portion of its analyses, without considering
all analyses, would create an incomplete view of the process underlying its
opinion. In addition, Morgan Stanley may have given various analyses and factors
more or less weight than other analyses and factors, and may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Morgan Stanley's view of the actual value of Arris or Sequana. In
performing its analyses, Morgan Stanley made numerous assumptions with respect
to industry performance, general business and economic conditions of other
matters, many of which are beyond the control of Arris or Sequana. Any estimates
contained herein are not necessarily indicative of future results actual values,
which may be significantly more or less favorable than those suggested by such
estimates. The analyses performed were prepared solely as part of Morgan
Stanley's analysis of the fairness of the Exchange Ratio pursuant to the
Reorganization Agreement from a financial point of view to Arris and were
conducted in connection with the delivery of the Morgan Stanley Opinion. The
analyses do not purport to be appraisals or to reflect the prices at which Arris
or Sequana might actually be sold. The Exchange Ratio pursuant to the Merger was
determined through arm's-length negotiations between Arris and Sequana and was
approved by the Arris Board of Directors. Morgan Stanley did not recommend any
specific exchange ratio to Arris or that any specific exchange ratio constituted
the only appropriate exchange ratio for the Merger.
The Arris Board of Directors retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan Stanley,
as part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the past, Morgan Stanley and its
affiliates have provided financial advisory and financing services for Arris and
have received fees for the rendering of these services. In the ordinary course
of Morgan Stanley's trading and brokerage activities, Morgan Stanley or its
affiliates may at any time hold long or short positions, may trade or otherwise
effect transactions, for its own account or for the account of customers in the
equity securities of Arris or Sequana.
Pursuant to the Engagement Letter, Morgan Stanley provided advisory
services and a financial opinion in connection with the Merger and Arris has
agreed to pay (i) an announcement fee of $500,000 which is
45
<PAGE> 56
currently payable, (ii) a transaction fee equal to approximately 1.0% of the
aggregate value of the transaction if the Merger is consummated, and (iii) an
advisory fee estimated to be between $150,000 and $250,000 if the Merger is not
consummated. The announcement and advisory fees are creditable against the
transaction fee. In addition, Arris has also agreed to indemnify Morgan Stanley
and its affiliates, their respective directors, officers, agents and employees
and each person, if any, controlling Morgan Stanley or any of its affiliates
against certain liabilities and expenses, including certain liabilities under
the federal securities laws, related to Morgan Stanley's engagement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Sequana's management and the Sequana Board of Directors
may be deemed to have certain interests in the Merger that are in addition to
their interests as shareholders of Sequana generally. The Sequana Board of
Directors was aware of these interests and considered them, among other matters,
in approving the Reorganization Agreement and the transactions contemplated
thereby.
Indemnification and Insurance. The Reorganization Agreement provides that
all rights to indemnification existing in favor of the persons serving as
directors and officers of Sequana as of the date of the Reorganization Agreement
for acts or omissions occurring prior to the Effective Time, as provided in the
Sequana Bylaws and in certain indemnification agreements between Sequana and
such directors and officers, will survive the Merger, and that Arris will cause
the Surviving Corporation to perform its obligations arising thereunder for at
least six years from the Effective Time. Subject to certain limitations, Arris
has also agreed to cause the Surviving Corporation to maintain in effect for six
years after the Effective Time a policy of directors' and officers' liability
insurance for the benefit of persons serving as directors and officers of
Sequana as of the date of the Reorganization Agreement. See "The Reorganization
Agreement -- Covenants -- Indemnification and Insurance."
Acceleration of Stock Options. As with all unvested options to purchase
Sequana Common Stock, unvested Sequana stock options held by officers and
directors of Sequana will become exercisable prior to the Sequana Special
Meeting as a result of, and contingent upon, the Merger. See "The Reorganization
Agreement--Stock Options; Employee Stock Purchase Plan."
Employment Agreements and Change of Control Arrangements
Kevin J. Kinsella. Sequana and Kevin J. Kinsella are parties to an
employment agreement pursuant to which Mr. Kinsella serves as Sequana's
President and Chief Executive Officer. Pursuant to the agreement, following the
Merger, certain shares held by Mr. Kinsella will be released from Sequana's
repurchase option. In addition, Sequana and Mr. Kinsella are parties to a
severance agreement. The severance agreement provides that following the Merger,
if Mr. Kinsella's employment is terminated voluntarily or involuntarily, Mr.
Kinsella is entitled to receive his then-current base salary and benefits for a
period of two years. Furthermore, the severance agreement provides that upon the
closing of the Merger Sequana shall forgive all principal and outstanding
interest owed by Mr. Kinsella to Sequana pursuant to a promissory note in the
principal amount of $187,500.
M. Scott Salka. Sequana and M. Scott Salka are parties to a severance
agreement. The agreement provides that following the Merger Mr. Salka is
entitled, in certain circumstances, to severance payments in the event of
voluntary or involuntary termination. If Mr. Salka voluntarily terminates his
employment after July 1, 1998, (or an earlier date mutually agreed to by the
parties) he shall be entitled to receive his then-current base salary and
benefits for a period of one year from the date of termination. In the event of
Mr. Salka's involuntary termination, other than for cause (as defined in the
agreement), Mr. Salka is entitled to receive his then-current base salary and
benefits for the period from the date of termination until July 1, 1999.
Timothy Harris. Sequana and Timothy J.R. Harris, Sequana's Senior Vice
President, Research and Development, Chief Technical Officer and director, are
parties to an employment agreement pursuant to which Dr. Harris serves as a
member of senior management of Sequana. If Dr. Harris' employment is terminated
involuntarily, he is entitled to receive salary continuation payments, at his
then-current base salary, for a period of 12 months or until he obtains
substantially similar employment, whichever is shorter. In addition, any
unvested restricted stock held by Dr. Harris upon an involuntary termination of
employment will
46
<PAGE> 57
continue to vest for a period of six months. Arris intends to enter into
an employment agreement with Dr. Harris, effective upon consummation of the
Merger, pursuant to which Dr. Harris would be employed as Arris' Senior Vice
President of Research and Development, La Jolla. It is contemplated that Dr.
Harris will earn an annual base salary of a minimum of $210,400 and will be
entitled to a bonus of fifty percent of the base salary if he remains
continuously employed by Arris for a one year period after the closing of the
Merger, and an additional fifty percent in the event that he meets certain
business objectives. It is intended that Dr. Harris will be entitled to
severance benefits under certain circumstances.
Other Members of Management. Certain other members of management of
Sequana have also entered into severance agreements with Sequana. Such
agreements provide base salary and benefits for a period of 12 months if the
employee is terminated involuntarily other than for cause (as defined in the
agreements) within six to 12 months following the Merger.
VOTING AGREEMENTS
Pursuant to the Arris Voting Agreements, the Voting Agreement Shareholders
who owned in the aggregate outstanding shares of Sequana Common Stock
representing approximately 19.6% of the shares of Sequana Common Stock based
upon the number of shares of Sequana Common Stock issued and outstanding as of
the Record Date have agreed that, prior to the Expiration Date, they will vote
their shares of Sequana Common Stock in favor of: (i) the Merger; (ii) the
execution and delivery by Sequana of the Reorganization Agreement; and (iii) the
approval of the terms of the Reorganization Agreement and each of the other
actions contemplated by the Reorganization Agreement and any action required in
furtherance thereof. The Voting Agreement Shareholders have also delivered to
Arris irrevocable proxies with respect to the matters covered by the Arris
Voting Agreements. In addition, subject to certain exceptions, the Voting
Agreement Shareholders have agreed not to transfer any of their beneficial
ownership of, interest in, or risk relating to, Subject Securities owned by them
unless and until the proposed transferee of such Subject Securities shall have
(i) executed a counterpart of the Arris Voting Agreement and an irrevocable
proxy and (ii) agreed to hold such Subject Securities subject to all of the
terms and conditions of the Arris Voting Agreement.
AFFILIATE AGREEMENTS
Sequana has made a covenant in the Reorganization Agreement to deliver to
Arris an agreement executed by each person who could reasonably be determined to
be an "affiliate," as such term is defined in Rule 145 promulgated under the
Securities Act, of Sequana ("Affiliate") that generally requires such person,
for the one year period following consummation of the Merger, to sell shares to
the public only in accordance with the volume restrictions and manner of sale
restrictions of Rule 144. These restrictions generally require that sales to the
public be made only through unsolicited "brokers' transactions" or in
transactions directly with a "market maker," as such terms are defined in Rule
144. Additionally, the number of shares to be sold by an affiliate (together
with certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 may not exceed the greater of 1% of
the outstanding shares of Arris Common Stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale. One
year after the Effective Time, an affiliate would be able to sell such Arris
Common Stock without such manner of sale or volume limitations provided that
Arris was current with its Exchange Act informational filings and such affiliate
was not then an affiliate of Arris. This requirement will lapse if the SEC
repeals the provisions currently contained in Rule 145(c) in a manner that would
apply to this transaction.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Sequana
Common Stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences to Arris, Sequana or
Sequana shareholders as described herein.
47
<PAGE> 58
Sequana shareholders should be aware that this discussion does not deal
with all U.S. federal income tax considerations that may be relevant to
particular Sequana shareholders in light of their particular circumstances, such
as shareholders who are dealers in securities, who are subject to the
alternative minimum tax provisions of the Code, who are foreign persons, who
acquired their shares in connection with stock option or stock purchase plans or
in other compensatory transactions or who hold their shares as a hedge or as
part of a hedging, straddle, conversion or other risk reduction transaction.
Further, no opinion is expressed as to the federal income tax treatment with
respect to holders of warrants for Sequana Common Stock. In addition, the
following discussion does not address the tax consequences of the Merger under
foreign, state or local tax laws or the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger).
SEQUANA SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
Neither Arris nor Sequana has requested a ruling from the Internal Revenue
Service (the "IRS") with regard to any of the U.S. federal income tax
consequences of the Merger. Wilson Sonsini Goodrich & Rosati P.C., counsel to
Sequana, and Cooley Godward LLP, counsel to Arris, will each render an opinion
(collectively, the "Tax Opinions") that the Merger will constitute a
reorganization under Section 368(a) of the Code (a "Reorganization"). As a
condition to the consummation of the Merger, such counsel must also render tax
opinions at the Closing that the Merger will constitute a Reorganization. Such
opinions are, and will be, based on certain assumptions as well as
representations (discussed below) and are and, will be subject to the
limitations discussed below. Moreover, such opinions will not be binding on the
IRS nor preclude the IRS from adopting a contrary position. The discussion below
assumes that the Merger will qualify as a reorganization, based upon the Tax
Opinions.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the following U.S.
federal income tax consequences should result:
(i) No gain or loss will be recognized by the holders of Sequana Common
Stock upon the receipt of Arris Common Stock solely in exchange for such
Sequana Common Stock in the Merger (except to the extent of cash
received in lieu of fractional shares);
(ii) The aggregate tax basis of the Arris Common Stock so received by
Sequana shareholders in the Merger (including any fractional share of
Arris Common Stock not actually received) will be the same as the
aggregate tax basis of Sequana Common Stock surrendered in exchange
therefor;
(iii) The holding period of the Arris Common Stock so received by each
Sequana shareholder in the Merger will include the period for which the
Sequana Common Stock surrendered in exchange therefor was considered to
be held, provided that the Sequana Common Stock so surrendered is held
as a capital asset at the Effective Time;
(iv) Cash payments received by holders of Sequana Common Stock in lieu of a
fractional share will be treated as if such fractional share of Arris
Common Stock had been issued in the Merger and then redeemed by Arris. A
Sequana shareholder receiving such cash will recognize gain or loss upon
such payment, measured by the difference (if any) between the amount of
cash received and the basis in such fractional share. The gain or loss
should be capital gain or loss provided that such share of Sequana
Common Stock was held as a capital asset at the Effective Time; and
(v) A shareholder of Sequana who exercises dissenters' rights under any
applicable law with respect to a share of Sequana Common Stock and
receives payments for such stock in cash will recognize capital gain or
loss (if such stock was held as a capital asset at the Effective Time of
the Merger) measured by the difference between the amount of cash
received and the shareholder's basis in such share, provided such
payment is neither essentially equivalent to a dividend within the
meaning of Section 302 of the Code nor has the effect of a distribution
of a dividend within the meaning of Section 356(a)(2) of the Code
(collectively, a "Dividend Equivalent Transaction"). A sale of Sequana
shares incident to an exercise of dissenters' rights will generally not
be a
48
<PAGE> 59
Dividend Equivalent Transaction if, as a result of such exercise, the
dissenting stockholder owns no shares of Arris Common Stock (either
actually or constructively within the meaning of Section 318 of the
Code); and
(vi) Neither Arris nor Sequana will recognize gain solely as a result of
the Merger.
The Tax Opinions will be subject to certain assumptions and qualifications
and will be based on the truth and accuracy of certain representations of Arris,
Sequana and certain shareholders of Sequana, including representations in
certain certificates delivered to counsel by the respective managements of Arris
and Sequana and certain shareholders of Sequana. Of particular importance are
the assumptions and representations relating to the "continuity of interest"
requirement.
To satisfy the "continuity of interest" requirement, Sequana shareholders
must not, pursuant to a plan or intent existing at or prior to the Effective
Time, dispose of or transfer so much of either (i) their Sequana Common Stock in
anticipation of the Merger or (ii) the Arris Common Stock to be received in the
Merger (collectively, "Planned Dispositions"), such that the Sequana
shareholders, as a group, would no longer have a "significant equity interest"
in the Sequana business being conducted by Arris after the Merger. Sequana
shareholders will generally be regarded as having a "significant equity
interest" as long as the Arris Common Stock received in the Merger (after taking
into account Planned Dispositions), in the aggregate, represents a substantial
portion of the entire consideration received by the Sequana shareholders in the
Merger. No assurance can be made that the "continuity of interest" requirement
will be satisfied, and if such requirement is not satisfied, the Merger would
not be treated as a Reorganization.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in significant adverse tax consequences to the Sequana
shareholders. A Sequana shareholder would recognize gain or loss with respect to
each share of Sequana Common Stock surrendered equal to the difference between
the shareholder's basis in such share and the fair market value, as of the
Effective Time, of the Arris Common Stock received in exchange therefor. In such
event, a shareholder's aggregate basis in the Arris Common Stock so received
would equal its fair market value, and the stockholder's holding period for such
stock would begin the day after the Closing Date.
Certain noncorporate Sequana shareholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in Arris Common Stock. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification number
("TIN") and certifies that he, she or it is not subject to backup withholding on
the substitute Form W-9 included in the Transmittal Letter, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct TIN on Form
W-9 may be subject to a $50 penalty imposed by the IRS.
Each Sequana shareholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the Merger.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for by Arris under the "purchase" method of
accounting in accordance with generally accepted accounting principles. Under
the purchase method of accounting, the purchase price of Sequana Common Stock,
including direct and indirect costs of the Merger, will be allocated to the
assets acquired and liabilities assumed based upon their estimated fair value,
with excess purchase consideration, if any, allocated to goodwill. Arris expects
the Merger to result in a substantial charge related to "in-process" technology.
See "Selected Unaudited Pro Forma Combined Condensed Financial Data".
REGULATORY MATTERS
Antitrust. Arris and Sequana do not believe that any governmental filings
with the FTC are required with respect to the Merger. However, the FTC or the
Antitrust Division could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin
consummation of the Merger or seeking to cause divestiture of significant assets
of Arris or Sequana or their subsidiaries. There can be no assurance that a
challenge to the Merger on antitrust grounds will not be made, or, if such
challenge is made, of what the result would be. Consummation of the Merger is
conditioned upon,
49
<PAGE> 60
among other things, the absence of any temporary restraining order, preliminary
or permanent injunction, or other order issued by any federal or state court in
the United States which prevents the consummation of the Merger.
Filing with the California Secretary of State. An Agreement of Merger must
be filed with the Secretary of State of the State of California in order to
consummate the Merger.
Securities Laws. Arris and Sequana must comply with the federal securities
laws and applicable securities laws of various states.
RIGHTS OF DISSENTING SHAREHOLDERS OF SEQUANA
Holders of Sequana Common Stock are generally entitled to dissenters'
rights with respect to the Reorganization under the CGCL if, and only if, the
holders of 5% or more of the outstanding Sequana Common Stock elect to exercise
dissenters' rights in respect of their shares. A person having a beneficial
interest in shares of Sequana Common Stock held of record in the name of another
person, such as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect whatever dissenters' rights the beneficial owner may have.
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under the CGCL and is qualified in its entirety by
reference to the full text of Chapter 13 of the CGCL, sections of which are
reprinted in their entirety as Appendix D to this Joint Proxy
Statement/Prospectus and should be read carefully and in their entirety.
If the Reorganization is approved by the affirmative vote of the holders of
a majority of the outstanding Sequana Common Stock and is not terminated in
accordance with the Reorganization Agreement (including termination at the
election of Arris if the aggregate number of shares voting against the
Reorganization exceeds 9%), Sequana's shareholders who vote against the
Reorganization and who have fully complied with all applicable provisions of
Chapter 13 of the CGCL and whose shares constitute Sequana Dissenting Shares (as
defined below), will, to the extent that their shares collectively aggregate 5%
or more of the outstanding shares of Sequana Common Stock, have the right to
require Sequana to purchase the shares of Sequana Common Stock held by them for
cash at the fair market value thereof determined as of the date preceding the
public announcement of the Reorganization, excluding any appreciation or
depreciation because of the Reorganization but adjusted for any stock split,
reverse stock split or share dividend which becomes effective thereafter. To
qualify as Sequana Dissenting Shares, such shareholders must not only vote
against the transaction but must also provide Sequana with a written demand
(described below) prior to the Sequana Special Meeting. Under the CGCL, no
shareholder of Sequana who is entitled to exercise dissenters' rights has any
right at law or in equity to contest the validity of the Reorganization or to
have the Reorganization set aside or rescinded, except in an action to test
whether the number of shares required to authorize or approve the Reorganization
had legally been voted in favor of the Reorganization. "Sequana Dissenting
Shares" means those shares of Sequana Common Stock with respect to which the
holders have voted against the Reorganization and have perfected their purchase
demand in accordance with the CGCL, except that no such shares will constitute
Sequana Dissenting Shares unless either (i) holders of 5% or more of the
outstanding shares of Sequana Common Stock file demands for payment as
dissenting shares under the CGCL or (ii) the shares in question are subject to a
restriction on transfer imposed by Sequana or by any law or regulation.
Sequana is not aware of any restriction on transfer of any shares of
Sequana Common Stock except restrictions that may be imposed upon shareholders
who are "affiliates" of Sequana for purposes of Rule 145 under the Securities
Act, shareholders who received shares in private transactions exempt from the
registration requirements of the Securities Act and restrictions on transfer
imposed on certain affiliates of Sequana in connection with the Reorganization.
Those shareholders who believe there is some such restriction affecting their
shares should consult with their own legal counsel as to the nature and extent
of any dissenters' rights they may have.
For a holder of Sequana Common Stock to exercise dissenters' rights, the
procedures to be followed under Chapter 13 of the CGCL include the following
requirements:
50
<PAGE> 61
(1) The shareholder of record must have voted the shares against the
Reorganization. It is not sufficient to abstain from voting. However, the
shareholder may abstain as to part of his or her shares or vote part of
those shares for the Reorganization without losing the right to exercise
dissenters' rights as to other shares which were voted against the
Reorganization.
(2) Any such shareholder who votes against the Reorganization, and
who wishes to have the shares that are being voted against the
Reorganization purchased, must make a written demand to have Sequana
purchase those shares for cash at their fair market value. The demand must
include the information specified below and must be received by Sequana not
later than the date of the Meeting. Merely voting or delivering a proxy
directing a vote against the approval of the Reorganization does not
constitute a demand for purchase. A written demand is essential.
The written demand that the dissenting shareholder must deliver to Sequana
must:
(1) Be made by the person who was the shareholder of record on the
Record Date (or such shareholder's duly authorized representative) and not
by someone who is merely a beneficial owner of the shares and not by a
shareholder who acquired the shares subsequent to the Record Date;
(2) State the number and class of dissenting shares held of record by
the dissenting shareholders; and
(3) Include a demand that Sequana purchase the shares at the dollar
amount that the shareholder claims to be the fair market value of such
shares on the last trading day before the terms of the Reorganization were
first announced, excluding any appreciation or depreciation because of the
proposed Reorganization but adjusted for any stock split, reverse stock
split or share dividend which becomes effective thereafter. Sequana
believes that this day is October 31, 1997. A shareholder may take the
position in the written demand that a different date is applicable. The
shareholder's statement of fair market value constitutes an offer by such
dissenting shareholder to sell the shares to Sequana at such price.
The written demand should be delivered to Sequana at its principal
executive offices, 11099 North Torrey Pines Road, Suite 160, La Jolla,
California 92037, Attention Chief Financial Officer.
A shareholder may not withdraw a demand for payment without the consent of
Sequana. Under the terms of the CGCL, a demand by a shareholder is not effective
for any purpose unless it is received by Sequana (or any transfer agent
thereof).
Within 10 days after the approval of the Reorganization by Sequana's
shareholders, Sequana must notify all holders of Sequana Dissenting Shares of
the approval and must offer all of such shareholders a cash price for their
shares which Sequana considers to be the fair market value of the shares. The
notice also must contain a brief description of the procedures to be followed
under Chapter 13 of the CGCL to dispute the price offered and attach a copy of
the relevant provisions of the CGCL in order for a shareholder to exercise the
right to have Sequana purchase his or her shares.
Within 30 days after the date on which the notice of the approval of the
Reorganization is mailed by Sequana to holders of Sequana Dissenting Shares, the
shareholder's certificates, representing any shares which the shareholder
demands be purchased, must be submitted to Sequana, at its principal office, or
at the office of any transfer agent, to be stamped or endorsed with a statement
that the shares are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed. Upon subsequent transfer of
those shares, the new certificates will be similarly stamped, together with the
name of the original dissenting shareholder.
If Sequana and a holder of Sequana Dissenting Shares agree that the shares
held by such shareholder are eligible for dissenters' rights and agree upon the
price of such shares, such holder of Sequana Dissenting Shares is entitled to
receive from Sequana the agreed price with interest thereon at the legal rate on
judgments from the date of such agreement. Any agreement fixing the fair market
value of dissenting shares as between Sequana and the holders thereof must be
filed with the Secretary of Sequana at the address set forth below. Subject to
certain provisions of Section 1306 and Chapter 5 of the CGCL, payment of the
fair market value of the Sequana Dissenting Shares shall be made within 30 days
after the amount has been agreed upon or within
51
<PAGE> 62
30 days after any statutory or contractual conditions to the Reorganization are
satisfied, whichever is later, subject to the surrender of the certificate
therefor, unless provided otherwise by agreement.
If Sequana and a holder of Sequana Dissenting Shares fail to agree on
either the fair market value of the shares or on the eligibility of the shares
to be purchased, then either such holder of Sequana Dissenting Shares or Sequana
may file a complaint for judicial resolution of the dispute in the superior
court of the proper county. The complaint must be filed within six months after
the date on which the respective notice of approval is mailed to the
shareholders. If a complaint is not filed within six months, the shares will
lose their status as Sequana Dissenting Shares. Two or more holders of Sequana
Dissenting Shares may join as plaintiffs or be joined as defendants in such an
action. If the eligibility of the shares is at issue, the court must first
decide that issue. If the fair market value of the shares is in dispute, the
court must determine, or shall appoint one or more impartial appraisers to
.assist in its determination of, the fair market value. The cost of the action
will be assessed or apportioned as the court considers equitable. If, however,
the appraised value of the dissenting shares exceeds the price offered by
Sequana, Sequana must pay the costs.
Any demands, notices, certificates or other documents required to be
delivered to Sequana may be sent to 11099 North Torrey Pines Road, Suite 160, La
Jolla, California 92037, Attention Chief Financial Officer.
NO ARRIS APPRAISAL RIGHTS
Holders of Arris Common Stock are not entitled to appraisal rights under
the DGCL because Arris is not a constituent corporation to the Reorganization
under the DGCL.
RESALE OF ARRIS COMMON STOCK
Arris Common Stock issued in connection with the Merger will be freely
transferable, except that shares issued to any Sequana shareholder who is an
Affiliate of Sequana or who becomes an Affiliate of Arris are subject to certain
restrictions on resale. An Affiliate is defined generally as including, without
limitation, directors, certain executive officers and certain other persons who
control a company. Sequana has made a covenant in the Reorganization Agreement
that, prior to the date of the Arris Special Meeting, Sequana will deliver to
Arris agreements executed by Affiliates of Sequana that prohibit the sale,
transfer or other disposition of Arris Common Stock received by such
stockholders in the Merger, except under certain circumstances, in order to
comply with the requirements of certain federal securities laws. See "Approval
of the Merger and Related Transactions--Affiliate Agreements." Certain Sequana
shareholders have also delivered to Arris certificates certifying that such
shareholders have no present intention to dispose of certain of the shares of
Arris Common Stock to be received by such shareholders in the Merger in order to
comply with the requirements of certain U.S. federal tax laws. See "Approval of
the Merger and Related Transactions--Certain Federal Income Tax Consequences."
52
<PAGE> 63
THE REORGANIZATION AGREEMENT
GENERAL
The following is a summary of the material provisions of the Reorganization
Agreement, a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. However, the
following is not a complete statement of all provisions of the Reorganization
Agreement and related agreements. Statements made in this Joint Proxy
Statement/Prospectus with respect to the terms of the Reorganization Agreement
and such related agreements are qualified in their respective entireties by
reference to the more detailed information set forth in the Reorganization
Agreement and such related agreements.
The Reorganization Agreement provides for the merger of Merger Sub with and
into Sequana. As a result of the Merger, Merger Sub will cease to exist, Sequana
will become a wholly owned subsidiary of Arris and the former shareholders of
Sequana will become stockholders of Arris. Sequana will continue as the
surviving corporation of the Merger (the "Surviving Corporation") and will
retain all of its separate corporate existence, with all its purposes, objects,
rights, privileges, powers and franchises unaffected by the Merger. Merger Sub
has been formed solely for the purpose of effecting the Merger, and there will
be no other activity in Merger Sub. The Merger will become effective upon the
filing of an Agreement of Merger with the California Secretary of State. Such
filing is anticipated to take place as soon as practicable after the receipt of
all required regulatory approvals and the satisfaction or waiver of the other
conditions to the Merger, including the adoption and approval of the
Reorganization Agreement and the Merger by the shareholders of Sequana and the
approval of the issuance of Arris Common Stock in connection with the Merger and
the Certificate of Amendment by the stockholders of Arris. It is currently
anticipated that the Effective Time will occur in January 1998. There can be no
assurance, however, that the required regulatory approvals will be obtained,
that the other conditions to the Merger will be satisfied by such date, or at
all, or that the Reorganization Agreement will not be terminated. See
"--Conditions to the Mergers".
MERGER CONSIDERATION
Sequana Common Stock. At the Effective Time, each share of Sequana Common
Stock then outstanding will be converted into the right to receive Arris Common
Stock based on the Exchange Ratio.
No Fractional Shares. No fractional shares of Arris Common Stock will be
issued in connection with the Merger, and no certificates for any such
fractional shares will be issued. In lieu of such fractional shares, any holder
of Sequana Common Stock (after aggregating all fractional shares of Arris Common
Stock issuable to such holder) will, upon surrender of such holder's stock
certificate(s) representing Sequana Common Stock to the Exchange Agent, be paid
in cash the dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the closing price of a share of Arris
Common Stock on the Nasdaq National Market on the date the Merger becomes
effective.
STOCK OPTIONS; EMPLOYEE STOCK PURCHASE PLAN; WARRANTS
Stock Options. Fifteen days prior to the Sequana Shareholders' Meeting,
all holders of options issued by Sequana pursuant to its 1994 Incentive Stock
Option Plan shall be sent notice that, contingent upon the closing of the
Merger, (i) each such option shall be fully exercisable during such fifteen day
period and (ii) each such option shall terminate at the end of such fifteen day
period. Thirty days prior to the Sequana Shareholders' Meeting, all holders of
options granted pursuant to its 1995 Director Option Plan shall be sent notice
that, contingent upon the closing of the Merger, that (i) each such option shall
be fully exercisable during such thirty day period and (ii) each such option
shall terminate at the end of such thirty day period. Options initially granted
pursuant to an option plan of NemaPharm will be similarly treated. Arris shall
grant options to purchase Arris Common Stock to Sequana employees effective upon
the first meeting of Arris' board of directors following the effective time of
the Merger, commensurate (including with respect to vesting) with option grants
to newly hired employees at similar grade levels.
Employee Stock Purchase Plan. Sequana's Board of Directors will shorten
the offering period then in progress under its Employee Stock Purchase Plan (the
"Sequana ESPP") by setting a new exercise date under the Sequana ESPP, at and as
of the date of the Sequana Shareholders' Meeting. The Sequana Board of Directors
will not thereafter commence any offering period under the Sequana ESPP. Subject
to the terms of
53
<PAGE> 64
the Purchase Plan and applicable law, Arris will take all reasonable actions to
ensure that from and after the effective date of the Merger, all Sequana
employees shall be entitled to participate in the Purchase Plan.
Warrants. Except for the warrants beneficially held by Kevin Kinsella and
by Novartis Pharmaceutical Corporation (which warrants shall either be exercised
or terminated at the Effective Time), all rights with respect to Sequana Common
Stock under warrants that are then outstanding shall be converted into and
become rights with respect to Arris Common Stock, and Arris shall, subject to
certain limitations, assume all such warrants in accordance with the terms of
such warrants. Each warrant assumed by Arris (i) may be exercised solely for
shares of Arris Common Stock, (ii) the number of shares of Arris Common Stock
subject to each warrant assumed shall be equal to the number of shares of
Sequana Common Stock subject to such warrant immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounding down to the nearest whole share
(with cash, less the applicable exercise price, being payable for any fraction
of a share), (iii) the per share exercise price under each warrant assumed shall
be adjusted by dividing the per share exercise price under the warrant by the
Exchange Ratio and rounding up to the nearest cent (to the extent permitted by
the terms of the warrants and otherwise rounded or without rounding as required
by the terms of the particular warrant).
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of Sequana Common Stock issued and
outstanding as of November 25, 1997 (assuming the exercise of all outstanding
options and warrants to purchase Sequana Common Stock expiring upon or before
the consummation of the Merger with an exercise price of $12.31 (the closing
price of Sequana Common Stock as reported on the Nasdaq National Market on
November 25, 1997) or less and no exercise of other outstanding rights to
purchase Sequana Common Stock), an aggregate of approximately 14,700,000 shares
of Arris Common Stock will be issued to security holders of Sequana. Based upon
the number of shares of Arris Common Stock issued and outstanding as of November
25, 1997 (assuming no exercise of outstanding options or other rights to
purchase Arris Common Stock), the former holders of Sequana Common Stock would
hold and have voting power with respect to approximately 49.2% of Arris' total
issued and outstanding shares after consummation of the Merger.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Time, the Exchange Agent will
mail to the registered holders of Sequana Common Stock (i) a Letter of
Transmittal and (ii) instructions for the use of the Letter of Transmittal in
effecting the surrender of the Sequana Stock Certificates in exchange for
certificates representing Arris Common Stock. Upon surrender of a Sequana Stock
Certificate to the Exchange Agent for exchange, together with a duly executed
Letter of Transmittal and such other documents as may reasonably be required by
the Exchange Agent or Arris, the holder of such Sequana Stock Certificate shall
be entitled to receive in exchange therefor a certificate representing the whole
number of shares of Arris Common Stock that such holder has the right to
receive. No fractional shares of Arris Common Stock will be issued in connection
with the Merger, and no certificates for any such fractional shares will be
issued. See "--Merger Consideration--No Fractional Shares".
If any Sequana Stock Certificate has been lost, stolen or destroyed, Arris
may require the owner of such lost, stolen or destroyed Sequana Stock
Certificate to provide an appropriate affidavit and to deliver a bond as
indemnity against any claim that may be made against the Exchange Agent, Arris
or Sequana with respect to such Sequana Stock Certificate.
SEQUANA SHAREHOLDERS SHOULD NOT SURRENDER THEIR SEQUANA STOCK CERTIFICATES
FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
EFFECT ON CERTIFICATES
At the Effective Time, (i) all shares of Sequana Common Stock outstanding
immediately prior to the Effective Time will automatically be canceled and
retired and will cease to exist, and all holders of certificates representing
shares of Sequana Common Stock that were outstanding immediately prior to the
Effective Time will cease to have any rights as shareholders of Sequana, and
(ii) the stock transfer books of Sequana will be
54
<PAGE> 65
closed with respect to all shares of Sequana Common Stock outstanding
immediately prior to the Effective Time. No further transfer of any such shares
of Sequana Common Stock will be made on such stock transfer books after the
Effective Time. If, after the Effective Time, a Sequana Stock Certificate is
presented to the Exchange Agent (or to Sequana or Arris), such Sequana Stock
Certificate will be canceled and will be exchanged as provided above under the
caption "--Conversion of Shares; Procedure for Exchange of Certificates;" and
"--Merger Consideration."
CORPORATE MATTERS
As of the Effective Time, the Articles of Incorporation of the Surviving
Corporation will be amended and restated to conform to the form of Articles of
Incorporation attached to the Reorganization Agreement and the Bylaws of the
Surviving Corporation will be amended and restated to conform to the Bylaws of
the Merger Sub as in effect immediately prior to the Effective Time. Immediately
after the Effective Time, the directors and officers of the Surviving
Corporation will be the respective individuals who are directors and officers of
Merger Sub immediately prior to the Effective Time.
THE COMPOSITION OF THE ARRIS BOARD OF DIRECTORS
Arris must use all reasonable efforts to nominate and appoint a board of
nine persons as soon as reasonably practicable after the Effective Time, to
serve until the next annual election of directors. Arris must use all reasonable
efforts to cause each of such directors, so long as each is then willing to
serve, to be nominated for an additional one year term as director of Arris and
included as nominees of Arris in Arris' 1998 proxy statement. The nine persons
who shall act as directors of Arris following the Effective Time shall be
selected as follows: Mr. John Walker and Mr. Irwin Lerner will meet and consult
with one another during the thirty days following the date of the Reorganization
Agreement to consult and discuss the appropriate make up of Arris'
post-Effective Time board of directors. If Messrs. Walker and Lerner agree upon
the individuals to become (or remain) members of the Arris Board of Directors
after the Effective Time, their agreed upon nominees shall make up the Arris
Board of Directors. If Messrs. Walker and Lerner are unable to agree, then Mr.
Walker shall propose five nominees, which nominees shall be reasonably
acceptable to Sequana and Mr. Lerner shall propose four nominees, which nominees
shall be reasonably acceptable to Arris, and such nine nominees shall make up
the Arris Board of Directors. Selection of the post-Effective Time board of
directors shall be completed no later than thirty days prior to the earlier of
the Sequana Shareholders' Meeting and the Arris Special Meeting. Supplemental
information will be distributed to the Arris stockholders and the Sequana
shareholders upon completion of the selection process.
CONDITIONS TO THE MERGER
Arris and Merger Sub. The obligations of Arris and Merger Sub to effect
the Merger and otherwise consummate the transactions contemplated by the
Reorganization Agreement are subject to the satisfaction, at or prior to the
consummation of the transactions contemplated by the Reorganization Agreement
(the "Closing") of conditions, among others, to the following general effect:
(i.) the representations and warranties of Sequana contained in the
Reorganization Agreement, except for any representation and warranty that
refers specifically to the date of the Reorganization Agreement or to any
date or period prior to the date of the Reorganization Agreement, shall be
accurate in all material respects as of the date of the Closing (the
"Closing Date") as if made on and as of the Closing Date except that any
inaccuracies in such representations and warranties shall be disregarded if
the circumstances giving rise to such inaccuracies (individually and
collectively) do not constitute a Material Adverse Effect (as defined
below) on Sequana (it being understood that, for purposes of determining
the accuracy of such representations and warranties, (i) all "Material
Adverse Effect" qualifications and other materiality qualifications
contained in such representations and warranties shall be disregarded and
(ii) any update of or modification to Sequana's disclosure schedule made or
purported to have been made after the date of the Reorganization Agreement
shall be disregarded);
(ii.) each covenant or obligation that Sequana is required to
comply with or to perform at or prior to the Closing shall have been
complied with and performed in all material respects;
55
<PAGE> 66
(iii.) the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
shall have been issued by the Commission with respect to the Registration
Statement;
(iv.) the Reorganization Agreement and Merger shall have been duly
approved by the Required Sequana Shareholder Vote and the issuance of Arris
Common Stock in the Merger shall have been duly approved by the Required
Arris Stockholder Vote;
(v.) fewer than 9% of the outstanding shares of Sequana Common
Stock shall have voted against approving the Reorganization Agreement and
the Merger at the Sequana Special Meeting;
(vi.) all material consents required to be obtained in connection
with the Merger and the other transactions contemplated by the
Reorganization Agreement shall have been obtained and shall be in full
force and effect;
(vii.) Arris shall have received the following legal documents, each
of which shall be in full force and effect (a) a legal opinion of Wilson
Sonsini Goodrich & Rosati, P.C., dated as of the Closing Date, in the form
attached to the Reorganization Agreement, (b) a legal opinion of Cooley
Godward LLP, dated as of the Closing Date and addressed to Arris, to the
effect that the Merger will constitute a reorganization within the meaning
of Section 368 of the Code; (c) a certificate executed on behalf of Sequana
by its Chief Executive Officer confirming that the conditions set forth in
clauses "(i)", "(ii)", "(iv)", "(v)", "(vi)" and "(viii)" have been duly
satisfied;
(viii.) there shall have been no material adverse change in the
business, financial condition, capitalization, assets, liabilities,
operations or financial performance of the Sequana or any of its
subsidiaries (the "Acquired Corporations") since the date of the
Reorganization Agreement;
(ix.) the waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated;
(x.) the shares of Arris Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market;
(xi.) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall
have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any legislation enacted or deemed applicable
to the Merger that makes consummation of the Merger illegal;
(xii.) there shall not be pending or threatened any legal proceeding
in which a governmental body is or is threatened to become a party or is
otherwise involved, or in which there is a reasonable possibility of an
outcome that would have a Material Adverse Effect on the Acquired
Corporations or on Arris: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by the Reorganization Agreement; (b) relating to the Merger
and seeking to obtain from Arris or any of its subsidiaries (the "Arris
Corporations") any damages that may be material to Arris; (c) seeking to
prohibit or limit in any material respect Arris' ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with
respect to the stock of the Surviving Corporation; or (d) which would
materially and adversely affect the right of Arris, the Surviving
Corporation or any subsidiary of Arris to own the assets or operate the
business of the Sequana;
(xiii.) except for Arris Warrants held by Kevin Kinsella as Trustee
of the Kevin J. Kinsella Declaration of Trust dated November 2, 1994 and by
Novartis Pharmaceutical Corporation which shall be exercised or terminate
upon the Effective Time, all of the other outstanding warrants to purchase
Sequana Common Stock (the "Assumed Warrants") outstanding at the Effective
Time (including the warrants held by Comdisco, Inc., to the extent such
warrants allow assumption in accordance with their respective terms) shall,
at the Effective Time; (a) represent an entitlement to receive upon
exercise that number of shares of Arris Common Stock which a holder of
Sequana capital stock deliverable upon exercise of the right to purchase
such Sequana Common Stock under the relevant warrant would have been
entitled in the Merger if the right to purchase such Sequana Common Stock
had been exercised immediately prior to the Merger; and (b) be subject to
exercise upon payment of a per share exercise
56
<PAGE> 67
price equal to the exercise price applicable immediately before the
Effective Time divided by the Exchange Ratio; and
(xiv.) prior to the Closing Date, all notices and adjustments to the
terms of all warrants to purchase Sequana Common Stock (the "Sequana
Warrants") outstanding on the Closing Date required to be given or made
pursuant to the terms of such Sequana Warrants shall have been duly and
timely given or made.
Sequana. The obligations of Sequana to effect the Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction, at or prior to the Closing of conditions, among
others, to the following general effect:
(i.) the representations and warranties of Arris and Merger Sub
contained in the Reorganization Agreement shall have been accurate in all
material respects as of the date of the Reorganization Agreement and shall
be accurate as of the Closing Date as if made on and as of the Closing Date
except that any inaccuracies in such representations and warranties shall
be disregarded if the circumstances giving rise to such inaccuracies
(individually and collectively) do not constitute a Material Adverse Effect
on Arris (it being understood that, for purposes of determining the
accuracy of such representations and warranties, (i) all materiality
qualifications contained in such representations and warranties shall be
disregarded and (ii) any update of or modification to the Parent Disclosure
Schedule made or purported to have been made after the date of this
Agreement shall be disregarded);
(ii.) all of the covenants and obligations that Arris and Merger
Sub are required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all material respects;
(iii.) the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
shall have been issued by the Commission with respect to the Registration
Statement;
(iv.) the Reorganization Agreement and the Merger shall have been
approved by the Required Sequana Shareholder Vote, and the issuance of
Arris Common Stock in the Merger shall have been duly approved by the
Required Arris Stockholder Vote;
(v.) Arris shall have received the following documents: (a) a legal
opinion of Cooley Godward LLP, dated as of the Closing Date, in the form
attached to the Reorganization Agreement, (b) a legal opinion of Wilson
Sonsini Goodrich & Rosati, P.C., dated as of the Closing Date, to the
effect that the Merger will constitute a reorganization within the meaning
of Section 368 of the Code, and (c) a certificate executed on behalf of
Arris by an executive officer of Arris, confirming that conditions set
forth in Sections "(i)", "(ii)", "(iv)" and "(vi)" have been duly
satisfied;
(vi.) there shall have been no material adverse change in Arris'
business, financial condition, assets, liabilities, operations or financial
performance since the date of this Agreement (it being understood that a
decline in Arris' stock price shall not constitute, in and of itself, a
material adverse change);
(vii.) the waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated;
(viii.) the shares of Arris Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market;
(ix.) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger by
Sequana shall have been issued by any court of competent jurisdiction and
remain in effect, and there shall not be any legislation enacted or deemed
applicable to the Merger that makes consummation of the Merger by Sequana
illegal;
(x.) Arris shall have taken all actions necessary to cause the
Arris Board of Directors following the Effective Time to be constituted of
individuals selected in accordance with the procedures set forth above
under the caption "--Composition of the Arris Board of Directors."
57
<PAGE> 68
For purposes of the Reorganization Agreement, an event, violation,
inaccuracy, circumstance or other matter will be deemed to have a "Material
Adverse Effect" on the Acquired Corporations if such event, violation,
inaccuracy, circumstance or other matter would have a material adverse effect on
(i) the business, financial condition, capitalization, assets, liabilities,
operations or financial performance of the Acquired Corporations taken as a
whole, (ii) the ability of the party to consummate the Merger or any of the
other transactions contemplated by the Reorganization Agreement or to perform
obligations under the Reorganization Agreement, or (iii) Arris' ability to vote,
receive dividends with respect to or otherwise exercise ownership rights with
respect to the stock of the Surviving Corporation. An event, violation,
inaccuracy, circumstance or other matter will be deemed to have a "Material
Adverse Effect" on Arris if such event, violation, inaccuracy, circumstance or
other matter would have a material adverse effect on (i) the business, financial
condition, assets, liabilities, operations or financial performance of the Arris
Corporations taken as a whole, (ii) the ability of Arris to consummate the
Merger or any of the other transactions contemplated by the Reorganization
Agreement or to perform its obligations under the Reorganization Agreement, or
(iii) the ability of Sequana's shareholders to vote, receive dividends with
respect to, or otherwise exercise ownership rights with respect to the stock of
Arris received by them.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains certain representations and
warranties, including, without limitation, representations and warranties by
Sequana as to: (i) due organization and subsidiaries; (ii) the Sequana Articles
of Incorporation and the Sequana Bylaws; (iii) capitalization; (iv) filings with
the Commission and financial statements; (v) absence of certain changes; (vi)
title to assets; (vii) the agreement between Sequana and Parke-Davis, a division
of the Warner-Lambert Company dated as of October 31, 1997; (viii) payments
under certain corporate partnering agreements; (ix) real property, equipment and
leaseholds; (x) proprietary assets; (xi) material contracts; (xii) liabilities;
(xiii) compliance with legal requirements; (xiv) certain business practices;
(xv) governmental authorizations; (xvi) tax matters; (xvii) employee and labor
matters and benefit plans; (xviii) environmental matters; (xix) insurance; (xx)
transactions with affiliates; (xxi) legal proceedings and orders; (xxii)
authority and binding nature of the Reorganization Agreement; (xxiii) absence
existing discussions or negotiations concerning other acquisition proposals;
(xxiv) vote required; (xxv) non-contravention and consents; (xxvi) the receipt
of a fairness opinion from an investment bank; (xxvii) brokers, finders,
investment bankers or other fees or commissions; and (xxviii) full disclosure.
The Reorganization Agreement contains further representations and
warranties by Arris and Merger Sub as to: (i) due organization and subsidiaries;
(ii) Certificate/Articles of Incorporation and Bylaws; (iii) capitalization;
(iv) filings with the Commission and financial statements; (v) absence of
certain changes; (vi) title to assets; (vii) payments under certain corporate
partnering agreements; (viii) real property, equipment and leaseholds; (ix)
proprietary assets; (x) material contracts; (xi) liabilities; (xii) compliance
with legal requirements; (xiii) certain business practices; (xiv) governmental
authorizations; (xv) tax matters; (xvi) employee and labor matters and benefit
plans; (xvii) environmental matters; (xviii) insurance; (xix) transactions with
affiliates; (xx) legal proceedings and orders; (xxi) authority and binding
nature of the Reorganization Agreement; (xxii) absence of discussions or
negotiations concerning other acquisition proposals; (xxiii) vote required;
(xxiv) non-contravention and consents; (xxv) the receipt of a fairness opinion
from an investment bank; (xxvi) valid issuance of Arris Common Stock; (xxvii)
brokers, finders, investment bankers or other fees or commissions; and (xxviii)
full disclosure.
COVENANTS
Conduct of Sequana's Business. The Reorganization Agreement requires that
until the Effective Time, (i) Sequana shall ensure that each of the Acquired
Corporations conducts its business and operations (A) in the ordinary course and
in accordance with past practices or the operating plan previously delivered by
Sequana to Arris and (B) in compliance with all applicable legislation and the
requirements of all of material contracts to which any Acquired Corporation is a
party, by which any Acquired Corporation or any of their respective assets is or
may become bound or under which any of the Acquired Corporations has or may be
come subject to any obligation, or under which any of the Acquired Corporations
has or may acquire any
58
<PAGE> 69
rights or interest (an "Acquired Corporation Contract"); (ii) Sequana shall use
all reasonable efforts to ensure that each of the Acquired Corporations
preserves intact its current business organization, keeps available the services
of its current officers and employees and maintains its relations and goodwill
with all suppliers, customers, landlords, creditors, licensors, licensees,
employees and other Persons having business relationships with the respective
Acquired Corporations; (iii) Sequana shall keep in full force certain insurance
policies or replace any such policies that terminate with comparable or superior
policies; (iv) Sequana shall provide all notices, assurances and support
required by any Acquired Corporation Contract relating to any Proprietary Asset
in order to ensure that no condition under such Acquired Corporation Contract
occurs which could result in, or could increase the likelihood of, any transfer
or public disclosure by any Acquired Corporation of any Proprietary Asset; and
(v) Sequana shall (to the extent requested by Arris) cause its officers to
report regularly Arris concerning the status of the Arris' business. During the
period from the date of the Reorganization Agreement through the Effective Time
(the "Pre-Closing Period"), Sequana shall not (without the prior written consent
of Parent), and shall not permit any of the other Acquired Corporations to:
(i.) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, or
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities, except for repurchases at less than fair market value
pursuant to employment or consulting agreements in effect prior to the date
of the Reorganization Agreement;
(ii.) hire any new employees except employees hired to fill those
positions identified on a schedule provided to Arris or employees hired to
replace employees who terminate their employment with an Acquired
Corporation during the Pre-Closing Period;
(iii.) sell, issue, grant or authorize the issuance or grant of (A)
any capital stock or other security (except Sequana Common Stock upon the
valid exercise of options or warrants to purchase Sequana Common Stock
outstanding on the date of this Agreement or the exercise of rights under
the ESPP), (B) any option, call, warrant or right to acquire any capital
stock or other security (other than options to purchase an aggregate of up
to 30,000 shares of Sequana Common Stock which may be granted to employees
hired in accordance with clause (ii) above who are not director-level or
above, and to current employees in connection with promotions made by
Sequana's management prior to the date of the Reorganization Agreement), or
(C) any instrument convertible into or exchangeable for any capital stock
or other security; provided, however, that notwithstanding the foregoing,
(x) Sequana may issue up to $2,000,000 of its Common Stock to
Warner-Lambert Company pursuant to an agreement with Warner-Lambert
Company, (y) Sequana may also issue additional shares of its Common Stock
to Boehringer Ingelheim International GmbH pursuant to certain stock
purchase rights allowing Boehringer Ingelheim International GmbH in this
instance to purchase 5.8% of the total number of new securities being
issued to Warner-Lambert Company and Boehringer Ingelheim International
GmbH collectively and (z) issue additional shares of Common Stock to
Corange International Ltd. ("Corange") pursuant to the Collaborative
Research Agreement between Sequana and Corange dated as of June 30, 1995
(the "Corange Agreement");
(iv.) except as contemplated by the Reorganization Agreement, amend
or waive any of its rights under, or accelerate the vesting under, any
provision of any of the Sequana stock option plans (other than acceleration
of the vesting of options in connection with employee terminations
involving, in the aggregate, options to purchase no more than 7,500 shares
of Sequana Common Stock), any provision of any agreement evidencing any
outstanding stock option or any restricted stock purchase agreement, or
otherwise modify any of the terms of any outstanding option, warrant or
other security or any related contract;
(v.) amend or permit the adoption of any amendment to the Sequana
Articles of Incorporation or Bylaws or other charter or organizational
documents, or effect or become a party to any merger, consolidation, share
exchange, business combination, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(vi.) form any subsidiary or acquire any equity interest or other
interest in any other entity;
59
<PAGE> 70
(vii.) make any capital expenditure, except capital expenditures
through December 31, 1997 in an aggregate amount of no more than the amount
provided for in the capital budget provided to Arris for such period, and
thereafter in an aggregate amount of no more than is provided for in a 1998
capital budget to be provided to and approved by Arris (such approval not
to be unreasonably withheld) prior to January 1, 1998 provided, however,
that notwithstanding the foregoing, Sequana may make capital expenditures
permitted under clause "(xix)" below;
(viii.) except as set forth in the operating plan provided to Arris,
enter into or become bound by, or permit any of the assets owned or used by
it to become bound by, any material contract, or amend or terminate, or
waive or exercise any material right or remedy under, any material
contract;
(ix.) acquire, lease or license any right or other asset from any
other person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other person (except in each case for (A)
assets not constituting proprietary assets acquired, leased, licensed or
disposed of by Sequana in the ordinary course of business; (B) consistent
with past practices and except in the case of the in-licensing of
proprietary assets, agreements involving the payment of less than $25,000
per year and a royalty of less than 0.75% and (C) rights granted to
academic institutions and researchers to use the data collected pursuant to
tissue sample agreements for research purposes), or waive or relinquish any
material right;
(x). lend money to any person, except travel advances and loans
related to relocation, education and immigration-related expenses made in
he ordinary course of business, and loans in connection with employee stock
purchases as provided for in agreements in effect on the date hereof, or
incur or guarantee any indebtedness or pledge or encumber any material
assets (except that Sequana may make routine borrowings in the ordinary
course of business and in accordance with past practices under its line of
credit with Sumitomo Bank);
(xi.) except as set forth in the Sequana's disclosure schedule,
establish, adopt or amend any employee benefit plan, pay any bonus (except
pursuant to existing incentive plans and employment contracts or
understandings currently in effect) or make any profit-sharing or similar
payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of
its directors, officers or employees;
(xii.) change any of its methods of accounting or accounting
practices in any respect;
(xiii.) make any material tax election;
(xiv.) commence or settle any legal proceeding;
(xv.) materially amend or otherwise modify any of the terms of its
engagement of Lehman Brothers , Inc.;
(xvi.) amend or otherwise modify any of the terms of any warrants
to purchase Sequana Common Stock, except as otherwise provided for in the
Reorganization Agreement;
(xvii.) enter into any material transaction or take any other
material action in each case not specifically provided for in the operating
plan provided by Sequana to Arris, or outside the ordinary course of
business or inconsistent with past practices;
(xviii.) enter into any license or cost sharing agreement with GC
BioTechnologies, LLC or Shanghai GeneCore BioTechnologies Co. Ltd. or
permit (to the extent Arris' permission is required) GC BioTechnologies,
LLC to enter into any license agreement or cost sharing agreement with
Shanghai GeneCore BioTechnologies Co. Ltd.;
(xix.) spend more than an incremental $1,000,000 (over amounts set
forth in the budget provided to Arris) on its pharmacogenetics program (it
being understood that such incremental expenditures include incremental
capital expenditures, the costs of new employees hired to work on this
program and expenditures related to acquiring tissue samples for this
program); or
(xx.) agree or commit to take any of the actions described in
clauses "(i)" through "(xix)".
During the Pre-Closing Period, Sequana must promptly notify Arris in
writing of: (1) the discovery by Sequana of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of
60
<PAGE> 71
the Reorganization Agreement and that caused or constitutes a material
inaccuracy in any representation or warranty made by Sequana in the
Reorganization Agreement; (2) any event, condition, fact or circumstance
that occurs, arises or exists after the date of this Agreement and that
would cause or constitute a material inaccuracy in any representation or
warranty made by Sequana in the Reorganization Agreement if (A) such
representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or
(B) such event, condition, fact or circumstance had occurred, arisen or
existed on or prior to the date of this Agreement; (3) any material breach
of any covenant or obligation of Sequana; and (4) any event, condition,
fact or circumstance that would make the timely satisfaction of any of the
conditions to closing set forth in the Reorganization Agreement impossible
or unlikely or that has had or could reasonably be expected to have a
Material Adverse Effect on the Acquired Corporations. No notification so
given to Arris will limit or otherwise affect any of the representations,
warranties, covenants or obligations of Sequana contained in the
Reorganization Agreement.
Conduct of Arris' Business. The Reorganization Agreement further provides
that prior to the Effective Time: (i) Arris shall ensure that each of the Arris
Corporations conducts its business and operations (A) in the ordinary course and
in accordance with past practices or the operating plan previously provided by
Arris to Sequana and (B) in compliance with all applicable legislation and the
requirements of all material contracts to which any Arris Corporation is a
party, by which any Arris Corporation or any of their respective assets is or
may become bound or under which any of the Arris Corporations has or may be come
subject to any obligation, or under which any of the Arris Corporations has or
may acquire any rights or interest (an "Arris Corporation Contract"); (ii) Arris
shall use all reasonable efforts to ensure that each of the Arris Corporations
preserves intact its current business organization, keeps available the services
of its current officers and employees and maintains its relations and goodwill
with all suppliers, customers, landlords, creditors, licensors, licensees,
employees and other Persons having business relationships with the respective
Arris Corporations; and (iii) Arris shall keep in full force certain insurance
policies or replace such policies with comparable or superior policies; and (iv)
Arris shall provide all notices, assurances and support required by any Arris
Corporation Contract relating to any proprietary asset in order to ensure that
no condition under such Arris Corporation Contract occurs which could result in,
or could increase the likelihood of, any transfer or public disclosure by any
Arris Corporation of any proprietary asset. During the Pre-Closing Period, Arris
shall not (without the prior written consent of Sequana), and shall not permit
any of the other Arris Corporations to:
(i.) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, or
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities, except for repurchases at less than fair market value
pursuant to employment or consulting agreements in effect prior to the date
hereof;
(ii.) hire an aggregate of more than forty new employees,
excluding those persons hired to replace employees who terminate their
employment with a Arris Corporation during the Pre-Closing Period;
(iii.) sell, issue, grant or authorize the issuance or grant of
(A) any capital stock or other security (except Arris Common Stock upon the
valid exercise of options or warrants to purchase Arris Common Stock
outstanding on the date of the Reorganization Agreement or the exercise of
rights under the Arris ESPP or pursuant to equipment lease financings and
similar transactions or otherwise in the ordinary course of business), (B)
any option, call, warrant or right to acquire any capital stock or other
security (other than options, warrants or rights to purchase an aggregate
of up to 300,000 shares of Arris Common Stock which may be granted to (i)
officers, directors, employees or consultants of Arris, or (ii) otherwise
in the ordinary course of business), (C) any instrument convertible into or
exchangeable for any capital stock or other security;
(iv.) except as contemplated by the Reorganization Agreement,
amend or waive any of its rights under, or accelerate the vesting under,
any provision of any of Arris' stock option plans, any provision of any
agreement evidencing any outstanding stock option or any restricted stock
purchase agreement, or otherwise modify any of the terms of any outstanding
option, warrant or other security or any related contract (other than any
such changes to options, warrants or other securities to purchase an
aggregate of up to 25,000 shares of Arris Common Stock);
61
<PAGE> 72
(v.) amend or permit the adoption of any amendment to its
Certificate of Incorporation or Bylaws or other charter or organizational
documents, or effect or become a party to any merger, consolidation, share
exchange, business combination, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(vi.) except as previously disclosed to Sequana, form any
subsidiary or acquire any equity interest or other interest in any other
entity;
(vii.) make any capital expenditure, except capital expenditures
in an aggregate amount of no more than $2,000,000;
(viii.) establish, adopt or amend any employee benefit plan not
generally available to Arris' employees and Arris' 1998 management
incentive program, or pay any bonus or make any profit sharing or similar
payment to (except pursuant to the management incentive program and any
employment contract or understanding as in effect on the date hereof), or
increase the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors,
officers or employees in an amount in excess of the higher of 20% of the
amount previously paid to such person or $20,000;
(ix.) change any of its methods of accounting or accounting
practices in any respect;
(x.) make any material tax election;
(xi.) commence or settle any legal proceeding except in the
ordinary course of business;
(xii.) materially amend or otherwise modify any of the terms of
its engagement of Morgan Stanley;
(xiii.) enter into any material transaction or take any other
material action in each case either inconsistent with the operating plan
provided by Arris to Sequana, or outside the ordinary course of business;
(xiv.) except as previously disclosed to Sequana, sell or
otherwise dispose of, or grant an exclusive license or any other exclusive
right to utilize Arris proprietary assets which individually or in the
aggregate constitute core technology material to the business of Arris,
other than pursuant to a corporate collaboration similar in structure to
those previously entered into by Arris, or grant to any third party a right
of first refusal, first offer, or first negotiation with regard to material
products or such core technology unless developed pursuant to funding
supplied by such party;
(xv.) agree or commit to take any of the actions described in
clause "(i)" through "(xiv)".
Prior to the Effective Time, Arris shall promptly notify Sequana in writing
of: (i) the discovery by Arris of any event, condition, fact or circumstance
that occurred or existed on or prior to the date of the Reorganization Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by Arris in the Reorganization Agreement; (ii) any event,
condition, fact or circumstance that occurs, arises or exists after the date of
this Agreement and that would cause or constitute a material inaccuracy in any
representation or warranty made by Arris in the Reorganization Agreement if (A)
such representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or (B)
such event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of the Reorganization Agreement; (iii) any material breach
of any covenant or obligation of Arris; and (iv) any event, condition, fact or
circumstance that would make the timely satisfaction of any of the conditions to
closing impossible or unlikely or that has had or could reasonably be expected
to have a Material Adverse Effect on the Arris Corporations. No notification so
given to Sequana will limit or otherwise affect any of the representations,
warranties, covenants or obligations of Arris contained in the Reorganization
Agreement.
Non-Solicitation. Pursuant to the Reorganization Agreement, Sequana and
Arris have each agreed that they will not, directly or indirectly, and will not
authorize or permit any of the other Acquired Corporations or Arris
Corporations, respectively, or any representative of any of the Acquired
Corporations or Arris Corporations, respectively, directly or indirectly to, (i)
solicit, initiate, knowingly encourage or induce the making, submission or
announcement of any Acquisition Proposal (as such term is defined below) or take
any
62
<PAGE> 73
similar action, (ii) furnish any non-public information regarding any of the
Acquired Corporations or Arris Corporations, respectively, to any person in
connection with or in response to an Acquisition Proposal, (iii) engage in
discussions or negotiations with any person with respect to any Acquisition
Proposal, (iv) approve, endorse or recommend any Acquisition Proposal or (v)
enter into any letter of intent or similar document or any contract
contemplating or otherwise relating to any Acquisition Transaction (as such term
is defined below). Sequana and Arris and their respective boards of directors
are not prevented, however, from (x) furnishing information regarding any of the
Acquired Corporations or Arris Corporations, respectively, to any person in
connection with or in response to a bona fide, unsolicited Acquisition Proposal
or engaging in discussions or negotiations with respect thereto if and only to
the extent that (A) the relevant board of directors determines in good faith,
after consultation with its financial advisor that such Acquisition Proposal is
reasonably likely to result in an offer for acquisition superior to the one
provided for in the Reorganization Agreement, (B) the relevant board of
directors determines in good faith, after consultation with its outside counsel
that such action is required in order for the board of directors to comply with
its fiduciary duties under applicable law, (C) the person who has requested such
information has executed and delivered to the relevant company a non-disclosure
agreement that is not less restrictive than the non-disclosure agreement in
effect between Sequana and Arris, and (D) the company engaging in such
activities has not breached its obligations concerning non-solicitation set
forth herein. Notwithstanding the foregoing, the relevant board of directors may
recommend a superior offer to its shareholders or stockholders, as the case may
be, if the relevant board of directors determines, after consultation with its
outside counsel that, in light of such superior offer, such recommendation is
required in order for the relevant board of directors to comply with its
fiduciary obligations.
An "Acquisition Proposal" is any offer or proposal contemplating or
otherwise relating to any Acquisition Transaction. An "Acquisition Transaction"
is any transaction or series of related transactions involving: (i) any merger,
consolidation, share exchange, business combination, issuance of securities,
acquisition of securities, tender offer, exchange offer or other similar
transaction (A) in which Arris or any of the Acquired Corporations is a
constituent corporation, (B) in which a person or "group" (as defined in the
Exchange Act and the rules promulgated thereunder) of persons directly or
indirectly acquires Arris or Sequana or more than 50% of Arris' business or
Sequana's business or directly or indirectly acquires beneficial or record
ownership of securities representing more than 20% of the outstanding securities
of any class of voting securities of any of Arris or Sequana, or (C) in which
any of Arris or Sequana issues securities representing more than 20% of the
outstanding securities of any class of voting securities of Sequana or Arris,
respectively; (ii) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of Sequana or Arris; or (iii) any
liquidation or dissolution of Sequana or Arris.
Meetings of Shareholders and Stockholders. Pursuant to the Reorganization
Agreement, Sequana will take all action necessary in accordance with applicable
law to convene and hold the Sequana Shareholders' Meeting to vote upon the
approval of the Reorganization Agreement and the Merger. Sequana's obligation to
call, give notice of, convene and hold the Sequana Shareholders' Meeting will
not be limited or otherwise affected by the withdrawal, amendment or
modification of the recommendation of the Board of Directors of Sequana with
respect to the Merger, except as is required by applicable law. Pursuant to the
Reorganization Agreement, Arris will take all action necessary in accordance
with applicable law to convert and hold the Arris Stockholders' Meeting to vote
upon the issuance of Arris Common Stock in the Merger and the Certificate of
Amendment. Arris' obligation to call, give notice of, convene and hold the Arris
Stockholders' Meeting will not be limited or otherwise affected by any
withdrawal, amendment or modification of the recommendation of the Board of
Directors of Arris with respect to the Merger, except as may be required by
applicable law.
Neither the board of directors of Sequana or Arris nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify, in a manner adverse to the other party, its recommendations in
favor of the Reorganization Agreement and the Merger in the care of Sequana, and
the issuance of Arris Common Stock in the care of Arris. However,
notwithstanding the foregoing, the Sequana Board of Directors shall not be
prevented from withdrawing, amending or modifying its unanimous recommendation
in favor of the Merger at any time prior to the approval of the Reorganization
Agreement by the Required Sequana Shareholder Vote if (i) an acquisition offer
superior to that proposed in the Reorganization Agreement is made to Sequana and
is not withdrawn, (ii) neither Sequana nor any of its Representatives has
violated the covenants given by them concerning non-solicitation (described
below) and
63
<PAGE> 74
(iii) the Sequana Board of Directors concludes in good faith after consultation
with outside counsel, including a discussion of applicable legal standards under
California law, that, in light of such superior offer, the withdrawal, amendment
or modification of such recommendation is required in order for the Sequana
Board of Directors to comply with its fiduciary obligations. Similarly, the
Arris Board of Directors shall not be prevented from withdrawing, amending or
modifying its unanimous (among all directors present) recommendation in favor of
the issuance of Arris Common Stock in the Merger at any time prior to the
approval of such issuance by the Required Arris Stockholder Vote if (i) neither
Arris nor any of its Representatives shall have violated the covenants given by
them concerning non-solicitation (described below) and (ii) the Arris Board of
Directors concludes in good faith, based upon the advice of its outside counsel,
including a discussion of applicable legal standards under Delaware law, that
the withdrawal, amendment or modification of such recommendation is required in
order for the Arris Board of Directors to comply with its fiduciary obligations.
Conditions Relating to Stock Options, Employee Stock Purchase Plan and
Warrants. For a description of the treatment of stock options and warrants to
purchase Sequana Common Stock and Sequana's employee stock purchase plan, see
the caption above entitled "--Stock Options; Employee Stock Purchase Plan;
Warrants."
Election of Directors. Arris must use all reasonable efforts to nominate
and appoint a nine person board of directors in the manner set forth in the
caption above entitled "--Composition of the Arris Board of Directors."
Amendment of Corange Agreement. Sequana must use reasonable efforts to
cause the Collaborative Research Agreement between Sequana and Corange dated as
of June 30, 1995 to be amended to provide that Corange's obligation to purchase
Sequana equity pursuant to the agreement shall, after the Effective Time, be an
obligation to purchase Arris equity on the same terms.
Indemnification and Insurance. Pursuant to the Reorganization Agreement,
all rights to indemnification existing in favor of the persons serving as
directors or officers of Sequana as of the date of the Reorganization Agreement
for acts and omissions occurring prior to the Effective Time, as provided in the
Sequana Bylaws and as provided in the indemnification agreements between Sequana
and said directors and officers, shall survive the Merger and Arris shall cause
the Surviving Corporation to perform all of its obligations arising thereunder
for a period of not less than six years from the Effective Time. The
Reorganization Agreement also provides that from the Effective Time until the
sixth anniversary of the date on which the Reorganization Agreement occurs,
Arris will cause the Surviving Corporation to maintain in effect, for the
benefit of the person serving as directors and officers of Sequana as of the
date of the Reorganization Agreement with respect to acts or omissions occurring
prior to the Effective Time, the existing policy of directors' and officers'
liability insurance maintained by Sequana as of the date of the Reorganization
Agreement (the "Existing Policy"); provided, however, that (i)the Surviving
Corporation may substitute for the Existing Policy a policy or policies of
comparable coverage, and (ii) the Surviving Corporation shall not be required to
pay an annual premium for the Existing Policy (or for any substitute policies)
in excess of 175% of the annual premium paid by Sequana for such insurance. If
Arris causes the Surviving Corporation to consolidate with or merge into any
other person and the Surviving Corporation is not the continuing or surviving
corporation in such consolidation or merger, or causes the Surviving Corporation
to transfer all or substantially all of its assets to any person, then proper
provision must be made so that the Surviving Corporation's successors and
assigns assume the obligation to maintain such indemnification and insurance.
Registration Rights. Pursuant to the Reorganization Agreement, Arris must
use all reasonable efforts to cause all persons who have the right to demand
registration of shares of Sequana's Common Stock held by them or to participate
in a registered offering of shares of Sequana's Common Stock (the "Sequana
Holders") to have registration rights under the Registration Rights Agreement
between Arris and certain persons dated as of April 16, 1993 (the "Arris
Registration Rights Agreement"), provided, however, that no Sequana Holders
shall become a party to the Arris Registration Rights Agreement if such Sequana
Holder would not have any rights to register shares pursuant to the Arris
Registration Rights Agreement, and provided further that, Arris shall use all
reasonable efforts to provide that no party to the Arris Registration Rights
Agreement shall request registration or participate in a registration of Arris
Common Stock thereunder until the earlier of
64
<PAGE> 75
(a) the date 90 days after the effective date of a registration statement for
the first public offering of Arris' shares following the Effective Time, and (b)
the first anniversary of the Effective Time.
In addition, each of Sequana and Arris shall promptly advise the other
orally and in writing of any Acquisition Proposal (including the identity of the
person making or submitting such Acquisition Proposal and the terms thereof)
that is made or submitted by any person during the Pre-Closing Period. Each of
Sequana and Arris shall keep the other informed with respect to material changes
to the terms of any such Acquisition Proposal and any material modification or
proposed modifications thereto. Sequana and Arris shall both immediately cease
and cause to be terminated any existing discussions with any person that relate
to any Acquisition Proposal and shall request the return or destruction of any
confidential information previously disclosed to such person and shall use
commercially reasonable efforts to ensure that such information is destroyed or
returned.
Certain Other Covenants. The Reorganization Agreement contains certain
other covenants including covenants relating to: (i) information and access,
(ii) preparation and filing of the Registration Statement, (iii) obtaining
regulatory approvals, (iv) public announcements, (v) tax qualification and
opinion back-up certificates, (vi) accountants' letters, (vii) resignation of
Sequana's officers and directors, (viii) FIRPTA, (ix) affiliate agreements, (x)
further action, and (xi) obtaining required consents.
TERMINATION
The Reorganization Agreement may be terminated prior to the Effective Time
(whether before or after approval of the Reorganization Agreement and the Merger
by the Required Sequana Shareholder Vote and whether before or after approval of
the issuance of Arris Common Stock in the Merger by the Required Arris
Stockholder Vote);
(i.) by mutual written consent of Arris and Sequana;
(ii.) by either Arris or Sequana if the Merger shall not have been
consummated by March 31, 1998 (unless the failure to consummate the Merger
is attributable to a failure on the part of the party seeking to terminate
the Reorganization Agreement to perform any material obligation required to
be performed by such party at or prior to the Effective Time);
(iii.) by either Arris or Sequana if a court of competent
jurisdiction or other governmental body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(iv.) by either Arris or Sequana if (i) the Sequana Shareholders'
Meeting shall have been held and completed and (ii) the Reorganization
Agreement and the Merger shall not have been approved at such meeting by
the Required Sequana Shareholder Vote;
(v.) by either Arris or Sequana if (i) the Arris Stockholders'
Meeting shall have been held and completed and (ii) the issuance of Arris
Common Stock in the Merger shall not have been approved at such meeting by
the Required Arris Stockholder Vote;
(vi.) by Arris (at any time prior to the approval of the
Reorganization Agreement and the Merger by the Required Sequana Shareholder
Vote) if a Sequana Triggering Event (as such term is defined below) shall
have occurred;
(vii.) by Sequana (at any time prior to the approval of the
Reorganization Agreement and the Merger and the issuance of Arris Common
Stock in the Merger by the Required Arris Stockholder Vote) if an Arris
Triggering Event (as such term is defined below) shall have occurred;
(viii.) by Arris if any of Sequana's representations and warranties
contained in this Agreement shall be or shall have become inaccurate, or if
any of Sequana's covenants contained in the Reorganization Agreement shall
have been breached, and such inaccuracy or breach would cause the condition
set forth in clauses "(i)" or "(ii)" under "--Conditions to the
Merger--Arris and Merger Sub" to not be satisfied; provided, however, that
if an inaccuracy in Sequana's representations and warranties or a breach of
a covenant by Sequana is curable by Sequana and Sequana is continuing to
exercise all reasonable efforts to cure such inaccuracy or breach, then
Arris may not terminate the Reorganization Agreement on
65
<PAGE> 76
account of such inaccuracy or breach until 20 days after delivery of
written notice of the inaccuracy or breach to Sequana by Arris, if the
inaccuracy or breach has not at that time been cured;
(ix.) by Sequana if any of Arris' representations and warranties
contained in the Reorganization Agreement shall be or shall have become
inaccurate, or if any of Arris' covenants contained in the Reorganization
Agreement shall have been breached, and such inaccuracy or breach would
cause the condition set forth in clauses "(i)" or "(ii)" under
"--Conditions to the Merger--Sequana" to not be satisfied; provided,
however, that if an inaccuracy in Arris' representations and warranties or
a breach of a covenant by Arris is curable by Arris and Arris is continuing
to exercise all reasonable efforts to cure such inaccuracy or breach, then
Sequana may not terminate the Reorganization Agreement on account of such
inaccuracy or breach until 20 days after delivery of written notice of the
breach or inaccuracy to Arris by Sequana, if the inaccuracy or breach has
not at that time been cured;
(x.) by Sequana if a Sequana Triggering Event shall have occurred
and the Board of Directors of Sequana shall have approved, endorsed or
recommended any Acquisition Proposal; or
(xi.) by Arris if an Arris Triggering Event shall have occurred and
the Board of Directors of Arris shall have approved, endorsed or
recommended any Acquisition Proposal.
A "Triggering Event" of a party shall be deemed to have occurred if: (i)
the board of directors of the party shall have failed to recommend, or shall for
any reason have withdrawn or shall have amended or modified in a manner adverse
to the other party its unanimous (among all directors present) recommendation in
favor of, the Merger or approval of this Agreement, (ii) the party shall have
failed to include in the Joint Proxy Statement/Prospectus the unanimous (among
all directors present) recommendation of its board of directors in favor of
approval of the Reorganization Agreement and the Merger, (iii) the board of
directors of the party fails to unanimously reaffirm its recommendation in favor
of approval of the Reorganization Agreement and the Merger within five business
days after the other party requests in writing that such recommendation be
reaffirmed, (iv) the board of directors of the party shall have approved,
endorsed or recommended any Acquisition Proposal, (v) the party shall have
entered into any letter of intent or similar document or any contract relating
to any Acquisition Proposal, (vi) the party shall have failed to hold the
relevant Shareholders' or Stockholders' Meeting as promptly as practicable and
in any event within 45 days after the Form S-4 Registration Statement is
declared effective under the Securities Act, (vii) a tender or exchange offer
relating to securities of the party shall have been commenced and the party
shall not have sent to its security holders, within five business days after the
commencement of such tender or exchange offer, a statement disclosing that the
party recommends rejection of such tender or exchange offer, or (viii) an
Acquisition Proposal is publicly announced, and the party (A) fails to issue a
press release announcing its opposition to such Acquisition Proposal within five
business days after such Acquisition Proposal is announced or (B) otherwise
fails to actively oppose such Acquisition Proposal.
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, all fees and expenses incurred in
connection with the Reorganization Agreement and the transactions contemplated
by the Reorganization Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that
Arris and Sequana shall share equally all fees and expenses, other than
attorneys' fees, incurred in connection with the filing, printing and mailing of
the Form S-4 Registration Statement and the Joint Proxy Statement/ Prospectus
and any amendments or supplements thereto.
The Reorganization Agreements provides that if it is terminated by Arris or
Sequana pursuant to clause (iv) under the caption "Termination," and there was
no Material Adverse Effect to Arris, then Sequana must pay to Arris, in cash, a
nonrefundable fee in the amount of $1,000,000. If the Reorganization Agreement
is terminated by Arris or Sequana pursuant to clause (v) under "Termination" and
there shall not have been a Material Adverse Effect to Sequana, then Arris shall
pay to Sequana, in cash, a nonrefundable fee in the amount of $1,000,000. If the
Reorganization Agreement is terminated by Arris pursuant to clause (vi) under
"Termination", then Sequana shall pay to Arris, in cash, a nonrefundable fee in
the amount of $5,000,000. If the Reorganization Agreement is terminated by
Sequana pursuant to clause (x) under "Termination", then Sequana shall pay to
Arris, in cash, a nonrefundable fee in the amount of $5,000,000,
66
<PAGE> 77
plus, in the event of the subsequent consummation of an Acquisition Proposal
within 12 months after the date of such termination, a nonrefundable fee in the
amount of five percent (5%) of the excess, if any, of the value of the
Acquisition Proposal that is consummated over $181,000,000. If the
Reorganization Agreement is terminated by Arris pursuant to clause (vii) under
"Termination", then Arris shall pay to Sequana, in cash a nonrefundable fee in
the amount of $5,000,000. If the Reorganization Agreement is terminated by Arris
pursuant to clause (xi) under "Termination", then Arris shall pay to Sequana, in
cash, a nonrefundable fee in the amount of $5,000,000, plus, in the event of the
subsequent consummation of an Acquisition Proposal within 12 months after the
date of termination, a nonrefundable fee in the amount of five percent (5%) of
the excess, if any, of the value of the Acquisition Proposal that is consummated
over $194,000,000.
67
<PAGE> 78
AMENDMENT OF THE ARRIS
CERTIFICATE OF INCORPORATION
The Arris Board of Directors has approved and submitted for a vote with the
Arris stockholders a Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Arris (the "Certificate of Amendment").
Conditional upon satisfaction of the various conditions to closing the
Merger in the Reorganization Agreement, the Certificate of Amendment changes the
corporate name of Arris to "AxyS Pharmaceuticals, Inc." Arris and Sequana, as a
combined company, intend to do business under this corporate name.
Conditional upon satisfaction of the various conditions to closing the
Merger in the Reorganization Agreement, the Certificate of Amendment also
increases the total number of shares of capital stock authorized from 40,000,000
shares to 60,000,000 shares and increases the total number of shares of Arris
Common Stock authorized from 30,000,000 shares to 50,000,000 shares.
Such amendments to the authorized capital of Arris are needed for the
holders of Sequana Common Stock to receive the consideration contemplated by the
Reorganization Agreement and to ensure that Arris has a sufficient number of
shares reserved for issuance upon the exercise of options granted under Arris'
equity incentive plans and for issuance otherwise in the ordinary course of
business. Upon consummation of the Merger (assuming no exercise of outstanding
options or other rights to purchase Arris Common Stock, the exercise of all
outstanding options and warrants to purchase Sequana Common Stock expiring upon
or before the consummation of the Merger with an exercise price of $12.31 (the
closing price of Sequana Common Stock as reported on the Nasdaq National Market
on November 25, 1997) or less and no exercise of other outstanding rights to
purchase Sequana Common Stock) an aggregate of approximately 29,870,000 shares
of Arris Common Stock will be issued and outstanding. In addition, as of October
31, 1997 and assuming approval of the Plan Proposals by the Arris stockholders,
Arris will have an aggregate of approximately 6,700,451 shares of Arris Common
Stock reserved for future issuance under its equity incentive plans, 2,046,688
of which are subject to outstanding options, and approximately 650,012 shares of
Arris Common Stock reserved for issuance under outstanding warrants, including
approximately 480,375 shares of Arris Common Stock issuable upon the exercise of
Sequana Warrants assumed in connection with the Merger.
Based on Arris' need to authorize additional shares of its capital stock in
connection with the Merger and pursuant to the terms of the Reorganization
Agreement, the Merger will occur only if the Certificate of Amendment is
approved by the Arris stockholders.
THE ARRIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF
THE CERTIFICATE OF AMENDMENT.
68
<PAGE> 79
ARRIS PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Arris Common Stock as of October 31, 1997 (or such earlier date as is
indicated in the footnotes to the table) by: (i) each director and Arris Named
Executive Officer (as defined in the Definitive Proxy Statement filed with the
Commission on April 17, 1997 and based on compensation for the fiscal year ended
December 31, 1996); (ii) all directors and Arris Named Executive Officers as a
group; and (iii) those stockholders known by Arris to be beneficial owners of
more than five percent of Arris Common Stock.
The information as to each person has been furnished by such person, and
each person has sole voting power and sole investment power with respect to all
shares beneficially owned by such person, except as otherwise indicated and
subject to community property laws where applicable. Except as set forth below,
the address of each named individual is the address of Arris as set forth
herein.
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIAL
OWNERSHIP PERCENT OF
BENEFICIAL OWNER SHARES TOTAL(1)
- ------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
BVF, Inc.(2)............................................................. 923,767 6.1
One Sansome Street
39th Floor
San Francisco, CA 94104
FMR Corp.(3)............................................................. 1,069,000 7.1
82 Devonshire Street
Boston, MA 02109
John P. Walker(4)........................................................ 280,127 1.9
Heinz W. Gschwend, Ph.D.(5).............................................. 89,390 *
Daniel H. Petree(6)...................................................... 51,188 *
Michael C. Venuti, Ph.D.(7).............................................. 49,907 *
Natalie J. Warner, M.D.(8)............................................... 28,738 *
Ann M. Arvin, M.D........................................................ 0 *
Brook H. Byers(9)........................................................ 4,731 *
Anthony B. Evnin, Ph.D.(10).............................................. 26,580 *
Vaughn M. Kailian(11).................................................... 11,965 *
Donald Kennedy, Ph.D(12)................................................. 3,750 *
Alan C. Mendelson(13).................................................... 17,757 *
Hans U. Sievertsson, Ph.D.(14)........................................... 740,303 4.9
All Directors and Executive Officers as a Group (12 Persons)(15)......... 1,304,436 8.5
</TABLE>
- ---------------
*Less than 1 percent.
(1) Percentage of beneficial ownership is based on 15,164,260 shares of Arris
Common Stock outstanding as of October 31, 1997.
(2) Based upon a Schedule 13D filed by Biotechnology Value Fund, L.P. ("BVF")
reporting such beneficial ownership as of October 1, 1997. Includes 494,521
shares of Arris Common Stock beneficially owned by BVF and 923,767 shares
of Arris Common Stock beneficially owned by BVF Partners L.P. ("BVF
Partners") and BVF, Inc. ("BVF, Inc."). BVF Partners is the general partner
of BVF, which is an investment limited partnership. BVF, Inc. is an
investment advisor to and general partner of BVF Partners. BVF shares
voting and dispositive power over the 494,521 shares it beneficially owns
with BVF Partners. BVF Partners and BVF, Inc. share voting and dispositive
power over the 923,767 shares they beneficially own with, in addition to
BVF, the managed accounts on whose behalf BVF Partners, as investment
manager, purchased such shares. The managed accounts on whose behalf BVF
Partners
69
<PAGE> 80
owns shares of the Stock are Investment 10 L.L.C., Palamundo, L.D.C., ZPG
Securities, L.C.C. and Biotechnology Value Fund, Ltd.
(3) Based upon a Schedule 13G filed by FMR Corp. reporting such beneficial
ownership as of December 21, 1996. Includes 793,200 shares of Common Stock
beneficially owned by Fidelity Management & Research Company ("Fidelity"),
a wholly-owned subsidiary of FMR Corp. and an investment advisor to various
investment companies. Edward C. Johnson 3d of FMR Corp., through its
control of Fidelity, and the funds each have sole power to dispose of the
793,200 shares. Fidelity votes such shares under written guidelines
established at the direction of the funds' boards of trustees. Also
includes 275,800 shares of Common Stock beneficially owned by Fidelity
Management Trust Company ("FMTC"), a wholly-owned subsidiary of FMR Corp.
and a bank, which serves as investment manager of certain institutional
accounts. Edward C. Johnson 3d and FMR Corp., through their control of
FMTC, have sole voting and dispositive power over such 275,800 shares. Mr.
Johnson is the chairman of, and Ms. Abigail P. Johnson is a director of,
FMR Corp. and, consequently, each may be deemed to beneficially own all
1,069,000 shares of Common Stock. In addition, members of the Edward C.
Johnson 3d family and trusts for their benefit may be deemed to be a
controlling group with respect to FMR Corp. and therefore may be deemed to
beneficially own all 1,069,000 shares of Common Stock. Based on a Form 13F
filed by FMR Corp. reporting beneficial ownership as of September 30, 1997,
FMR Corp. and its affiliates held 965,700 shares as of such date.
(4) Includes 100,624 shares issuable upon exercise of options exercisable
within 60 days of October 31, 1997. Also includes an aggregate of 8,574
shares beneficially owned by Mr. Walker's wife as trustee of educational
trusts for his children.
(5) Includes 25,105 shares issuable upon exercise of options exercisable within
60 days of October 31, 1997.
(6) Includes 50,105 shares issuable upon exercise of options exercisable within
60 days of October 31, 1997.
(7) Includes 46,230 shares issuable upon exercise of options exercisable within
60 days of October 31, 1997.
(8) Includes 25,540 shares issuable upon exercise of options exercisable within
60 days of October 31, 1997.
(9) Includes 670 shares issuable upon exercise of a warrant held by Kleiner
Perkins Caufiel & Byers VI ("Kleiner Perkins") exercisable within 60 days
of October 31, 1997 and 88 shares issuable upon exercise of a warrant held
by KPCB VI Founders Fund ("KPCB") exercisable within 60 days of October 31,
1997. Mr. Byers is a general partner of Kleiner Perkins. Mr. Byers
disclaims beneficial ownership of the shares held by Kleiner Perkins except
to the extent of his pro rata interest therein. Also includes 1,875 shares
issuable upon exercise of options held by Mr. Byers exercisable within 60
days of October 31, 1997.
(10) Includes 1,875 shares issuable upon exercise of options exercisable within
60 days of October 31, 1997.
(11) Consists of shares issuable upon exercise of options exercisable within 60
days of October 31, 1997.
(12) Consists of shares issuable upon exercise of options exercisable within 60
days of October 31, 1997.
(13) Includes 6,497 shares held by GC&H Investments ("GC&H") and 8,260 shares
held by Cooley Godward LLP ("Cooley"). Mr. Mendelson is a partner of Cooley
and disclaims beneficial ownership of the shares held by GC&H and Cooley
except to the extent of his pecuniary interests therein. Also includes
1,400 shares held in the Cooley Profit-Sharing Trust for the benefit of Mr.
Mendelson.
(14) Includes 738,428 shares held by Pharmacia & Upjohn AB. Dr. Sievertsson is a
Vice President at Pharmacia AB, a unit of Pharmacia & Upjohn AB. Dr.
Sievertsson disclaims beneficial ownership of all shares held by Pharmacia
& Upjohn AB. Also includes 1,875 shares issuable upon exercise of options
held by Dr. Sievertsson exercisable within 60 days of October 31, 1997.
(15) Includes an aggregate of 268,944 shares issuable upon exercise of options
and 758 shares issuable upon exercise of warrants exercisable within 60
days of October 31, 1997. See footnotes 5 through 15.
70
<PAGE> 81
SEQUANA PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Sequana Common Stock as of September 30, 1997 by (i)
each person known by Sequana to be a beneficial owner of 5% or more of Sequana's
outstanding Common Stock, (ii) each director, (iii) each Sequana Named Executive
Officer (as defined in the Definitive Proxy Statement filed with the Commission
on April 29, 1997 and based on compensation for the fiscal year ended December
31, 1996), (iv) entities affiliated with certain directors, and (v) all
directors and Sequana Named Executive Officers as a group:
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIAL
OWNERSHIP PERCENT OF
BENEFICIAL OWNER SHARES TOTAL(1)
- ------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Entities affiliated with The Carlyle Group(2)............................ 945,219 9.3%
1001 Pennsylvania Avenue, N.W.
Suite 220 South
Washington, D.C. 20001
Boehringer Ingelheim International GmbH.................................. 555,556 5.5%
D-55216 Ingelheim am Rhein
New Enterprise Associates VI, L.P.(3).................................... 464,017 4.6%
235 Montgomery Street
San Francisco, CA 94104
Entities affiliated with Sequoia Capital(4).............................. 307,731 3.0%
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
Richard Darman(5)........................................................ 952,698 9.3%
Kevin J. Kinsella(6)..................................................... 342,050 3.3%
Thomas C. McConnell(7)................................................... 471,496 4.6%
Thomas F. Stephenson(8).................................................. 315,210 3.0%
Irwin Lerner(9).......................................................... 47,646 *
Howard D. Palefsky(10)................................................... 6,250 *
Timothy J. R. Harris(11)................................................. 47,697 *
M. Scott Salka(12)....................................................... 54,319 *
Carl D. Johnson(13)...................................................... 89,290 *
All current directors and executive officers as a group (9
persons)(14)........................................................... 2,324,989 22.6%
</TABLE>
- ---------------
*Less than one percent of the outstanding shares
(1) Applicable percentage of ownership is based on 10,257,153 shares of Sequana
Common Stock outstanding as of September 30, 1997 together with applicable
options or warrants for such shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities, subject to the community property laws, where applicable.
Shares of Sequana Common Stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of September 30, 1997
are deemed to be beneficially owned by the person holding such options or
warrants for the purpose of computing the percentage of ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) TC Group L.L.C. ("The Carlyle Group") is the General Partner of
Carlyle-Sequana Investors II, L.P., which holds 773,360 shares, and the
Managing Member of Carlyle-Sequana Investors L.L.C., which holds 171,859
shares. Richard Darman, a director of the Company, is a Member and Managing
Director of TCG Holdings L.L.C., which is the Managing Member of TC Group
L.L.C.
(3) Thomas McConnell, a director of Sequana, is a General Partner of New
Enterprise Associates.
(4) Thomas F. Stephenson, a director of Sequana, is a General Partner of the
Sequoia Partnerships that are investors in Sequana. Includes 283,354 shares
held by Sequoia Capital VI, 13,544 shares held by
71
<PAGE> 82
Sequoia Technology Partners VI, 6,274 shares held by Sequoia XXIV, and
4,559 shares held by Sequoia XXIII.
(5) Includes shares beneficially owned by The Carlyle Group and certain of its
affiliates and related parties, which Mr. Darman may be deemed to
beneficially own in his capacity as a member of TCG Holdings L.L.C. and as
a Managing Director of TC Group L.L.C. and TCG Holdings L.L.C. Mr. Darman
disclaims beneficial ownership of such shares. A trust of which Mr. Darman
is trustee is a non-controlling member of Carlyle-Sequana Investors L.L.C.
Also includes 7,479 shares issuable to Mr. Darman pursuant to options
exercisable within 60 days of September 30, 1997.
(6) Includes 6,666 shares held by Mr. Kinsella's spouse, 308,771 shares held by
the Kevin J. Kinsella individually and as trustee for certain trusts for
the benefit of Kevin J. Kinsella and his family, 8,334 shares issuable
pursuant to currently exercisable warrants held by Mr. Kinsella, and 18,279
shares issuable to Mr. Kinsella pursuant to options exercisable within 60
days of September 30, 1997.
(7) Includes shares beneficially owned by New Enterprise Associates VI, L.P.,
which Mr. McConnell may be deemed to beneficially own in his capacity as a
General Partner of New Enterprise Associates. Also includes 7,479 shares
issuable to Mr. McConnell pursuant to options exercisable within 60 days of
September 30, 1997.
(8) Includes shares beneficially owned by entities affiliated with Sequoia
Capital, which Mr. Stephenson may be deemed to beneficially own in his
capacity as a General Partner of Sequoia Capital. Mr. Stephenson disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. Also includes 7,479 shares issuable to Mr. Stephenson
pursuant to options exercisable within 60 days of September 30, 1997.
(9) Includes 1,000 shares held by Mr. Lerner's spouse and 7,479 shares issuable
to Mr. Lerner pursuant to options exercisable within 60 days of September
30, 1997.
(10) Includes 6,250 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.
(11) Includes 12,032 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.
(12) Includes 19,866 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.
(13) Includes 5,417 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.
(14) Includes 91,760 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.
72
<PAGE> 83
COMPARISON OF SHAREHOLDERS' RIGHTS
In connection with the Merger, the Sequana shareholders will be converting
their shares of Sequana Common Stock into shares of Arris Common Stock. Arris is
a Delaware corporation and Sequana is a California corporation and the Arris
Certificate of Incorporation and the Arris Bylaws differ from the Sequana
Articles of Incorporation and the Sequana Bylaws in several significant
respects. Because of the differences between the DGCL and the CGCL, and the
differences in the charter documents of Arris and Sequana, the rights of a
holder of Arris Common Stock differ from the rights of a holder of Sequana
Common Stock.
Below is a summary of some of the important differences between the DGCL
and the CGCL and the charter documents of Arris and Sequana. It is not practical
to summarize all of such differences in this Joint Proxy Statement/Prospectus,
but some of the principal differences which could materially affect the rights
of shareholders include the following:
SIZE OF THE BOARD OF DIRECTORS
Under the DGCL, the number of directors shall be fixed by, or in the manner
provided in, the Bylaws, unless the number of directors is fixed in the
Certificate of Incorporation, in which case a change in the number of directors
may be made only by amendment to the Certificate of Incorporation. The Arris
Certificate of Incorporation does not fix the number of directors and, as a
result, the Arris Board of Directors acting without stockholder approval, may
change such number in the manner provided in the Arris Bylaws. The Arris Bylaws
currently provide that the Arris Board of Directors shall have eight (8)
directors.
Under the CGCL, although changes in the number of directors must in general
be approved by the shareholders, the board of directors may fix the exact number
of directors within a stated range set forth in the Articles of Incorporation or
Bylaws, if the stated range has been approved by the shareholders. The Sequana
Bylaws, as amended, permit the Sequana Board of Directors to adjust the size of
the Board from a minimum of seven (7) directors to a maximum of eleven (11); the
current number of directors is seven (7).
CLASSIFIED BOARD OF DIRECTORS
A classified board is one in which a certain number, but not all, of the
directors are elected on a rotating basis each year. The DGCL permits, but does
not require, a classified board of directors, pursuant to which the directors
can be divided into as many as three classes with staggered terms of office,
with only one class of directors standing for election each year. The Arris
charter documents, however, do not provide for a classified board of directors.
Rather, the Arris Certificate of Incorporation provides that directors shall be
elected at each annual stockholders' meeting for a term of one (1) year.
Under the CGCL, directors generally must be elected annually; however, as a
"listed corporation" (shares of Sequana Common Stock are traded on the Nasdaq
National Market) Sequana is permitted to adopt a classified board. However, the
Sequana Bylaws do not provide for a classified board of directors. The Sequana
Articles of Incorporation provide that directors shall be elected at each annual
shareholders meeting for a term of one (1) year.
CUMULATIVE VOTING
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number of
directors to be elected. A shareholder may then cast all such votes for a single
candidate or may allocate them among as many candidates as the shareholder may
choose. Under the DGCL, cumulative voting in the election of directors is not
available unless specifically provided in the Certificate of Incorporation. The
Arris Certificate of Incorporation does not provide for cumulative voting.
In contrast, under the CGCL and the Sequana Bylaws, any shareholder is
entitled to cumulate his or her votes in the election of directors upon proper
notice of his or her intention to do so.
73
<PAGE> 84
REMOVAL OF DIRECTORS
Under the DGCL, if a corporation has a classified board, the stockholders
may remove a director only for cause, unless the Certificate of Incorporation
provides otherwise. While Arris does not have a classified board, the Arris
Certificate of Incorporation and the Arris Bylaws provide that any and all
directors may only be removed with cause by a majority vote of the stockholders
entitled to vote.
Under the CGCL and the Sequana Bylaws, any director or the entire board of
directors may be removed, with or without cause, if the removal is approved by
the affirmative vote of a majority of the outstanding shares entitled to vote;
however, no director of a corporation may be removed if the number of votes cast
against removal would be sufficient to elect the director under cumulative
voting (without regard to whether shares may otherwise be voted cumulatively) at
an election at which the same total number of votes were cast and either the
number of directors elected at the most recent annual meeting of shareholders,
or if greater, the number of directors for whom removal is being sought, were
then being elected.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Arris and Sequana provide for similar indemnification of directors,
officers and employees. Both companies' Bylaws provide that the company shall,
to the maximum extent and in the manner permitted by the law, indemnify each of
its directors, officers and employees against expenses (including attorney's
fees), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of the corporation.
Under both the DGCL and the CGCL, other than an action brought by or in the
right of the company, such indemnification is available if it is determined that
the proposed indemnitee acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful. In actions brought by or in the right
of the company, such indemnification is limited to expenses (including
attorneys' fees) actually and reasonably incurred and permitted only if the
indemnitee acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the company, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person is adjudged to be liable to the company, unless and only to the
extent that the court in which the action was brought determines that, despite
the adjudication of liability but in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper. To the extent that the proposed indemnitee has
been successful in defense of any action, suit or proceeding, he must be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the action.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION AND ARTICLES OF INCORPORATION
Under the DGCL, a company's Certificate of Incorporation can be amended by
the affirmative vote of the board of directors and approved by the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote
thereon, unless the Certificate of Incorporation requires the vote of a larger
portion of the shares. The Arris Certificate of Incorporation requires approval
only by a majority of the outstanding shares entitled to vote.
Under the CGCL, a company's Articles of Incorporation can be amended by the
affirmative vote of the majority of the board of directors of the company and of
the holders of a majority of the outstanding shares entitled to vote, unless the
company's Articles of Incorporation require the vote of a larger portion of the
shares. The Sequana Articles of Incorporation does not require a larger
percentage affirmative vote than a majority of the shares entitled to vote
thereon.
AMENDMENT OF BYLAWS
Under the Arris Bylaws, the stockholders of Arris may alter, amend or
repeal the Arris Bylaws by a vote of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares entitled to vote thereon. Under
74
<PAGE> 85
the Arris Certificate of Incorporation, the Arris Board of Directors may amend
or enact such other bylaws by a majority vote.
Under the Sequana Bylaws, the shareholders of Sequana may alter, amend or
repeal the Sequana Bylaws by a majority vote of the outstanding shares entitled
to vote. The Sequana Bylaws also authorize the Sequana Board of Directors to
alter, amend or repeal the Sequana Bylaws. An amendment reducing the minimum
number of directors below five (5) cannot be adopted if the votes against the
amendment exceed sixteen and two-thirds percent (16 2/3%) of the outstanding
shares entitled to vote thereon. Furthermore, no amendment may change the
maximum number of directors greater than two (2) times the minimum number of
directors minus one (1).
POWER TO CALL SPECIAL SHAREHOLDERS' MEETING; ACTION BY CONSENT
Under the DGCL, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the Certificate
of Incorporation or the Bylaws. The Arris Certificate of Incorporation and the
Arris Bylaws provide that special meetings of stockholders may be called only by
the Chairman of the Arris Board of Directors, the President or Chief Executive
Officer, or by a majority of the Arris Board of Directors. The Arris Certificate
of Incorporation provides that any action taken by stockholders must be effected
at an annual or special meeting and may not be effected by written consent
without a meeting.
Under the CGCL and the Sequana Bylaws, a special meeting of shareholders
may be called by the Sequana Board of Directors, the Chairman of the Sequana
Board of Directors, the President, or by one or more shareholders holding ten
percent (10%) or more of the votes entitled to vote thereon. In addition, the
Sequana Bylaws provide that any action which may be taken at any annual or
special meeting of shareholders may be taken without a meeting and without prior
notice if a consent in writing is signed by the holders of the requisite number
of outstanding shares entitled to vote thereon. In the case of the election of
Sequana directors (other than an election to fill a vacancy that has not been
filled by the directors), however, such consent shall be effective only if
signed by the holders of all outstanding shares entitled to vote for the
election of directors.
INSPECTION OF SHAREHOLDERS' LIST
Both the DGCL and the CGCL allow any shareholder to inspect the
shareholders' list for a purpose reasonably related to such person's interest as
a shareholder. The CGCL provides, in addition, an absolute right to inspect and
copy the corporation's shareholders' list by a person or persons holding five
percent (5%) or more of a corporation's outstanding voting shares, or any
shareholder or shareholders holding one percent (1%) or more of such shares who
has filed certain documents with the Commission relating to the election of
directors. The DGCL does not provide for any such absolute right of inspection.
DIVIDENDS AND REPURCHASES OF SHARES
The DGCL permits a corporation, unless otherwise restricted by its
Certificate of Incorporation, to declare and pay dividends out of its surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared or for the preceding fiscal year as long as the amount of
capital of the corporation is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. The Arris Certificate of
Incorporation does not contain any such restrictions on Arris's ability to
declare and pay dividends. In addition, the DGCL generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation. The ability of a
Delaware corporation to pay dividends on, or to make repurchases or redemptions
of, its shares is dependent on the financial status of the corporation standing
alone and not on a consolidated basis. In determining the amount of surplus of a
Delaware corporation, the assets of the corporation, including stock of
subsidiaries owned by the corporation, must be valued at their fair market value
as determined by the board of directors, regardless of their historical book
value.
75
<PAGE> 86
Under the CGCL, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses and
deferred charges) would be at least equal to 1 1/4 times its liabilities (not
including deferred taxes, deferred income and other deferred credits), and the
corporation's current assets, as defined, would be at least equal to its current
liabilities or (1 1/4 times its current liabilities if the average pre-tax and
pre-interest earnings for the preceding two fiscal years were less than the
average interest expenses for such years). Such tests are applied to California
corporations on a consolidated basis. Under the CGCL, there are certain
exceptions to the foregoing rules for repurchases of shares including in
connection with certain rescission actions or pursuant to certain employee stock
plans.
APPROVAL OF CERTAIN CORPORATE TRANSACTIONS
Under both the DGCL and the CGCL, with certain exceptions, any merger,
consolidation or sale, lease or exchange of all or substantially all of the
assets must be approved by the board of directors and by the affirmative vote of
a majority of the outstanding shares entitled to vote. Under the CGCL, similar
board and shareholder approval is also required in connection with certain
additional acquisition transactions.
BUSINESS COMBINATION FOLLOWING A CHANGE OF CONTROL
The DGCL prohibits certain business combinations between a Delaware
corporation, the shares of which are listed on a national securities exchange,
and an "interested shareholder" for a period of three years following the time
that such person became an "interested shareholder" without board approval,
unless certain conditions are met and unless the Certificate of Incorporation of
the corporation contains a provision expressly electing not to be governed by
such provisions. The Arris Certificate of Incorporation does not contain such an
election.
The CGCL does not contain an analogous law. However, the CGCL does provide
that (i) in connection with a sale of all or substantially all of the assets of
a company where the buyer is in control of or under common control with the
seller (control being ownership of shares possessing more than fifty percent of
the voting power), the principal terms of the sale must be approved by at least
ninety percent (90%) of the voting power unless the sale is in consideration of
nonredeemable common shares of the purchasing corporation or its parent and (ii)
in connection with a merger where one constituent corporation or its parent owns
more than fifty percent (50%) of the voting power of another constituent
corporation (but less than ninety (90%) of the voting power of each class) the
common stock of a disappearing corporation may be converted only into
nonredeemable common shares of the surviving corporation or parent unless all of
the shareholders of the class consent or the transaction is determined to be
fair by the Commissioner of Corporations.
APPRAISAL RIGHTS
Under the DGCL and the CGCL, a shareholder of a corporation participating
in certain major corporate transactions may, under varying circumstances, be
entitled to appraisal rights pursuant to which such shareholder may receive cash
in the amount of the fair market value of the shares held by such shareholder
(as determined by a court or by agreement of the corporation and the
shareholder) in lieu of the consideration such shareholder may otherwise receive
in the transaction. The limitations on the availability of appraisal rights
under the DGCL are different from those under the CGCL.
Under the DGCL, appraisal rights are not available to: (i) shareholders
with respect to a merger or consolidation by a corporation, the shares of which
are either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more than 2,000
holders if such shareholders receive only shares of the surviving corporation or
shares of any other corporation which are either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or are
held of record by more than
76
<PAGE> 87
2,000 holders; or (ii) shareholders of a corporation surviving a merger if no
vote of the shareholders of the surviving corporation is required to approve the
merger because, among other things, the number of shares to be issued in the
merger does not exceed twenty percent (20%) of the shares of the surviving
corporation outstanding immediately prior to the merger, and if certain other
conditions are met.
Shareholders of a California corporation whose shares are listed on a
national securities exchange or on a list of over-the-counter margin stocks
issued by the Board of Governors of the Federal Reserve System generally do not
have such appraisal rights unless the holders of at least five percent (5%) of
the class of outstanding shares claim the right. See "Rights of Sequana
Dissenting Shareholders." Appraisal rights are unavailable, however, if the
shareholders of a corporation or the corporation itself, or both, immediately
prior to a reorganization shall own (immediately after the reorganization) more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent.
The DGCL also does not provide stockholders of a corporation with appraisal
rights when the corporation acquires another business through the issuance of
its capital stock: (i) in exchange for all or substantially all of the assets of
the business to be acquired, (ii) in exchange for more than fifty percent of the
outstanding shares of the corporation to be acquired, or (iii) in a merger of
the corporation to be acquired with a subsidiary of the acquiring corporation.
The CGCL treats these kinds of acquisitions in the same manner as a direct
merger of the acquiring corporation with the corporation to be acquired.
DISSENTERS' RIGHTS MAY BE AVAILABLE TO SHAREHOLDERS OF SEQUANA WITH RESPECT
TO THE MERGER. SEE "RIGHTS OF SEQUANA DISSENTING SHARES."
DISSOLUTION
Under the DGCL and the Arris Bylaws, a dissolution must be initiated by the
Arris Board of Directors and approved by the affirmative vote of the holders of
a majority of the outstanding stock of the corporation entitled to vote thereon.
Under the CGCL, shareholders holding fifty percent (50%) or more of the
voting power may authorize a corporation's dissolution, with or without the
approval of the corporation's board of directors, and this right may not be
modified by the Articles of Incorporation.
77
<PAGE> 88
APPROVAL OF THE 1997 EQUITY INCENTIVE PLAN
In November 1997, the Arris Board of Directors adopted, conditional upon
the consummation of the Merger, Arris' 1997 Equity Incentive Plan (the "Equity
Incentive Plan") and reserved 2,500,000 shares of Arris Common Stock for
issuance thereunder. The form of the Equity Incentive Plan is attached hereto as
Appendix E. No options will be granted under the Equity Incentive Plan until
after consummation of the Merger and the Equity Incentive Plan will not become
effective if the Merger is not Consummated.
Arris stockholders are requested in this proposal to approve, conditional
upon the consummation of the Merger, the Equity Incentive Plan (the "Equity
Incentive Plan Proposal"). The affirmative vote of the holders of a majority of
the shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve the 1989 Plan, as amended.
Consummation of the Merger will approximately double the number of
employees at Arris. None of the employees of Sequana will have any outstanding
options following consummation of the Merger. Arris has agreed to make option
grants to the employees of Sequana on the same basis as it would make to
comparable newly hired employees. In addition, Arris intends to grant additional
options with extended vesting terms to certain senior employees of Arris and
Sequana to help ensure retention of these key employees. The Arris Board of
Directors is proposing adoption of the Equity Incentive Plan in order to meet
these objectives.
THE ARRIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE
EQUITY INCENTIVE PLAN PROPOSAL.
The essential features of the Equity Incentive Plan are outlined below.
GENERAL
The Equity Incentive Plan provides for the grant of both incentive and
nonstatutory stock options as well as restricted stock purchase rights.
Incentive stock options granted are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1989,
as amended (the "Code"). Nonstatutory stock options are intended not to qualify
as incentive stock options under the Code. See "Federal Income Tax Information"
for a discussion of the tax treatment of the various awards provided under the
Equity Incentive Plan.
PURPOSE
The purpose of the Equity Incentive Plan is to attract and retain qualified
personnel, to provide additional incentives to employees, officers, directors
and consultants of Arris and to promote the success of Arris' business. Pursuant
to the Equity Incentive Plan, Arris may grant or issue incentive stock options
to employees and officers and nonstatutory stock options or stock purchase
rights to employees, officers, consultants and directors. After consummation of
the Merger, all of the combined company's approximately 391 employees will be
eligible to participate in the Equity Incentive Plan.
ADMINISTRATION
The Equity Incentive Plan is administered by the Arris Board of Directors
of Arris. The Arris Board of Directors has the power to construe and interpret
the Equity Incentive Plan and, subject to the provisions of the Equity Incentive
Plan, to determine the persons to whom and the dates on which awards will be
granted, the number of shares to be subject to each award, the time or times
during the term of each award within which all or a portion of such award may be
exercised, the exercise price, the type of consideration and other terms of the
award. The Arris Board of Directors is authorized to delegate administration of
the Equity Incentive Plan to a committee and has delegated such authority to the
Compensation Committee and, for grants to employees other than executive
officers, the Option Committee. As used herein with respect to the Equity
Incentive Plan, the "Arris Board of Directors" refers to the Compensation
Committee and the Option Committee, as well as to the Arris Board of Directors
itself.
78
<PAGE> 89
Arris currently limits the directors who may serve as members of the
Compensation Committee to those who are "outside directors," as such term is
defined in Section 162(m) of the Code. This limitation excludes from the
Compensation Committee (i) current employees of Arris, (ii) former employees of
Arris receiving compensation for past services (other than benefits under a
tax-qualified retirement plan), (iii) current and former officers of Arris, (iv)
directors currently receiving direct or indirect compensation from Arris in any
capacity (other than as a director), unless any such person is otherwise
considered an "outside director" under applicable federal guidance.
ELIGIBILITY
No incentive stock option may be granted under the Equity Incentive Plan to
any person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of Arris or any
affiliate of Arris, unless the option exercise price is at least 110% of the
fair market value of the stock subject to the option on the date of grant, and
the term of the option does not exceed five years from the date of grant. In
addition, the aggregate fair market value, determined at the time of grant, of
the shares of Common Stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year (under
all such plans of Arris and its affiliates) may not exceed $100,000.
Under the Equity Incentive Plan, no individual may be granted options
covering more than 500,000 shares of Common Stock in any calendar year. The
principal purpose for such a per-employee limitation is to comply with Code
regulations that permit certain performance-based compensation, including
compensation attributable to stock options that meet specified criteria, to be
exempt from the $1,000,000 limitation under Section 162(m) of the Code on the
amount that may be deducted by publicly held corporations for compensation paid
to certain employees. See "Federal Income Tax Information." Arris does not
currently have any intention of granting such number of options to any
individual. There can. be no assurance, however, that the Arris Board of
Directors will not determine in some future circumstances that it would be in
the best interests of Arris and its stockholders to grant options to purchase
such number of shares to a single employee during a calendar year.
STOCK SUBJECT TO THE EQUITY INCENTIVE PLAN
If options granted under the Equity Incentive Plan expire or otherwise
terminate without being exercised. the Common Stock not purchased pursuant to
such options again becomes available for issuance under the Equity Incentive
Plan.
The permissible terms of options and restricted stock purchase rights under
the Equity Incentive Plan are described below. Individual option grants and
restricted stock purchase rights may be more restrictive as to any or all of the
permissible terms described below.
TERMS OF OPTIONS
Exercise Price; Payment. The exercise price of stock options granted under
the Equity Incentive Plan may not be less than the fair market value of the
Common Stock subject to the option on the date of the option grant, and in some
cases (see "Eligibility" above), may not be less than 110% of such fair market
value.
The exercise price of options granted under the Equity Incentive Plan must
be paid either: (a) in cash at the time the option is exercised; or (b) at the
discretion of the Arris Board of Directors, (i) by delivery of other Common
Stock of Arris (ii) pursuant to a deferred payment arrangement, or (c) in any
other form of legal consideration acceptable to the Arris Board of Directors.
Option Exercise. Options granted under the Equity Incentive Plan may
become exercisable in cumulative increments ("vest") as determined by the Arris
Board of Directors. Shares covered by currently outstanding options under the
Equity Incentive Plan typically vest at the rate of 12.5% of the shares subject
to the option at the end of the first six months and 1/48th of the shares
subject to the option each month for 42 months thereafter, for initial grants to
employees. Subsequent grants to employees generally vest monthly over 48 months.
Shares covered by options granted in the future under the Equity Incentive Plan
may be subject to
79
<PAGE> 90
different vesting terms. The Arris Board of Directors has the power to
accelerate the time during which an option may be exercised. To the extent
provided by the terms of an option, an optionee may satisfy any federal, state
or local tax withholding obligation relating to the exercise of such option by a
cash payment upon exercise, by authorizing Arris to withhold a portion of the
stock otherwise issuable to the optionee, by delivering already owned stock of
Arris or by a combination of these means.
Term. The maximum term of options granted under the Equity Incentive Plan
is 10 years, except that in certain cases (see "Eligibility"), the maximum term
is five years. Options under the Equity Incentive Plan terminate ninety (90)
days after termination of the optionee's employment or relationship as a
consultant or director of Arris or any subsidiary of Arris, unless (a) such
termination is due to such person's permanent and total disability (as defined
in the Code), in which case the option may, but need not, provide that it may be
exercised at any time within twelve (12) months of such termination; (b) the
optionee dies while employed by or serving as a consultant of Arris or any
affiliate of Arris, or within ninety (90) days after termination of such
relationship in which case the option may, but need not, provide that it may be
exercised (to the extent the option was exercisable at the time of the
optionee's death) within twelve (12) months of the optionee's death by the
person or persons to whom the rights to such option pass by will or by the laws
of descent and distribution: or (c) the option by its terms specifically
provides otherwise. Individual options by their terms may provide for exercise
within a longer period of time following termination of employment or the
consultant or director relationship. The option term may also be extended in the
event that exercise of the option within these periods is prohibited for
specified reasons.
TERMS OF RESTRICTED STOCK PURCHASE RIGHTS
Purchase Price: Term. The Equity Incentive Plan provides that the purchase
price under each stock purchase agreement may not be less than 100% of the fair
market value of the Common Stock subject to the restricted stock purchase right
on the date such right is granted. The term of such restricted stock purchase
right may not exceed 30 days or such longer time as may be determined by the
Arris Board of Directors.
Repurchase. Shares of the Common Stock sold under the Equity Incentive
Plan may, but need not, be subject to a repurchase option in favor of Arris in
accordance with a vesting schedule determined by the Arris Board of Directors.
In the event a purchaser ceases to provide services to Arris or an affiliate of
Arris, Arris may repurchase any or all of the shares of the Common Stock held by
that purchaser that have not vested as of the date of termination, at the
original price paid by the purchaser. The repurchase price may be paid by
cancellation of an indebtedness of the purchaser to Arris.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Equity Incentive Plan or
subject to any option granted under the Equity Incentive Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Equity Incentive Plan and options outstanding thereunder will be appropriately
adjusted as to the class and the maximum number of shares subject to such plan,
the maximum number of shares which may be granted to an employee during a
calendar year, and the class, number of shares and price per share of stock
subject to such outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
The Equity Incentive Plan provides that, in the event of a merger of Arris,
such options shall be assumed or equivalent options substituted by each
successor corporation or a parent or subsidiary of such successor corporation or
in the event that the successor corporation refuses to assume or replace, then
such options shall accelerate and become immediately exercisable in full and
will subsequently terminate if not exercised prior to the completion of the
corporate transaction. In the event of a dissolution or liquidation of Arris,
outstanding options will terminate.
80
<PAGE> 91
DURATION, AMENDMENT AND TERMINATION
The Arris Board of Directors may suspend or terminate the Equity Incentive
Plan without stockholder approval at any time. Unless sooner terminated, the
Equity Incentive Plan will terminate in November 2007.
The Arris Board of Directors may also amend the Equity Incentive Plan at
any time or from time to time. However, no amendment will be effective unless
approved by the stockholders of Arris within twelve months before or after its
adoption by the Arris Board if such modification requires stockholder approval
in order to comply with Rule 16b-3 promulgated under the Exchange Act, or
satisfy the requirements of Section 422 of the Code or any Nasdaq or securities
exchange listing requirements. The Arris Board of Directors may submit any other
amendment to the Equity Incentive Plan for stockholder approval, including, but
not limited to, amendments intended to satisfy the requirements of Section
162(m) of the Code regarding the exclusion of performance-based compensation
from the limitation on the deductibility of compensation paid to certain
employees.
RESTRICTIONS ON TRANSFER
Under the Equity Incentive Plan, an incentive stock option may not be
transferred by the optionee otherwise than by will or by the laws of descent and
distribution and during the lifetime of the optionee, may be exercised only by
the optionee. A nonstatutory stock option may be transferred to the extent
specifically provided in the option agreement evidencing such nonstatutory stock
option.
FEDERAL INCOME TAX INFORMATION
Incentive Stock Options. Incentive stock options under the Equity
Incentive Plan are intended to be eligible for the favorable federal income tax
treatment accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or
Arris by reason of the grant or exercise of an incentive stock option. However,
the exercise of an incentive stock option may result in the imposition of or an
increase in liability of the optionee for alternative minimum tax liability.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be a capital gain or loss. Generally, if the optionee disposes of the
stock before the expiration of either of these holding periods (a "disqualifying
disposition"), at the time of disposition, the optionee will recognize taxable
ordinary income equal to the lesser of (i) the excess of the stock's fair market
value on the date of exercise over the exercise price, or (ii) the optionee's
actual gain, if any, on the purchase and sale. The optionee's additional gain,
or any loss, upon the disqualifying disposition will be a capital gain or loss.
Capital gains currently are generally subject to lower tax rates than ordinary
income. The maximum capital gains rate for federal income tax purposes is
currently 28% while the maximum ordinary income rate is effectively 39.6% at the
present time. Slightly different rules may apply to optionees who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, Arris will generally be entitled (subject to the
requirement of reasonableness, the provisions of Section 162(m) of the Code and
the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
Nonstatutory Stock Options. Nonstatutory stock options granted under the
Equity Incentive Plan generally have the following federal income tax
consequences:
There are no tax consequences to the optionee or Arris by reason of the
grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary income equal to
the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, Arris is required
to withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of
81
<PAGE> 92
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, Arris will generally be entitled to
a business expense deduction equal to the taxable ordinary income realized by
the optionee. Upon disposition of the stock, the optionee will recognize a
capital gain or loss equal to the difference between the selling price and the
sum of the amount paid for such stock plus any amount recognized as ordinary
income upon exercise of the option. Slightly different rules may apply to
optionees who acquire stock subject to certain repurchase options or who are
subject to Section 16(b) of the Exchange Act.
Restricted Stock. Restricted stock granted under the Equity Incentive Plan
generally has the following federal income tax consequences:
Upon acquisition of stock under a restricted stock award. the recipient
normally will recognize taxable ordinary income equal to the excess of the
stock's fair market value over the purchase price, if any. However, to the
extent the stock is subject to certain types of vesting restrictions, the
taxable event will be delayed until the vesting restrictions lapse unless the
recipient elects to be taxed on receipt of the stock. With respect to employees,
Arris is required to withhold from regular wages or supplemental wage payments
an amount based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, Arris will generally be entitled to
a business expense deduction equal to the taxable ordinary income realized by
the recipient. Upon disposition of the stock, the recipient will recognize a
capital gain or loss equal to the difference between the selling price and the
sum of the amount paid for such stock, if any, plus any amount recognized as
ordinary income upon acquisition (or vesting) of the stock. Slightly different
rules may apply to persons who acquire stock subject to forfeiture under Section
16(b) of the Exchange Act.
Potential Limitation on Company Deductions. As part of the Omnibus Budget
Reconciliation Act of 1993, the U.S. Congress amended the Code to add Section
162(m), which denies a deduction to any publicly held corporation for
compensation paid to certain employees in a taxable year to the extent that
compensation exceeds $1,000,000 for a covered employee. It is possible that
compensation attributable to awards under the Equity Incentive Plan, when
combined with all other types of compensation received by a covered employee
from Arris, may cause this limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m) of the Code,
compensation attributable to stock options will qualify as performance-based
compensation, provided that: (i) the stock award plan contains a per-employee
limitation on the number of hares for which stock options may be granted during
a specified period; (ii) the per-employee limitation is approved by the
stockholders; (iii) the award is granted by a compensation committee comprised
solely of outside directors"; and (iv) the exercise price of the award is no
less than the fair market value of the stock on the date of grant. Restricted
stock qualifies as performance-based compensation under these proposed Treasury
regulations only if: (i) the award is granted by a compensation committee
comprised solely of "outside directors"; (ii) the award is granted (or
exercisable) only upon the achievement of an objective performance goal
established in writing by the compensation committee while the outcome is
substantially uncertain: (iii) the compensation committee certifies in writing
prior to the granting (or exercisability) of the award that the performance goal
has been satisfied; and (iv) prior to the granting (or exercisability) of the
award, stockholders have approved the material terms of the award (including the
class of employees eligible for such award, the business criteria on which the
performance goal is based, nd the maximum amount (or formula used to calculate
the amount) payable upon attainment of the performance goal).
82
<PAGE> 93
APPROVAL OF THE
1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN, AS AMENDED
In April 1994, the Arris Board of Directors adopted and the stockholders
subsequently approved, Arris' 1994 Non-Employee Directors' Stock Option Plan
(the "Directors' Option Plan") and reserved 125,000 shares of Arris Common Stock
for issuance thereunder. The Directors' Option Plan designed to provide for the
automatic grant of options to purchase shares of Arris Common Stock to
non-employee directors of Arris. Arris, by means of the Directors' Option Plan,
seeks to attract and retain the best available personnel for service as
directors of Arris, to provide additional incentive for such persons to exert
maximum efforts for the success of Arris, and to encourage their continued
service on the Arris Board of Directors.
At October 31, 1997, options (net of canceled, repurchased or expired
options) covering an aggregate of 125,000 shares of Arris Common Stock had been
granted under the Directors' Option Plan and no shares (other than any shares
that might in the future be returned to the reserve as a result of cancellations
or expiration of options) remained available for future grants under the
Directors' Option Plan. During the last fiscal year, under the Directors' Option
Plan, Arris granted to non-employee directors as a group options to purchase
25,000 shares of Common Stock at exercise prices ranging from $14.09 to $15.36
per share.
In November 1997, the Arris Board of Directors approved an amendment to the
Equity Incentive Plan, subject to stockholder approval, to increase the number
of shares authorized for issuance under the Equity Incentive Plan by 350,000
shares, to a total of 475,000 shares. It is expected that the Arris Board of
Directors following consummation of the Merger will contain at least four new
members and the proposed increase in shares under the Directors' Option Plan is
necessary to permit grants to these new members as well as to make ongoing
grants in accordance with the terms of the Directors' Option Plan. See "The
Reorganization Agreement--The Composition of the Arris Board of Directors."
Stockholders are requested in this proposal to approve the Directors'
Option Plan, as amended to increase the number of shares of Common Stock
authorized for issuance by 350,000 shares (the "Directors' Plan Proposal"). The
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy and entitled to vote at the meeting will be required to
approve the Directors' Option Plan, as amended.
THE ARRIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE
DIRECTORS' PLAN PROPOSAL.
The essential features of the Directors' Option Plan are outlined below.
GENERAL
The Directors' Option Plan provides for the automatic grant of nonstatutory
stock options to non-employee Board members. Nonstatutory stock options granted
under the Directors' Option Plan do not qualify as incentive stock options
within the meaning of Section 422 of the Code. See "Federal Income Tax
Information" above. Subject to stockholder approval of this Proposal Four, the
maximum number of shares of Common Stock that may be issued pursuant to options
granted under the Directors' Option Plan is 475,000.
ADMINISTRATION
The Directors' Option Plan is administered by the Arris Board of Directors.
The Arris Board of Directors has the power, subject to the provisions of the
Directors' Option Plan, to construe and interpret the Directors' Option Plan and
options granted under it, to establish, amend and revoke rules and regulations
for its administration, to amend the Directors' Option Plan, and to generally
exercise such powers and to perform such acts as the Arris Board of Directors
deems necessary or expedient to promote the best interests of Arris. The Arris
Board of Directors has the power to delegate administration of such plan to a
committee of not less than two board members.
ELIGIBILITY
Options are granted under the Directors' Option Plan only to non-employee
directors of Company. A "non-employee director" is defined in the Directors'
Option Plan as a director of Arris who is not otherwise
83
<PAGE> 94
an employee of Arris or of any affiliate of Arris. Four of Arris six current
nominees (Messrs. Byers, Evnin, Garvey and Sievertsson) are eligible to
participate in the Directors' Option Plan.
The option grants under the Directors' Option Plan are nondiscretionary.
Pursuant to the terms of the Directors' Option Plan, each person elected for the
first time to be a non-employee director will automatically be granted an option
to purchase 30,000 shares of Common Stock upon the date of his or her first
attendance at a meeting of the Arris Board of Directors. Thereafter, so long as
any such person remains a non-employee director of Arris and the Directors'
Option Plan remains in effect, he or she shall be automatically granted an
option to purchase 5,000 shares of Arris Common Stock on the date of each Annual
Meeting of Stockholders, unless such director elects to decline such grant or
has not been a non-employee director for at least three months prior to such
Annual Meeting of Stockholders.
TERMS OF OPTIONS
The exercise price of each option granted under the Directors' Option Plan
shall be equal to 100% of the fair market value of the Common Stock subject to
such option on the date such option is granted. Options granted under the
Directors' Option Plan vest with respect to each option in four (4) equal annual
installments commencing on the first anniversary of the date of grant of the
option. No option granted under the Directors' Option Plan is exercisable after
the earlier of ten years from the date the option was granted and the date three
(3) months after termination of the optionee's service to Arris. An option
generally is nontransferable except by will or pursuant to the laws of descent
and distribution.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Directors' Option Plan
or subject to any option granted under the Directors' Option Plan (through
merger, consolidation, reorganization, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or
otherwise), the Directors' Option Plan and options outstanding will be
appropriately adjusted as to the class and maximum number of shares subject to
the Directors' Option Plan and the class, number of shares and price per share
of stock subject to such outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a merger of Arris, the time which all outstanding options
may be exercised shall be accelerated and the options shall terminate if not
exercised prior to such event.
DURATION, AMENDMENT AND TERMINATION
The Arris Board of Directors may suspend or terminate the Directors' Option
Plan at any time. Unless sooner terminated, the Directors' Option Plan will
terminate in April 2004.
The Arris Board of Directors may amend the Directors' Option Plan at any
time and from time to time. However, no amendment will be effective unless
approved by the stockholders of Arris within twelve months before or after its
adoption by the Arris Board to the extent such modification requires stockholder
approval in order for the Director's Option Plan to comply with the requirements
of Rule 16b-3 or any Nasdaq or securities exchange requirements.
FEDERAL INCOME TAX INFORMATION
Stock options granted under the Directors' Option Plan are subject to
federal income tax treatment pursuant to rules governing options that are not
incentive stock options. See "Federal Income Information" above.
84
<PAGE> 95
NEW PLAN BENEFITS
Each non-employee director of the Arris Board of Directors will be granted
an option to purchase 5,000 shares of Arris Common Stock on the date of each of
the Annual Stockholders' Meetings of Arris, unless such director elects to
decline such grant or has not been a non-employee director for at least three
months prior to such Annual Stockholders' Meeting. Each person elected for the
first time to be a non-employee director will automatically be granted on option
to purchase 30,000 shares of Common Stock upon the date of his or her first
attendance at a meeting of the Arris Board of Directors. The current
non-employee directors of Arris are Drs. Arvin, Evnin, Kennedy and Sievertsson
and Messrs. Byers, Kailian and Mendelson. For a description of the composition
of the Arris Board of Directors upon consummation of the Merger, see "The
Reorganization Agreement -- The Composition of the Arris Board of Directors".
85
<PAGE> 96
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
In October 1993, the Arris Board of Directors adopted and the stockholders
subsequently approved, the Employee Stock Purchase Plan (the "Purchase Plan").
As a result of an amendment in February 1996, there were 250,000 shares of Arris
Common Stock authorized for issuance under the Purchase Plan. At October 31,
1997, an aggregate of 199,193 shares had been issued under the Purchase Plan and
only 50,807 shares remained for the grant of future rights under the Plan. In
November 1997, the Arris Board of Directors adopted an amendment to the Purchase
Plan to increase the number of shares authorized for issuance under the Purchase
Plan by 400,000 shares to a total of 650,000 shares. This amendment is intended
to afford Arris greater flexibility in providing employees with stock incentives
and to ensure that Arris can continue to provide such incentives at levels
determined appropriate by the Arris Board of Directors. During the last fiscal
year, shares were purchased in the amounts and at the weighted average prices
per share under the Purchase Plan as follows: 66,689 shares at a weighted
average price of $5.8875 per share; all Arris Named Executive Officers as a
group, 7,340 shares at a weighted average price of $5.9946; and, all employees
(excluding executive officers) as a group, 59,349 shares at a weighted average
price of $5.8742.
Stockholders are requested in this proposal to approve the Purchase Plan,
as amended (the "Purchase Plan Proposal"). The affirmative vote of the holders
of a majority of the shares present in person or represented by proxy and
entitled to vote at the meeting will be required to approve the Purchase Plan,
as amended.
THE ARRIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE
PURCHASE PLAN PROPOSAL.
The essential features of the Purchase Plan, as amended, are outlined
below.
GENERAL
The purpose of the Purchase Plan is to provide a means by which employees
of Arris (and any parent or subsidiary of Arris designated by the Arris Board of
Directors to participate in the Purchase Plan) may be given an opportunity to
purchase Common Stock of Arris through payroll deductions, to assist Arris in
retaining the services of its employees, to secure and retain the services of
new employees, and to provide incentives for such persons to exert maximum
efforts for the success of Arris. All of Arris' approximately 127 employees are
eligible to participate in the Purchase Plan.
The rights to purchase Common Stock granted under the Purchase Plan are
intended to qualify as options issued under an "employee stock purchase plan" as
that term is defined in Section 423(b) of the Code.
ADMINISTRATION
The Purchase Plan is administered by the Arris Board of Directors, which
has the final power to construe and interpret the Purchase Plan and the rights
granted under it. The Arris Board of Directors has the power, subject to the
provisions of the Purchase Plan, to determine when and how rights to purchase
Common Stock of Arris will be granted, the provisions of each offering of such
rights (which need not be identical), and whether any parent or subsidiary of
Arris shall be eligible to participate in such plan. The Arris Board of
Directors is authorized to delegate administration of the Purchase Plan to a
committee and has delegated such authority to the Compensation Committee. As
used herein with respect to the Purchase Plan, the "Arris Board of Directors"
refers to the Compensation Committee as well as the Arris Board of Directors
itself.
OFFERINGS
Under the Purchase Plan, the Arris Board of Directors from time to time may
institute an offering consisting of rights granted to all eligible employees to
purchase Common Stock periodically while such offering is in effect. Each such
offering may have a duration of no more than twenty-seven months. The Arris
Board of Directors determines the duration of each offering and establishes one
or more purchase dates during the offering on which shares will be purchased by
participating employees. Under the terms of the offerings
86
<PAGE> 97
approved by the Arris Board of Directors to date, each offering lasts for two
years, except that if, on a purchase date during an offering, the price of
Arris' Common Stock on such purchase date is lower than it was at the start of
the offering, then that offering automatically terminates and a new offering
begins on the following day. Currently, the Arris Board of Directors has
established purchase dates to occur every six months, on each July 31, and
January 31.
ELIGIBILITY
Generally, under the terms of the Purchase Plan, any employee who is
customarily employed at least 20 hours per week and five months per calendar
year by Arris (or by any parent or subsidiary of Arris designated from time to
time by the Arris Board of Directors) on the first day of the offering period is
eligible to participate in that offering, provided that such employee has been
employed continuously for such period (which may not exceed two years) as the
Arris Board of Directors may establish as a service requirement for
participation. In addition, the Arris Board of Directors may provide for the
commencement of participation at specified dates during an offering by employees
who first meet the eligibility requirements after the first day of the offering.
Currently, a continuous period of employment of three months is required for
otherwise eligible employees to participate in the Purchase Plan.
Notwithstanding the foregoing, no employee is eligible for the grant of any
rights under the Purchase Plan if, immediately after such grant, the employee
would own, directly or indirectly, stock possessing 5% or more of the total
combined voting power or value of all classes of stock of Arris or of any parent
or subsidiary of Arris (including any stock which such employee may purchase
under all outstanding rights and options). Also, under the Purchase Plan no
employee may be granted rights that would permit the purchase of more than
$25,000 worth of Common Stock (determined by using the fair market value of the
shares at the time such rights are granted) under all employee stock purchase
plans of Arris for each calendar year in which such rights are outstanding.
Under prior offerings, the Arris Board of Directors has limited the amount of
Common Stock that any participant could purchase to 5,000 shares per offering.
Currently, a participant may purchase on each purchase date during an offering
no more than the number of shares of Common Stock determined by dividing $12,500
by the fair market value of the Common Stock on the first day of the offering.
PARTICIPATION IN THE PLAN
Eligible employees become participants in the Purchase Plan by delivering
to Arris, prior to the date selected by the Arris Board of Directors, an
agreement authorizing payroll deductions from such employees' total compensation
during the offering. The Purchase Plan permits payroll deductions of up to 15%,
but under the offerings made to date the Arris Board of Directors has limited
payroll deductions to no more than 10% of an employee's total compensation.
PURCHASE PRICE
The purchase price per share at which Common Stock is sold in an offering
under the Purchase Plan is the lower of (a) 85% of the fair market value of a
share of Common Stock on the date of commencement of the offering, or (b) 85% of
the fair market value of a share of Common Stock on the applicable purchase date
for the purchase of such Common Stock.
ACCUMULATION OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the Common Stock is accumulated by payroll deductions
over the period of the offering. Payroll deductions of a participant begin on
the date specified in the offering and may be increased or reduced on the date
or dates specified in the offering. All payroll deductions made for a
participant are credited to the participant's account under the Purchase Plan
and are deposited with the general funds of Arris. A participant may not make
any additional payments into such account unless permitted under the terms of an
offering.
87
<PAGE> 98
PURCHASE OF STOCK
By executing an agreement to participate in an offering under the Purchase
Plan, the employee becomes entitled to purchase shares under such offering. In
connection with offerings made under the Purchase Plan, the Arris Board of
Directors specifies a maximum number of shares any participant may be granted
the right to purchase and the maximum aggregate number of shares which may be
purchased pursuant to such offering by all participants. Under the Purchase
Plan, if the aggregate number of shares to be purchased upon exercise of rights
granted in the offering would exceed the maximum aggregate number, the Arris
Board of Directors would make a pro rata allocation of shares available in a
uniform and equitable manner. Unless the participant's participation is
discontinued, the right to purchase shares is exercised automatically on each
purchase date at the applicable price. See "Withdrawal" below.
WITHDRAWAL
A participant may withdraw from a given offering by terminating payroll
deductions for such offering and delivering to Arris a notice of withdrawal from
the offering. Such withdrawal must be elected by the time set forth in the
applicable offering.
Upon any withdrawal from an offering by the participant, Arris will
distribute to the participant, without interest, the accumulated payroll
deductions in the participant's account under the Purchase Plan, less any
accumulated deductions previously applied to the purchase of stock on the
participant's behalf during such offering period, and such participant's
interest in the offering will be automatically terminated. The employee is not
entitled to again participate in such offering. An employee's withdrawal from an
offering will not have any effect upon such employee's eligibility to
participate in subsequent offerings under the Purchase Plan.
TERMINATION OF EMPLOYMENT
Rights granted pursuant to any offering under the Purchase Plan terminate
immediately upon cessation of a participant's employment for any reason, and
Arris will distribute to such participant, without interest, all of the
accumulated payroll deductions from the participant's account under the Purchase
Plan.
RESTRICTIONS ON TRANSFER
Rights granted under the Purchase Plan are not transferable and may be
exercised only by the person to whom such rights are granted.
DURATION, AMENDMENT AND TERMINATION
The Arris Board of Directors may suspend or terminate the Purchase Plan at
any time. Unless terminated earlier, such plan will terminate on December 31,
2002.
The Arris Board of Directors may amend the Purchase Plan at any time. To be
effective any amendment of the Purchase Plan must be approved by the
stockholders within 12 months of its adoption by the Arris Board of Directors if
the amendment would (a) increase the number of shares of Common Stock reserved
for issuance under the Purchase Plan, (b) modify the requirements relating to
eligibility for participation in the Purchase Plan, or (c) modify any other
provision of the Purchase Plan in a manner that would materially increase the
benefits accruing to participants under the Purchase Plan, if such approval is
required in order to comply with the requirements of Rule 16b-3 under the
Exchange Act or Section 423 of the Code.
Rights granted before amendment or termination of the Purchase Plan will
not be altered or impaired by any amendment or termination of such plan without
the consent of the employee to whom such rights were granted.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a dissolution, liquidation or specified type of merger of
Arris, then, as determined by the Arris Board of Directors in its sole
discretion, the surviving corporation either will assume the rights under the
88
<PAGE> 99
Purchase Plan or substitute similar rights, or the purchase date under any
ongoing offering will be accelerated such that the outstanding rights may be
exercised immediately prior to any such event.
STOCK SUBJECT TO PURCHASE PLAN
If rights granted under the Purchase Plan expire, lapse or otherwise
terminate without being exercised, the Common Stock not purchased under such
rights again becomes available for issuance under such plan.
FEDERAL INCOME TAX INFORMATION
Rights granted under the Purchase Plan are intended to qualify for
favorable federal income tax treatment associated with rights granted under an
employee stock purchase plan which qualifies under provisions of Section 423 of
the Code.
A participant will be taxed on amounts withheld for the purchase of shares
as if such amounts were actually received. Other than this, no income will be
taxable to a participant until disposition of the shares acquired, and the
method of taxation will depend upon the holding period of the purchased shares.
If the stock is disposed of at least two years after the beginning of the
offering period and at least one year after the stock is transferred to the
participant, then the lesser of (a) the excess of the fair market value of the
stock at the time of such disposition over the purchase price or (b) the excess
of the fair market value of the stock as of the beginning of the offering period
over the exercise price (which for this purpose is deemed to be 85% of the fair
market value of the stock as of the beginning of the offering period) will be
treated as ordinary income. Any further gain or any loss will be taxed as
capital gain or loss. Capital gains currently are generally subject to lower tax
rates than ordinary income. The maximum capital gains rate for federal income
tax purposes is 28% while the maximum ordinary rate is effectively 39.6% at the
present time.
If the stock is sold or disposed of before the expiration of either of the
holding periods described above, then the excess of the fair market value of the
stock on the purchase date over the purchase price will be treated as ordinary
income at the time of such disposition, and Arris may, in the future, be
required to withhold income taxes relating to such ordinary income from other
payments made to the participant. The balance of any gain will be treated as
capital gain. Even if the stock is later disposed of for less than its fair
market value on the purchase date, the same amount of ordinary income is
attributed to the participant, and a capital loss is recognized equal to the
difference between the sales price and the fair market value of the stock on
such purchase date.
There are no federal income tax consequences to Arris by reason of the
grant or exercise of rights under the Purchase Plan. Arris is entitled to a
deduction to the extent amounts are taxed as ordinary income to a participant
(subject to the requirement of reasonableness, and the satisfaction of a tax
reporting obligation).
ADDITIONAL INFORMATION
In addition to the Equity Incentive Plan, the Director's Plan and the
Purchase Plan, Arris has a 1989 Stock Plan, as amended (the "1989 Plan") and a
1997 Non-Officer Employee Equity Incentive Plan (the "Non-Officer Plan"). The
terms of the 1989 Plan and the Non-Officer Plan are substantially similar to the
Equity Incentive Plan, except: (i) the Non-Officer Plan only provides for the
grant of nonstatutory stock options and restricted stock purchase rights, and
(ii) officers (as defined in Section 16 of the Exchange Act) of Arris are not
eligible to participate in the Non-Officer Plan. As of October 31, 1997, options
(net of canceled, repurchased or expired options) covering an aggregate of
2,815,311 shares of Arris Common Stock had been granted under the 1989 Plan and
602,189 shares (plus any shares that might in the future be returned to the
reserve as a result of cancellation or expiration of options) remain available
for future grants under the 1989 Plan. As of October 31, 1997, options (net of
canceled, repurchased or expired options) covering an aggregate of 256,414
shares of Arris Common Stock had been granted under the Non-Officer Plan and
743,586 shares (plus any shares that might in the future be returned to the
reserve as a result of cancellation or expiration of options) remain available
for future grants under the Non-Officer Plan.
89
<PAGE> 100
In February 1997, Arris granted Michael C. Venuti, Ph.D., Vice President
Research and Chief Technical Officer of Arris, an option to purchase 10,000
shares of Arris Common Stock. Such option has an exercise price of $14.04 per
share and vests monthly over a four year period.
In May 1997, pursuant to the terms of the Directors' Plan, Arris granted
each of Brook Byers, Anthony Evnin, Ph.D., Vaughn Kailian, Donald Kennedy, Ph.D.
and Hans Sievertsson, Ph.D., continuing non-employee directors of Arris, an
option to purchase 5,000 shares of Arris Common Stock and Alan Mendelson, a new
non-employee director of Arris, an option to purchase 30,000 shares of Arris
Common Stock. Each option has an exercise price of $12.19 per share and vests
annually over a four year period.
In August 1997, Arris granted John P. Walker, President and Chief Executive
Office of Arris, an option to purchase 100,000 shares of Arris Common Stock.
Such option has an exercise price of $13.18 per share and is subject to vesting
in full, contingent upon continued service and an agreement not to compete, on
the earlier of (i) December 31, 2000, or (ii) the twentieth consecutive trading
day on which the Arris Common Stock price closes at or above $20.00 per share,
as adjusted for stock splits or other corporate reorganizations. The grant of
such option was made pursuant to an employment contract between Mr. Walker and
Arris that will extend through December 31, 2000. The terms of such employment
contract were approved by the Compensation Committee in August 1997. Such
contract also provides for a salary of $380,000 a year (retroactive to June 1,
1997), an annual bonus opportunity of 50% of salary for 100% achievement of
specified goals, debt forgiveness on notes with an aggregate principal amount of
$950,000 (with partial tax gross-up) equal to $1,170,000 of total forgiveness
through 2001 plus accrued interest, and certain disability, long-term care and
supplemental life insurance benefits.
In September 1997, Arris granted Ann Arvin, Ph.D., a new director of Arris,
options to purchase 30,000 shares of Common Stock. Such options have an exercise
price of $14.49 per share and vest annually over a four year period.
From January 1, 1997 to September 30, 1997, Arris received an aggregate of
$4,533,432 from Pharmacia & Upjohn AB relating to commitment fees and research
funding and support under collaborative agreements with Arris. Arris paid
Pharmacia & Upjohn AB approximately $30,096 for routine purchases of materials
and supplies. Hans Sievertsson, Ph.D., a director of Arris, is a Vice President
of Pharmacia AB, a unit of Pharmacia & Upjohn AB.
EXPERTS
The consolidated financial statements of Arris at December 31, 1995 and
1996, and for each of the years ended December 31, 1994, 1995 and 1996,
incorporated in this Proxy Statement/Prospectus by reference to the Annual
Report on Form 10-K , of Arris have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of that firm as experts in accounting and auditing.
The consolidated financial statements of Sequana at December 31, 1995 and
1996, and for each of the years ended December 31, 1994, 1995 and 1996,
incorporated in this Proxy Statement/Prospectus by reference to the Annual
Report on Form 10-K, of Sequana have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for Arris by Cooley Godward LLP ("Cooley Godward"), Palo Alto, California.
Cooley Godward and certain attorneys in such firm own an aggregate of
approximately 19,357 shares of Arris Common Stock. Alan C. Mendelson, a partner
of Cooley Godward, is a director and the Secretary of Arris.
90
<PAGE> 101
Certain legal matters in connection with the Merger will be passed upon for
Sequana by Wilson Sonsini Goodrich & Rosati ("WSGR"), Palo Alto, California.
Michael J. O'Donnell, a partner of WSGR and Secretary of Sequana, owns
approximately 2,083 shares of Sequana Common Stock.
REPRESENTATIVES OF INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP expect to be present at the Arris
Special Meeting and at the Sequana Special Meeting. While such representatives
have stated that they do not plan to make a statement at such meetings, they
will be available to respond to appropriate questions from stockholders in
attendance.
91
<PAGE> 102
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
AMONG:
ARRIS PHARMACEUTICAL CORPORATION,
A DELAWARE CORPORATION;
BEAGLE ACQUISITION SUB, INC.,
A CALIFORNIA CORPORATION; AND
SEQUANA THERAPEUTICS, INC.,
A CALIFORNIA CORPORATION
------------------------------------------
DATED AS OF NOVEMBER 2, 1997
------------------------------------------
================================================================================
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
SECTION 1. DESCRIPTION OF TRANSACTION............................................ 1
1.1 Merger of Merger Sub into the Company................................. 1
1.2 Effect of the Merger.................................................. 1
1.3 Closing; Effective Time............................................... 1
1.4 Articles of Incorporation and Bylaws; Directors and Officers.......... 2
1.5 Conversion of Shares.................................................. 2
1.6 Closing of the Company's Transfer Books............................... 3
1.7 Exchange of Certificates.............................................. 3
1.8 Dissenting Shares..................................................... 4
1.9 Tax Consequences...................................................... 4
1.10 Accounting Consequences............................................... 5
1.11 Further Action........................................................ 5
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................... 5
2.1 Due Organization; Subsidiaries; Etc. ................................. 5
2.2 Articles of Incorporation and Bylaws.................................. 5
2.3 Capitalization, Etc................................................... 5
2.4 SEC Filings; Financial Statements..................................... 7
2.5 Absence of Changes.................................................... 7
2.6 Title to Assets....................................................... 7
2.7 Parke-Davis Agreement................................................. 8
2.8 Payments Under Corporate Partnering Agreements........................ 8
2.9 Real Property; Equipment; Leasehold................................... 8
2.10 Proprietary Assets.................................................... 9
2.11 Material Contracts.................................................... 10
2.12 Liabilities........................................................... 12
2.13 Compliance with Legal Requirements.................................... 12
2.14 Certain Business Practices............................................ 12
2.15 Governmental Authorizations........................................... 12
2.16 Tax Matters........................................................... 12
2.17 Employee and Labor Matters; Benefit Plans............................. 13
2.18 Environmental Matters................................................. 15
2.19 Insurance............................................................. 15
2.20 Transactions with Affiliates.......................................... 15
2.21 Legal Proceedings; Orders............................................. 16
2.22 Authority; Binding Nature of Agreement................................ 16
2.23 No Existing Discussions............................................... 16
2.24 Vote Required......................................................... 16
2.25 Non-Contravention; Consents........................................... 16
2.26 Fairness Opinion...................................................... 17
2.27 Financial Advisor..................................................... 17
2.28 Full Disclosure....................................................... 17
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB............... 18
3.1 Due Organization, Subsidiaries, Etc. ................................. 18
3.2 Certificate/Articles of Incorporation and Bylaws...................... 18
3.3 Capitalization, Etc................................................... 18
3.4 SEC Filings; Financial Statements..................................... 20
3.5 Absence of Changes.................................................... 20
</TABLE>
i
<PAGE> 104
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
3.6 Title to Assets....................................................... 20
3.7 Payments Under Corporate Partnering Agreements........................ 20
3.8 Real Property; Equipment; Leasehold................................... 21
3.9 Proprietary Assets.................................................... 21
3.10 Material Contracts.................................................... 22
3.11 Liabilities........................................................... 24
3.12 Compliance with Legal Requirements.................................... 24
3.13 Certain Business Practices............................................ 24
3.14 Governmental Authorizations........................................... 24
3.15 Tax Matters........................................................... 25
3.16 Employee and Labor Matters; Benefit Plans............................. 25
3.17 Environmental Matters................................................. 26
3.18 Insurance............................................................. 27
3.19 Transactions with Affiliates.......................................... 27
3.20 Legal Proceedings; Orders............................................. 27
3.21 Authority; Binding Nature of Agreement................................ 27
3.22 No Existing Discussions............................................... 28
3.23 Vote Required......................................................... 28
3.24 Non-Contravention; Consents........................................... 28
3.25 Fairness Opinion...................................................... 29
3.26 Valid Issuance........................................................ 29
3.27 Financial Advisor..................................................... 29
3.28 Full Disclosure....................................................... 29
SECTION 4. CERTAIN COVENANTS OF THE PARTIES...................................... 29
4.1 Access and Investigation.............................................. 29
4.2 Operation of the Company's Business................................... 29
4.3 Operation of Parent's Business........................................ 32
4.4 No Solicitation by Company............................................ 34
4.5 No Solicitation by Parent............................................. 35
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES................................... 36
5.1 Registration Statement; Joint Proxy Statement......................... 36
5.2 Company Shareholders' Meeting......................................... 36
5.3 Parent Stockholders' Meeting.......................................... 37
5.4 Regulatory Approvals.................................................. 38
5.5 Stock Options; ESPP................................................... 38
5.6 Warrants.............................................................. 39
5.7 Indemnification of Officers and Directors............................. 39
5.8 Additional Agreements................................................. 40
5.9 Disclosure............................................................ 40
5.10 Tax Matters........................................................... 41
5.11 Letter of Accountants................................................. 41
5.12 Resignation of Officers and Directors................................. 41
5.13 FIRPTA Matters........................................................ 41
5.14 Affiliate Agreements.................................................. 41
5.15 Election of Directors................................................. 41
</TABLE>
ii
<PAGE> 105
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
5.16 Registration Rights................................................... 42
5.17 Modification of Corange Agreement..................................... 42
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.......... 42
6.1 Accuracy of Representations........................................... 42
6.2 Performance of Covenants.............................................. 42
6.3 Effectiveness of Registration Statement............................... 43
6.4 Shareholder Approval.................................................. 43
6.5 Consents.............................................................. 43
6.6 Documents............................................................. 43
6.7 No Material Adverse Change............................................ 43
6.8 HSR Act............................................................... 43
6.9 Listing............................................................... 43
6.10 No Restraints......................................................... 43
6.11 No Governmental Litigation............................................ 43
6.12 No Other Litigation................................................... 43
6.13 Assumption of Warrants................................................ 44
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY..................... 44
7.1 Accuracy of Representations........................................... 44
7.2 Performance of Covenants.............................................. 44
7.3 Effectiveness of Registration Statement............................... 44
7.4 Shareholder Approval.................................................. 44
7.5 Documents............................................................. 44
7.6 No Material Adverse Change............................................ 45
7.7 HSR Act............................................................... 45
7.8 Listing............................................................... 45
7.9 No Restraints......................................................... 45
7.10 Directors............................................................. 45
SECTION 8. TERMINATION........................................................... 45
8.1 Termination........................................................... 45
8.2 Effect of Termination................................................. 46
8.3 Expenses; Termination Fees............................................ 46
SECTION 9. MISCELLANEOUS PROVISIONS.............................................. 47
9.1 Amendment............................................................. 47
9.2 Waiver................................................................ 47
9.3 No Survival of Representations and Warranties......................... 48
9.4 Entire Agreement; Counterparts; Applicable Law........................ 48
9.5 Jury Waiver........................................................... 48
9.6 Disclosure Schedule................................................... 48
9.7 Attorneys' Fees....................................................... 48
9.8 Assignability......................................................... 48
9.9 Notices............................................................... 48
9.10 Cooperation........................................................... 49
9.11 Construction.......................................................... 49
</TABLE>
iii
<PAGE> 106
EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Certain definitions
Exhibit B -- Form of Articles of Incorporation of Surviving Corporation
Exhibit C -- Form of Affiliate Agreement
Exhibit D -- Form of legal opinion of Wilson, Sonsini, Goodrich & Rosati
Exhibit E -- Form of legal opinion of Cooley Godward LLP
</TABLE>
iv
<PAGE> 107
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of November 2, 1997, by and among: ARRIS PHARMACEUTICAL
CORPORATION, a Delaware corporation ("Parent"); BEAGLE ACQUISITION SUB, INC., a
California corporation and a wholly owned subsidiary of Parent ("Merger Sub");
and SEQUANA THERAPEUTICS, INC., a California corporation (the "Company").
Certain capitalized terms used in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the California
General Corporation Law (the "Merger"). Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly-owned subsidiary
of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For financial reporting purposes, it is intended that the
Merger be accounted for as a purchase.
C. The respective boards of directors of Parent, Merger Sub and the Company
have adopted this Agreement and approved the Merger.
D. Certain shareholders of the Company have executed Voting and
Non-Disposition Agreements in connection with the Merger.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 Merger of Merger Sub into the Company. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation"). At the
election of Parent, any direct wholly-owned subsidiary of Parent may be
substituted for Merger Sub as a constituent corporation in the Merger. In such
event, the parties hereto agree to execute an appropriate amendment of this
Agreement to reflect such substitution.
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the California General
Corporation Law ("CGCL").
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California, at 10:00 a.m. on a date to be agreed by Parent and the Company (the
"Closing Date"), which shall be no later than the tenth business day after the
satisfaction or waiver of the conditions set forth in Sections 6 and 7.
Contemporaneously with or as promptly as practicable after the Closing, a
properly executed agreement of merger conforming to the requirements of Chapter
11 of the CGCL shall be filed with the Secretary of State of the State of
California. The Merger shall take effect at the time such agreement of merger is
filed with the Secretary of State of the State of California (the "Effective
Time").
1
<PAGE> 108
1.4 Articles of Incorporation and Bylaws; Directors and Officers. Unless
otherwise agreed by Parent and the Company prior to the Effective Time:
(a) the Articles of Incorporation of the Surviving Corporation shall
be amended and restated as of the Effective Time to conform to Exhibit B;
(b) the Bylaws of the Surviving Corporation shall be amended and
restated as of the Effective Time to conform to the Bylaws of Merger Sub as
in effect immediately prior to the Effective Time; and
(c) the directors and officers of the Surviving Corporation
immediately after the Effective Time shall be the respective individuals
who are directors and officers of Merger Sub immediately prior to the
Effective Time.
1.5 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any
further action on the part of Parent, Merger Sub, the Company or any
shareholder of the Company or of Merger Sub:
(i) any shares of Company Common Stock then held by the Company or
any subsidiary of the Company shall be canceled and retired and shall
cease to exist, and no consideration shall be delivered in exchange
therefor;
(ii) any shares of Company Common Stock then held by Parent, Merger
Sub or any other subsidiary of Parent shall be canceled and retired and
shall cease to exist, and no consideration shall be delivered in
exchange therefor;
(iii) except as provided in clauses "(i)" and "(ii)" above and
subject to Sections 1.5(b), 1.5(d) and 1.8, each share of Company Common
Stock then outstanding shall be converted into the right to receive one
and thirty five one hundredths (1.35) fully paid and nonassessable
shares of Parent Common Stock; and
(iv) each share of the common stock, no par value, of Merger Sub
then outstanding shall be converted into one share of common stock of
the Surviving Corporation.
(b) The fraction of a share of Parent Common Stock specified in
Section 1.5(a)(iii) (as such fraction may be adjusted in accordance with
this Section 1.5(b)) is hereinafter referred to as the "Exchange Ratio."
If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock or Parent Common Stock are
changed into a different number or class of shares by reason of any stock
split, stock dividend, reverse stock split, reclassification,
recapitalization, exchange of shares or other similar transaction, or if
Parent pays an extraordinary dividend or makes an extraordinary
distribution, then the Exchange Ratio shall be appropriately adjusted.
(c) Except as set forth in the Company Disclosure Schedule, if any
shares of Company Common Stock outstanding immediately prior to the
Effective Time are unvested or are subject to a repurchase option, risk of
forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with the Company or under which the
Company has any rights, then the shares of Parent Common Stock issued in
exchange for such shares of Company Common Stock will also be unvested and
subject to the same repurchase option, risk of forfeiture or other
condition, and the certificates representing such shares of Parent Common
Stock may accordingly be marked with appropriate legends. The Company shall
take all action that may be necessary to ensure that, from and after the
Effective Time, Parent is entitled to exercise any such repurchase option
or other right set forth in any such restricted stock purchase agreement or
other agreement.
(d) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates or scrip for any such
fractional shares shall be issued. Any holder of Company Common Stock who
would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common
Stock issuable to such holder) shall, in lieu of such fraction of a share
and, upon surrender of such holder's Company Stock Certificate(s) (as
defined in Section 1.6), be paid in cash the dollar amount (rounded to the
nearest whole cent), without interest,
2
<PAGE> 109
determined by multiplying such fraction by the closing price of a share of
Parent Common Stock on the Nasdaq National Market on the date the Merger
becomes effective.
1.6 Closing of the Company's Transfer Books. At the Effective Time: (a) all
shares of Company Common Stock outstanding immediately prior to the Effective
Time shall automatically be canceled and retired and shall cease to exist, and
all holders of certificates representing shares of Company Common Stock that
were outstanding immediately prior to the Effective Time shall cease to have any
rights as shareholders of the Company except the right to receive (i)
certificates representing the number of fully paid and nonassessable shares of
Parent Common Stock into which such shares of Company Common Stock were
converted at the Effective Time and (ii) any cash in lieu of fractional shares
of Parent Common Stock, to be issued or paid in consideration therefor upon
surrender of such certificate in accordance with Section 1.7; and (b) the stock
transfer books of the Company shall be closed with respect to all shares of
Company Common Stock outstanding immediately prior to the Effective Time. No
further transfer of any such shares of Company Common Stock shall be made on
such stock transfer books after the Effective Time. If, after the Effective
Time, a valid certificate previously representing any of such shares of Company
Common Stock (a "Company Stock Certificate") is presented to the Exchange Agent
(as defined in Section 1.7) or to the Surviving Corporation or Parent, such
Company Stock Certificate shall be canceled and shall be exchanged as provided
in Section 1.7.
1.7 Exchange of Certificates.
(a) On or prior to the Effective Time, Parent shall select a reputable
bank or trust company reasonably acceptable to the Company to act as
exchange agent in the Merger (the "Exchange Agent"). As of the Effective
Time, Parent shall deposit with the Exchange Agent (i) certificates
representing the shares of Parent Common Stock issuable pursuant to this
Section 1, and (ii) cash sufficient to make payments in lieu of fractional
shares in accordance with Section 1.5(d). The shares of Parent Common Stock
and cash amounts so deposited with the Exchange Agent, together with any
dividends or distributions with respect to such shares with a record date
on or after the Effective Time, are referred to collectively as the
"Exchange Fund."
(b) As soon as reasonably practicable after the Effective Time, and in
any event within five (5) business days, the Exchange Agent will mail to
the holders of Company Stock Certificates (i) a letter of transmittal in
customary form and containing such provisions as Parent may reasonably
specify (including a provision confirming that delivery of Company Stock
Certificates shall be effected, and risk of loss and title to Company Stock
Certificates shall pass, only upon delivery of such Company Stock
Certificates to the Exchange Agent), and (ii) instructions for use in
effecting the surrender of Company Stock Certificates in exchange for
certificates representing Parent Common Stock. Upon surrender of a Company
Stock Certificate to the Exchange Agent for exchange, together with a duly
executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent, (1) the holder of such
Company Stock Certificate shall be entitled to receive in exchange therefor
a certificate representing the number of whole shares of Parent Common
Stock that such holder has the right to receive pursuant to the provisions
of Section 1.5, any cash in lieu of any fractional share(s) of Parent
Common Stock, and any dividends or other distributions to which such holder
is entitled, and (2) the Company Stock Certificate so surrendered shall be
canceled. Until surrendered as contemplated by this Section 1.7, each
Company Stock Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive shares of Parent Common Stock,
any cash in lieu of any fractional share(s) of Parent Common Stock, and any
dividends or other distributions to which such holder is entitled, each as
contemplated by Section 1. If any Company Stock Certificate shall have been
lost, stolen or destroyed, Parent may, in its discretion and as a condition
precedent to the issuance of any certificate representing Parent Common
Stock, require the owner of such lost, stolen or destroyed Company Stock
Certificate to provide an appropriate affidavit and to deliver a bond (in
such sum as Parent may reasonably direct) as indemnity against any claim
that may be made against the Exchange Agent, Parent or the Surviving
Corporation with respect to such Company Stock Certificate. In the event of
a transfer of ownership of Company Common Stock which is not registered in
the transfer records of the Company, a certificate representing the proper
number of shares of Parent Common Stock may be
3
<PAGE> 110
issued to a Person other than the Person in whose name the certificate so
surrendered is registered, if, upon presentation to the Exchange Agent,
such certificate shall be properly endorsed or otherwise be in proper form
for transfer and the Person requesting such issuance shall pay any transfer
or other taxes required by reason of the issuance of shares of Parent
Common Stock to a Person other than the registered holder of such
certificate or establish to the satisfaction of Parent that such tax has
been paid or is not applicable.
(c) No dividends or other distributions declared or made with respect
to Parent Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Company Stock Certificate with
respect to the shares of Parent Common Stock represented thereby, and no
cash payment in lieu of any fractional share nor any other cash payment
shall be paid to any such holder, until such holder surrenders such Company
Stock Certificate in accordance with this Section 1.7 (at which time such
holder shall be entitled, subject to the effect of applicable escheat or
similar laws, to receive all such dividends, distributions and cash
payments, without interest).
(d) Any portion of the Exchange Fund that remains undistributed to
holders of Company Stock Certificates as of the date 365 days after the
date on which the Merger becomes effective shall be delivered to Parent
upon demand, and any holders of Company Stock Certificates who have not
theretofore surrendered their Company Stock Certificates in accordance with
this Section 1.7 shall thereafter look only to Parent for satisfaction of
their claims for Parent Common Stock, cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to
Parent Common Stock.
(e) Each of the Exchange Agent, Parent and the Surviving Corporation
shall be entitled to deduct and withhold from any consideration payable or
otherwise deliverable pursuant to this Agreement to any holder or former
holder of Company Common Stock such amounts as may be required to be
deducted or withheld therefrom under the Code or any provision of state,
local or foreign tax law or under any other applicable Legal Requirement.
To the extent such amounts are so deducted or withheld, such amounts shall
be treated for all purposes under this Agreement as having been paid to the
Person to whom such amounts would otherwise have been paid.
(f) Neither Parent nor the Surviving Corporation shall be liable to
any holder or former holder of Company Common Stock or to any other Person
with respect to any shares of Parent Common Stock (or dividends or
distributions with respect thereto), or for any cash amounts, delivered to
any public official pursuant to any applicable abandoned property law,
escheat law or similar Legal Requirement.
1.8 Dissenting Shares. Notwithstanding anything to the contrary contained
in this Agreement, any shares of Company Common Stock outstanding immediately
prior to the Effective Time that are or may become "dissenting shares" within
the meaning of Section 1300(b) of the CGCL ("Dissenting Shares") shall not be
converted into or represent the right to receive Parent Common Stock in
accordance with Section 1.5(a)(iii) (or cash in lieu of fractional shares in
accordance with Section 1.5(d)), and each holder of Dissenting Shares shall be
entitled only to such rights as may be granted to such holder under Chapter 13
of the CGCL. From and after the Effective Time, a holder of Dissenting Shares
shall not have and shall not be entitled to exercise any of the voting rights or
other rights of a shareholder of the Surviving Corporation. If any holder of
Dissenting Shares shall fail to assert or perfect, or shall waive, rescind,
withdraw or otherwise lose, such holder's right to dissent and obtain payment
under Chapter 13 of the CGCL, then such shares shall automatically be converted
into and shall represent only the right to receive (upon the surrender of
Company Stock Certificate(s) previously representing such shares) Parent Common
Stock in accordance with Section 1.5(a)(iii) (and cash in lieu of any fractional
share in accordance with Section 1.5(d) and any dividends or other distributions
to which such holder is entitled in accordance with Section 1.7).
1.9 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
4
<PAGE> 111
1.10 Accounting Consequences. For financial reporting purposes, the Merger
is intended to be accounted for as a purchase.
1.11 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Merger Sub and the
Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the Company
and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub, except as set
forth in the disclosure schedule delivered by the Company to Parent prior to the
execution of this Agreement and signed by an executive officer of the Company
(the "Company Disclosure Schedule"), as follows:
2.1 Due Organization; Subsidiaries; Etc.
(a) The Company has no Subsidiaries, except for the corporations
identified in the Company Disclosure Schedule; and neither the Company nor
any of the other corporations identified in the Company Disclosure Schedule
owns any capital stock of, or any equity interest of any nature in, any
other Entity, other than the Entities identified in the Company Disclosure
Schedule. (The Company and each of its Subsidiaries are referred to
collectively in this Agreement as the "Acquired Corporations".) Except as
set forth in the Company Disclosure Schedule, none of the Acquired
Corporations has agreed or is obligated to make, or is bound by any
Contract under which it may become obligated to make, any future investment
in or capital contribution to any other Entity. Except as set forth in the
Company Disclosure Schedule, none of the Acquired Corporations has, at any
time, been a general partner of any general partnership, limited
partnership or other Entity.
(b) Each of the Acquired Corporations is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has all necessary power and authority: (i) to conduct
its business in the manner in which its business is currently being
conducted; (ii) to own, lease and use its assets in the manner in which its
assets are currently owned, leased and used; and (iii) to perform its
obligations under all Contracts by which it is bound.
(c) Each of the Acquired Corporations is qualified to do business as a
foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of its business requires such qualification
except in jurisdictions where the failure to so qualify, individually and
in the aggregate, would not have a Material Adverse Effect.
(d) The Company has not conducted any business under or otherwise
used, for any purpose or in any jurisdiction, any fictitious name, assumed
name, trade name or other name, other than the name Sequana Therapeutics,
Inc., and in the case of the Company's Subsidiaries, other than the names
Nemapharm, Inc., Genescape, Inc. and GeneCore Biotechnologies, Inc.
2.2 Articles of Incorporation and Bylaws. The Company has delivered to
Parent accurate and complete copies of the articles of incorporation, bylaws and
other charter and organizational documents of the respective Acquired
Corporations, including all amendments thereto.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of: (i)
50,000,000 shares of Company Common Stock, $.001 par value, of which, as of
October 30, 1997, 10,258,091 shares were issued and outstanding; and (ii)
5,000,000 shares of preferred stock, $.001 par value, none of which are
outstanding. All of the outstanding shares of Company Common Stock have
been duly authorized and validly issued, and are fully paid and
nonassessable. As of the date of this Agreement, there are no shares of
Company Common Stock held by any of the other Acquired Corporations. Except
as set forth in the Company Disclosure Schedule: (i) none of the
outstanding shares of Company Common Stock is entitled or subject to any
preemptive right, right of participation in future financings, right to
maintain a percentage
5
<PAGE> 112
ownership position, or any similar right; (ii) none of the outstanding
shares of Company Common Stock is subject to any right of first refusal in
favor of the Company; and (iii) there is no Acquired Corporation Contract
relating to the voting or registration of, or restricting any Person from
purchasing, selling, pledging or otherwise disposing of (or granting any
option or similar right with respect to), any shares of Company Common
Stock. None of the Acquired Corporations is under any obligation, or is
bound by any Contract pursuant to which it may become obligated, to
repurchase, redeem or otherwise acquire any outstanding shares of Company
Common Stock or any other securities of any Acquired Corporation.
(b) As of the October 30, 1997: (i) 843,149 shares of Company Common
Stock are reserved for future issuance pursuant to stock options granted
and outstanding under the Company's 1994 Incentive Stock Option Plan; (ii)
125,995 shares of Company Common Stock are reserved for future issuance
under the Company's 1995 Employee Stock Purchase Plan (the "ESPP"); and
(iii) 118,000 shares of Company Common Stock are reserved for future
issuance pursuant to stock options granted and outstanding under the
Company's 1995 Director Option Plan. (Stock options granted by the Company
pursuant to the 1994 Incentive Stock Option Plan and the 1995 Director
Option Plan are referred to in this Agreement as "Company Options.") The
Company Disclosure Schedule sets forth the following information with
respect to each Company Option outstanding as of the date of this
Agreement: (i) the particular plan pursuant to which such Company Option
was granted; (ii) the name of the optionee; (iii) the number of shares of
Company Common Stock subject to such Company Option; (iv) the exercise
price of such Company Option; (v) the date on which such Company Option was
granted; (vi) the applicable vesting schedules, and the extent to which
such Company Option is vested and exercisable as of October 30 1997; and
(vii) the date on which such Company Option expires. The Company has
delivered to Parent accurate and complete copies of all stock option plans
and forms of option grant pursuant to which the Company has granted any
outstanding stock options. Except as set forth in the Company Disclosure
Schedule, the Company did not grant any new Company Options between October
30, 1997 and the date hereof. The Company Disclosure Schedule sets forth
the following information with respect to each outstanding warrant to
purchase Company Common Stock: (1) the name of the holder of such warrant;
(2) the number of shares of Company Common Stock subject to such warrant;
(3) the exercise price of such warrant; (4) the date on which such warrant
was issued; (5) the conditions, if any, limiting exercise of such warrant
and (6) the date on which such warrant expires. The Company has delivered
to Parent an accurate and complete copy of each such warrant.
(c) Except as set forth in the Company Disclosure Schedule there is
no: (i) outstanding subscription, option, call, warrant or right (whether
or not currently exercisable) to acquire any shares of the capital stock or
other securities of the Company or any other Acquired Corporation; (ii)
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock or
other securities of the Company or any other Acquired Corporation; (iii)
shareholder rights plan (or similar plan commonly referred to as a "poison
pill") or Contract under which the Company or any other Acquired
Corporation is or may become obligated to sell or otherwise issue any
shares of its capital stock or any other securities; or (iv) condition or
circumstance that may reasonably give rise to or provide a basis for the
assertion of a claim by any Person to the effect that such Person is
entitled to acquire or receive any shares of capital stock or other
securities of the Company or any other Acquired Corporation. There are no
bonds, debentures, notes or other indebtedness of the Company outstanding
having the right to vote (or convertible into securities having the right
to vote) on any matters on which the shareholders of the Company have the
right to vote.
(d) All outstanding securities of all of the Acquired Corporations,
including shares of Company Common Stock, all outstanding Company Options,
all outstanding warrants to purchase Company Common Stock, all outstanding
rights under the ESPP and all outstanding shares of capital stock of each
subsidiary of the Company have been issued and granted in all material
respects in compliance with (i) all applicable securities laws and other
applicable Legal Requirements, and (ii) all requirements set forth in
applicable Contracts.
6
<PAGE> 113
(e) The Company Disclosure Schedule sets forth the capitalization and
record and beneficial ownership of the outstanding securities of each
Acquired Corporation. All of the outstanding shares of capital stock of the
corporations identified in the Company Disclosure Schedule have been duly
authorized and are validly issued, are fully paid and nonassessable and are
(other than Company Common Stock) owned beneficially and of record by the
Company, free and clear of any Encumbrances.
2.4 SEC Filings; Financial Statements.
(a) The Company has listed in the Company Disclosure Schedule and has
made available to Parent accurate and complete copies (excluding copies of
exhibits) of all registration statements, proxy statements and other
statements, reports, schedules, forms and other documents filed by the
Company with the SEC since June 14, 1995 (the "Company SEC Documents"). All
statements, reports, schedules, forms and other documents required to have
been filed by the Company with the SEC have been so filed. As of the time
it was filed with the SEC (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing): (i) each
of the Company SEC Documents complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act (as the
case may be); and (ii) none of the Company SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The financial statements (including any related notes) contained
in the Company SEC Documents: (i) complied in all material respects as to
form with the published rules and regulations of the SEC applicable
thereto; (ii) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered (except as may be indicated in the notes to such financial
statements or, in the case of unaudited statements, as permitted by Form
10-Q of the SEC, and except that the unaudited financial statements may not
contain footnotes and are subject to normal and recurring year-end
adjustments which will not, individually or in the aggregate, be material
in amount), and (iii) fairly present the consolidated financial position of
the Company and its Subsidiaries as of the respective dates thereof and the
consolidated results of operations and cash flows of the Company and its
Subsidiaries for the periods covered thereby.
(c) Since June 30, 1997, the Company and its Subsidiaries have not
incurred any liabilities of the type required under GAAP to be recorded on
a balance sheet or in the footnotes thereto except liabilities incurred in
the ordinary course of business.
2.5 Absence of Changes. Since December 31, 1996:
(a) there has not been any Material Adverse Change in the business,
condition, capitalization, assets, liabilities, operations or financial
performance of the Acquired Corporations taken as a whole, and no event has
occurred that could reasonably be expected to have a Material Adverse
Effect on the Acquired Corporations;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the assets of any of the
Acquired Corporations (whether or not covered by insurance);
(c) there has not been any transaction, commitment, or other event or
condition (financial or otherwise) which would be prohibited by Section
4.2(b)(i), (iv), (xii), (xiii), or (xiv) if it were to be effected,
accepted or were to take place, between the date hereof and the Effective
Time.
2.6 Title to Assets. Except as set forth in the Company Disclosure
Schedule, the Acquired Corporations own, and have good, valid and marketable
title to, all assets purported to be owned by them, including: all assets
reflected in the books and records of the Acquired Corporations as being owned
by the Acquired Corporations. All of said assets are owned by the Acquired
Corporations free and clear of any Encumbrances, except for (a) any lien for
current taxes not yet due and payable, (b) minor liens that have arisen in the
ordinary course of business and that do not (in any case or in the aggregate)
materially detract from the value
7
<PAGE> 114
of the assets subject thereto or materially impair the operations of any of the
Acquired Corporations, and (c) liens described in the Company Disclosure
Schedule.
2.7 Parke-Davis Agreement. An accurate and complete copy of the agreement
(the "Parke-Davis Agreement") between the Company and Parke-Davis, a division of
the Warner-Lambert Company ("Parke-Davis") has been delivered to Parent. Neither
(1) the execution, delivery or performance of this Agreement or any of the other
agreements referred to herein nor (2) the consummation of the Merger or any of
the other transactions contemplated by this Agreement requires the consent or
approval of Parke-Davis nor does such execution, delivery, performance or
consummation contravene or conflict with or result in a violation of any of the
terms or requirements of the Parke-Davis Agreement. Parke-Davis has been
informed of this Agreement and the Merger and, to the best of knowledge of the
Company, Parke-Davis has no objection to this Agreement or to the Merger or to
complying with all of its obligations under the Parke-Davis Agreement during the
pendency or after the consummation of the Merger, subject to Warner-Lambert's
right to terminate the agreement as set forth therein.
2.8 Payments Under Corporate Partnering Agreements. Except as previously
disclosed to Parent, all amounts charged to Boehringer Ingelheim GmbH, Corange
International Ltd., Glaxo Inc., Genos BioSciences, Inc. and Mount Sinai Hospital
Corporation (the "Corporate Partners") for reimbursement or payments in
accordance with the agreements between the Company and such Persons represent
amounts due to the Company under the terms of such agreements for actual work or
services performed or, in the case of advance payments, work or services to be
performed, or milestones met.
(a) Except as previously disclosed to Parent, the Company has received
all amounts that are owed and due to be paid to the Company under such
agreements prior to the date of this Agreement. For each such payment
received by the Company under any such agreement, any revenue that the
Company recognized with respect to such payment was recognized in
accordance with generally accepted accounting principles.
(b) Except as previously disclosed to Parent, the Company's research
program with respect to the TUBBY gene and related genes has not been
funded by any Corporate Partner in any manner or to any extent, and no
Corporate Partner has any rights in any information, results, data or
intellectual property rights resulting from or based upon such research
project.
(c) Except as previously disclosed to Parent, the Company Disclosure
Schedule identifies all facts of which the Company has knowledge that a
Corporate Partner is considering, intending or planning to terminate any of
the agreements between any such Corporate Partner and the Company, or any
research program under such agreement.
(d) The Company did not exercise its option to enter into Phase II
under the Letter Agreement dated July 16, 1996 among the Company, Cold
Spring Harbor Laboratory and John Hopkins University (the "Cold Spring
Letter Agreement") and has no ongoing or future financial obligation to any
other Person under the Cold Spring Letter Agreement.
2.9 Real Property; Equipment; Leasehold.
(a) None of the Acquired Corporations owns any real property or any
interest in real property, except for the leasehold created under the real
property lease(s) set forth in the Company Disclosure Schedule. Complete
and correct copies of such lease have previously been delivered to Parent
by the Company.
(b) All material items of equipment and other tangible assets owned by
or leased to the Acquired Corporations are reasonably adequate for the uses
to which they are being put, are in good condition and repair (ordinary
wear and tear excepted) and are reasonably adequate for the conduct of the
business of the Acquired Corporations in the manner in which such business
is currently being conducted and in the manner in which such business is
required to be conducted pursuant to Contracts to which the Company is a
party and which are in effect on the date hereof.
8
<PAGE> 115
2.10 Proprietary Assets.
(a) The Company Disclosure Schedule sets forth, with respect to each
Proprietary Asset owned by the Acquired Corporations and registered with
any Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Proprietary Asset, and
(ii) the names of the jurisdictions covered by the applicable registration
or application. The Company Disclosure Schedule identifies and provides a
brief description of, and identifies any ongoing royalty or payment
obligations in excess of $25,000 per year with respect to, each Proprietary
Asset that is licensed or otherwise made available to the Acquired
Corporations by any Person (except for any Proprietary Asset that is
licensed to the Acquired Corporations under any third party software
license generally available to the public), and identifies the Contract
under which such Proprietary Asset is being licensed or otherwise made
available to such Acquired Corporation. Excluding the payments required
under the Acquired Corporation Contracts set forth in the Company
Disclosure Schedule, the aggregate amounts payable by the Acquired
Corporations for ongoing royalty or license payments (except payments made
in connection with provision to the Company of tissue samples) do not
exceed $75,000 per year. Excluding the payments required under Contracts
set forth in the Company Disclosure Schedule, the aggregate amounts payable
by the Acquired Corporations for ongoing payments made or to be made in
connection with the provision to the Acquired Corporations of tissue
samples do not exceed $200,000. The Acquired Corporations have good, valid
and marketable title to all of the Acquired Corporation Proprietary Assets
(except for licensed assets), free and clear of all Encumbrances, except
for (i) any lien for current taxes not yet due and payable, and (ii) minor
liens that have arisen in the ordinary course of business and that do not
(individually or in the aggregate) materially detract from the value of the
assets subject thereto or materially impair the operations of any of the
Acquired Corporations. The Acquired Corporations have a valid right to use,
license and otherwise exploit all Acquired Corporation Proprietary Assets.
Except as set forth in the Company Disclosure Schedule, none of the
Acquired Corporations has developed jointly with any other Person any
Acquired Corporation Proprietary Asset that is material to the business of
the Acquired Corporations with respect to which such other Person has any
rights. Except as set forth in the Company Disclosure Schedule, there is no
Acquired Corporation Contract pursuant to which any Person has any right
(whether or not currently exercisable) to use, license or otherwise exploit
any Acquired Corporation Proprietary Asset.
(b) The Acquired Corporations have taken all reasonable measures and
precautions to protect and maintain the confidentiality, secrecy and value
of all material Acquired Corporation Proprietary Assets (except Acquired
Corporation Proprietary Assets whose value would be unimpaired by
disclosure). Except where the failure to obtain such agreements would not
impair the value of any Acquired Corporation Proprietary Asset, the
Acquired Corporations have obtained, from all current and former employees
of the Acquired Corporations and from all current and former consultants
and independent contractors to the Acquired Corporations, signed agreements
appropriately restricting the use and disclosure of the Company Proprietary
Assets, and providing for assignment to the Acquired Corporations of the
Company Proprietary Assets developed by such employees and consultants.
(c) To the best of the knowledge of the Company: (i) all patents,
patent applications, trademarks, service marks and copyrights held by any
of the Acquired Corporations were filed and were and have been prosecuted
in good faith and in compliance with all applicable Legal Requirements; and
(ii) there has not been any claim, action or proceeding, and there is no
pending or threatened claim, action or proceeding related to any
registration or filing of an Acquired Corporation Proprietary Asset; (iii)
none of the Acquired Corporation Proprietary Assets infringes,
misappropriates or conflicts with any Proprietary Asset owned or used by
any other Person; (iv) none of the products that are or have been designed,
created, developed, assembled, manufactured or sold by any of the Acquired
Corporations is infringing, misappropriating or making any unlawful or
unauthorized use of any Proprietary Asset owned or used by any other
Person, and none of such products has at any time infringed,
misappropriated or made any unlawful or unauthorized use of, and none of
the Acquired Corporations has received any notice or other communication
(in writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful or unauthorized use of, any
Proprietary Asset owned or used by any other
9
<PAGE> 116
Person; (v) no other Person is infringing, misappropriating or making any
unlawful or unauthorized use of, and no Proprietary Asset owned or used by
any other Person infringes or conflicts with, any material Acquired
Corporation Proprietary Asset.
(d) The Acquired Corporation Proprietary Assets constitute all the
Proprietary Assets reasonably necessary to enable the Acquired Corporations
to conduct their business in the manner in which such business has been and
is being conducted and in the manner in which such business is required to
be conducted pursuant to Contracts to which the Company is a party and
which are in effect on the date hereof. Except as set forth in the Company
Disclosure Schedule, none of the Acquired Corporations has (i) licensed any
of the material Acquired Corporation Proprietary Assets to any Person on an
exclusive basis, or (ii) entered into any covenant not to compete or
Contract limiting its ability to exploit fully any material Acquired
Corporation Proprietary Assets or to transact business in any market or
geographical area or with any Person.
2.11 Material Contracts.
(a) The Company Disclosure Schedule identifies each Acquired
Corporation Contract that constitutes a "Company Material Contract." For
purposes of this Agreement, each of the following shall be deemed to
constitute a "Company Material Contract":
(i) any Contract relating to the employment of, or the performance
of services by, any employee or consultant, and any Contract pursuant to
which any of the Acquired Corporations is or may become obligated to
make any severance, termination, bonus or relocation payment or any
other payment (other than payments in respect of salary and the grant of
standard benefits);
(ii) any Contract relating to the acquisition, transfer,
development, sharing or license of any Proprietary Asset (except for any
Contract pursuant to which any Proprietary Asset is licensed to the
Acquired Corporations under any third party software license generally
available to the public);
(iii) any Contract which provides for indemnification of any
officer, director, employee or agent;
(iv) any Contract imposing any restriction on the right or ability
of any Acquired Corporation (A) to compete with any other Person, (B) to
acquire any product or other asset or any services from any other
Person, to sell any product or other asset to or perform any services
for any other Person or to transact business or deal in any other manner
with any other Person, or (C) to develop or distribute any technology;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities, (B) providing any
Person with any preemptive right, right of participation, right of
maintenance or any similar right with respect to any securities, or (C)
providing the Company with any right of first refusal with respect to,
or right to repurchase or redeem, any securities;
(vi) any Contract requiring that the Company give any notice,
obtain any consent or provide any information to any Person prior to
accepting any Acquisition Proposal;
(vii) any Contract (not otherwise identified in this Section) that
(A) has a term of more than 60 days or that may not be terminated by an
Acquired Corporation (without penalty) within 60 days after the delivery
of a termination notice by such Acquired Corporation and (B) that
contemplates or involves (I) the payment or delivery of cash or other
consideration on or after the date hereof in an amount or having a value
in excess of $50,000 in aggregate payments under such Contract, or (II)
the performance of services on or after the date hereof having a value
in excess of $50,000 in aggregate payments under such Contract;
(viii) any Contract (A) to which any Governmental Body is a party
or under which any Governmental Body has any rights or obligations, or
involving or directly or indirectly benefiting any Governmental Body
(including any subcontract or other Contract between the Company and any
contractor or subcontractor to any Governmental Body) and that (B)
contemplates or involves (I) the payment or delivery of cash or other
consideration on or after the date hereof in an amount or
10
<PAGE> 117
having a value in excess of $50,000 in aggregate payments under such
Contract, or (II) the performance of services on or after the date
hereof having a value in excess of $50,000 in aggregate payments under
such Contract;
(ix) any open purchase order placed by an Acquired Corporation
requiring future aggregate payments in excess of $25,000;
(x) any Contract (not otherwise identified in this Section) that
could reasonably be expected to have a material effect on the business,
condition, assets, liabilities, capitalization assets, liabilities,
operations, or financial performance of any of the Acquired Corporations
or to any of the transactions contemplated by this Agreement; and
(xi) any Contract (not otherwise identified in this Section), if a
breach of such Contract could reasonably be expected to have a Material
Adverse Effect on the Acquired Corporations.
(b) Each Acquired Corporation Contract that constitutes a Company
Material Contract is valid and in full force and effect, and is enforceable
in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii)
rules of law governing specific performance, injunctive relief and other
equitable remedies. The aggregate amount payable by the Acquired
Corporations under Contracts that would be Company Material Contracts but
for the limitations of Sections 2.10(a)(vii)(B) or 2.10(a)(viii)(B) do not
exceed $500,000. The aggregate amount payable by the Acquired Corporations
under purchase orders not listed on Part 2.10 of the Company Disclosure
Schedule does not exceed $500,000.
(c) Except as set forth in the Company Disclosure Schedule: (i) none
of the Acquired Corporations has materially violated or breached, or
committed any material default under, any Company Material Contract, and,
to the best of the knowledge of the Company, no other Person has materially
violated or breached, or committed any material default under, any Company
Material Contract; (ii) to the best of the knowledge of the Company, no
event has occurred, and no circumstance or condition exists, that (with or
without notice or lapse of time) could reasonably be expected to (A) result
in a material violation or breach of any of the provisions of any Company
Material Contract, (B) give any Person the right to declare a default or
exercise any remedy under any Company Material Contract, (C) give any
Person the right to a rebate, chargeback, penalty or change in delivery
schedule under any Company Material Contract, (D) give any Person the right
to accelerate the maturity or performance of any Company Material Contract,
or (E) give any Person the right to cancel, terminate or materially modify
any Company Material Contract; (iii) since January 1, 1996, none of the
Acquired Corporations has received any written notice or other written
communication regarding any actual or possible violation or breach of,
default under, or intention to terminate, any Acquired Corporation Contract
except for communication (A) that has subsequently been revoked; or (B) has
been received from a complaining party that has not contacted the Company
or otherwise, to the knowledge of the Company, taken any action with
respect to such party's complaint for a period of more than six months
following receipt of the communication; and (iv) none of the Acquired
Corporations has waived any of its material rights under any Company
Material Contract.
(d) To the best of the knowledge of the Company, no Person is
renegotiating, or has the right to renegotiate, any material amount paid or
payable to the Acquired Corporations under any Company Material Contract,
or any other material term or provision of any Company Material Contract,
including termination provisions.
(e) The Acquired Corporation Contracts collectively constitute all of
the Contracts necessary to enable the Acquired Corporations to conduct
their respective businesses in the manner in which its business is
currently being conducted and in the manner in which such business is
required to be conducted pursuant to Contracts to which the Company is a
party and which are in effect on the date hereof.
11
<PAGE> 118
(f) The Company Disclosure Schedule sets forth a list of all claims
made under any Company Material Contract which are disputed or, to the
Company's knowledge, where a dispute has been threatened.
2.12 Liabilities. None of the Acquired Corporations has any accrued,
contingent or other liabilities of any nature, either matured or unmatured
(whether or not required to be reflected in financial statements in accordance
with generally accepted accounting principles, and whether due or to become
due), except for: (a) liabilities identified as such in the financial statements
in the Company SEC Documents; (b) normal and recurring liabilities that have
been incurred by the Acquired Corporations since December 31, 1996 in the
ordinary course of business and consistent with past practices; and (c) other
liabilities which have not had and could not reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect on Acquired
Corporations.
2.13 Compliance with Legal Requirements. Each of the Acquired Corporations
is, and has at all times since inception, been, in compliance with all
applicable Legal Requirements, except where the failure to comply with such
Legal Requirements has not had and could not reasonably be expected to have a
Material Adverse Effect on the Acquired Corporations. Since inception, none of
the Acquired Corporations has received any notice or other communication from
any Governmental Body regarding any actual or possible violation of, or failure
to comply with, any material Legal Requirement.
2.14 Certain Business Practices. None of the Acquired Corporations nor any
director, officer, agent or employee of any of the Acquired Corporations has (i)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful
payment.
2.15 Governmental Authorizations. The Acquired Corporations hold all
material Governmental Authorizations necessary to enable the Acquired
Corporations to conduct their respective businesses in the manner in which such
businesses are currently being conducted. All such Governmental Authorizations
are valid and in full force and effect. Each Acquired Corporation is, and at all
times since inception has been, in substantial compliance with the terms and
requirements of such Governmental Authorizations. Since inception, none of the
Acquired Corporations has received any notice or other communication from any
Governmental Body regarding (a) any actual or possible violation of or failure
to comply with any term or requirement of any material Governmental
Authorization, or (b) any actual or possible revocation, withdrawal, suspension,
cancellation, termination or modification of any material Governmental
Authorization or (c) any requirement to apply for or hold Governmental
Authorization not held by any Acquired Corporation.
2.16 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of the
respective Acquired Corporations with any Governmental Body with respect to
any taxable period ending on or before the Closing Date (the "Acquired
Corporation Returns") have been or will be filed on or before the
applicable due date (including any extensions of such due date). All
amounts shown on the Acquired Corporation Returns to be due on or before
the Closing Date have been or will be paid on or before the Closing Date.
(b) The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
Each Acquired Corporation will establish, in the ordinary course of
business and consistent with its past practices, quarterly reserves
adequate for the payment of all Taxes for the applicable periods from
December 31, 1996 through the Closing Date. Since January 1, 1997, no
material Tax liability has been incurred other than in the ordinary course
of business.
(c) Except as set forth in the Company Disclosure Schedule, no
Acquired Corporation Return has ever been examined or audited by any
Governmental Body. No extension or waiver of the limitation period
applicable to any of the Acquired Corporation Returns has been granted (by
the Company or any other Person), and no such extension or waiver has been
requested from any Acquired Corporation.
12
<PAGE> 119
(d) No claim or Legal Proceeding is pending or, to the best of the
knowledge of the Company, has been threatened against or with respect to
any Acquired Corporation in respect of any Tax. There are no unsatisfied
liabilities for Taxes (including liabilities for interest, additions to tax
and penalties thereon and related expenses) with respect to any notice of
deficiency or similar document received by any Acquired Corporation (other
than liabilities for Taxes asserted under any such notice of deficiency or
similar document which are being contested in good faith by the Acquired
Corporations and with respect to which adequate reserves for payment have
been established). There are no liens for Taxes upon any of the assets of
any of the Acquired Corporations except liens for current Taxes not yet due
and payable. None of the Acquired Corporations has entered into or become
bound by any agreement or consent pursuant to Section 341(f) of the Code.
None of the Acquired Corporations has been, and none of the Acquired
Corporations will be, required to include any adjustment in taxable income
for any tax period (or portion thereof) pursuant to Section 481 or 263A of
the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing. None of the Acquired Corporations is or has been a
United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code. No Acquired Corporation has any liability
for the taxes of any other Person.
(e) There is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of any of the Acquired Corporations that, considered
individually or considered collectively with any other such Contracts,
will, or could reasonably be expected to, give rise directly or indirectly
to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. None of the Acquired Corporations
is, or has ever been, a party to or bound by any tax indemnity agreement,
tax sharing agreement, tax allocation agreement or similar Contract (other
than a Contract entered into in the ordinary course of business in
connection with the purchase or sale of inventory or supplies).
2.17 Employee and Labor Matters; Benefit Plans.
(a) The Company Disclosure Schedule identifies each salary, bonus,
deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or
other insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, program or agreement (collectively, the
"Company Plans") sponsored, maintained, contributed to or required to be
contributed to by any of the Acquired Corporations for the benefit of any
current or former employee of any of the Acquired Corporations.
(b) Except as set forth in the Company Disclosure Schedule, none of
the Acquired Corporations maintains, sponsors or contributes to, and none
of the Acquired Corporations has at any time in the past maintained,
sponsored or contributed to a Pension Plan for the benefit of employees or
former employees of any of the Acquired Corporations.
(c) Except as set forth in the Company Disclosure Schedule, none of
the Acquired Corporations maintains, sponsors or contributes to any Welfare
Plan for the benefit of any employees or former employees of any of the
Acquired Corporations.
(d) With respect to each Company Plan, the Company has made available
to Parent: (i) an accurate and complete copy of such Company Plan
(including all amendments thereto); (ii) an accurate and complete copy of
the annual report, if required under ERISA, with respect to such Company
Plan for the last two plan years; (iii) an accurate and complete copy of
the most recent summary plan description, together with each summary of
material modifications thereto, if required under ERISA, with respect to
such Company Plan, (iv) if such Company Plan is funded through a trust or
any third party funding vehicle, an accurate and complete copy of the trust
or other funding agreement (including all amendments thereto); (v) accurate
and complete copies of all Contracts relating to such Company Plan,
including service provider agreements, insurance contracts, minimum premium
contracts, stop-loss agreements, investment management agreements,
subscription and participation agreements and recordkeeping agreements; and
(vi) an accurate and complete copy of the most recent determination,
opinion,
13
<PAGE> 120
notification or advisory letter received from the Internal Revenue Service
with respect to such Company Plan (if such Company Plan is intended to be
qualified under Section 401(a) of the Code).
(e) None of the Acquired Corporations is or has ever been required to
be treated as a single employer with any Person under Section 4001(b)(1) of
ERISA or Section 414(b), (c), (m) or (o) of the Code other than an Acquired
Corporation. None of the Acquired Corporations has ever been a member of an
"affiliated service group" (within the meaning of Section 414(m) of the
Code) other than with another Acquired Corporation. None of the Acquired
Corporations has ever made a complete or partial withdrawal from a
multiemployer plan, as such term is defined in Section 3(37) of ERISA,
resulting in "withdrawal liability," as such term is defined in Section
4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA).
(f) None of the Acquired Corporations has any plan or commitment to
create any Welfare Plan or any Pension Plan, or to modify or change any
existing Welfare Plan or Pension Plan (other than to comply with applicable
law) in a manner that would create any material liability for any of the
Acquired Corporations.
(g) No Company Plan provides death, medical or health benefits
coverage (whether or not insured) with respect to any current or former
employee of any of the Acquired Corporations after any such employee's
termination of service (other than (i) benefit coverage mandated by
applicable law, including coverage provided pursuant to Section 4980B of
the Code, (ii) deferred compensation benefits accrued as liabilities on the
most recent financial statements included in the Company SEC filings, and
(iii) benefits the full costs of which are borne by current or former
employees of any of the Acquired Corporations (or the employees'
beneficiaries)).
(h) With respect to any Company Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects. The Company Disclosure Schedule lists all qualified beneficiaries
under COBRA with respect to all such Company Plans.
(i) Each of the Company Plans has been operated and administered in
all material respects in accordance with applicable Legal Requirements,
including but not limited to ERISA and the Code.
(j) Each of the Company Plans intended to be qualified under Section
401(a) of the Code has received a favorable determination, opinion,
notification or advisory letter from the Internal Revenue Service, and the
Company is not aware of any reason why any such letter should be revoked.
(k) Except as set forth in the Company Disclosure Schedule, neither
the execution, delivery or performance of this Agreement, nor the
consummation of the Merger or any of the other transactions contemplated by
this Agreement, will result in any payment (including any bonus, golden
parachute or severance payment) to any current or former employee or
director of any of the Acquired Corporations (whether or not under any
Plan), or materially increase the benefits payable under any Company Plan,
or result in any acceleration of the time of payment or vesting of any such
benefits.
(l) The Company Disclosure Schedule contains a list of all employees
of each of the Acquired Corporations as of the date of this Agreement, and
correctly reflects, in all material respects, their salaries, any other
compensation payable to them (including compensation payable pursuant to
bonus, deferred compensation or commission arrangements), their dates of
employment and their positions. None of the Acquired Corporations is a
party to any collective bargaining contract or other Contract with a labor
union involving any of its employees. All of the employees of the Acquired
Corporations are "at will" employees.
(m) The Company Disclosure Schedule identifies each Employee who is
not fully available to perform work because of disability or other leave
and sets forth the basis of such leave and the anticipated date of return
to full service.
(n) Each of the Acquired Corporations is in compliance in all material
respects with all applicable Legal Requirements and Contracts relating to
employment, employment practices, wages, bonuses and
14
<PAGE> 121
terms and conditions of employment, including employee compensation matters
and the classification of independent contractors and workers.
(o) Each of the Acquired Corporations has good labor relations, and
none of the Acquired Corporations has any knowledge indicating that (i) the
consummation of the Merger or any of the other transactions contemplated by
this Agreement will have a material adverse effect on the labor relations
of any of the Acquired Corporations, or (ii) any of the employees of any of
the Acquired Corporations intends to terminate his or her employment with
the Acquired Corporation with which such employee is employed.
2.18 Environmental Matters. Each of the Acquired Corporations is in
compliance in all material respects with all applicable Environmental Laws,
which compliance includes the possession by each of the Acquired Corporations of
all permits and other Governmental Authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof. None
of the Acquired Corporations has received any notice or other communication (in
writing or otherwise), whether from a Governmental Body, citizens group,
employee or otherwise, that alleges that any of the Acquired Corporations is not
in compliance with any Environmental Law, and, to the best of the knowledge of
the Company, there are no circumstances that may prevent or interfere with the
compliance by any of the Acquired Corporations with any Environmental Law in the
future. To the knowledge of the Company without further inquiry, no current or
prior owner of any property leased or controlled by any of the Acquired
Corporations has received any notice or other communication (in writing or
otherwise), whether from a Government Body, citizens group, employee or
otherwise, that alleges that such current or prior owner or any of the Acquired
Corporations is not in compliance with any Environmental Law. To the best of the
knowledge of the Company, all property that is leased to, controlled by or used
by the Company, and all surface water, groundwater and soil associated with or
adjacent to such property is in clean and healthful condition and is free of any
material environmental contamination of any nature. None of the Acquired
Corporations has disposed of, emitted, discharged, handled, stored, transported,
used or released any Materials of Environmental Concern, arranged for the
disposal, discharge, storage or release of any Materials of Environmental
Concern, or exposed any employee or other individual to any Materials of
Environmental concern or condition so as to give rise to any material liability
or material corrective or remedial obligation under any Environmental Laws. (For
purposes of this Section 2.17 and 3.17: (i) "Environmental Law" means any
federal, state, local or foreign Legal Requirement relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata), including any law or
regulation relating to emissions, discharges, releases or threatened releases of
Materials of Environmental Concern, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Materials of Environmental Concern; and (ii) "Materials of
Environmental Concern" include chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other substance that
is now or hereafter regulated by any Environmental Law or that is otherwise a
danger to health, reproduction or the environment.)
2.19 Insurance. The Company has delivered to Parent a summary of all
material insurance policies and all material self insurance programs relating to
the business, assets and operations of the respective Acquired Corporations and
has made available to Parent copies of the policies. Each of such insurance
policies is in full force and effect. Since December 31, 1996, none of the
Acquired Corporations has received any notice or other communication regarding
any actual or possible (a) cancellation or invalidation of any insurance policy,
(b) refusal of any coverage or rejection of any material claim under any
insurance policy, or (c) material adjustment in the amount of the premiums
payable with respect to any insurance policy. Except as set forth in the Company
Disclosure Schedule, there is no pending claim (including any workers'
compensation claim) under or based upon any insurance policy of any of the
Acquired Corporations.
2.20 Transactions With Affiliates.
(a) Except as set forth in the Company SEC Reports, since the date of
the Company's last proxy statement filed with the SEC, no event has
occurred that would be required to be reported by the Company pursuant to
Item 404 of Regulation S-K promulgated by the SEC. The Company Disclosure
15
<PAGE> 122
Schedule identifies each Person who is an "affiliate" (as that term is used
in Rule 145 under the Securities Act) of the Company as of the date of this
Agreement.
(b) The Company Disclosure Schedule contains an accurate and complete
list as of the date of this Agreement of all outstanding loans and advances
made by any of the Acquired Corporations to any employee, director,
consultant or independent contractor other than routine travel advances
made to employees in the ordinary course of business.
2.21 Legal Proceedings; Orders.
(a) There is no pending Legal Proceeding, and (to the best of the
knowledge of the Company) no Person has threatened to commence any Legal
Proceeding: (i) that involves any of the Acquired Corporations or any of
the assets owned or used by any of the Acquired Corporations; or (ii) that
challenges, or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with, the Merger or any of the other
transactions contemplated by this Agreement. To the best of the knowledge
of the Company, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that could reasonably be expected to give
rise to or serve as a basis for the commencement of any such Legal
Proceeding that would reasonably be expected to have a Material Adverse
Effect on any of the Acquired Corporations.
(b) There is no material order, writ, injunction, judgment or decree
to which any of the Acquired Corporations, or any of the assets owned or
used by any of the Acquired Corporations, is subject. To the best of the
knowledge of the Company, no officer or key employee of any of the Acquired
Corporations is subject to any order, writ, injunction, judgment or decree
that prohibits such officer or other employee from engaging in or
continuing any conduct, activity or practice relating to the business of
any of the Acquired Corporations.
2.22 Authority; Binding Nature of Agreement. The Company has the absolute
and unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors of the Company (at a
meeting duly called and held) has (a) unanimously (among all directors present
at such meeting) determined that the Merger is advisable and fair and in the
best interests of the Company and its shareholders, (b) unanimously (among all
directors present) authorized and approved the execution, delivery and
performance of this Agreement by the Company and unanimously (among all
directors present) approved the Merger, and (c) unanimously (among all directors
present) recommended the approval of this Agreement and the Merger by the
holders of Company Common Stock and directed that this Agreement and the Merger
be submitted for consideration by the Company's shareholders at the Company
Shareholders' Meeting (as defined in Section 5.2). This Agreement constitutes
the legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
2.23 No Existing Discussions. None of the Acquired Corporations, and no
Representative of any of the Acquired Corporations, is engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating to
any Acquisition Proposal.
2.24 Vote Required. The affirmative vote of the holders of a majority of
the shares of Company Common Stock outstanding on the record date for the
Company Shareholders' Meeting (the "Required Company Shareholder Vote") is the
only vote of the holders of any class or series of the Company's capital stock
necessary to approve this Agreement, the Merger and the other transactions
contemplated by this Agreement.
2.25 Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Merger
16
<PAGE> 123
or any of the other transactions contemplated by this Agreement, will directly
or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the articles of incorporation, bylaws or other charter or
organizational documents of any of the Acquired Corporations, or (ii) any
resolution adopted by the shareholders, the board of directors or any
committee of the board of directors of any of the Acquired Corporations;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order,
writ, injunction, judgment or decree to which any of the Acquired
Corporations, or any of the assets owned or used by any of the Acquired
Corporations, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by any of the Acquired Corporations or that
otherwise relates to the business of any of the Acquired Corporations or to
any of the assets owned or used by any of the Acquired Corporations;
(d) contravene, conflict with or result in a violation or material
breach of, or result in a default (or an event which with notice or lapse
of time or both would become a default) under, any provision of any Company
Material Contract, or give any Person the right to (i) declare a default or
exercise any remedy under any such Company Material Contract, (ii) a
rebate, chargeback, penalty or change in delivery schedule under any such
Company Material Contract, (iii) accelerate the maturity or performance of
any such Company Material Contract, or (iv) cancel, terminate or materially
modify any term of such Company Material Contract; or
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by any of the Acquired Corporations
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of any of the Acquired Corporations).
Except as may be required by the Exchange Act, the CGCL, the HSR Act and the
NASD Bylaws (as they relate to the Form S-4 Registration Statement and the Joint
Proxy Statement) none of the Acquired Corporations was, is or will be required
to make any filing with or give any notice to, or to obtain any Consent from,
any Person in connection with (x) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, or (y)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement.
2.26 Fairness Opinion. The Company's board of directors has received the
written opinion of Lehman Brothers, Inc. ("Lehman Brothers"), financial advisor
to the Company, dated the date of this Agreement, to the effect that the
consideration to be received by the shareholders of the Company in the Merger is
fair to the shareholders of the Company from a financial point of view. The
Company has furnished an accurate and complete copy of said written opinion to
Parent.
2.27 Financial Advisor. Except for Lehman Brothers, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
any of the Acquired Corporations. The Company has furnished to Parent accurate
and complete copies of all agreements under which any such fees, commissions or
other amounts have been paid or may become payable and all indemnification and
other arrangements relating to the engagement of Lehman Brothers.
2.28 Full Disclosure. This Agreement (including the Company Disclosure
Schedule) does not, and the certificate referred to in Section 6.6(c) will not,
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any material
fact necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in
17
<PAGE> 124
the light of the circumstances under which such representations, warranties and
information were or will be made or provided) not false or misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the disclosure schedule delivered by Parent to the Company prior to
the execution of this Agreement and signed by an executive officer of Parent
(the "Parent Disclosure Schedule"):
3.1 Due Organization, Subsidiaries, Etc.
(a) Parent has no Subsidiaries, except for the corporations identified
in the Parent Disclosure Schedule; and neither Parent nor any of the other
corporations identified in the Parent Disclosure Schedule owns any capital
stock of, or any equity interest of any nature in, any other Entity other
than the Entities identified in the Parent Disclosure Schedule. (Parent and
each of its Subsidiaries are collectively referred to as the "Parent
Corporations"). None of the Parent Corporations has agreed or is obligated
to make or is bound by any Contract under which it is obligated to make,
any future investment in or capital contribution to any other Entity. None
of the Parent Corporations has, at any time, been a general partner of any
general partnership, limited partnership, or other Entity.
(b) Each of the Parent Corporations is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has all necessary power and authority: (i) to conduct
its business in the manner in which its business is currently being
conducted; (ii) to own, lease and use assets in the manner in which its
assets are currently owned, leased and used; and (iii) to perform its
obligations under all contracts by which it is bound.
(c) Each of the Parent Corporations is qualified to do business as
foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of its business requires such qualification
except in jurisdictions where the failure to so qualify, individually and
in the aggregate, would not have a Material Adverse Effect.
(d) Parent or Merger Sub has not conducted any business under or
otherwise used, for any purpose or in any jurisdiction , any fictitious
name, assumed name, trade name, or other name, other than the name "Arris
Pharmaceutical Corporation", and in the case of Parent's Subsidiaries,
other than the names "Arris Protease, Inc.", "Arris Pharmaceuticals Canada,
Inc.", or "Beagle Acquisition Sub, Inc.", "Khepri Pharmaceuticals, Inc."
and "Khepri Pharmaceuticals Canada, Inc.".
3.2 Certificate/Articles of Incorporation and Bylaws. Parent has delivered
to the Company complete and accurate copies of the Certificate/Articles of
Incorporation, Bylaws, and other charter and organizational documents of the
respective Parent Corporations, including all amendments thereto.
3.3 Capitalization, Etc.
(a) The authorized capital stock of Parent consists of: Thirty Million
(30,000,000) shares of Parent Common Stock, par value $0.001, of which, as
of October 30, 1997 15,164,260 shares were issued and outstanding. No
shares were held by Parent in its treasury; and Ten Million (10,000,000)
shares of preferred stock, par value $0.001, none of which are issued and
outstanding or are held by the Parent in its treasury. All of the
outstanding shares of Parent Common Stock have been duly authorized and
validly issued, and are fully paid and nonassessable. Except as set forth
in the Parent Disclosure Schedule: (i) none of the outstanding shares of
Parent Common Stock is entitled or subject to any preemptive right, right
of participation in future financings, right to maintain a percentage
ownership position, or any similar right; (ii) none of the outstanding
shares of Parent Common Stock is subject to any right of first refusal in
favor of the Parent; and (iii) there is no Parent Corporation Contract
relating to the voting or registration of, or restricting any Person from
purchasing, selling, pledging or otherwise disposing of (or granting any
option or similar right with respect to), any shares of Parent Common
Stock. None of the Parent Corporations is under any obligation, or is bound
by any Contract pursuant to which it may become obligated, to repurchase,
redeem or otherwise acquire any outstanding shares of Parent Common
18
<PAGE> 125
Stock or any other securities of any Parent Corporation. The authorized
capital of Merger Sub consists of 1,000 shares of Common Stock, par value
$.001 per share, 100 shares of which are issued and outstanding and are
held beneficially and of record, by Parent.
(b) As of October 31, 1997: (i) 256,414 shares of Parent Common Stock
are reserved for future issuance pursuant to stock options granted and
outstanding under Parent's 1997 Non-Officer Equity Incentive Plan; (ii)
1,615,038 shares Parent Common Stock are reserved for future issuance
pursuant to stock options granted and outstanding under Parent's 1989 Stock
Plan; (iii) 50,807 shares of Parent Common Stock are reserved for future
issuance under Parent's 1993 Employee Stock Purchase Plan (the "Parent
ESPP"); (iv) 125,000 shares of Parent Common Stock are reserved for future
issuance pursuant to stock options granted and outstanding under Parent's
1994 Non-Employee Directors' Stock Option Plan; (v) 4,350 shares of Parent
Common Stock are reserved for future issuance pursuant to stock options
granted and outstanding under Parent's 1993 Employee Stock Bonus Plan; and
(vi) 45,886 shares are reserved for future issuance pursuant to stock
options granted and outstanding under Parent's 1993 Khepri Stock Option
Plan. (Stock options granted by Parent pursuant to the 1997 Non-Officer
Equity Incentive Plan, the 1989 Stock Plan, the 1994 Non-Employee
Directors' Stock Option Plan, the 1993 Employee Stock Bonus Plan and the
1993 Khepri Stock Option Plan are referred to in this Agreement as "Parent
Options.") The Parent Disclosure Schedule sets forth the following
information with respect to each Parent Option outstanding as of the date
of this Agreement: (i) the particular plan pursuant to which such Parent
Option was granted; (ii) the name of the optionee; (iii) the number of
shares of Parent Common Stock subject to such Parent Option; (iv) the
exercise price of such Parent Option; (v) the date on which such Parent
Option was granted; (vi) the applicable vesting schedules, and the extent
to which such Parent Option is vested and exercisable as of October 30,
1997; and (vii) the date on which such Parent Option expires. Parent has
delivered to the Company accurate and complete copies of all stock option
plans and forms of option grant pursuant to which Parent has granted any
outstanding stock options. The Parent Disclosure Schedule sets forth the
following information with respect to each outstanding warrant to purchase
Parent Common Stock: (1) the name of the holder of such warrant; (2) the
number of shares of Parent Common Stock subject to such warrant; (3) the
exercise price of such warrant; (4) the date on which such warrant was
issued; (5) the conditions, if any, limiting exercise of such warrant; and
(6) the date on which such warrant expires. Parent has delivered to the
Company an accurate and complete copy of each such warrant.
(c) Except as set forth in the Parent Disclosure Schedule there is no:
(i) outstanding subscription, option, call, warrant or right (whether or
not currently exercisable) to acquire any shares of the capital stock or
other securities of Parent or any other Parent Corporation; (ii)
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock or
other securities of Parent or any other Parent Corporation; (iii)
stockholder rights plan (or similar plan commonly referred to as a "poison
pill") or Contract under which Parent or any other Parent Corporation is or
may become obligated to sell or otherwise issue any shares of its capital
stock or any other securities; or (iv) condition or circumstance that may
reasonably give rise to or provide a basis for the assertion of a claim by
any Person to the effect that such Person is entitled to acquire or receive
any shares of capital stock or other securities of Parent or any other
Parent Corporation. There are no bonds, debentures, notes or other
indebtedness of the Parent outstanding having the right to vote (or
convertible into Securities having the right to vote) on any matters on
which the shareholders of the Parent have the right to vote.
(d) All outstanding securities of all of the Parent Corporations,
including shares of Parent Common Stock, all outstanding Parent Options,
all outstanding warrants to purchase Parent Common Stock, all outstanding
rights under the Parent ESPP and all outstanding shares of capital stock of
each subsidiary of the Company have been issued and granted in all material
respects in compliance with (i) all applicable securities laws and other
applicable Legal Requirements, and (ii) all requirements set forth in
applicable Contracts.
(e) All of the outstanding shares of capital stock of the Parent
Corporations have been duly authorized and are validly issued, are fully
paid and nonassessable and (other than the capital stock of Parent) are
owned beneficially and of record by Parent, free and clear of any
Encumbrances.
19
<PAGE> 126
3.4 SEC Filings; Financial Statements.
(a) Parent has listed on the Parent Disclosure Schedule and has made
available to the Company accurate and complete copies (excluding copies of
exhibits) of all registration statements, proxy statements and other
statements, reports, schedules, forms and other documents filed by Parent
with the SEC since January 1, 1996 (the "Parent SEC Documents"). All
statements, reports, schedules, forms and other documents required to have
been filed by Parent with the SEC have been so filed. As of the time it was
filed with the SEC (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing): (i) each of the
Parent SEC Documents complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act (as the case may
be); and (ii) none of the Parent SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements (including any related
notes) contained in the Parent SEC Documents: (i) complied as to form in
all material respects with the published rules and regulations of the SEC
applicable thereto; (ii) were prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered (except as may be indicated in the notes to such financial
statements and, in the case of unaudited statements, as permitted by Form
10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to normal and recurring year-end audit
adjustments which will not, individually or in the aggregate, be material
in amount); and (iii) fairly present the consolidated financial position of
Parent and its Subsidiaries as of the respective dates thereof and the
consolidated results of operations and cash flows of Parent and its
Subsidiaries for the periods covered thereby.
(c) Since June 30, 1997, Parent and its subsidiaries have not incurred
any liabilities of the type required under GAAP to be recorded on a balance
sheet or in the footnotes thereto except liabilities incurred in the
ordinary course of business.
3.5 Absence of Changes. Since December 31, 1996:
(a) there has not been any Material Adverse Change in the business,
condition, capitalization, assets, liabilities, operations or financial
performance of the Parent Corporations, and no event has occurred that
could reasonably be expected to have a Material Adverse Effect on the
Parent Corporations;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the assets of the Parent
Corporations (whether or not covered by insurance);
(c) there has not been any transaction, commitment, or other event or
condition (financial or otherwise) which would be prohibited by Section
4.3(b)(i), (iv), (ix), (x) or (xi) if it were to be effected, accepted or
were to take place between the date hereof and the effective time.
3.6 Title to Assets. Except as set forth in the Parent Disclosure Schedule,
the Parent Corporations own, and have good, valid and marketable title to, all
assets purported to be owned by them, including: all assets reflected in its
books and records as being owned by the Parent Corporations. All of said assets
are owned by the Parent Corporations free and clear of any Encumbrances, except
for (a) any lien for current taxes not yet due and payable, (b) minor liens that
have arisen in the ordinary course of business and that do not (in any case or
in the aggregate) materially detract from the value of the assets subject
thereto or materially impair the operations of any of the Parent Corporations,
and (c) liens described in the Parent Disclosure Schedule.
3.7 Payments under Corporate Partnering Agreements. All amounts charged to
Amgen, Inc., Bayer AG, Pharmacia & Upjohn, Inc., Merck & Co., Inc., SmithKline
Beecham Corporation and Abbott Laboratories (the "Parent Corporate Partners")
for reimbursement or payments in accordance with the agreements between Parent
and such Persons represent amounts due to Parent under the terms of such
agreements for actual work or services performed or, in the case of advance
payments, work or services to be performed, or milestones met.
20
<PAGE> 127
(a) Parent has received all amounts that are owed and due to be paid
to Parent under such agreements prior to the date of this Agreement. For
each such payment received by Parent under any such agreement, any revenue
that Parent recognized with respect to such payment was recognized in
accordance with generally accepted accounting principles.
(b) The Parent Disclosure Schedule identifies all facts of which
Parent has knowledge that a Parent Corporate Partner is considering,
intending or planning to terminate any of the agreements between any such
Parent Corporate Partner and Parent, or any research program under such
agreement.
(c) Parent has not terminated or made a decision to terminate its
research and development program with respect to APC-366 or APC 1390 (the
"APC Products"). To the knowledge of Parent, to the extent it has the
ability to terminate clinical development of the APC Products, Bayer AG has
not terminated or made a decision to terminate clinical development of the
APC Products.
3.8 Real Property; Equipment; Leasehold.
(a) None of the Parent Corporations owns any real property or any
interest in real property, except for the leasehold created under real
property leases set forth in the Parent Disclosure Schedule. Complete and
correct copies of such leases have previously been delivered to the Company
by Parent.
(b) All material items of equipment and other tangible assets owned by
or leased to the Parent Corporations are reasonably adequate for the uses
to which they are being put, are in good condition and repair (ordinary
wear and tear excepted) and are reasonably adequate for the conduct of the
business of the Parent Corporations in the manner in which such business is
currently being conducted and in the manner in which such business is
required to be conducted pursuant to Contracts to which the Company is a
party and which are in effect on the date hereof.
3.9 Proprietary Assets.
(a) The Parent Disclosure Schedule sets forth, with respect to each
Proprietary Asset owned by the Parent Corporations and registered with any
Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Proprietary Asset, and
(ii) the names of the jurisdictions covered by the applicable registration
or application. The Parent Disclosure Schedule identifies and provides a
brief description of, and identifies any ongoing royalty or payment
obligations in excess of $25,000 per year with respect to each Proprietary
Asset that is licensed or otherwise made available to the Parent
Corporations by any Person (except for any Proprietary Asset that is
licensed to the Parent Corporations under any third party software license
generally available to the public), and identifies the Contract under which
such Proprietary Asset is being licensed or otherwise made available to
such Parent Corporation. Excluding the payments required under the Parent
Corporation Contracts set forth in the Parent Disclosure Schedule, the
aggregate amounts payable by the Parent Corporations for ongoing royalty or
license payments do not exceed $75,000 per year. The Parent Corporations
have good, valid and marketable title to all of the Parent Corporation
Proprietary Assets (except for licensed assets), free and clear of all
Encumbrances, except for (i) any lien for current taxes not yet due and
payable, and (ii) minor liens that have arisen in the ordinary course of
business and that do not (individually or in the aggregate) materially
detract from the value of the assets subject thereto or materially impair
the operations of any of the Parent Corporations. The Parent Corporations
have a valid right to use, license and otherwise exploit all Parent
Corporation Proprietary Assets. Except as set forth in the Parent
Disclosure Schedule, none of the Parent Corporations has developed jointly
with any other Person any Parent Corporation Proprietary Asset that is
material to the business of the Parent Corporations with respect to which
such other Person has any rights. Except as set forth in the Parent
Disclosure Schedule, there is no Parent Corporation Contract pursuant to
which any Person has any right (whether or not currently exercisable) to
use, license or otherwise exploit any Parent Corporation Proprietary Asset.
(b) The Parent Corporations have taken all reasonable measures and
precautions to protect and maintain the confidentiality, secrecy and value
of all Parent Corporation Proprietary Assets (except Parent Proprietary
Assets whose value would be unimpaired by disclosure). Except where the
failure to
21
<PAGE> 128
obtain such agreements would not impair the value of any Parent Proprietary
Asset, the Parent Corporations have obtained, from all current and former
employees of the Parent Corporations and from all current and former
consultants and independent contractors to the Parent Corporations, signed
agreements appropriately restricting the use and disclosure of the Parent
Proprietary Assets, and providing for assignment to the Parent Corporations
of the Parent Proprietary Assets developed by such employees and
consultants.
(c) To the best of the knowledge of Parent: (i) all patents, patent
applications, trademarks, service marks and copyrights held by any of the
Parent Corporations were filed and were and have been prosecuted in good
faith and in compliance with all applicable Legal Requirements; (ii) there
has not been any claim, action or proceeding, and there is no pending or
threatened claim, action or proceeding relating to any registration or
filing of a Parent Proprietary Asset; (iii) none of the Parent Corporation
Proprietary Assets infringes, misappropriates or conflicts with any
Proprietary Asset owned or used by any other Person; (iv) none of the
products that are being or have been designed, created, developed,
assembled, manufactured or sold by any of the Parent Corporations is
infringing, misappropriating or making any unlawful or unauthorized use of
any Proprietary Asset owned or used by any other Person, and none of such
products has at any time infringed, misappropriated or made any unlawful or
unauthorized use of, and none of the Parent Corporations has received any
notice or other communication (in writing or otherwise) of any actual,
alleged, possible or potential infringement, misappropriation or unlawful
or unauthorized use of, any Proprietary Asset owned or used by any other
Person; (v) no other Person is infringing, misappropriating or making any
unlawful or unauthorized use of, and no Proprietary Asset owned or used by
any other Person infringes or conflicts with, any material Parent
Corporation Proprietary Asset.
(d) The Parent Corporation Proprietary Assets constitute all of the
Proprietary Assets reasonably necessary to enable the Parent Corporations
to conduct their business in the manner in which such businesses have been
and are being conducted and in the manner in which such businesses are
required to be conducted pursuant to Contracts to which Parent is a party
and which are in effect on the date hereof. Except as set forth in the
Parent Disclosure Schedule, none of the Parent Corporations has (i)
licensed any of the material Parent Corporation Proprietary Assets to any
Person on an exclusive basis, or (ii) entered into any covenant not to
compete or Contract limiting its ability to exploit fully any material
Parent Corporation Proprietary Assets or to transact business in any market
or geographical area or with any Person.
3.10 Material Contracts.
(a) The Parent Disclosure Schedule identifies each Parent Corporation
Contract that constitutes a "Parent Material Contract." For purposes of
this Agreement, each of the following shall be deemed to constitute a
"Parent Material Contract":
(i) any Contract relating to the employment of, or the performance
of services by, any employee or consultant, and any Contract pursuant to
which any of the Parent Corporations is or may become obligated to make
any severance, termination, bonus or relocation payment or any other
payment (other than payments in respect of salary and the grant of
standard benefits);
(ii) any Contract relating to the acquisition, transfer,
development, sharing or license of any Proprietary Asset (except for any
Contract pursuant to which any Proprietary Asset is licensed to the
Parent Corporation under any third party software license generally
available to the public);
(iii) any Contract which provides for indemnification of any
officer, director, employee or agent;
(iv) any Contract imposing any restriction on the right or ability
of Parent (A) to compete with any other Person, (B) to acquire any
product or other asset or any services from any other Person, to sell
any product or other asset to or perform any services for any other
Person or to transact business or deal in any other manner with any
other Person, or (C) to develop or distribute any technology;
22
<PAGE> 129
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities, (B) providing any
Person with any preemptive right, right of participation, right of
maintenance or any similar right with respect to any securities, or (C)
providing the Company with any right of first refusal with respect to,
or right to repurchase or redeem, any securities;
(vi) any Contract requiring that Parent give any notice, obtain any
consent or provide any information to any Person prior to accepting any
Acquisition Proposal;
(vii) any Contract (not otherwise identified in this Section) that
(A) has a term of more than 60 days or that may not be terminated by a
Parent Corporation (without penalty) within 60 days after the delivery
of a termination notice by such Parent Corporation and (B) that
contemplates or involves (I) the payment or delivery of cash or other
consideration on or after the date hereof in an amount or having a value
in excess of $50,000 in aggregate payments under such Contract, or (II)
the performance of services on or after the date hereof having a value
in excess of $50,000 in aggregate payments under such Contract;
(viii) any Contract (A) to which any Governmental Body is a party
or under which any Governmental Body has any rights or obligations, or
involving or directly or indirectly benefiting any Governmental Body
(including any subcontract or other Contract between the Company and any
contractor or subcontractor to any Governmental Body) and (B) that
contemplates and involves (I) the payment or delivery of cash or other
consideration on or after the date hereof in an amount or having a value
in excess of $50,000 in aggregate payments under such Contract, or (B)
the performance of services on or after the date hereof having a value
in excess of $50,000 in aggregate payments under such Contract;
(ix) any open purchase order placed by a Parent Corporation
requiring future aggregate payments in excess of $25,000;
(x) any Contract (not otherwise identified in this Section) that
could reasonably be expected to have a material effect on the business,
condition, assets, liabilities, capitalization assets, liabilities,
operations, or financial performance of any of the Parent Corporations
or to any of the transactions contemplated by this Agreement; and
(xi) any other Contract (not otherwise identified in this Section),
if a breach of such Contract could reasonably be expected to have a
Material Adverse Effect on any of the Parent Corporations.
(b) Each Parent Contract that constitutes a Parent Material Contract
is valid and in full force and effect, and is enforceable in accordance
with its terms, subject to (i) laws of general application relating to
bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable
remedies. The aggregate amount payable by the Parent Corporations under
Contracts that would be Parent Material Contracts but for the limitations
of Sections 3.10(a)(vii)(B) or 3.10(a)(viii)(B) do not exceed $500,000. The
aggregate amount payable by the Parent Corporations under purchase orders
not listed on Part 3.10 of the Parent Disclosure Schedule does not exceed
$500,000.
(c) Except as set forth in the Parent Disclosure Schedule: (i) none of
the Parent Corporations has materially violated or breached, or committed
any material default under, any Parent Material Contract, and, to the best
of the knowledge of Parent, no other Person has materially violated or
breached, or committed any material default under, any Parent Material
Contract; (ii) to the best of the knowledge of Parent, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) could reasonably be expected to (A) result in a
material violation or breach of any of the provisions of any Parent
Material Contract, (B) give any Person the right to declare a default or
exercise any remedy under any Parent Material Contract, (C) give any Person
the right to a rebate, chargeback, penalty or change in delivery schedule
under any Parent Material Contract, (D) give any Person the right to
accelerate the maturity or performance of any Parent Material Contract, or
(E) give any Person the right to cancel, terminate or materially modify any
Parent Material Contract; (iii) since January 1, 1996, none of the Parent
Corporations has received any written notice or other written communication
23
<PAGE> 130
regarding any actual or possible violation or breach of, default under, or
any intention to terminate, any Parent Corporation Contract, except for
communication (A) that has subsequently been revoked; or (B) has been
received from a complaining party that has not contacted Parent or
otherwise, to Parent's knowledge, taken any action with respect to such
party's complaint for a period of more than six months following receipt of
the communication; and (iv) none of the Parent Corporations has waived any
of its material rights under any Parent Material Contract.
(d) To the best of the knowledge of Parent, no Person is
renegotiating, or has the right to renegotiate, any material amount paid or
payable to the Parent Corporations under any Parent Material Contract, or
any other material term or provision of any Parent Material Contract,
including termination provisions.
(e) The Parent Material Contracts and other Contracts of the Parent
Corporations collectively constitute all of the Contracts necessary to
enable the Parent Corporations to conduct their respective businesses in
the manner in which their businesses are currently being conducted and in
the manner in which such business is required to be conducted pursuant to
Contracts to which Parent is a party and which are in effect on the date
hereof.
(f) The Parent Disclosure Schedule sets forth a list of all claims
made under any Parent Material Contract which are disputed or, to Parent's
knowledge, where a dispute has been threatened.
3.11 Liabilities. None of the Parent Corporations has any accrued,
contingent or other liabilities of any nature, either matured or unmatured
(whether or not required to be reflected in financial statements in accordance
with generally accepted accounting principles, and whether due or to become
due), except for: (a) liabilities identified as such in the financial statements
in the Parent SEC Documents; (b) normal and recurring liabilities that have been
incurred by the Parent Corporations since December 31, 1996 in the ordinary
course of business and consistent with past practices; and (c) other liabilities
which have not had and could not reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect on Parent
Corporations.
3.12 Compliance with Legal Requirements. Each of the Parent Corporations
is, and has at all times since inception, been, in compliance with all
applicable Legal Requirements, except where the failure to comply with such
Legal Requirements has not had and could not reasonably be expected to have, a
Material Adverse Effect on the Parent Corporations. Since inception, none of the
Parent Corporations has received any notice or other communication from any
Governmental Body regarding any actual or possible violation of, or failure to
comply with, any material Legal Requirement.
3.13 Certain Business Practices. None of the parent corporations nor any
director, officer, agent or employee of any of the Parent Corporations has (i)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful
payment.
3.14 Governmental Authorizations. The Parent Corporations hold all material
Governmental Authorizations necessary to enable it to conduct their respective
businesses in the manner in which such businesses are currently being conducted.
All such Governmental Authorizations are valid and in full force and effect.
Each Parent Corporation is, and at all times since inception has been, in
substantial compliance with the terms and requirements of such Governmental
Authorizations. Since inception, none of the Parent Corporations has received
any notice or other communication from any Governmental Body regarding (a) any
actual or possible violation of or failure to comply with any term or
requirement of any material Governmental Authorization, or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any material Governmental Authorization or (c) any requirement
to apply for or hold a Governmental Authorization not held by any Acquired
Corporation.
24
<PAGE> 131
3.15 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of the
respective Parent Corporations with any Governmental Body with respect to
any taxable period ending on or before the Closing Date (the "Parent
Corporation Returns") have been or will be filed on or before the
applicable due date (including any extensions of such due date). All
amounts shown on the Parent Returns to be due on or before the Closing Date
have been or will be paid on or before the Closing Date.
(b) The Parent Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
Each Parent Corporation will establish, in the ordinary course of business
and consistent with its past practices, quarterly reserves adequate for the
payment of all Taxes for the applicable periods from December 31, 1996
through the Closing Date. Since January 1, 1997 no material Tax liability
has been incurred other than in the ordinary course of business.
(c) Except as set forth in the Parent Disclosure Schedule, no Parent
Corporation Return has ever been examined or audited by any Governmental
Body. No extension or waiver of the limitation period applicable to any of
the Parent Corporation Returns has been granted (by Parent or any other
Person), and no such extension or waiver has been requested from Parent
Corporation.
(d) No claim or Legal Proceeding is pending or, to the best of the
knowledge of Parent, has been threatened against or with respect to any
Parent Corporation in respect of any Tax. There are no unsatisfied
liabilities for Taxes (including liabilities for interest, additions to tax
and penalties thereon and related expenses) with respect to any notice of
deficiency or similar document received by any Parent Corporation (other
than liabilities for Taxes asserted under any such notice of deficiency or
similar document which are being contested in good faith by the Parent
Corporation and with respect to which adequate reserves for payment have
been established). There are no liens for Taxes upon any of the assets of
any of the Parent Corporations except liens for current Taxes not yet due
and payable. None of the Parent Corporations has entered into or become
bound by any agreement or consent pursuant to Section 341(f) of the Code.
None of the Parent Corporations has been, and none of the Parent
Corporations will be required to include any adjustment in taxable income
for any tax period (or portion thereof) pursuant to Section 481 or 263A of
the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing. None of the Parent Corporations is nor has been a
United States real property holding corporation within the meaning of
Section 847(c)(2) of the Code. No Parent Corporation has liabilities for
the Taxes of any other Person.
(e) There is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of any of the Parent Corporations that, considered
individually or considered collectively with any other such Contracts,
will, or could reasonably be expected to, give rise directly or indirectly
to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. None of the Parent Corporations
is, or has ever been, a party to or bound by any tax indemnity agreement,
tax sharing agreement, tax allocation agreement or similar Contract (other
than a Contract entered into in the ordinary course of business in
connection with the purchase or sale of inventory or supplies).
3.16 Employee and Labor Matters; Benefit Plans.
(a) Parent has made available to the Company: accurate and complete
copies of each of its salary, bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance pay, termination pay,
hospitalization, medical, life or other insurance, supplemental
unemployment benefit, profit-sharing, pension or retirement plan, program
or agreement (including all amendments thereto) (collectively, the "Parent
Plans").
(b) No Parent Corporation is or has been, required to be treated as a
single employer with any other Person under Section 4001(b)(1) of ERISA or
Section 414(b), (c), (m) or (o) of the Code. No Parent Corporation has at
any time been a member of an "affiliated service group" within the meaning
of
25
<PAGE> 132
Section 414(m) of the Code. No Parent Corporation has at any time made a
complete or partial withdrawal from a multiemployer plan, as such term is
defined in Section 3(37) of ERISA, resulting in "withdrawal liability," as
such term is defined in Section 4201 of ERISA (without regard to subsequent
reduction or waiver of such liability under either Section 4207 or 4208 of
ERISA).
(c) Parent has no plan or commitment to create any Welfare Plan or any
additional Pension Plan, or to modify or change any existing Pension Plan
(other than to comply with applicable law) in a manner that would create
any material liability for any of the Parent Corporations.
(d) No Parent Plan provides death, medical or health benefits coverage
(whether or not insured) with respect to any of its current or former
employees after any such employee's termination of service (other than (i)
benefit coverage mandated by applicable law, including coverage provided
pursuant to Section 4980B of the Code, (ii) deferred compensation benefits
accrued as liabilities on the most recent financial statements included in
the Company SEC filings, and (iii) benefits the full cost of which are
borne by such current or former employees (or the employees'
beneficiaries)).
(e) With respect to any Parent Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects.
(f) Each of the Parent Plans has been operated and administered in all
material respects in accordance with applicable Legal Requirements,
including but not limited to ERISA and the Code.
(g) Each of the Parent Plans intended to be qualified under Section
401(a) of the Code has received a favorable determination, opinion,
notification or advisory letter from the Internal Revenue Service, and
Parent is not aware of any reason why any such letter should be revoked.
(h) Neither the execution, delivery or performance of this Agreement,
nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any payment (including any
bonus, golden parachute or severance payment) to any of Parent's current or
former employees or directors (whether or not under any Parent Plan), or
materially increase the benefits payable under any Parent Plan, or result
in any acceleration of the time of payment or vesting of any such benefits.
(i) Parent is not a party to any collective bargaining contract or
other Contract with a labor union involving any of its employees. All of
Parent's employees are "at will" employees.
(j) Each Parent Corporation is in compliance in all material respects
with all applicable Legal Requirements and Contracts relating to
employment, employment practices, wages, bonuses and terms and conditions
of employment, including employee compensation matters and the
classification of independent contractors and workers.
(k) Each Parent Corporation has good labor relations and has no
knowledge indicating that the consummation of the Merger or any of the
other transactions contemplated by this Agreement will have a material
adverse effect on Parent's labor relations.
3.17 Environmental Matters. Each of the Parent Corporations is in
compliance in all material respects with all applicable Environmental Laws (as
defined in Section 2.18 hereto), which compliance includes the possession by
each of the Parent Corporations of all permits and other Governmental
Authorizations required under applicable Environmental Laws, and compliance with
the terms and conditions thereof. None of the Parent Corporations has received
any notice or other communication (in writing or otherwise), whether from a
Governmental Body, citizens group, employee or otherwise, that alleges that any
of the Parent Corporations is not in compliance with any Environmental Law, and,
to the best of the knowledge of Parent, there are no circumstances that may
prevent or interfere with the compliance by any of the Parent Corporations with
any Environmental Law in the future. To the knowledge of Parent without further
inquiry, no current or prior owner of any property leased or controlled by any
of the Parent Corporations has received any notice or other communications (in
writing or otherwise), whether from a Government Body, citizens group, employee
or otherwise, that alleges that such current or prior owner or any of the Parent
Corporations is not in compliance
26
<PAGE> 133
with any Environmental Law. To the best of the knowledge of Parent, all property
that is leased to, controlled by or used by Parent, and all surface water,
groundwater and soil associated with or adjacent to such property is in clean
and healthful condition and is free of any material environmental contamination
of any nature. None of the Parent Corporations has disposed of, emitted,
discharged, handled, stored, transported, used or released any Materials of
Environmental Concern, arranged for the disposal, discharge, storage or release
of any Materials of Environmental concern, or exposed any employee or other
individual to any Materials of Environmental Concern or condition so as to give
rise to any material liability or material corrective or remedial obligation
under any Environmental Laws.
3.18 Insurance. Parent has delivered to the Company a summary of all
material insurance policies and all material self insurance programs relating to
the business, assets and operations of the respective Parent Corporations and
has made available to the Company copies of the polices. Each of such insurance
policies is in full force and effect. Since December 31, 1996, none of the
Parent Corporations has received any notice or other communication regarding any
actual or possible (a) cancellation or invalidation of any insurance policy, (b)
refusal of any coverage or rejection of any material claim under any insurance
policy, or (c) material adjustment in the amount of the premiums payable with
respect to any insurance policy. Except as set forth in the Parent Disclosure
Schedule, there is no pending claim (including any workers' compensation claim)
under or based upon any insurance policy of any of the Parent Corporations.
3.19 Transactions with Affiliates.
(a) Except as set forth in the Company SEC Reports, since the date of
the Company's last proxy statement filed with the SEC, no event has
occurred that would be required to be reported by the Company pursuant to
Item 404 of Regulation S-K promulgated by the SEC. The Parent Disclosure
Schedule identifies each Person who is an "affiliate" (as that term is used
in Rule 145 under the Securities Act) of Parent and who beneficially owns
more than one percent of the outstanding voting capital of parent as of the
date of this Agreement.
(b) The Parent Disclosure Schedule contains an accurate and complete
list as of the date of this Agreement of all outstanding loans and advances
made by any of the Parent Corporations to any employee, director,
consultant or independent contractor other than routine travel advances
made to employees in the ordinary course of business.
3.20 Legal Proceedings; Orders.
(a) There is no pending Legal Proceeding, and (to the best of the
knowledge of Parent) no Person has threatened to commence any Legal
Proceeding: (i) that involves Parent or any of the assets owned or used by
Parent or any of the Parent Corporations; or (ii) that challenges, or that
may have the effect of preventing, delaying, making illegal or otherwise
interfering with, the Merger or any of the other transactions contemplated
by this Agreement. To the best of the knowledge of Parent, no event has
occurred, and no claim, dispute or other condition or circumstance exists,
that could reasonably be expected to, give rise to or serve as a basis for
the commencement of any such Legal Proceeding that would reasonably be
expected to have a Material Adverse Effect on Parent Corporations.
(b) There is no material order, writ, injunction, judgment or decree
to which any of the Parent Corporations, or any of the assets owned or used
by any of the Parent Corporations, is subject. To the best of the knowledge
of any of the Parent Corporations, no officer or key employee of the Parent
Corporations is subject to any order, writ, injunction, judgment or decree
that prohibits such officer or other employee from engaging in or
continuing any conduct, activity or practice relating to the business of
any of the Parent Corporations.
3.21 Authority; Binding Nature of Agreement. Parent and Merger Sub have the
absolute and unrestricted right, power and authority to enter into and to
perform their respective obligations under this Agreement. The Board of
Directors of Parent (at a meeting duly called and held) has (a) unanimously
(among all directors present at such meeting) determined that the Merger is
advisable and fair and in the best interests of Parent and its shareholders, (b)
unanimously (among all directors present) authorized and approved the execution,
delivery and performance of this Agreement by Parent and unanimously (among all
27
<PAGE> 134
directors present) approved the Merger as sole shareholder of Merger Sub, and
(c) unanimously (among all directors present) recommended the approval of the
issuance of Parent Common Stock in the Merger by the holders of Parent Common
Stock and directed that such issuance be submitted for consideration by Parent's
stockholders at the Parent Stockholders' Meeting (as defined in Section 5.3);
and the Board of Directors of Merger Sub has duly authorized by all necessary
action the execution, delivery and performance by Merger Sub of this Agreement.
This Agreement constitutes the legal, valid and binding obligation of Parent and
Merger Sub, enforceable against Parent and Merger Sub in accordance with its
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
3.22 No Existing Discussions. None of the Parent Corporations, and no
Representative of any of the Parent Corporations, is engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating to
any Acquisition Proposal.
3.23 Vote Required. The affirmative vote of the holders of a majority of
the shares of Parent Common Stock present in Person or represented by proxy at a
meeting of the Parent stockholders and entitled to vote approving the issuance
of Parent Common Stock in the Merger and of the holders of a majority of the
outstanding shares of Parent Common Stock approving a related increase to the
number of authorized shares of Parent Common Stock (collectively, the "Required
Parent Stockholder Vote"), is the only vote of the holders of any class or
series of the Parent's capital stock necessary to approve the issuance of Parent
Common Stock in the Merger.
3.24 Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the certificate of incorporation, bylaws or other charter
or organizational documents of any of the Parent Corporations, or (ii) any
resolution adopted by the stockholders, the board of directors or any
committee of the board of directors of any of the Parent Corporations;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order,
writ, injunction, judgment or decree to which any of the Parent
Corporations, or any of the assets owned or used by any of the Parent
Corporations, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by Parent or that otherwise relates to Parent's
business or to any of the assets owned or used by any of the Parent
Corporations;
(d) contravene, conflict with or result in a violation or material
breach of, or result in a default (or an event which with notice or lapse
of time or both would become a default) under, any provision of any Parent
Contract that is or would constitute a Parent Material Contract, or give
any Person the right to (i) declare a default or exercise any remedy under
any such Parent Material Contract, (ii) a rebate, chargeback, penalty or
change in delivery schedule under any such Parent Material Contract, (iii)
accelerate the maturity or performance of any such Parent Material
Contract, or (iv) cancel, terminate or materially modify any term of such
Parent Material Contract; or
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by any of the Parent Corporations
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of any of the Parent Corporations).
28
<PAGE> 135
Except as may be required by the Exchange Act, the DGCL, the HSR Act and
the NASD Bylaws (as they relate to the Form S-4 Registration Statement and
the Joint Proxy Statement) none of the Parent Corporations was, is or will
be required to make any filing with or give any notice to, or to obtain any
Consent from, any Person in connection with (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in
this Agreement, or (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement.
3.25 Fairness Opinion. Parent's board of directors has received the written
opinion of Morgan Stanley, financial advisor to Parent, dated October 31, 1997,
to the effect that the Exchange Ratio is fair to Parent from a financial point
of view. Parent has furnished an accurate and complete copy of said written
opinion to the Company.
3.26 Valid Issuance. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.
3.27 Financial Advisor. Except for Morgan Stanley, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Parent Corporations. Parent has furnished to Company accurate and complete
copies of all agreements under which any such fees, commissions, or other
amounts have been paid or may become payable and all indemnification and other
arrangements relating to the engagement of Morgan Stanley.
3.28 Full Disclosure. This Agreement (including the Parent Disclosure
Schedule) does not, and the certificate referred to in Section 7.5(c) will not,
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any material
fact necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information were
or will be made or provided) not false or misleading.
SECTION 4. CERTAIN COVENANTS OF THE PARTIES
4.1 Access and Investigation.
(a) During the period from the date of this Agreement through the
Effective Time (the "Pre-Closing Period"), the Company and Parent each
shall, and the Company and Parent shall cause the respective
Representatives of the Acquired Corporations and the Parent Corporations
to: (a) provide each other and their respective Representatives with
reasonable access to each others' and their Subsidiaries' respective
Representatives, personnel and assets and to all existing books, records,
Tax Returns, work papers and other documents and information relating to
each other and to their Subsidiaries; and (b) provide each other and their
respective Representatives with such copies of the existing books, records,
Tax Returns, work papers and other documents and information relating to
each other and their Subsidiaries, and with such additional financial,
operating and other data and information regarding each other and their
Subsidiaries, as Parent and the Company may reasonably request.
4.2 Operation of the Company's Business.
(a) During the Pre-Closing Period: (i) the Company shall ensure that
each of the Acquired Corporations conducts its business and operations (A)
in the ordinary course and in accordance with past practices or the
operating plan previously delivered by the Company to Parent and (B) in
compliance with all applicable Legal Requirements and the requirements of
all Acquired Company Contracts that constitute Material Contracts; (ii) the
Company shall use all reasonable efforts to ensure that each of the
Acquired Corporations preserves intact its current business organization,
keeps available the services of its current officers and employees and
maintains its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other Persons
having business relationships with the respective Acquired Corporations;
(iii) the Company shall keep in full force all insurance policies referred
to in Section 2.18 or replace any such policies that terminate with
comparable or superior policies; (iv) the Company shall provide all
notices, assurances and support required by any Acquired
29
<PAGE> 136
Corporation Contract relating to any Proprietary Asset in order to ensure
that no condition under such Acquired Corporation Contract occurs which
could result in, or could increase the likelihood of, any transfer or
public disclosure by any Acquired Corporation of any Proprietary Asset; and
(v) the Company shall (to the extent requested by Parent) cause its
officers to report regularly to Parent concerning the status of the
Company's business.
(b) During the Pre-Closing Period, the Company shall not (without the
prior written consent of Parent), and shall not permit any of the other
Acquired Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, or
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities, except for repurchases at less than fair market value
pursuant to employment or consulting agreements in effect prior to the
date hereof;
(ii) hire any new employees except employees hired to fill those
positions identified on a schedule (the "New Company Employee Schedule")
previously provided to Parent or employees hired to replace employees
who terminate their employment with an Acquired Corporation during the
Pre-Closing Period (the "New Company Employees");
(iii) sell, issue, grant or authorize the issuance or grant of (A)
any capital stock or other security (except Company Common Stock upon
the valid exercise of Company Options or Company warrants outstanding on
the date of this Agreement or the Exercise of Rights under the ESPP),
(B) any option, call, warrant or right to acquire any capital stock or
other security (other than options to purchase an aggregate of up to
30,000 shares of Company Common Stock which may be granted to New
Company Employees who are not director-level or above and to current
employees in connection with promotions made by the Company's management
prior to the date of this Agreement), or (C) any instrument convertible
into or exchangeable for any capital stock or other security; provided,
however, that notwithstanding the foregoing, (x) the Company may issue
up to $2,000,000 of its Common Stock to Warner-Lambert Company pursuant
to an agreement with Warner-Lambert Company, (y) the Company may also
issue additional shares of its Common Stock to Boehringer-Ingelheim
International GmbH pursuant to certain stock purchase rights allowing
Boehringer-Ingelheim International GmbH in this instance to purchase
5.8% of the total number of new securities being issued to
Warner-Lambert Company and Boehringer-Ingelheim International GmbH
collectively and (z) issue additional shares of Common Stock to Corange
International Ltd. ("Corange") pursuant to Section 2.2(ii) of the
Collaborative Research Agreement between the Company and Corange dated
as of June 30, 1995 (the "Corange Agreement");
(iv) except as contemplated by this Agreement, amend or waive any
of its rights under, or accelerate the vesting under, any provision of
any of the Company's stock option plans (other than acceleration of the
vesting of options in connection with employee terminations involving,
in the aggregate, options to purchase no more than 7,500 shares of
Company Common Stock), any provision of any agreement evidencing any
outstanding stock option or any restricted stock purchase agreement, or
otherwise modify any of the terms of any outstanding option, warrant or
other security or any related Contract;
(v) amend or permit the adoption of any amendment to its articles
of incorporation or bylaws or other charter or organizational documents,
or effect or become a party to any merger, consolidation, share
exchange, business combination, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(vi) form any Subsidiary or acquire any equity interest or other
interest in any other Entity;
(vii) make any capital expenditure, except capital expenditures
through December 31, 1997 in an aggregate amount of no more than the
amount provided for in the capital budget previously provided to Parent
for such period, and thereafter in an aggregate amount of no more than
is provided for in a 1998 capital budget which shall be provided to and
approved by Parent (such approval not to be unreasonably withheld) prior
to January 1, 1998 provided, however, that
30
<PAGE> 137
notwithstanding the foregoing, the Company may make capital expenditures
permitted under clause "(xix)" below;
(viii) except as set forth in the operating plan previously
provided to Parent, enter into or become bound by, or permit any of the
assets owned or used by it to become bound by, any Company Material
Contract, or amend or terminate, or waive or exercise any material right
or remedy under, any Company Material Contract;
(ix) acquire, lease or license any right or other asset from any
other Person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other Person (except in each case for (A)
assets not constituting Proprietary Assets acquired, leased, licensed or
disposed of by the Company in the ordinary course of business; (B)
consistent with past practices and except in the case of the
in-licensing of Proprietary Assets, for agreements involving the payment
of less than $25,000 per year and a royalty of less than 0.75% and (C)
rights granted to academic institutions and researchers to use the data
collected pursuant to tissue sample agreements for research purposes),
or waive or relinquish any material right;
(x) lend money to any Person, except travel advances and loans
related to relocation, education and immigration-related expenses made
in the ordinary course of business, and loans in connection with
employee stock purchases as provided for in agreements in effect on the
date hereof, or incur or guarantee any indebtedness or pledge or
encumber any material assets (except that the Company may make routine
borrowings in the ordinary course of business and in accordance with
past practices under its line of credit with Sumitomo Bank);
(xi) except as set forth in the Company Disclosure Schedule,
establish, adopt or amend any employee benefit plan, pay any bonus
(except pursuant to existing Company incentive plans and employment
contracts or understandings currently in effect) or make any
profit-sharing or similar payment to, or increase the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees;
(xii) change any of its methods of accounting or accounting
practices in any respect;
(xiii) make any material Tax election;
(xiv) commence or settle any Legal Proceeding;
(xv) materially amend or otherwise modify any of the terms of its
engagement of the financial advisor referenced in Section 2.26 above;
(xvi) amend or otherwise modify any of the terms of any Company
Warranty (as defined in Section 5.3 below), except to the extent
necessary to effect the provisions of Section 6.13 below;
(xvii) enter into any material transaction or take any other
material action in each case not specifically provided for in the
operating plan previously provided by the Company to Parent, or outside
the ordinary course of business or inconsistent with past practices; or
(xviii) enter into any license or cost sharing agreement with GC
BioTechnologies, LLC or Shanghai GeneCore BioTechnologies Co. Ltd. or
permit (to the extent the Company's permission is required) GC
BioTechnologies, LLC to enter into any license agreement or cost sharing
agreement with Shanghai GeneCore BioTechnologies Co. Ltd.;
(xix) spend more than an incremental $1,000,000 (over amounts set
forth in the budget previously provided to Parent) on its
pharmacogenetics program (it being understood that such incremental
expenditures include incremental capital expenditures, the costs of new
employees hired to work on this program and expenditures related to
acquiring tissue samples for this program); or
(xx) agree or commit to take any of the actions described in
clauses "(i)" through "(xix)" of this Section 4.2(b).
31
<PAGE> 138
(c) During the Pre-Closing Period, the Company shall promptly notify
Parent in writing of: (i) the discovery by the Company of any event,
condition, fact or circumstance that occurred or existed on or prior to the
date of this Agreement and that caused or constitutes a material inaccuracy
in any representation or warranty made by the Company in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or constitute
a material inaccuracy in any representation or warranty made by the Company
in this Agreement if (A) such representation or warranty had been made as
of the time of the occurrence, existence or discovery of such event,
condition, fact or circumstance, or (B) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date of
this Agreement; (iii) any material breach of any covenant or obligation of
the Company; and (iv) any event, condition, fact or circumstance that would
make the timely satisfaction of any of the conditions set forth in Section
6 or Section 7 impossible or unlikely or that has had or could reasonably
be expected to have a Material Adverse Effect on the Acquired Corporations.
No notification given to Parent pursuant to this Section 4.2(c) shall limit
or otherwise affect any of the representations, warranties, covenants or
obligations of the Company contained in this Agreement.
4.3 Operation of Parent's Business.
(a) During the Pre-Closing Period: (i) Parent shall ensure that each
of the Parent Corporations conducts its business and operations (A) in the
ordinary course and in accordance with past practices or the operating plan
previously provided by Parent to the Company and (B) in compliance with all
applicable Legal Requirements and the requirements of all Parent
Corporation Contracts that constitute Material Contracts; (ii) Parent shall
use all reasonable efforts to ensure that each of the Parent Corporations
preserves intact its current business organization, keeps available the
services of its current officers and employees and maintains its relations
and goodwill with all suppliers, customers, landlords, creditors,
licensors, licensees, employees and other Persons having business
relationships with the respective Parent Corporations; and (iii) Parent
shall keep in full force all insurance policies referred to in Section 3.18
or replace such policies with comparable or superior policies; and (iv)
Parent shall provide all notices, assurances and support required by any
Parent Corporation Contract relating to any Proprietary Asset in order to
ensure that no condition under such Parent Corporation Contract occurs
which could result in, or could increase the likelihood of, any transfer or
public disclosure by any Parent Corporation of any Proprietary Asset.
(b) During the Pre-Closing Period, Parent shall not (without the prior
written consent of the Company), and shall not permit any of the other
Parent Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, or
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities, except for repurchases at less than fair market value
pursuant to employment or consulting agreements in effect prior to the
date hereof;
(ii) hire an aggregate of more than forty new employees, excluding
those persons hired to replace employees who terminate their employment
with a Parent Corporation during the Pre-Closing Period;
(iii) sell, issue, grant or authorize the issuance or grant of (A)
any capital stock or other security (except Parent Common Stock upon the
valid exercise of Parent Options or Parent warrants outstanding on the
date of this Agreement or the Exercise of Rights under the Parent ESPP
or pursuant to equipment lease financings and similar transactions or
otherwise in the ordinary course of business), (B) any option, call,
warrant or right to acquire any capital stock or other security (other
than options, warrants or rights to purchase an aggregate of up to
300,000 shares of Parent Common Stock which may be granted to (i)
officers, directors, employees or consultants of Parent, or (ii)
otherwise in the ordinary course of business), (C) any instrument
convertible into or exchangeable for any capital stock or other
security;
32
<PAGE> 139
(iv) except as contemplated by this Agreement, amend or waive any
of its rights under, or accelerate the vesting under, any provision of
any of Parent's stock option plans, any provision of any agreement
evidencing any outstanding stock option or any restricted stock purchase
agreement, or otherwise modify any of the terms of any outstanding
option, warrant or other security or any related Contract (other than
any such changes to options, warrants or other securities to purchase an
aggregate of up to 25,000 shares of Parent Common Stock);
(v) amend or permit the adoption of any amendment to its
certificate of incorporation or bylaws or other charter or
organizational documents, or effect or become a party to any merger,
consolidation, share exchange, business combination, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(vi) except as previously disclosed to the Company, form any
Subsidiary or acquire any equity interest or other interest in any other
Entity;
(vii) make any capital expenditure, except capital expenditures in
an aggregate amount of no more than $2,000,000;
(viii) establish, adopt or amend any employee benefit plan not
generally available to the Company's employees and the Company's 1998
management incentive program, or pay any bonus or make any profit
sharing or similar payment to (except pursuant to the management
incentive program and any employment contract or understanding as in
effect on the date hereof), or increase the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees in an amount in
excess of the higher of 20% of the amount previously paid to such Person
or $20,000;
(ix) change any of its methods of accounting or accounting
practices in any respect;
(x) make any Material Tax election;
(xi) commence or settle any Legal Proceeding except in the ordinary
course of business;
(xii) materially amend or otherwise modify any of the terms of its
engagement of the financial advisor references in Section 3.27 above;
(xiii) enter into any material transaction or take any other
material action in each case either inconsistent with the operating plan
previously provided by Parent to the Company, or outside the ordinary
course of business; or
(xiv) Except as previously disclosed to the Company, sell or
otherwise dispose of, or grant an exclusive license or any other
exclusive right to utilize Parent Proprietary Assets which individually
or in the aggregate constitute core technology material to the business
of Parent, other than pursuant to a corporate collaboration similar in
structure to those previously entered into by Parent, or grant to any
third party a right of first refusal, first offer, or first negotiation
with regard to material products or such core technology unless
developed pursuant to funding supplied by such party.
(xv) agree or commit to take any of the actions described in clause
"(i)" through "(xiv)" of this Section 4.3(b).
(c) During the Pre-Closing Period, Parent shall promptly notify the
Company in writing of: (i) the discovery by Parent of any event, condition,
fact or circumstance that occurred or existed on or prior to the date of
this Agreement and that caused or constitutes a material inaccuracy in any
representation or warranty made by Parent in this Agreement; (ii) any
event, condition, fact or circumstance that occurs, arises or exists after
the date of this Agreement and that would cause or constitute a material
inaccuracy in any representation or warranty made by Parent in this
Agreement if (A) such representation or warranty had been made as of the
time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition, fact or circumstance
had occurred, arisen or existed on or prior to the date of this Agreement;
(iii) any material breach of any covenant or obligation of Parent; and (iv)
any event, condition, fact or circumstance that would make the timely
satisfaction of any
33
<PAGE> 140
of the conditions set forth in Section 6 or Section 7 impossible or
unlikely or that has had or could reasonably be expected to have a Material
Adverse Effect on the Parent Corporations. No notification given to the
Company pursuant to this Section 4.3(c) shall limit or otherwise affect any
of the representations, warranties, covenants or obligations of Parent
contained in this Agreement.
4.4 No Solicitation by Company.
(a) The Company shall not directly or indirectly, and shall not
authorize or permit any of the other Acquired Corporations or any
Representative of any of the Acquired Corporations directly or indirectly
to, (i) solicit, initiate, knowingly encourage or induce the making,
submission or announcement of any Acquisition Proposal or take any similar
action, (ii) furnish any non-public information regarding any of the
Acquired Corporations to any Person in connection with or in response to an
Acquisition Proposal, (iii) engage in discussions or negotiations with any
Person with respect to any Acquisition Proposal, (iv) approve, endorse or
recommend any Acquisition Proposal or (v) enter into any letter of intent
or similar document or any Contract contemplating or otherwise relating to
any Acquisition Transaction. Without limiting the generality of the
foregoing, the Company acknowledges and agrees that any violation of any of
the restrictions set forth in the preceding sentence by any Representative
of any of the Acquired Corporations, whether or not such Representative is
purporting to act on behalf of any of the Acquired Corporations, shall be
deemed to constitute a breach of this Section 4.4 by the Company.
(b) Nothing contained in this Agreement shall prevent the Company or
its Board of Directors from (i) furnishing information regarding any of the
Acquired Corporations (including a copy of this Section 4.4) to any Person
in connection with or in response to a bona fide, unsolicited Acquisition
Proposal or engaging in discussions or negotiations with respect thereto if
and only to the extent that (A) the Board of Directors of the Company
determines in good faith, after consultation with its financial advisor
that such Acquisition Proposal is reasonably likely to result in a Superior
Offer, (B) the Board of Directors of the Company determines in good faith,
after consultation with its outside counsel, including discussions of
applicable legal standards under California law, that such action is
required in order for the Board of Directors to comply with its fiduciary
duties under applicable law, (C) the Person who has requested such
information has executed and delivered to the Company a non-disclosure
agreement that is not less restrictive than the non-disclosure agreement in
effect between the Company and Parent, and (D) the Company has not breached
Section 4.4(a)(i), or (ii) complying with Rule 14e-2 and Rule 14d-9
promulgated under the Exchange Act. In addition, nothing in paragraph
4.4(a) above shall prevent the Board of Directors of the Company from
recommending a Superior Offer to its shareholders, if the Board determines,
after consultation with its outside counsel, including discussions of
applicable legal standards under California law, that, in light of such
Superior Offer, such recommendation is required in order for the Board of
Directors to comply with its fiduciary obligations to the Company's
shareholders under applicable law (which determination shall be made in
light of a revised proposal, if any, made by the Parent prior to the date
of such determination); provided however that the Company (i) shall provide
Parent with at least 48 hours prior written notice of its intention to hold
any meeting at which the Company's Board of Directors is reasonably
expected to consider an Acquisition Proposal, or such lesser amount of time
as has been given to the Board in relation to such meeting, and (ii) shall
not recommend to its shareholders a Superior Offer for at least two
business days after the Company has provided Parent with the material terms
of such Superior Offer.
(c) The Company shall promptly advise Parent orally and in writing of
any Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal and the terms thereof) that is made or
submitted by any Person during the Pre-Closing Period. The Company shall
keep Parent informed with respect to material changes to the terms of any
such Acquisition Proposal and any material modification or proposed
modifications thereto.
(d) The Company shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition
Proposal and shall request the return or destruction of any confidential
information previously disclosed to such Person and shall use commercially
reasonable efforts to ensure that such information is destroyed or
returned.
34
<PAGE> 141
4.5 No Solicitation by Parent.
(a) Parent shall not directly or indirectly, and shall not authorize
or permit any of the other Parent Corporations or any Representative of any
of the Parent Corporations directly or indirectly to, (i) solicit,
initiate, knowingly encourage or induce the making, submission or
announcement of any Acquisition Proposal or take any similar action, (ii)
furnish any non-public information regarding any of the Parent Corporations
to any Person in connection with or in response to an Acquisition Proposal,
(iii) engage in discussions or negotiations with any Person with respect to
any Acquisition Proposal, (iv) approve, endorse or recommend any
Acquisition Proposal or (v) enter into any letter of intent or similar
document or any Contract contemplating or otherwise relating to any
Acquisition Transaction. Without limiting the generality of the foregoing,
Parent acknowledges and agrees that any violation of any of the
restrictions set forth in the preceding sentence by any Representative of
any of the Parent Corporations, whether or not such Representative is
purporting to act on behalf of any of the Acquired Corporations, shall be
deemed to constitute a breach of this Section 4.5 by Parent.
(b) Nothing contained in this Agreement shall prevent Parent or its
Board of Directors from (i) furnishing information regarding any of the
Parent Corporations (including copy of this Section 4.5) to any Person in
connection with or in response to a bona fide, unsolicited Acquisition
Proposal or engaging in discussions or negotiations with respect thereto if
and only to the extent that (A) the Board of Directors of Parent determines
in good faith, after consultation with its financial advisor that such
Acquisition Proposal is reasonably likely to result in a Superior Offer,
(B) the Board of Directors of Parent determines in good faith, after
consultation with its outside counsel, including discussions of applicable
legal standards under Delaware law, that such action is required in order
for the Board of Directors to comply with its fiduciary duties under
applicable law, (C) the Person who has requested such information has
executed and delivered to Parent a non-disclosure agreement that is not
less restrictive than the non-disclosure agreement in effect between Parent
and the Company, and (D) Parent has not breached Section 4.5(a)(i), or (ii)
complying with Rule 14e-2 and Rule 14d-9 promulgated under the Exchange
Act. In addition, nothing in paragraph 4.5(a) above shall prevent the Board
of Directors of Parent from recommending a Superior Offer to its
stockholders, if the Board determines, after consultation with its outside
counsel, including discussions of applicable legal standards under Delaware
law, that, in light of such Superior Offer, such recommendation is required
in order for the Board of Directors to comply with its fiduciary
obligations to Parent's stockholders under applicable law (which
determination shall be made in light of a revised proposal, if any, made by
the Company prior to the date of such determination); provided however that
Parent (i) shall provide the Company with at least 48 hours prior written
notice of its intentions to hold any meeting at which Parent's Board of
Directors is reasonably expected to consider an Acquisition Proposal, or
such lesser amount of time as has been given to the Board in relation to
such meeting, and (ii) Parent shall not recommend to its stockholders a
Superior Offer for at least two business days after Parent has provided
Parent with the material terms of such Superior Offer.
(c) Parent shall promptly advise the Company orally and in writing of
any Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal and the terms thereof) that is made or
submitted by any Person during the Pre-Closing Period. Parent shall keep
the Company informed with respect to material changes to the terms of any
such Acquisition Proposal and any material modification or proposed
modifications thereto.
(d) Parent shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition
Proposal and shall request the return or destruction of any confidential
information previously disclosed to such Person and shall use commercially
reasonable efforts to ensure that such information is destroyed or
returned.
35
<PAGE> 142
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 Registration Statement; Joint Proxy Statement.
(a) As promptly as practicable after the date of this Agreement,
Parent and the Company shall prepare and cause to be filed with the SEC the
Joint Proxy Statement and simultaneously or thereafter Parent shall prepare
and cause to be filed with the SEC the Form S-4 Registration Statement, in
which the Joint Proxy Statement will be included as a prospectus. Each of
Parent and the Company shall use all reasonable efforts to cause the Form
S-4 Registration Statement and the Joint Proxy Statement to comply with the
rules and regulations promulgated by the SEC, to respond promptly to any
comments of the SEC or its staff and to have the Form S-4 Registration
Statement declared effective under the Securities Act as promptly as
practicable after it is filed with the SEC. Parent will use all reasonable
efforts to cause the Joint Proxy Statement to be mailed to Parent's
stockholders, and the Company will use all reasonable efforts to cause the
Joint Proxy Statement to be mailed to the Company's shareholders, as
promptly as practicable after the Form S-4 Registration Statement is
declared effective under the Securities Act. Each of the Company and Parent
shall promptly furnish to the other all information concerning the Acquired
Corporations and the Company's shareholders and the Parent Corporations,
respectively, that may be required or reasonably requested in connection
with any action contemplated by this Section 5.1. Each of the Company and
Parent shall notify the other promptly of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for any
amendment or supplement to the Form S-4 Registration Statement or Joint
Proxy Statement or for any other information and shall supply the other
with copies of all correspondence between such party and the SEC or its
staff or other governmental officials with respect to the S-4 Registration
Statement or Joint Proxy Statement. The information supplied by each of
Parent and the Company for inclusion in the Form S-4 Registration Statement
and the Joint Proxy Statement shall not (i) at the time the Form S-4
Registration Statement is declared effective, (ii) at the time the Joint
Proxy Statement is first mailed to the shareholders and shareholders of
Parent and the Company, respectively, (iii) at the time of the Company
Shareholders' Meeting and at the time of the Parent Stockholders' Meeting,
and (iv) at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If Parent or the
Company becomes aware of any information, that should be disclosed in an
amendment or supplement to the Form S-4 Registration Statement or the Joint
Proxy Statement, then Parent or the Company, as the case may be, shall
promptly inform the Company or Parent thereof and shall cooperate with the
other in filing such amendment or supplement with the SEC and, if
appropriate, in mailing such amendment or supplement to the shareholders of
the Company or the stockholders of Parent.
(b) Prior to the Effective Time, Parent shall use reasonable efforts
to obtain all regulatory approvals needed to ensure that the Parent Common
Stock to be issued in the Merger (i) will be registered or qualified under
the securities law of every jurisdiction of the United States in which any
registered holder of Company Common Stock has an address of record on the
record date for determining the shareholders entitled to notice of and to
vote at the Company Shareholders' Meeting; and (ii) will be approved for
quotation at the Effective Time on the Nasdaq National Market; provided,
however, that Parent shall not be required (i) to qualify to do business as
a foreign corporation in any jurisdiction in which it is not now qualified
or (ii) to file a general consent to service of process in any
jurisdiction.
5.2 Company Shareholders' Meeting.
(a) The Company shall take all action necessary under all applicable
Legal Requirements to call, give notice of, convene and hold a meeting of
the holders of Company Common Stock to consider, act upon and vote upon the
approval of this Agreement and of the Merger (the "Company Shareholders'
Meeting"). The Company Shareholders' Meeting will be held as promptly as
practicable and in any event within 45 days after the Form S-4 Registration
Statement is declared effective under the Securities Act. The Company shall
ensure that the Company Shareholders' Meeting is called, noticed, convened,
held and conducted, and that all proxies solicited in connection with the
Company Shareholders' Meeting are
36
<PAGE> 143
solicited, in compliance with all applicable Legal Requirements. The
Company's obligation to call, give notice of, convene and hold the Company
Shareholders' Meeting in accordance with this Section 5.2(a) shall not be
limited or otherwise affected by the withdrawal, amendment or modification
of the recommendation of the board of directors of the Company with respect
to the Merger, except as is required by applicable law.
(b) Subject to Section 5.2(c): (i) the board of directors of the
Company shall unanimously recommend that the Company's shareholders vote in
favor of and approve this Agreement and the Merger at the Company
Shareholders' Meeting; (ii) the Joint Proxy Statement shall include a
statement to the effect that the board of directors of the Company has
unanimously recommended that the Company's shareholders vote in favor of
and approve this Agreement and the Merger at the Company Shareholders'
Meeting; and (iii) neither the board of directors of the Company nor any
committee thereof shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify, in a manner adverse to Parent, the unanimous
recommendation of the board of directors of the Company that the Company's
shareholders vote in favor of and approve this Agreement and the Merger.
For purposes of this Agreement, said recommendation of the board of
directors of the Company shall be deemed to have been modified in a manner
adverse to Parent if said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.2(b) shall prevent the board of directors of
the Company from withdrawing, amending or modifying its unanimous
recommendation in favor of the Merger at any time prior to the approval of
this Agreement by the Required Company Shareholder Vote if (i) a Superior
Offer is made to the Company and is not withdrawn, (ii) neither the Company
nor any of its Representatives shall have violated any of the restrictions
set forth in Section 4.4, and (iii) the board of directors of the Company
concludes in good faith, after consultation with its outside counsel,
including discussion of applicable legal standards under California law,
that, in light of such Superior Offer, the withdrawal, amendment or
modification of such recommendation is required in order for the board of
directors of the Company to comply with its fiduciary obligations to the
Company's shareholders under applicable law. Except as may be limited by
applicable law, nothing contained in this Section 5.2 shall limit the
Company's obligation to call, give notice of, convene and hold the Company
Shareholders' Meeting (regardless of whether the unanimous recommendation
of the board of directors of the Company shall have been withdrawn, amended
or modified).
5.3 Parent Stockholders' Meeting.
(a) Parent shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the
holders of Parent Common Stock to consider, act upon and vote upon the
issuance of Parent Common Stock in the Merger (the "Parent Stockholders'
Meeting"). The Parent Stockholders' Meeting will be held as promptly as
practicable and in any event within 45 days after the Form S-4 Registration
Statement is declared effective under the Securities Act. Parent shall
ensure that the Parent Stockholders' Meeting is called, noticed, convened,
held and conducted, and that all proxies solicited in connection with the
Parent Stockholders' Meeting are solicited in compliance with all
applicable Legal Requirements. Parent's obligation to call, give notice of,
convene and hold the Parent Stockholders' Meeting in accordance with this
Section 5.3(a) shall not be limited or otherwise affected by any
withdrawal, amendment or modification of the recommendation of the board of
directors of Parent with respect to the Merger, except as may be required
by applicable law.
(b) Subject to Section 5.3(c): (i) the board of directors of Parent
shall unanimously (among all directors present at the meeting duly called
and held) recommend that Parent's stockholders vote in favor of the
issuance of Parent Common Stock in the Merger at the Parent Stockholders'
Meeting; (ii) the Joint Proxy Statement shall include a statement to the
effect that the board of directors of Parent has unanimously (among all
directors present) recommended that Parent's stockholders vote in favor of
the issuance of Parent Common Stock in the Merger at the Parent
Stockholders' Meeting; and (iii) neither the board of directors of Parent
nor any committee thereof shall withdraw, amend or modify, or propose or
resolve to withdraw, amend or modify, in a manner adverse to the Company,
the unanimous (among all directors present) recommendation of the board of
directors of Parent that Parent's stockholders vote
37
<PAGE> 144
in favor of the issuance of Parent Common Stock in the Merger. For purposes
of this Agreement, said recommendation of the board of directors of Parent
shall be deemed to have been modified in a manner adverse to the Company if
said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.3(b) shall prevent the board of directors of
Parent from withdrawing, amending or modifying its unanimous (among all
directors present) recommendation in favor of the issuance of Parent Common
Stock in the Merger at any time prior to the approval of this Agreement by
the Required Parent Stockholder Vote if (i) neither Parent nor any of its
Representatives shall have violated any of the restrictions set forth in
Section 4.5, and (ii) the board of directors of Parent concludes in good
faith, based upon the advice of its outside counsel, including a discussion
of applicable legal standards under Delaware law, that the withdrawal,
amendment or modification of such recommendation is required in order for
the board of directors of Parent to comply with its fiduciary obligations
to Parent's stockholders under applicable law. Except as may be limited by
applicable law, nothing contained in this Section 5.3 shall limit Parent's
obligation to call, give notice of, convene and hold the Parent
Stockholders' Meeting (regardless of whether the unanimous (among all
directors present) recommendation of the board of directors shall have been
withdrawn, amended or modified).
5.4 Regulatory Approvals. The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. Without limiting the generality of the foregoing, the
Company and Parent shall, promptly after the date of this Agreement, prepare and
file the notifications required under the HSR Act in connection with the Merger.
The Company and Parent shall respond as promptly as practicable to (i) any
inquiries or requests received from the Federal Trade Commission or the
Department of Justice for additional information or documentation and (ii) any
inquiries or requests received from any state attorney general or other
Governmental Body in connection with antitrust or related matters. Each of the
Company and Parent shall (1) give the other party prompt notice of the
commencement of any Legal Proceeding by or before any Governmental Body with
respect to the Merger or any of the other transactions contemplated by this
Agreement, (2) keep the other party informed as to the status of any such Legal
Proceeding, and (3) promptly inform the other party of any communication to or
from the Federal Trade Commission, the Department of Justice or any other
Governmental Body regarding the Merger. The Company and Parent will consult and
cooperate with one another, and will consider in good faith the views of one
another, in connection with any analysis, appearance, presentation, memorandum,
brief, argument, opinion or proposal made or submitted in connection with any
Legal Proceeding under or relating to the HSR Act or any other federal or state
antitrust or fair trade law. In addition, except as may be prohibited by any
Governmental Body or by any Legal Requirement, in connection with any Legal
Proceeding under or relating to the HSR Act or any other federal or state
antitrust or fair trade law or any other similar Legal Proceeding, each of the
Company and Parent will permit authorized Representatives of the other party to
be present at each meeting or conference relating to any such Legal Proceeding
and to have access to and be consulted in connection with any document, opinion
or proposal made or submitted to any Governmental Body in connection with any
such Legal Proceeding.
5.5 Stock Options; ESPP.
(a) Fifteen days prior to the Company Shareholders' Meeting, the
Administrator, as such term is defined in the Company's 1994 Incentive
Stock Plan, shall give notice to all holders of Company Options issued
under such plan that, contingent upon the closing of the Merger, (i) each
such option shall be fully exercisable during such fifteen day period and
(ii) each such option will terminate at the end of such fifteen day period.
(b) Thirty days prior to the Company Shareholders' Meeting, the
Company's Board of Directors shall give notice to all holders of options
issued under the Company's 1995 Director Option Plan that, contingent upon
the closing of the Merger, (i) each such option shall be fully exercisable
during such thirty day period and (ii) each such option shall terminate at
the end of such thirty day period.
38
<PAGE> 145
(c) The Company's Board of Directors shall shorten the offering
periods then in progress under the ESPP by setting a New Exercise Date, as
such term is defined in the ESPP, at and as of the date of the Company
Shareholders' Meeting and shall timely provide the notice to all
participants relating thereto required under Section 18(c) of the ESPP. The
Company's Board of Directors shall not thereafter commence any offering
period under the ESPP.
(d) Parent shall grant options to purchase Parent Common Stock to
employees of the Company effective upon the first meeting of Parent's Board
of Directors following the Effective Time, commensurate (including with
respect to vesting) with option grants to newly hired employees at similar
grade levels. Subject to the terms of Parent's ESPP and applicable law,
Parent shall take all reasonable actions to ensure that from and after the
Effective Time all employees of the Company shall be entitled to
participate in the ESPP of Parent.
(e) The Company shall take all action that may be necessary (under the
plans pursuant to which Company Options are outstanding and otherwise) to
effectuate the provisions of this Section 5.5 and to ensure that, from and
after the Effective Time, holders of Company Options issued under the 1995
Director Option Plan or rights under the ESPP have no rights with respect
thereto.
5.6 Warrants. Except for the warrants held by Kevin Kinsella as Trustee of
the Kevin J. Kinsella Declaration of Trust dated November 2, 1994 and by
Novartis Pharmaceutical Corporation, which warrants shall either be exercised or
shall terminate at the Effective Time in accordance with their respective terms,
at the Effective Time, all rights with respect to Company Common Stock under
warrants to purchase Company Common Stock ("Company Warrants") that are then
outstanding shall be converted into and become rights with respect to Parent
Common Stock, and Parent shall assume each Company Warrant in accordance with
the terms (as in effect as of the date hereof) of such Company Warrants,
including the Company Warrants held by Comdisco, Inc., but only to the extent
such warrants allow assumption by Parent in accordance with their respective
terms. From and after the Effective Time, (a) each Company Warrant assumed by
Parent may be exercised solely for shares of parent Common Stock, (b) the number
of shares of Parent Common Stock subject to each Company Warrant shall be equal
to the number of shares of Company Common Stock subject to such Company Warrant
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounding down to the nearest whole share (with cash, less the applicable
exercise price, being payable for any fraction of a share), (c) the per share
exercise price under each such Company Warrant shall be adjusted by dividing the
per share exercise price under such Company Warrant by the Exchange Ratio and
rounding up to the nearest cent (to the extent permitted by the terms of the
Company Warrants and otherwise rounded or without rounding as required by the
terms of the particular Company Warrant), and (d) any restriction on the
exercise of any Company Warrant shall continue in full force and effect and the
term exercisability, schedule and other provisions of such Company Warrant shall
otherwise remain unchanged; provided, however, that such Company Warrant shall,
in accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transactions subsequent to the Effective Time. The Company shall take all action
that may be necessary (under the Company Warrants and otherwise) to effectuate
the provisions of this Section 5.6 and to ensure that, from and after the
Effective Time, holders of Company Warrants have no rights with respect thereto
other than those specifically provided herein.
5.7 Indemnification of Officers and Directors.
(a) All rights to indemnification existing in favor of the current
directors and officers ("Indemnified Parties") of the Company for acts and
omissions occurring prior to the Effective Time, as provided in the
Company's Bylaws (as in effect as of the date of this Agreement) and as
provided in the indemnification agreements between the Company and said
officers and directors (as in effect as of the date of this Agreement),
shall survive the Merger and shall be observed by the Surviving Corporation
for a period of not less than six years from the Effective Time.
(b) In the event that Parent (i) causes the Surviving Corporation to
consolidate with or merge into any other Person and Surviving Corporation
is not the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) causes the Surviving Corporation to
transfer or convey all or
39
<PAGE> 146
substantially all of Surviving Corporation's properties and assets to any
Person, then, and in each such case, to the extent necessary to effectuate
the purposes of this Section 5.7, proper provision shall be made so that
the successors and assigns of the Surviving Corporation assume the
obligations set forth in this Section 5.7 and none of the actions described
in clause (i) or (ii) shall be taken until such provision is made.
(c) From the Effective Time until the sixth anniversary of the date on
which the Merger becomes effective, the Surviving Corporation shall
maintain in effect, for the benefit of the current directors and officers
of the Company with respect to acts or omissions occurring prior to the
Effective Time, the existing policy of directors' and officers' liability
insurance maintained by the Company as of the date of this Agreement (the
"Existing Policy"); provided, however, that (i) the Surviving Corporation
may substitute for the Existing Policy a policy or policies of comparable
coverage, and (ii) the Surviving Corporation shall not be required to pay
an annual premium for the Existing Policy (or for any substitute policies)
in excess of 175% of the annual premium currently paid by the Company for
such insurance. In the event any future annual premium for the Existing
Policy (or any substitute policies) exceeds 175% of the annual premium
currently paid by the Company for such insurance, the Surviving Corporation
shall be entitled to reduce the amount of coverage of the Existing Policy
(or any substitute policies) to the amount of coverage that can be obtained
for a premium equal to 175% of the annual premium currently paid by the
Company for such insurance.
5.8 Additional Agreements.
(a) Subject to Section 5.6(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, but subject to Section 5.6(b), each party to this Agreement (i)
shall make all filings (if any) and give all notices (if any) required to
be made and given by such party in connection with the Merger and the other
transactions contemplated by this Agreement, (ii) shall use all reasonable
efforts to obtain each Consent (if any) required to be obtained (pursuant
to any applicable Legal Requirement or Contract, or otherwise) by such
party in connection with the Merger or any of the other transactions
contemplated by this Agreement, and (iii) shall use all reasonable efforts
to lift any restraint, injunction or other legal bar to the Merger. The
Company shall promptly deliver to Parent a copy of each such filing made,
each such notice given and each such Consent obtained by the Company during
the Pre-Closing Period.
(b) Notwithstanding anything to the contrary contained in this
Agreement, Parent shall not have any obligation under this Agreement: (i)
to dispose or cause any of its subsidiaries to dispose of any assets, or to
commit to cause any of the Acquired Corporations to dispose of any assets;
(ii) to discontinue or cause any of its subsidiaries to discontinue
offering any product, or to commit to cause any of the Acquired
Corporations to discontinue offering any product; (iii) to license or
otherwise make available, or cause any of its subsidiaries to license or
otherwise make available, to any Person, any technology, software or other
Proprietary Asset, or to commit to cause any of the Acquired Corporations
to license or otherwise make available to any Person any technology, or
other Proprietary Asset; (iv) to hold separate or cause any of its
subsidiaries to hold separate any assets or operations (either before or
after the Closing Date), or to commit to cause any of the Acquired
Corporations to hold separate any assets or operations; or (v) to make or
cause any of its subsidiaries make any commitment (to any Governmental Body
or otherwise) regarding its future operations or the future operations of
any of the Acquired Corporations.
5.9 Disclosure. Parent and the Company shall consult with each other before
issuing any press release or otherwise making any public statement with respect
to the Merger or any of the other transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, neither the Company nor Parent
shall, and neither shall permit, any of itsRepresentatives to, make any
disclosure regarding the Merger or any of the other transactions contemplated by
this Agreement unless (a) the other Party shall have approved such disclosure or
(b) the disclosing party shall have been advised in writing by its outside legal
40
<PAGE> 147
counsel that such disclosure is required by applicable law and shall have given
the other Party the opportunity, to the extent practicable, to review and
comment upon the disclosure.
5.10 Tax Matters. Each of the Parent and the Company acknowledge and agree
that (i) it intends the Merger to constitute a reorganization within the meaning
of Section 368(a) of the Code, (ii) it will report the Merger as such a
reorganization in any and all federal, state and local income tax returns filed
by it. The Company shall use all reasonable efforts to obtain and deliver to
Cooley Godward LLP and to Wilson, Sonsini, Goodrich & Rosati, P.C., as soon as
practicable after the date of this Agreement, Continuity of Interest
Certificates (in a form agreed to by counsel to Parent and the Company) signed
by entities controlled by the Carlyle Group and by Boehringer Ingelheim
International GmbH. At or prior to the filing of the S-4 Registration Statement
with the SEC and, to the extent necessary, at the Closing, the Company and
Parent shall execute and deliver to Cooley Godward LLP and to Wilson, Sonsini,
Goodrich & Rosati P.C. management tax representation letters in a form agreed to
by counsel to Parent and the Company. Parent and the Company shall use all
reasonable efforts prior to the Effective Time to cause the Merger to qualify as
a tax free reorganization under Section 368(a)(1) of the Code. In the event of
the issuance of final or temporary Treasury regulations relating to the
continuity of shareholder interest (proposed regulations on the topic were
issued in the Federal Register on December 23, 1996 (Reg-252231-96); these
regulations would, among other things, add a new section 1.368-1(a) to existing
regulations), the parties agree to use their reasonable best efforts to take
advantage of, and comply with, any provisions therein (such as an election
and/or reporting requirements) to the extent necessary to cause such regulations
to apply to the Merger.
5.11 Letter of Accountants. The Company and Parent shall use all of their
reasonable efforts to cause to be delivered to the Company and to Parent a
letter of Ernst and Young LLP, dated no more than two business days before the
date on which the Form S-4 Registration Statement becomes effective (and
reasonably satisfactory in form and substance to the Company and to Parent) and
addressed to the Board of Directors of the Company and the Board of Directors of
Parent, that is customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Form S-4 Registration Statement.
5.12 Resignation of Officers and Directors. The Company shall use all
reasonable efforts to obtain and deliver to Parent prior to the Closing the
resignation of each officer and director of each of the Acquired Corporations.
5.13 FIRPTA Matters. At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 -- 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section
1.897 -- 2(h)(2) of the United States Treasury Regulations.
5.14 Affiliate Agreements. The Company shall, no later than twenty days in
advance of the Parent Stockholders' Meeting, deliver to Parent a list (the
"Affiliate List") of Persons who are "affiliates" (as that term is used in Rule
145 under the Securities Act). Prior to the date of the Parent Stockholders'
Meeting, the Company shall deliver to Parent an Affiliate Agreement in the form
of Exhibit C duly executed by each Person on the Affiliate List, and by each
Person who becomes an affiliate after delivery of the Affiliate List and prior
to the date of delivery of the signed Affiliate Agreements.
5.15 Election of Directors.
(a) Parent shall use all reasonable efforts to nominate and appoint a
Board of nine persons selected as set forth in Section 5.15(b) to its Board
of Directors as soon as reasonably practicable after the Effective Time, to
serve until the next annual election of directors. Parent shall use
reasonable efforts to cause each of such directors, so long as each is then
willing to serve, to be nominated for an additional one-year term as
Director of Parent and included as nominees of Parent in Parent's 1998
Proxy Statement.
41
<PAGE> 148
(b) The nine persons who shall act as directors of Parent following
the Effective Time shall be selected as follows:
Mr. John Walker and Mr. Irwin Lerner will meet and consult with one
another during the 30 days following the date of this agreement to
consult and discuss the appropriate make up of Parent's post-Effective
Time Board of Directors. If Messrs. Walker and Lerner agree upon the
individuals to become (or remain) members of the Board of Directors of
Parent after the Effective Time, their agreed upon nominees shall make
up such Board of Directors. If Messrs. Walker and Lerner are unable to
agree, then Mr. Walker shall propose five nominees, which nominees shall
be reasonably acceptable to the Company and Mr. Lerner shall propose
four nominees, which nominees shall be reasonably acceptable to Parent
and such nine nominees shall make up such Board of Directors. Selection
of the post-Effective Time Board of Directors shall be completed no
later than 30 days prior to the earlier of the Company Shareholder
Meeting and the Parent Shareholder Meeting.
5.16 Registration Rights. Parent shall use all reasonable efforts to cause
all Persons who have the right to demand registration of shares of the Company's
Common Stock held by them or to participate in a registered offering of shares
of the Company's Common Stock (the "Company Holders") to become a Holder, as
such term is defined in the Registration Rights Agreement between Parent and
certain Persons dated as of April 16, 1993 (the "Parent Registration Rights
Agreement"), provided, however, that no Company Holders shall become a Holder if
such Company Holder would not, pursuant to Section 16(a) of the Parent
Registration Rights Agreement, have any rights to register shares pursuant to
the Parent Registration Rights Agreement, and provided further that, Parent
shall use all reasonable efforts to cause the Parent Registration Rights
Agreement to be amended to remove Sections 1, 3 and 4, and to provide that no
Holder thereunder shall request registration or participate in a registration of
Parent Common Stock pursuant to Sections 5, 6 and 7 thereunder until the earlier
of (a) the date 90 days after the effective date of a registration statement for
the first public offering of Parent's shares following the Effective Time, and
(b) the first anniversary of the Effective Time.
5.17 Modification of Corange Agreement. The Company shall use reasonable
efforts to cause the Corange Agreement to be amended to provided that Corange's
obligation to purchase equity pursuant to Section 2.2(ii) of such agreement
shall, after the Effective Time, be an obligation to purchase equity of Parent
instead of the Company, all other terms and conditions of such agreement
remaining unchanged.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
6.1 Accuracy of Representations.
The representations and warranties of the Company contained in this
Agreement shall be accurate in all material respects as of the date hereof and
shall be accurate as of the Closing Date as if made on and as of the Closing
Date (except representations and warranties that refer specifically to "the date
of this Agreement" or a specific date prior to the date of this Agreement)
except that any inaccuracies in such representations and warranties shall be
disregarded if the circumstances giving rise to such inaccuracies (individually
and collectively) do not constitute a Material Adverse Effect on the Company (it
being understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect" qualifications
and other materiality qualifications contained in such representations and
warranties shall be disregarded and (ii) any update of or modification to the
Company Disclosure Schedule made or purported to have been made after the date
of this Agreement shall be disregarded).
6.2 Performance of Covenants. Each covenant or obligation that the Company
is required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
42
<PAGE> 149
6.3 Effectiveness of Registration Statement. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
6.4 Shareholder Approval. This Agreement and the Merger shall have been
duly approved by the Required Company Shareholder Vote, and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the required
Parent Stockholder Vote. Fewer than 9% of the outstanding shares of Company
Common Stock shall have voted against approving this Agreement and the Merger at
the Company Shareholder Meeting.
6.5 Consents. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in Part 6.5 of the Company Disclosure
Schedule) shall have been obtained and shall be in full force and effect.
6.6 Documents. Parent shall have received the following legal documents,
each of which shall be in full force and effect:
(a) a legal opinion of Wilson, Sonsini, Goodrich & Rosati, P.C., dated
as of the Closing Date, in the form of Exhibit D;
(b) a legal opinion of Cooley Godward LLP dated as of the Closing Date
and addressed to Parent, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code (it being
understood that, in rendering such opinion, Cooley Godward LLP may rely
upon the Continuity of Interest Certificates and tax representation letters
referred to in Section 5.10 and a copy of the legal opinion described in
Section 7.5(b) hereof). The opinion described in this Section 6.6(b) and in
Section 7.5(b) shall be substantially identical in form and substance.);
(c) a certificate executed on behalf of the Company by its Chief
Executive Officer confirming that the conditions set forth in Sections 6.1,
6.2, 6.4, 6.5 and 6.7 have been duly satisfied; and
6.7 No Material Adverse Change. There shall have been no material adverse
change in the business, financial condition, capitalization, assets,
liabilities, operations or financial performance of the Acquired Corporations
since the date of this Agreement.
6.8 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
6.9 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
6.10 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
6.11 No Governmental Litigation. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from Parent or any of its subsidiaries any damages that may be material to
Parent; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or (d)
which would materially and adversely affect the right of Parent, the Surviving
Corporation or any subsidiary of Parent to own the assets or operate the
business of the Company.
6.12 No Other Litigation. There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on the Acquired Corporations or on Parent: (a)
challenging or seeking to restrain or prohibit the consummation of the Merger or
any of the other transactions contemplated by this Agreement; (b) relating to
the Merger and seeking to obtain from Parent or any of its subsidiaries any
damages that may be material to Parent; (c) seeking to prohibit or limit in
43
<PAGE> 150
any material respect Parent's ability to vote, receive dividends with respect to
or otherwise exercise ownership rights with respect to the stock of the
Surviving Corporation; or (d) which would affect adversely the right of Parent,
the Surviving Corporation or any subsidiary of Parent to own the assets or
operate the business of the Company.
6.13 Assumption of Warrants. Except for the Company Warrants held by Kevin
Kinsella as Trustee of the Kevin J. Kinsella Declaration of Trust dated November
2, 1994 and by Novartis Pharmaceutical Corporation, all of the other Company
Warrants (the "Assumed Warrants") outstanding at the Effective Time (including
the warrants held by Comdisco, Inc., to the extent such warrants allow
assumption in accordance with their respective terms) shall, at the Effective
Time; (a) represent an entitlement to receive upon exercise that number of
shares of Parent Common Stock which a holder of Company capital stock
deliverable upon exercise of the right to purchase such Company capital stock
under the relevant warrant would have been entitled in the Merger if the right
to purchase such Company capital stock had been exercised immediately prior to
the Merger; and (b) be subject to exercise upon payment of a per share exercise
price equal to the exercise price applicable immediately before the Effective
Time divided by the Exchange Ratio. All restrictions on the exercise of the
Assumed Warrants in effect immediately before the Effective Time shall be
continuing in full force and effect and the term, exercisability schedule and
other provisions of the Assumed Warrants shall otherwise remain unchanged. Prior
to the Closing Date, all notices and adjustments to the terms of all Company
Warrants outstanding on the Closing Date required to be given or made pursuant
to the terms of such Company Warrants shall have been duly and timely given or
made.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY
The obligation of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions:
7.1 Accuracy of Representations.
The representations and warranties of Parent and Merger Sub contained in
this Agreement shall have been accurate in all material respects as of the date
of this Agreement and shall be accurate as of the Closing Date as if made on and
as of the Closing Date except that any inaccuracies in such representations and
warranties shall be disregarded if the circumstances giving rise to such
inaccuracies (individually and collectively) do not constitute a Material
Adverse Effect on the Company (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
materiality qualifications contained in such representations and warranties
shall be disregarded and (ii) any update of or modification to the Parent
Disclosure Schedule made or purported to have been made after the date of this
Agreement shall be disregarded).
7.2 Performance of Covenants. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all material
respects.
7.3 Effectiveness of Registration Statement. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
7.4 Shareholder Approval. This Agreement and the Merger shall have been
approved by the Required Company Shareholder Vote, and the issuance of Parent
Common Stock in the Merger shall have been duly approved by the Required Parent
Stockholder Vote.
7.5 Documents. The Company shall have received the following documents:
(a) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date, in the form of Exhibit E;
(b) a legal opinion of Wilson, Sonsini, Goodrich & Rosati, P.C., dated
as of the Closing Date, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code (it being
understood that, in rendering such opinion, WILSON, SONSINI, GOODRICH &
ROSATI,
44
<PAGE> 151
P.C., may rely upon tax representation letters referred to in Section 5.10
and a copy of the legal opinions described in Section 6.6(b). The opinions
described in this Section 7.5(b) and in Section 6.6(b) shall be
substantially identical in form and substance.); and
(c) a certificate executed on behalf of Parent by an executive officer
of Parent, confirming that conditions set forth in Sections 7.1, 7.2, 7.4
and 7.6 have been duly satisfied.
7.6 No Material Adverse Change. There shall have been no material adverse
change in Parent's business, financial condition, assets, liabilities,
operations or financial performance since the date of this Agreement (it being
understood that a decline in Parent's stock price shall not constitute, in and
of itself, a Material Adverse Change).
7.7 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
7.8 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
7.9 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger by the
Company shall have been issued by any court of competent jurisdiction and remain
in effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger by the Company
illegal.
7.10 Directors. Parent shall have taken all actions necessary to cause the
Board of Directors of Parent following the Effective Time to be constituted of
individuals selected in accordance with the procedures set forth in Section
5.15.
SECTION 8. TERMINATION
8.1 Termination. This Agreement may be terminated prior to the Effective
Time (whether before or after approval of this Agreement and the Merger by the
Required Company Shareholder Vote and whether before or after approval of the
issuance of Parent Common Stock in the Merger by the Required Parent Stockholder
Vote);
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by March 31, 1998 (unless the failure to consummate the Merger
is attributable to a failure on the part of the party seeking to terminate
this Agreement to perform any material obligation required to be performed
by such party at or prior to the Effective Time);
(c) by either Parent or the Company if a court of competent
jurisdiction or other Governmental Body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either Parent or the Company if (i) the Company Shareholders'
Meeting shall have been held and completed and (ii) this Agreement and the
Merger shall not have been approved at such meeting by the Required Company
Shareholder Vote; provided, however, that the Company may not terminate
this Agreement pursuant to this Section 8.1(d) unless the Company shall
have paid the fee referred to in Section 8.3(b) prior to such termination,
if so required by such Section;
(e) by either Parent or the Company if (i) the Parent Stockholders'
Meeting shall have been held and completed and (ii) the issuance of Parent
Common Stock in the Merger shall not have been approved at such meeting by
the Required Parent Stockholder Vote, provided, however, that Parent may
not terminate this Agreement pursuant to this Section 8.1(e) unless Parent
shall have paid the fee referred to in Section 8.3(d) prior to such
termination, if so required by such Section.
(f) by Parent (at any time prior to the approval of this Agreement and
the Merger by the Required Company Shareholder Vote) if a Company
Triggering Event shall have occurred;
45
<PAGE> 152
(g) by the Company (at any time prior to the approval of this
Agreement and the Merger and the issuance of Parent Common Stock in the
Merger by the Required Parent Stockholder Vote) if a Parent Triggering
Event shall have occurred;
(h) by Parent if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become inaccurate, or if
any of the Company's covenants contained in this Agreement shall have been
breached, and such inaccuracy or breach would cause the condition set forth
in Sections 6.1 or 6.2, respectively, to not be satisfied; provided,
however, that if an inaccuracy in the Company's representations and
warranties or a breach of a covenant by the Company is curable by the
Company and the Company is continuing to exercise all reasonable efforts to
cure such inaccuracy or breach, then Parent may not terminate this
Agreement under this Section 8.1(h) on account of such inaccuracy or breach
until 20 days after delivery of written notice of the inaccuracy or breach
to the Company by Parent, if the inaccuracy or breach has not at that time
been cured;
(i) by the Company if any of Parent's representations and warranties
contained in this Agreement shall be or shall have become inaccurate, or if
any of Parent's covenants contained in this Agreement shall have been
breached, and such inaccuracy or breach would cause the condition set forth
in Sections 7.1 or 7.2, respectively, to not be satisfied; provided,
however, that if an inaccuracy in Parent's representations and warranties
or a breach of a covenant by Parent is curable by Parent and Parent is
continuing to exercise all reasonable efforts to cure such inaccuracy or
breach, then the Company may not terminate this Agreement under this
Section 8.1(i) on account of such inaccuracy or breach until 20 days after
delivery of written notice of the breach or inaccuracy to Parent by the
Company, if the inaccuracy or breach has not at that time been cured;
(j) by the Company if a Company Triggering Event shall have occurred
and the board of directors of the Company shall have approved, endorsed or
recommended any Acquisition Proposal; or
(k) by Parent if a Parent Triggering Event shall have occurred and the
board of directors of Parent shall have approved, endorsed or recommended
any Acquisition Proposal.
8.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement shall be of no further
force or effect; provided, however, that (i) this Section 8.2, Section 8.3 and
Section 9 shall survive the termination of this Agreement and shall remain in
full force and effect, and (ii) the termination of this Agreement shall not
relieve any party from any liability for any breach of any representation,
warranty or covenant contained in this Agreement occurring prior to the date of
such termination.
8.3 Expenses; Termination Fees.
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that
Parent and the Company shall share equally all fees and expenses, other
than attorneys' fees, incurred in connection with (i) the filing, printing
and mailing of the Form S-4 Registration Statement and the Joint Proxy
Statement and any amendments or supplements thereto and (ii) the filing of
the premerger notification and report forms relating to the Merger under
the HSR Act.
(b) If this Agreement is terminated by Parent or the Company pursuant
to Section 8.1(d) and there shall not have been a Material Adverse Effect
on Parent, then the Company shall pay to Parent, in cash (at the time
specified in Section 8.3(c)), a nonrefundable fee in the amount of
$1,000,000. If this Agreement is terminated by Parent pursuant to Section
8.1(f), then the Company shall pay to Parent, in cash (at the time
specified in Section 8.3(c)), a nonrefundable fee in the amount of
$5,000,000. If this Agreement is terminated by the Company pursuant to
Section 8.1(j), then the Company shall pay to Parent, in cash, a
nonrefundable fee in the amount of $5,000,000 (at the time specified in
Section 8.3(c)), plus, in the event of the subsequent consummation of an
Acquisition Proposal within 12 months after the date of termination, a
nonrefundable fee in the amount set forth in Section 8.3(f) (at the time
specified in Section 8.3(f)).
46
<PAGE> 153
(c) In the case of termination of this Agreement by the Company
pursuant to Section 8.1(d) or 8.1(j), the fee referred to in Section 8.3(b)
shall be paid by the Company prior to such termination, and in the case of
termination of this Agreement by Parent pursuant to Section 8.1(d) or
Section 8.1(f), the fee referred to in Section 8.3(b) shall be paid by the
Company within three business days after such termination.
(d) If this Agreement is terminated by Parent or the Company pursuant
to Section 8.1(e) and there shall not have been a Material Adverse Effect
on the Company, then Parent shall pay to the Company, in cash (at the time
specified in Section 8.3(e)), a nonrefundable fee in the amount of
$1,000,000. If this Agreement is terminated by the Company pursuant to
Section 8.1(g), then Parent shall pay to the Company, in cash (at the time
specified in Section 8.3(e)), a nonrefundable fee in the amount of
$5,000,000. If this Agreement is terminated by the Parent pursuant to
Section 8.1(k), then Parent shall pay to the Company, in cash, a
nonrefundable fee in the amount of $5,000,000 (at the time specified in
Section 8.3(e)), plus, in the event of the subsequent consummation of an
Acquisition Proposal (within 12 months after the date of termination), a
nonrefundable fee in the amount set forth in Section 8.3(f) (at the time
specified in Section 8.3(f)).
(e) In the case of termination of this Agreement by Parent pursuant to
Section 8.1(e) or 8.1(k), the fee referred to in Section 8.3(d) shall be
paid by Parent prior to such termination, and in the case of termination of
this Agreement by the Company pursuant to Section 8.1(e) or Section 8.1(g),
the fee referred to in Section 8.3(d) shall be paid by Parent within three
business days after such termination.
(f) The additional amount to be paid by the Company pursuant to the
last clause of Section 8.3(b) shall be equal to five percent (5%) of the
excess, if any, of the Value (as defined below) of the Acquisition Proposal
that is consummated over $181,000,000. The additional amount to be paid by
Parent pursuant to the last clause of Section 8.3(d) shall be equal to five
percent (5%) of the excess, if any, of the Value of the Acquisition
proposal that is consummated over $194,000,000. Any amounts payable
pursuant to this Section 8.3(f) shall be paid one business day after the
consummation of the acquisition. Value, for purposes of this Section
8.3(f), shall be equal to the aggregate consideration paid the shareholders
of the Company or to the Company, or to the stockholders of Parent or to
Parent, as the case may be, with publicly-traded securities valued at the
closing price of such securities on the trading day prior to the
consummation of the acquisition and with non-publicly-traded securities
value in accordance with the valuation placed upon them by the Company's
Board of Directors when it made its decision to recommend the Acquisition
Proposal. For purposes of calculating the value of consideration paid to
shareholders of the Company or stockholders of Parent, as the case may be,
all exercisable in-the-money options, warrants and similar rights shall be
deemed to have been exercised.
SECTION 9. MISCELLANEOUS PROVISIONS
9.1 Amendment. This Agreement may be amended with the approval of the
respective boards of directors of the Company and Parent at any time (whether
before or after approval of this Agreement and the Merger by the shareholders of
the Company; and whether before or after approval of the issuance of Parent
Common Stock in the Merger by Parent's stockholders) provided, however, that (i)
after any such approval of this Agreement and the Merger by the Company's
shareholders, no amendment shall be made which by law or NASD regulation
requires further approval of the shareholders of the Company without the further
approval of such shareholders, and (ii) after any such approval of the issuance
of Parent Common Stock in the Merger by Parent's stockholders, no amendment
shall be made which by law or NASD regulation requires further approval of
Parent's stockholders without the further approval of such Stockholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
9.2 Waiver.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
party in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or
47
<PAGE> 154
partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power,
right, privilege or remedy.
(b) No party shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it
is given.
9.3 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Merger.
9.4 Entire Agreement; Counterparts; Applicable Law. This Agreement and the
other agreements and schedules referred to herein and therein and the
Non-Disclosure Agreement dated as of July 28, 1997 between Parent and the
Company constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among or between any of the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in several counterparts, each of which shall be deemed an original and all of
which shall constitute one and the same instrument, and shall be governed in all
respects by the laws of the State of California as applied to contracts entered
into and to be performed entirely within California provided, however that
matters of corporate governance involving Parent shall be governed by the
Delaware General Corporate Law.
9.5 Jury Waiver. The parties hereto hereby agree to waive their respective
rights to a trial by jury of any claim or cause of action based upon or arising
out of or related to this Agreement or the transactions contemplated thereby in
any action, proceeding or other litigation of any type brought by any party
against any other party with respect to contracts, claims, tort claims or
otherwise. The scope of this waiver is intended to be as broad as permitted by
law, covering all disputes that may be filed in any court that relate to the
subject matter of this Agreement, including tort claims, contract claims, claims
under common law, statutory claims and any action, counterclaim or other
proceeding which seeks in whole or in part to challenge the validity or
enforceability of this Agreement or the transactions contemplated thereby. This
waiver is irrevocable.
9.6 Disclosure Schedule. The Company Disclosure Schedule and Parent
Disclosure Schedule shall be arranged in separate parts corresponding to the
numbered and lettered sections contained in Sections 2 and 3, and the
information disclosed in any numbered or lettered part shall, together with any
other information in any other part or parts of the relevant Disclosure Schedule
which a reasonable Person would relate to such numbered or lettered part, be
deemed to relate to and to qualify the representation or warranty set forth in
the corresponding numbered or lettered section and shall otherwise not be deemed
to relate to or to qualify any other representation or warranty.
9.7 Attorneys' Fees. In any action at law or suit in equity to enforce this
Agreement or the rights of any of the parties hereunder, the prevailing party in
such action or suit shall be entitled to receive a reasonable sum for its
attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
9.8 Assignability. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the rights hereunder may be assigned by any party without
the prior written consent of the other party, and any attempted assignment of
this Agreement or any of such rights by a party without such consent shall be
void and of no effect. Nothing in this Agreement, express or implied, is
intended to or shall confer upon any Person any right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
9.9 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or
48
<PAGE> 155
facsimile telephone number as such party shall have specified in a written
notice given to the other parties hereto):
<TABLE>
<S> <C>
IF TO PARENT: Arris Pharmaceutical Corporation
180 Kimball Way
South San Francisco, CA 94080
Attention: Frederick Ruegsegger
WITH A COPY TO: Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Michael R. Jacobson
IF TO MERGER SUB: Beagle Acquisition Sub, Inc.
c/o Arris Pharmaceutical Corporation
180 Kimball Way
South San Francisco, CA 94080
Attention: Frederick Ruegsegger
IF TO THE COMPANY: Sequana Therapeutics, Inc.
11099 North Torrey Pines Road, Suite 160
La Jolla, CA 92037
Attention: Scott Salka
WITH A COPY TO: Wilson Sonsini Goodrich & Rosati P.C.
650 Page Mill Road
Palo Alto, CA 94306
Attention: Michael J. O'Donnell
</TABLE>
9.10 Cooperation. The Company agrees to cooperate fully with Parent and to
execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by
Parent to evidence or reflect the transactions contemplated by this Agreement
and to carry out the intent and purposes of this Agreement.
9.11 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
49
<PAGE> 156
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
ARRIS PHARMACEUTICAL CORPORATION
By: /s/ JOHN P. WALKER
------------------------------------
BEAGLE ACQUISITION SUB, INC.
By: /s/ JOHN P. WALKER
------------------------------------
SEQUANA THERAPEUTICS, INC.
By: /s/ KEVIN J. KINSELLA
------------------------------------
50
<PAGE> 157
EXHIBITS
Exhibit A -- Certain definitions
Exhibit B -- Form of Articles of Incorporation of Surviving Corporation
Exhibit C -- Form of Affiliate Agreement
Exhibit D -- Form of legal opinion of Wilson, Sonsini, Goodrich & Rosati
Exhibit E -- Form of legal opinion of Cooley Godward LLP
<PAGE> 158
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquired Corporation Contract. "Acquired Corporation Contract" shall mean
any Contract: (a) to which any of the Acquired Corporations is a party; (b) by
which any of the Acquired Corporations or any asset of any of the Acquired
Corporations is or may become bound or under which any of the Acquired
Corporations has, or may become subject to, any obligation; or (c) under which
any of the Acquired Corporations has or may acquire any right or interest.
Acquired Corporation Proprietary Asset. "Acquired Corporation Proprietary
Asset" shall mean any Proprietary Asset owned by or licensed to any of the
Acquired Corporations or otherwise used by any of the Acquired Corporations.
Acquisition Proposal. "Acquisition Proposal" shall mean any offer or
proposal (other than an offer or proposal by Parent) contemplating or otherwise
relating to any Acquisition Transaction.
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction or series of related transactions involving:
(a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which Parent or any of the
Acquired Corporations is a constituent corporation, (ii) in which a Person
or "group" (as defined in the Exchange Act and the rules promulgated
thereunder) of Persons directly or indirectly acquires Parent or the
Company or more than 50% of Parent's business or the Company's business or
directly or indirectly acquires beneficial or record ownership of
securities representing more than 20% of the outstanding securities of any
class of voting securities of any of Parent or the Company, or (iii) in
which any of the Company or Parent issues securities representing more than
20% of the outstanding securities of any class of voting securities of the
Company or Parent, respectively;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of the Company or Parent; or
(c) any liquidation or dissolution of the Company or Parent.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
Best of Knowledge; Knowledge. Information shall be deemed to be known to
the "best of knowledge" or to the "knowledge" of a party if that information was
actually known or reasonably should have been known by an executive officer of
such party.
Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
Company Common Stock. "Company Common Stock" shall mean the Common Stock,
$.001 par value, of the Company.
Company Disclosure Schedule. "Company Disclosure Schedule" shall mean the
disclosure schedule that has been prepared by the Company in accordance with the
requirements of Section 9.6 and that has been delivered by the Company to Parent
on the date of this Agreement and signed by the President of the Company.
Company Triggering Event. A "Company Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of the Company shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Parent its unanimous (among all directors
present) recommendation in favor of, the Merger or approval of this Agreement;
(ii) the Company shall have failed to include in the Joint Proxy Statement the
unanimous (among all directors present)
A-1
<PAGE> 159
recommendation of the board of directors of the Company in favor of approval of
this Agreement and the Merger; (iii) the board of directors of the Company fails
to unanimously reaffirm its recommendation in favor of approval of this
Agreement and the Merger within five business days after the Parent requests in
writing that such recommendation be reaffirmed; (iv) the board of directors of
the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (v) the Company shall have entered into any letter of intent or
similar document or any Contract relating to any Acquisition Proposal; (vi) the
Company shall have failed to hold the Company Shareholders' Meeting as promptly
as practicable and in any event within 45 days after the Form S-4 Registration
Statement is declared effective under the Securities Act; (vii) a tender or
exchange offer relating to securities of the Company shall have been commenced
and the Company shall not have sent to its security holders, within five
business days after the commencement of such tender or exchange offer, a
statement disclosing that the Company recommends rejection of such tender or
exchange offer; or (viii) an Acquisition Proposal is publicly announced, and the
Company (A) fails to issue a press release announcing its opposition to such
Acquisition Proposal within five business days after such Acquisition Proposal
is announced or (B) otherwise fails to actively oppose such Acquisition
Proposal.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Form S-4 Registration Statement. "Form S-4 Registration Statement" shall
mean the registration statement on Form S-4 to be filed with the SEC by Parent
in connection with issuance of Parent Common Stock in the Merger, as said
registration statement may be amended prior to the time it is declared effective
by the SEC.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, variance, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
HSR Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
Joint Proxy Statement. "Joint Proxy Statement" shall mean the joint proxy
statement/prospectus to be sent to the Company's shareholders in connection with
the Company Shareholder's Meeting and to Parent's stockholders in connection
with the Parent Stockholders' Meeting.
A-2
<PAGE> 160
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on the Acquired
Corporations if such event, violation, inaccuracy, circumstance or other matter
would have a material adverse effect on (i) the business, financial condition,
capitalization, assets, liabilities, operations or financial performance of the
Acquired Corporations taken as a whole, (ii) the ability of the company to
consummate the Merger or any of the other transactions contemplated by this
Agreement or to perform obligations under this Agreement, or (iii) Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation. An
event, violation, inaccuracy, circumstance or other matter will be deemed to
have a "Material Adverse Effect" on Parent if such event, violation, inaccuracy,
circumstance or other matter would have a material adverse effect on (i) the
business, financial condition, assets, liabilities, operations or financial
performance of the Parent Corporations taken as a whole, (ii) the ability of
Parent to consummate the Merger or any of the other transactions contemplated by
this Agreement or to perform its obligations under this Agreement, or (iii) the
ability of the Company's shareholders to vote, receive dividends with respect
to, or otherwise exercise ownership rights with respect to the stock of Parent
received by them.
Parent Common Stock. "Parent Common Stock" shall mean the Common Stock,
$0.001 par value per share, of Parent.
Parent Corporation Proprietary Asset. "Parent Corporation Proprietary
Asset" shall mean any Proprietary Asset owned by or licensed to any of the
Parent Corporations or otherwise used by any of the Parent Corporations.
Parent Triggering Event. A "Parent Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of the Parent shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to the Company its unanimous (among all directors
present) recommendation in favor of, the Merger or approval of this Agreement;
(ii) Parent shall have failed to include in the Joint Proxy Statement the
unanimous (among all directors present) recommendation of the board of directors
of Parent in favor of approval of this Agreement and the Merger; (iii) the board
of directors of Parent fails to unanimously reaffirm its recommendation in favor
of approval of this Agreement and the Merger within five business days after the
Company requests in writing that such recommendation be reaffirmed; (iv) the
board of directors of Parent shall have approved, endorsed or recommended any
Acquisition Proposal; (v) the Parent shall have entered into any letter of
intent or similar document or any Contract relating to any Acquisition Proposal;
(vi) the Parent shall have failed to hold the Parent Shareholders' Meeting as
promptly as practicable and in any event within 45 days after the Form S-4
Registration Statement is declared effective under the Securities Act; (vii) a
tender or exchange offer relating to securities of the Parent shall have been
commenced and the Parent shall not have sent to its security holders, within
five business days after the commencement of such tender or exchange offer, a
statement disclosing that the Parent recommends rejection of such tender or
exchange offer; or (viii) an Acquisition Proposal is publicly announced, and the
Parent (A) fails to issue a press release announcing its opposition to such
Acquisition Proposal within five business days after such Acquisition Proposal
is announced or (B) otherwise fails to actively oppose such Acquisition
Proposal.
Pension Plan. "Pension Plan" shall mean any employee pension benefit plan
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), whether or not excluded from coverage under specific
Titles or Subtitles of ERISA).
A-3
<PAGE> 161
Person. "Person" shall mean any individual, Entity or Governmental Body.
Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, source code, algorithm, invention, design,
blueprint, engineering drawing, proprietary product, technology, proprietary
right or other intellectual property right or intangible asset; or (b) right to
use or exploit any of the foregoing.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
Sec. "SEC" shall mean the United States Securities and Exchange Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Subsidiary. An entity shall be deemed to be a "Subsidiary" of another
Person if such Person directly or indirectly owns, beneficially or of record, an
amount of voting securities or other interests in such Entity that is sufficient
to enable such Person to elect at least a majority of the members of such
Entity's board of directors or other governing body.
Superior Offer. "Superior Offer" shall mean an unsolicited, bona fide
written offer made by a third party to purchase more than 50% of outstanding
Company Common Stock or Parent Common Stock, as the case may be, on terms that
the board of directors of the Company or Parent, as the case may be, determines
in its reasonable judgment, after consultation with its financial advisor, to be
more favorable to the Company's shareholders or Parent's stockholders, as the
case may be, than the terms of the Merger; provided, however, that any such
offer shall not be deemed to be a "Superior Offer" if any financing required to
consummate the transaction contemplated by such offer is not committed and is
not reasonably capable of being obtained by such third party.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
Welfare Plan. "Welfare Plan" shall mean an employee welfare benefit plan
(as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA).
A-4
<PAGE> 162
EXHIBIT B
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SEQUANA THERAPEUTICS, INC.
I.
The name of this corporation is SEQUANA THERAPEUTICS, INC.
II.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
The corporation is authorized to issue only one class of stock, to be
designated Common Stock. The total number of shares of Common Stock presently
authorized is Ten Million (10,000,000) shares, each having a par value of
one-tenth of one cent ($.001).
IV.
(a) The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
(b) This corporation is authorized to provide indemnification of agents as
defined in Section 317 of the California Corporations Code) for breach of duty
to the corporation and its shareholders through bylaw provisions or through
agreements with the agents, or through shareholder resolutions, or otherwise, in
excess of the indemnification otherwise permitted by Section 317 of the
Corporations Code, subject to the limits on such excess indemnification set
forth in Section 204 of the Corporations Code.
(c) Any repeal or modification of this Article shall only be prospective
and shall not affect the rights under this Article in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
V.
The name and address in the State of California of this corporation's
initial agent for service of process is:
Daniel Petree
180 Kimball Way
South San Francisco, California 94080
These Amended and Restated Articles of Incorporation have been signed on
this day of , 199 .
B-1
<PAGE> 163
EXHIBIT C
AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT is being executed and delivered as of
, 1997 by ("Shareholder") in favor of and for the benefit of Parent, Inc., a
Delaware corporation ("Parent").
RECITALS
A. Shareholder is a shareholder and is an officer and director of Beagle,
Inc., a California corporation (the "Company").
B. Parent, the Company, and Beagle Acquisition Sub, Inc., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), have entered
into an Agreement and Plan of Merger and Reorganization dated as of October ,
1997 (the "Reorganization Agreement"), providing for the merger of Merger Sub
into the Company (the "Merger"). The Reorganization Agreement contemplates that,
upon consummation of the Merger, (i) holders of shares of the capital stock of
the Company will receive shares of common stock of Parent ("Parent Common
Stock") in exchange for their shares of capital stock of the Company and (ii)
the Company will become a wholly owned subsidiary of Parent. It is accordingly
contemplated that Shareholder will receive shares of Parent Common Stock in the
Merger.
C. Shareholder understands that the Parent Common Stock being issued in the
Merger will be issued pursuant to a registration statement on Form S-4, and that
Shareholder may be deemed an "affiliate" of Parent as such term is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the General Rules and
Regulations of the Securities and Exchange Commission ("Rule 145") under the
Securities Act of 1933, as amended (the "Act"), and, as such, Shareholder may
only transfer, sell or dispose of such Parent Common Stock in accordance with
this Affiliate Agreement and Rule 145.
AGREEMENT
1. Representations and Warranties. Shareholder represents and warrants to
Parent as follows:
a. Shareholder is the holder and "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of the
number and class of shares of capital stock of the Company set forth
beneath Shareholder's signature on the signature page hereof (the "Company
Shares"), and Shareholder has good and valid title to the Company Shares,
free and clear of any liens, pledges, security interests, adverse claims,
equities, options, proxies, charges, encumbrances or restrictions of any
nature.
b. Shareholder has carefully read this Affiliate Agreement, and to the
extent Shareholder felt necessary, has discussed with counsel the
limitations imposed on Shareholder's ability to sell, transfer or otherwise
dispose the shares of Parent Common Stock that Shareholder is to receive in
the Merger (the "Parent Shares"). Shareholder fully understands the
limitations this Affiliate Agreement places upon Shareholder's ability to
sell, transfer or otherwise dispose of the Parent Shares.
c. Shareholder understands that the representations, warranties and
covenants set forth in this Affiliate Agreement will be relied upon by
Parent and its counsel for purposes of determining whether Parent should
proceed with the Merger and for various other purposes.
2. Prohibitions Against Transfer. Shareholder agrees that Shareholder shall
not effect any sale, transfer or other disposition of any Parent Shares unless:
a. such sale, transfer or other disposition is effected pursuant to an
effective registration statement under the Act;
b. such sale, transfer or other disposition is made in conformity with
the requirements of Rule 145 under the Act, as evidenced by a broker's
letter and a representation letter executed by Shareholder (satisfactory in
form and content to Parent) stating that such requirements have been met;
C-1
<PAGE> 164
c. counsel reasonably satisfactory to Parent shall have advised Parent
in a written opinion letter (satisfactory in form and content to Parent),
upon which Parent may rely, that such sale, transfer or other disposition
will be exempt from registration under the Act; or
d. an authorized representative of the SEC shall have rendered written
advice to Shareholder to the effect that the SEC would take no action, or
that the staff of the SEC would not recommend that the SEC take action,
with respect to such sale, transfer or other disposition, and a copy of
such written advice and all other related communications with the SEC shall
have been delivered to Parent.
3. Stop Transfer Instructions; Legend.
Shareholder acknowledges and agrees that (a) stop transfer instructions
will be given to Parent's transfer agent with respect to the Parent Shares, and
(b) each certificate representing any of such shares shall bear a legend
identical or similar in effect to the following legend (together with any other
legend or legends required by applicable state securities laws or otherwise):
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145(d) OF THE SECURITIES ACT OF 1933 APPLIES AND MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH RULE AND
IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED AS OF ,
1997, BETWEEN THE REGISTERED HOLDER HEREOF AND PARENT, INC., A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF PARENT, INC."
4. Independence of Obligations. The covenants and obligations of
Shareholder set forth in this Affiliate Agreement shall be construed as
independent of any other agreement or arrangement between Shareholder, on the
one hand, and the Company or Parent, on the other. The existence of any claim or
cause of action by Shareholder against the Company or Parent shall not
constitute a defense to the enforcement of any of such covenants or obligations
against Shareholder.
5. Specific Performance. Shareholder agrees that in the event of any breach
or threatened breach by Shareholder of any covenant, obligation or other
provision contained in this Affiliate Agreement, Parent shall be entitled (in
addition to any other remedy that may be available to Parent) to: (a) a decree
or order of specific performance or mandamus to enforce the observance and
performance of such covenant, obligation or other provision; and (b) an
injunction restraining such breach or threatened breach.
6. Indemnification. Without in any way limiting any of the rights or
remedies otherwise available to Parent, Shareholder shall hold harmless and
indemnify Parent from and against, and shall compensate and reimburse Parent
for, any loss, damage, injury, decline in value, lost opportunity, liability,
exposure, claim, demand, settlement, judgment, award, fine, penalty, tax, fee,
charge, cost or expense of any nature (whether or not relating to a third party
claim) which is directly or indirectly suffered or incurred at any time by
Parent or any of Parent's affiliates or to which Parent or any of Parent's
affiliates otherwise becomes subject and that arises from any inaccuracy in or
breach of any representation, warranty, covenant or obligation of Shareholder
contained in this Affiliate Agreement.
7. Other Agreements. Nothing in this Affiliate Agreement shall limit any of
the rights or remedies of Parent under the Reorganization Agreement, the Voting
Agreement dated as of October , 1997 between Shareholder and Parent or any
Continuity of Interest Certificate executed by Shareholder in favor of Parent;
and nothing in the Reorganization Agreement, said Voting Agreement or any such
Continuity of Interest Certificate shall limit any of the rights or remedies of
Parent under this Affiliate Agreement.
8. Notices. Any notice or other communication required or permitted to be
delivered to Shareholder or Parent under this Affiliate Agreement shall be in
writing and shall be deemed properly delivered, given and received when
delivered (by hand, by registered mail, by courier or express delivery service
or by facsimile) to the address or facsimile telephone number set forth beneath
the name of such party below (or to such other
C-2
<PAGE> 165
address or facsimile telephone number as such party shall have specified in a
written notice given to the other party):
IF TO PARENT:
IF TO SHAREHOLDER:
9. Severability. If any provision of this Affiliate Agreement or any part
of any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (c) the
invalidity or unenforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Affiliate Agreement.
Each provision of this Affiliate Agreement is separable from every other
provision of this Affiliate Agreement, and each part of each provision of this
Affiliate Agreement is separable from every other part of such provision.
10. Governing Law. This Affiliate Agreement shall be construed in
accordance with, and governed in all respects by, the laws of the State of
California (without giving effect to principles of conflicts of laws).
11. Waiver. No failure on the part of Parent to exercise any power, right,
privilege or remedy under this Affiliate Agreement, and no delay on the part of
Parent in exercising any power, right, privilege or remedy under this Affiliate
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. Parent shall not be deemed to have waived any claim
arising out of this Affiliate Agreement, or any power, right, privilege or
remedy under this Affiliate Agreement, unless the waiver of such claim, power,
right, privilege or remedy is expressly set forth in a written instrument duly
executed and delivered on behalf of Parent; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it is
given.
12. Captions. The captions contained in this Affiliate Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Affiliate Agreement and shall not be referred to in connection with the
construction or interpretation of this Affiliate Agreement.
13. Further Assurances. Shareholder shall execute and/or cause to be
delivered to Parent such instruments and other documents and shall take such
other actions as Parent may reasonably request to effectuate the intent and
purposes of this Affiliate Agreement.
14. Entire Agreement. This Affiliate Agreement, the Reorganization
Agreement, the Voting Agreement referred to in Section 7 of this Affiliate
Agreement and any Continuity of Interest Certificate referred to in Section 7 of
this Affiliate Agreement set forth the entire understanding of Parent and
Shareholder relating to the subject matter hereof and thereof and supersede all
other prior agreements and understandings between Parent and Shareholder
relating to the subject matter hereof and thereof.
15. Non-Exclusivity. The rights and remedies of Parent hereunder are not
exclusive of or limited by any other rights or remedies which Parent may have,
whether at law, in equity, by contract or otherwise, all of which shall be
cumulative (and not alternative).
C-3
<PAGE> 166
16. Amendments. This Affiliate Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Parent and Shareholder.
17. Assignment. This Affiliate Agreement and all obligations of Shareholder
hereunder are personal to Shareholder and may not be transferred or delegated by
Shareholder at any time. Parent may freely assign any or all of its rights under
this Affiliate Agreement (including its indemnification rights under Section 6),
in whole or in part, to any other person or entity without obtaining the consent
or approval of Shareholder.
18. Binding Nature. Subject to Section 17, this Affiliate Agreement will
inure to the benefit of Parent and its successors and assigns and will be
binding upon Shareholder and Shareholder's representatives, executors,
administrators, estate, heirs, successors and assigns.
19. Attorneys' Fees and Expenses. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Affiliate
Agreement is brought against Shareholder, the prevailing party shall be entitled
to recover reasonable attorneys' fees, costs and disbursements (in addition to
any other relief to which the prevailing party may be entitled).
20. Survival. Each of the representations, warranties, covenants and
obligations contained in this Affiliate Agreement shall survive the consummation
of the Merger.
Shareholder has executed this Affiliate Agreement on , 1997.
Signature:
--------------------------------------
Number of shares of capital stock of
the Company beneficially owned:
------------------------------------------------------
shares of common stock
C-4
<PAGE> 167
EXHIBIT D
FORM OF LEGAL OPINION OF WILSON, SONSINI, GOODRICH & ROSATI
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California.
2. All corporate action, including approval by the Company's Board of
Directors and Shareholders, required to be taken on the part of the Company to
authorize the Company to execute, deliver and perform its obligations under the
Reorganization Agreement and to consummate the Merger has been duly and validly
taken.
3. The Reorganization Agreement has been duly authorized, executed and
delivered by the Company and is the valid and binding obligation of the Company
enforceable in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar
laws affecting creditors' rights, and subject to general equity principles and
to limitations on availability of equitable relief, including specific
performance. [Opinion will not extend to Section 8.3.]
4. The execution and delivery of the Reorganization Agreement by the
Company, and the consummation by the Company of the transactions contemplated
thereby and compliance by the Company with the provisions thereof, do not
violate any provisions of the Company's Amended and Restated Articles of
Incorporation[, as amended,] or the Company's Bylaws, as amended and do not
violate or contravene any order, writ, judgment, injunction, decree,
determination or award which has been entered against the Company and of which
we are aware, which default or violation or contravention would have a Material
Adverse Effect on the Company.
5. No government consent, approval, authorization, registration,
declaration or filing is required for the execution and delivery of the
Reorganization Agreement on behalf of the Company or for the performance by the
Company of the Merger, except for (a) the filing of the agreement of merger with
the Secretary of State of the State of California as contemplated by Section 1.3
of the Reorganization Agreement and as required by the California General
Corporation Law and (b) such government consents, approvals, authorizations,
registrations, declarations and filings as have been obtained or made, unless
the failure to obtain or make the same would (A) not have a Material Adverse
Effect on the Company and (B) not adversely affect the ability of the Company to
consummate the transactions contemplated by the Reorganization Agreement to take
place at the Closing.
6. To the best of our knowledge, except as set forth in the Company's SEC
Filings, there is no action, proceeding or investigation pending or overtly
threatened against the Company before any court or administrative agency that
calls into question the validity or performance of the Merger or that, if
determined adversely to it, may reasonably be expected to have a Material
Adverse Effect on the Company.
[The opinion may be limited by customary qualifications and limitations.]
D-1
<PAGE> 168
EXHIBIT E
FORM OF LEGAL OPINION OF COOLEY GODWARD LLP
1. Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware.
2. Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of California.
3. All corporate action, including approval by Parent's Board of Directors
and Stockholders, required to be taken on the part of Parent to authorize Parent
to execute, deliver and perform its obligations under the Reorganization
Agreement and to consummate the Merger has been duly and validly taken. All
corporate action, including approval by Merger Sub's Board of Directors and sole
shareholder, required to be taken on the part of Merger Sub to authorize Merger
Sub to execute, deliver and perform its obligations under the Reorganization
Agreement and to consummate the Merger has been duly and validly taken.
4. The Reorganization Agreement has been duly authorized, executed and
delivered by Parent and by Merger Sub and are the valid and binding obligations
of Parent and Merger Sub enforceable in accordance with its terms, except as may
be limited by applicable bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws affecting creditors' rights, and subject to
general equity principles and to limitations on availability of equitable
relief, including specific performance. [Opinion will not extend to Section
8.3.]
5. The execution and delivery of the Reorganization Agreement by Parent and
Merger Sub, and the consummation by Parent and Merger Sub of the transactions
contemplated thereby and compliance by Parent and Merger Sub with the provisions
thereof, do not violate any provisions of Parent's Amended and Restated
Certificate of Incorporation, as amended, Merger Sub's Articles of Incorporation
or Parent's or Merger Sub's Bylaws, and do not violate or contravene any order,
writ, judgment, injunction, decree, determination or award which has been
entered against Parent and of which we are aware, which default or violation or
contravention would have a Material Adverse Effect on Parent.
6. No government consent, approval, authorization, registration,
declaration or filing is required for the execution and delivery of the
Reorganization Agreement on behalf of Parent or Merger Sub or for the
performance by Parent or Merger Sub of the Merger, except for (a) the filing of
the agreement of merger with the Secretary of State of the State of California
as contemplated by Section 1.3 of the Reorganization Agreement and as required
by the California General Corporation Law and (b) such government consents,
approvals, authorizations, registrations, declarations and filings as have been
obtained or made, unless the failure to obtain or make the same would (A) not
have a Material Adverse Effect on Parent and (B) not adversely affect the
ability of Parent or Merger Sub to consummate the transactions contemplated by
the Reorganization Agreement to take place at the Closing.
7. To the best of our knowledge, except as set forth in the Parent SEC
Filings, there is no action, proceeding or investigation pending or overtly
threatened against Parent or Merger Sub before any court or administrative
agency that calls into question the validity or performance of the Merger or
that, if determined adversely to it, may reasonably be expected to have a
Material Adverse Effect on Parent.
[The opinion may be limited by customary qualifications and limitations.]
E-1
<PAGE> 169
APPENDIX B
FORM OF
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ARRIS PHARMACEUTICAL CORPORATION
UNDER SECTION 242 OF THE DELAWARE GENERAL CORPORATION LAW
The undersigned, being the President and Secretary of Arris Pharmaceutical
Corporation (the "Corporation"), do hereby certify and set forth:
1. The name of the corporation is Arris Pharmaceutical Corporation.
2. The Certificate of Incorporation of Arris Pharmaceutical
Corporation was filed with the Secretary of State of the State of Delaware
on April 19, 1989, and was amended and restated in its entirety on December
17, 1993.
3. The title of the Amended and Restated Certificate of Incorporation
of Arris Pharmaceutical Corporation (the "Amended Certificate"), which sets
forth the Company's name, is hereby amended to change the name of the
Company to AxyS Pharmaceuticals, Inc.
The preamble of the Amended Certificate is amended to replace the name
"Arris Pharmaceutical Corporation" with "AxyS Pharmaceuticals, Inc."
The first paragraph of the Amended Certificate is amended to read as
follows:
The name of the Corporation is "AxyS Pharmaceuticals, Inc." (hereinafter
referred to as the "Corporation").
4. The fourth paragraph of the Amended Certificate, which sets forth
the aggregate number of shares which the Corporation shall have authority
to issue is hereby amended to change the total number of shares of capital
stock authorized from 40,000,000 shares to 60,000,000 shares and to change
the number of shares of Common Stock authorized from 30,000,000 shares, par
value $0.001, to 50,000,000 shares of common stock, par value $0.001. The
Corporation shall continue to have the authority to issue 10,000,000 shares
of Preferred Stock, par value $0.001 per share.
5. This Certificate of Amendment was authorized by the unanimous
written consent of the Board of Directors followed by the affirmative vote
of the holders of a majority of all shares of capital stock of the Company
entitled to vote thereon at a meeting of the stockholders of the
Corporation duly called and held on the day of , 1998, a
quorum being present.
IN WITNESS WHEREOF this Certificate of Amendment has been subscribed this
day of , 1998, by the undersigned who affirm that the
statements made herein are true under penalties of perjury.
--------------------------------------
President
--------------------------------------
Secretary
B-1
<PAGE> 170
APPENDIX C-1
MORGAN STANLEY
MORGAN STANLEY & CO
INCORPORATED
555 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 576-2000
October 31, 1997
Board of Directors
Arris Pharmaceutical Corporation
180 Kimball Way
San Francisco, California 94080
Members of the Board:
We understand that Sequana Therapeutics, Inc. ("Sequana"), Arris Pharmaceutical
Corporation ("Arris") and Beagle Acquisition Sub, Inc. a wholly owned subsidiary
of Arris ("Acquisition Sub") propose to enter into an Agreement and Plan of
Merger and Reorganization, substantially in the form of the draft dated October
31, 1997 (the "Merger Agreement"), which provides, among other things, for the
merger (the "Merger") of Acquisition Sub with and into Sequana. Pursuant to the
Merger, Sequana will become a wholly owned subsidiary of Arris and each issued
and outstanding share of common stock, par value $0.001 per share, of Sequana
(the "Sequana Common Stock"), other than shares held in treasury or held by
Arris or any affiliate of Arris or as to which dissenters' rights have been
perfected, will be converted into the right to receive 1.35 (the "Exchange
Ratio") shares of common stock, par value $0.001 per share, of Arris (the "Arris
Common Stock"). The terms and conditions of the Merger are more fully set forth
in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to Arris.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and
other information of Arris and Sequana;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning Arris and Sequana
prepared by the managements of Arris and Sequana;
(iii) reviewed certain financial projections prepared by the
management of Arris and Sequana;
(iv) discussed the past and current operations and financial
condition and the prospects of Arris, including information
relating to certain strategic, financial and operational
benefits anticipated from the Merger, with senior executives of
Arris;
(v) discussed the past and current operations and financial
condition and the prospects of Sequana, including information
relating to certain strategic, financial and operational
benefits anticipated from the Merger, with senior executives of
Sequana;
(vi) reviewed the pro forma impact of the Merger on Arris'
consolidated capitalization;
(vii) reviewed the reported prices and trading activity for the Arris
Common Stock and the Sequana Common Stock;
(viii) compared the financial performance of Arris and Sequana and the
prices and trading activity of the Arris Common Stock and the
Sequana Common Stock with that of certain publicly-traded
companies and their securities;
C-1
<PAGE> 171
(ix) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(x) reviewed and discussed with the senior managements of Arris and
Sequana the strategic rationale for the Merger and certain
alternatives to the Merger;
(xi) participated in discussions and negotiations among
representatives of Arris and Sequana and their financial and
legal advisors;
(xii) reviewed the Merger Agreement and certain related agreements;
and
(xiii) performed such other analyses and considered such other factors
as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the internal financial projections and other financial
and operating data and discussions relating to the strategic, financial and
operational benefits anticipated from the Merger provided by Arris and Sequana,
we have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the prospects of Arris and
Sequana, respectively. We have relied upon the assessment by the managements of
Arris and Sequana of their ability to retain key employees of both Arris and
Sequana. We have also relied upon, without independent verification, the
assessment by the managements of Arris and Sequana of Arris' and Sequana's
technologies and potential future products, the timing and risks associated with
the integration of Arris with Sequana, and the validity of, and risks associated
with, Arris' and Sequana's existing and future products and technologies. We
have not made any independent valuation or appraisal of the assets, liabilities
or technology of Arris or Sequana, respectively, nor have we been furnished with
any such appraisals. We have assumed that the Merger will be accounted for as a
"purchase" business combination in accordance with U.S. Generally Accepted
Accounting Principles, will be treated as a tax-free reorganization and/or
exchange pursuant to the Internal Revenue Code of 1986, as amended, and will be
consummated in accordance with the terms set forth in the Merger Agreement. Our
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Arris in
connection with this transaction and will receive a fee for our services. In the
past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for Arris and have received fees for
the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Arris and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
filing made by Arris or Sequana with the Securities and Exchange Commission with
respect to the transactions contemplated by the Merger Agreement. In addition,
this opinion does not in any manner address the prices at which the Arris Common
Stock will actually trade at any time and we express no recommendation or
opinion as to how the holders of Arris Common Stock should vote at the
shareholders' meeting held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to Arris.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ CATHERINE J. FRIEDMAN
------------------------------------
Catherine J. Friedman
Principal
C-2
<PAGE> 172
APPENDIX C-2
LEHMAN BROTHERS
November 2, 1997
Board of Directors
Sequana Therapeutics Inc.
11099 North Torrey Pines Rd., Suite 160
La Jolla, CA 92037
Members of the Board:
We understand that Sequana Therapeutics Inc. (the "Company") and Arris
Pharmaceutical Corp. ("Arris") have entered into an Agreement and Plan of Merger
and Reorganization dated November 2, 1997 (the "Agreement") which provides,
among other things, for the merger of the Company with a wholly owned subsidiary
of Arris. Pursuant to the Agreement, each issued and outstanding share of Common
Stock of the Company shall be converted into the right to receive 1.35 shares of
Arris Common Stock (the "Exchange Ratio") (the "Proposed Transaction"). The
terms and conditions of the Proposed Transaction are set forth in more detail in
the Agreement.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Exchange Ratio to be offered to such stockholders
in the Proposed Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction; (2) publicly available
information concerning the Company and Arris which we believe to be relevant to
our analysis, including the Company's and Arris' Forms 10-K and 10-Q for the
year ended December 31, 1996 and the quarter ended June 30, 1997; (3) financial
and operating information with respect to the business, operations, technology
and prospects of the Company and Arris furnished to us by the Company and Arris;
(4) a trading history of the common stock of the Company from the date of the
Company's initial public offering to the present and of Arris from October 1996
to the present and comparisons of those trading histories with those of other
companies which we deemed relevant; (5) comparisons of the historical financial
results and present financial condition of the Company and Arris with those of
other companies which we deemed relevant; (6) a comparison of the financial
terms of the Proposed Transaction with the financial terms of certain other
transactions which we deemed relevant; and (7) the results of our efforts to
solicit indications of interest and proposals from third parties with respect to
an acquisition of the Company. In addition, we have had discussions with
management of the Company and Arris concerning their businesses, operations,
assets, technology, financial condition and prospects and the potential
strategic benefits that may result from a combination of the businesses of the
Company and Arris, and have undertaken such other studies, analyses and
investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company and Arris
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of the Company and Arris, upon advice of the Company and Arris we have assumed
that such projections have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of the
Company and Arris as to the future financial performance of the Company and
Arris, and we have relied upon such projections in performing our analysis. In
arriving at our opinion, we have not conducted a physical inspection of the
properties and facilities of the
<PAGE> 173
Company and have not made nor obtained any evaluations or appraisals of the
assets or liabilities of the Company. Our opinion is necessarily based upon
market, economic and other conditions as they exist on, and can be evaluated as
of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered to the Company's stockholders in the Proposed Transaction is fair to
such stockholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities which arise out of the rendering
of this opinion. We have also performed various investment banking services for
the Company in the past, including acting as underwriter of the Company's
initial public offering and follow-on offering in 1995 and 1996, respectively,
and received customary fees for such services. In the ordinary course of our
business, we actively trade in the securities of the Company and Arris for our
own account and the account of our customers, and accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
By: /s/ FREDRICK A. LEIGH
------------------------------------
Fredrick A. Leigh
Vice Chairman
<PAGE> 174
APPENDIX D
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13 DISSENTERS' RIGHTS
SEC. 1300. CORPORATE PURCHASE OF DISSENTING SHARES.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for enforcement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record.
SEC. 1301. NOTICE TO DISSENTING SHAREHOLDERS; DEMAND FOR PURCHASE OF SHARES.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any
D-1
<PAGE> 175
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SEC. 1302. SHAREHOLDER CERTIFICATES OR NOTICE; TIME LIMIT FOR SUBMISSION.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SEC. 1303. AGREED PRICE; INTEREST; FILING OF AGREEMENTS; TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SEC. 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING OR TO DETERMINE
FAIR MARKET VALUE.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
D-2
<PAGE> 176
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SEC. 1305. APPRAISER'S REPORT.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SEC. 1306. HOLDERS OF DISSENTING SHARES AS CREDITORS.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307. DIVIDENDS ON DISSENTING SHARES AFTER APPROVAL DATE.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SEC. 1308. RIGHTS IN DISSENTING SHARES PRIOR TO DETERMINATION OF FAIR MARKET
VALUE.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
D-3
<PAGE> 177
SEC. 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SEC. 1310. LITIGATION; SUSPENSION OF PROCEEDINGS.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SEC. 1311. SHARES SPECIFYING AMOUNT IN EVENT OF MERGER OR REORGANIZATION.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SEC. 1312. ATTACK ON VALIDITY OF MERGER OR REORGANIZATION.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack
D-4
<PAGE> 178
the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-5
<PAGE> 179
APPENDIX E
ARRIS PHARMACEUTICAL CORPORATION
1997 EQUITY INCENTIVE PLAN
ADOPTED NOVEMBER 10, 1997
APPROVED BY STOCKHOLDERS , 1997
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and its Affiliates may
be given an opportunity to benefit from increases in value of the common stock
of the Company ("Common Stock") through the granting of (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to
purchase restricted stock, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and a separate certificate or certificates will be
issued for shares purchased on exercise of each type of Option.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code, or such other parent corporation or
subsidiary corporation designated by the Board.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a committee appointed by the Board in accordance with
subsection 3(c) of the Plan.
(e) "Company" means Arris Pharmaceutical Corporation, a Delaware
corporation.
(f) "Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(g) "Continuous Service" means the employment or relationship as a Director
or Consultant is not interrupted or terminated. The Board, in its sole
discretion, may determine whether Continuous Service shall be considered
interrupted in the case of: (i) any leave of absence approved by the Board,
including sick leave, military leave, or any other personal leave; or (ii)
transfers between locations of the Company or between the Company, Affiliates or
their successors.
(h) "Director" means a member of the Board.
(i) "Disability" means total and permanent disability as defined in Section
22(e) of the Code.
E-1
<PAGE> 180
(j) "Employee" means any person, including Officers and Directors, employed
by the Company or any Affiliate of the Company. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(1) If the Common Stock is listed on any established stock exchange,
or traded on the Nasdaq National Market or The Nasdaq SmallCap Market, the
Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the
greatest volume of trading in Common Stock) on the last market trading day
prior to determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable;
(2) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(m) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(n) "Non-Employee Director" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K"), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation SK, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
(r) "Option Agreement" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. Each
Option Agreement shall be subject to the terms and conditions of the Plan.
(s) "Optionee" means a person to whom an Option is granted pursuant to the
Plan.
(t) "Outside Director" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(u) "Plan" means this 1997 Equity Incentive Plan.
(v) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(w) "Stock Award" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
E-2
<PAGE> 181
(x) "Stock Award Agreement" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall
be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted
stock, or a combination of the foregoing; the provisions of each Stock
Award granted (which need not be identical), including the time or times
when a person shall be permitted to receive stock pursuant to a Stock
Award; and the number of shares with respect to which a Stock Award shall
be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 12.
(4) Generally, to exercise such powers and to perform such acts as the
Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee or
committees ("Committee") of two (2) or more members of the Board. In the
discretion of the Board, a Committee may consist solely of two (2) or more
Non-Employee Directors, in accordance with Rule 16b-3, or solely of two (2) or
more Outside Directors, in accordance with Code Section 162(m). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board (and references in this Plan to the Board shall thereafter be to
the Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 11 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate two million five hundred thousand (2,500,000) shares
of Common Stock. In the event a Stock Award shall for any reason expire or
otherwise terminate after the date of grant, in whole or in part, without having
been exercised in full (or vested in the case of restricted stock), the stock
not acquired under such Stock Award shall revert to and again become available
for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Stock Awards
other than Incentive Stock Options may be granted only to Employees, Directors
or Consultants.
E-3
<PAGE> 182
(b) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any of
its Affiliates unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of such stock at the date of grant
and the Option is not exercisable after the expiration of five (5) years from
the date of grant.
(c) Subject to the provisions of Section 11 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Stock Awards
covering more than five hundred thousand (500,000) shares of Common Stock in any
calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
(b) Price. The exercise price of each Option shall be not less than one
hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date of grant. Notwithstanding the foregoing, an Option may be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other Common Stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board. In the case of any deferred
payment arrangement, interest shall be payable at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment arrangement.
(d) Transferability. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option may be transferred
to the extent provided in the Option Agreement; provided that if the Option
Agreement does not expressly permit the transfer of a Nonstatutory Stock Option,
the Nonstatutory Stock Option shall not be transferable except by will, by the
laws of descent and distribution or pursuant to a domestic relations order
satisfying the requirements of Rule 16b-3, and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person or any
transferee pursuant to a domestic relations order. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that from time to time during each of
such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not
E-4
<PAGE> 183
fully exercised. The Option may be subject to such other terms and conditions on
the time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(f) Termination of Continuous Service. In the event an Optionee's
Continuous Service terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option within such period of
time designated by the Board, which shall in no event be later than the
expiration of the term of the Option as set forth in the Option Agreement (the
"Post-Termination Exercise Period") and only to the extent that the Optionee was
entitled to exercise the Option on the date Optionee's Continuous Service
terminates. In the case of an Incentive Stock Option, the Board shall determine
the Post-Termination Exercise Period at the time the Option is granted, and the
term of such PostTermination Exercise Period shall in no event exceed ninety
(90) days from the date of termination. In addition, the Board may at any time,
with the consent of the Optionee, extend the Post-Termination Exercise Period
and provide for continued vesting; provided however, that any extension of such
period by the Board in excess of ninety (90) days from the date of termination
shall cause an Incentive Stock Option so extended to become a Nonstatutory Stock
Option, effective as of the date of Board action. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement or as otherwise
determined above, the Option shall terminate, and the shares covered by such
Option shall revert to the Plan. Notwithstanding the foregoing, the Board shall
have the power to permit an Option to continue to vest during the
Post-Termination Exercise Period.
An Optionee's Option Agreement may also provide that if the exercise of the
Option following the termination of the Optionee's Continuous Service (other
than upon the Optionee's death or disability) would be prohibited at any time
solely because the issuance of Shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in the first
paragraph of this subsection 6(f), or (ii) the expiration of a period of ninety
(90) days after the termination of the Optionee's Continuous Service during
which the exercise of the Option would not be in violation of such registration
requirements.
(g) Disability of Optionee. In the event an Optionee's Continuous Service
terminates as a result of the Optionee's disability, the Optionee may exercise
his or her Option (to the extent that the Optionee was entitled to exercise it
at the date of termination), but only within such period of time ending on the
earlier of (i) the date twelve (12) months following such termination (or such
longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
at the date of termination, the Optionee is not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(h) Death of Optionee. In the event of the death of an Optionee during, or
within a ninety (90)-day period after the termination of, the Optionee's
Continuous Service, the Option may be exercised to the extent vested by the
Optionee's estate, by a person who acquired the right to exercise the Option by
bequest or inheritance or by a person designated to exercise the option upon the
Optionee's death pursuant to subsection 6(d), but only within the period ending
on the earlier of (i) the date twelve (12) months following the date of death
(or such longer or shorter period specified in the Option Agreement), or (ii)
the expiration of the term of such Option as set forth in the Option Agreement.
If, at the time of death, the Optionee was not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after death, the Option is not exercised within the time specified herein, the
Option shall terminate, and the shares covered by such Option shall revert to
and again become available for issuance under the Plan.
E-5
<PAGE> 184
(i) Early Exercise. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or Committee shall
deem appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate agreements need not be identical, but each stock bonus or restricted
stock purchase agreement shall include (through incorporation of provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions as appropriate:
(a) Purchase Price. The purchase price under each restricted stock purchase
agreement shall be such amount as the Board or Committee shall determine and
designate in such agreement but in no event shall the purchase price be less
than one hundred percent (100%) of the stock's Fair Market Value on the date
such award is made. Notwithstanding the foregoing, the Board or Committee may
determine that eligible participants in the Plan may be awarded stock pursuant
to a stock bonus agreement in consideration for past services actually rendered
to the Company for its benefit.
(b) Transferability. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a domestic
relations order satisfying the requirements of Rule 16b-3, so long as stock
awarded under such agreement remains subject to the terms of any restrictive
covenant (such as a repurchase option or reacquisition option) in favor of the
Company.
(c) Consideration. The purchase price of stock acquired pursuant to a stock
purchase agreement shall be paid either: (i) in cash at the time of purchase;
(ii) at the discretion of the Board or Committee, according to a deferred
payment or other arrangement with the person to whom the stock is sold, except
that the stock's "par value" (as defined by the Delaware General Corporation
Law) shall not be paid by deferred payment; or (iii) in any other form of legal
consideration that may be acceptable to the Board or Committee in its
discretion. Notwithstanding the foregoing, the Board or Committee to which
administration of the Plan has been delegated may award stock pursuant to a
stock bonus agreement in consideration for past services actually rendered to
the Company for its benefit.
(d) Vesting. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board or Committee.
(e) Termination of Continuous Service. In the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of stock held by that person which have not vested as
of the date of termination under the terms of the stock bonus or restricted
stock purchase agreement between the Company and such person.
8. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance
E-6
<PAGE> 185
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such Stock Awards
unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
10. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director nor a Consultant nor any person to whom a
Stock Award is transferred in accordance with the Plan shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
subject to such Stock Award unless and until such person has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Consultant or other holder of
Stock Awards any right to continue in the employ of the Company or any
Affiliate, or to continue serving as a Consultant and Director, or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without notice and with or without cause, or the right to
terminate the relationship of any Consultant pursuant to the terms of such
Consultant's agreement with the Company or Affiliate or service as a Director
pursuant to the Company's By-Laws.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
this Plan and all other plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall be
treated as Nonstatutory Stock Options.
(e) The Company may require any person to whom a Stock Award is granted, or
any person to whom a Stock Award is transferred in accordance with the Plan, as
a condition of exercising or acquiring stock under any Stock Award, (1) to give
written assurances satisfactory to the Company as to such person's knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (2) to give written assurances
satisfactory to the Company stating that such person is acquiring the stock
subject to the Stock Award for such person's own account and not with any
present intention of selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (i) the issuance of the shares upon the exercise or acquisition
of stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act, or (ii) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the Common Stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the Common Stock
of the Company.
E-7
<PAGE> 186
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the maximum number of shares subject to
award to any person during any calendar year, and the outstanding Stock Awards
will be appropriately adjusted in the class(es) and number of shares and price
per share of stock subject to such outstanding Stock Awards. Such adjustments
shall be made by the Board or Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise; or (4) the acquisition by any person, entity or group within the
meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or any Affiliate of the Company) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then to the extent permitted by applicable
law: (i) any surviving corporation (or an Affiliate thereof) shall assume any
Stock Awards outstanding under the Plan or shall substitute similar Stock Awards
for those outstanding under the Plan, or (ii) such Stock Awards shall continue
in full force and effect. In the event any surviving corporation (or an
Affiliate) refuses to assume or continue such Stock Awards, or to substitute
similar Stock Awards for those outstanding under the Plan, then, with respect to
Stock Awards held by persons then performing services as Employees, Directors or
Consultants, the time during which such Stock Awards may be exercised shall be
accelerated and the Stock Awards terminated if not exercised prior to such
event.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 11 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to certain
executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees,
Directors or Consultants with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
E-8
<PAGE> 187
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate ten (10) years from the date the Plan is
adopted by the Board or approved by the stockholders of the Company, whichever
is earlier. No Stock Awards may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Stock Award was granted.
14. EFFECTIVE DATE OF PLAN.
This Plan shall become effective on the date of adoption by the Board, but
no Stock Awards granted under the Plan shall be exercised unless and until the
Plan has been approved by the stockholders of the Company, which approval shall
be within twelve (12) months before or after the date the Plan is adopted by the
Board.
E-9
<PAGE> 188
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by third parties and in connection
with actions or suits by or in the right of the corporation, by reason of the
fact that they were or are such directors, officers, employees and agents,
against expenses (including attorney's fees) and, in the case of actions, suits
or proceedings brought by third parties, against judgments, fines and amounts
paid in settlement actually and reasonably incurred in any action, suit or
proceeding.
The Registrant's Amended and Restated Certificate of Incorporation and
Bylaws provide for indemnifications to the fullest extent permitted by the
Delaware General Corporation Law. As permitted by the Delaware General
Corporation Law, the Registrant's Amended and Restated Certificate of
Incorporation eliminates the personal liability of its directors to the
Registrant and its stockholders, in certain circumstances, for monetary damages
arising from a breach of the director's duty of care. Additionally, the
Registrant has entered into indemnification agreements with each of its
directors and officers. These agreements provide indemnification to the fullest
extent permitted by law. The agreements do not provide indemnification for,
among other things, conduct that is adjudged to be fraud, deliberate dishonesty
or willful misconduct.
The Registrant has obtained directors' and officers' liability insurance
that covers certain liabilities, including liabilities to the Registrant and its
stockholders, in the amount of $7 million.
Pursuant to the Reorganization Agreement, all rights to indemnification
existing in favor of the persons serving as directors or officers of Sequana as
of the date of the Reorganization Agreement for acts and omissions occurring
prior to the Effective Time, as provided in Sequana's Bylaws (as in effect as of
the date of the Reorganization Agreement) and as provided in the indemnification
agreements between Sequana and said directors and officers (as in effect as of
the date of the Reorganization Agreement), shall survive the Merger and the
Registrant shall cause the Surviving Corporation to perform all of its
obligations arising thereunder for a period of not less than six years from the
Effective Time. The Reorganization Agreement also provides that from the
Effective Time until the sixth anniversary of the Effective Time, the Registrant
will cause the Surviving Corporation to maintain in effect, for the benefit of
the persons serving as directors and officers of Sequana as of the date of the
Reorganization Agreement with respect to acts or omissions occurring prior to
the Effective Time, the existing policy of directors' and officers' liability
insurance maintained by Sequana as of the date of the Reorganization Agreement
(the "Existing Policy"); provided, however, that (i) the Surviving Corporation
may substitute for the Existing Policy a policy or policies of comparable
coverage, and (ii) the Surviving Corporation shall not be required to pay an
annual premium for the Existing Policy (or for any substitute policies) in
excess of 175% of the annual premium currently paid by Sequana for such
insurance. The Reorganization Agreement further provides that in the event any
future annual premium for the Existing Policy (or any substitute policies)
exceeds 175% of the annual premium currently paid by Sequana for such insurance,
the Surviving Corporation shall be entitled to reduce the amount of coverage of
the Existing Policy (or any substitute policies) to the amount of coverage that
can be obtained for a premium equal to 175% of the annual premium currently paid
by Sequana for such insurance.
II-1
<PAGE> 189
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ ------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of November 2, 1997,
by and among Arris Pharmaceutical Corporation, a Delaware corporation
("Arris"), Beagle Acquisition Sub, Inc., a California corporation and a wholly
owned subsidiary of Arris, and Sequana Therapeutics, Inc., a California
corporation ("Sequana"). (See Appendix A to the Joint Proxy
Statement/Prospectus.)
5.1 Legal Opinion of Cooley Godward LLP.
8.1 Tax Opinion of Cooley Godward LLP.
8.2 Tax Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
23.1 Consent of Ernst & Young LLP (Arris).
23.2 Consent of Ernst & Young LLP (Sequana).
23.3 Consent of Morgan Stanley & Co. Incorporated.
23.4 Consent of Lehman Brothers Inc.
23.5 Consent of Cooley Godward LLP. (See Exhibits 5.1 and 8.1.)
23.6 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (See Exhibit 8.2.)
24.1 Power of Attorney. (See page II-4.)
99.1 Form of Voting Agreement. (Incorporated by reference to Exhibit 4.2 of the
Schedule 13D/A related to Sequana filed by Arris on or about November 17,
1997.)
99.2 Form of Affiliate Agreement. (See Exhibit C to Appendix A of the Joint Proxy
Statement/Prospectus.)
99.3 Arris Form of Proxy Card.
99.4 Sequana Form of Proxy Card.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto
incorporated by reference into the Joint Proxy Statement/Prospectus.
(c) ITEM 4(B) REPORTS
See Appendices C-1 and C-2 to the Joint Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS.
(1) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the Joint Proxy Statement/Prospectus
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(2) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(3) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is
II-2
<PAGE> 190
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") and the Bylaws
(the "Bylaws") of the Registrant and the Delaware General Corporation Law, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
question has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) (A) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(B) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (A) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 191
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized on the date indicated.
Date: November 26, 1997 ARRIS PHARMACEUTICAL CORPORATION
By: /s/ JOHN P. WALKER
------------------------------------
John P. Walker
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
hereby authorizes John P. Walker and Frederick J. Ruegsegger and each of them,
as attorney-in-fact, to sign on his behalf individually and in each capacity
stated below, and to file, any amendments, including post-effective amendments,
to this Registration Statement.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ----------------------------------------------- ------------------------- ------------------
<C> <S> <C>
/s/ JOHN P. WALKER President, Chief November 26, 1997
- ----------------------------------------------- Executive
John P. Walker Officer and Director
(Principal Executive
Officer)
/s/ FREDERICK J. RUEGSEGGER Vice President and Chief November 26, 1997
- ----------------------------------------------- Financial Officer
Frederick J. Ruegsegger (Principal Financial
Officer)
/s/ ANN MARGARET ARVIN Director November 19, 1997
- -----------------------------------------------
Ann Margaret Arvin
/s/ BROOK H. BYERS Director November 26, 1997
- -----------------------------------------------
Brook H. Byers
/s/ ANTHONY B. EVNIN Director November 26, 1997
- -----------------------------------------------
Anthony B. Evnin, Ph.D.
/s/ VAUGHN M. KAILIAN Director November 26, 1997
- -----------------------------------------------
Vaughn M. Kailian
/s/ DONALD KENNEDY Director November 19, 1997
- -----------------------------------------------
Donald Kennedy, Ph.D.
/s/ HANS U. SIEVERTSSON Director November 20, 1997
- -----------------------------------------------
Hans U. Sievertsson, Ph.D.
/s/ ALAN C. MENDELSON Director November 26, 1997
- -----------------------------------------------
Alan C. Mendelson
</TABLE>
II-4
<PAGE> 192
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ ------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of November 2, 1997,
by and among Arris Pharmaceutical Corporation, a Delaware corporation
("Arris"), Beagle Acquisition Sub, Inc., a California corporation and a wholly
owned subsidiary of Arris, and Sequana Therapeutics, Inc., a California
corporation ("Sequana"). (See Appendix A to the Joint Proxy
Statement/Prospectus.)
5.1 Legal Opinion of Cooley Godward LLP.
8.1 Tax Opinion of Cooley Godward LLP.
8.2 Tax Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
23.1 Consent of Ernst & Young LLP (Arris).
23.2 Consent of Ernst & Young LLP (Sequana).
23.3 Consent of Morgan Stanley & Co. Incorporated.
23.4 Consent of Lehman Brothers Inc.
23.5 Consent of Cooley Godward LLP. (See Exhibits 5.1 and 8.1.)
23.6 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (See Exhibit 8.2.)
24.1 Power of Attorney. (See page II-4.)
99.1 Form of Voting Agreement. (Incorporated by reference to Exhibit 4.2 of the
Schedule 13D/A related to Sequana filed by Arris on or about November 17,
1997.)
99.2 Form of Affiliate Agreement. (See Exhibit C to Appendix A of the Joint Proxy
Statement/Prospectus.)
99.3 Arris Form of Proxy Card.
99.4 Sequana Form of Proxy Card.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
November 25, 1997
Arris Pharmaceutical Corporation
180 Kimball Way
South San Francisco, CA 94080
Ladies and Gentlemen:
We have acted as counsel for Arris Pharmaceutical Corporation, a Delaware
corporation (the "Company" or "Arris") in connection with the merger (the
"Merger") and other transactions contemplated by the certain Agreement and Plan
of Merger and Reorganization dated as of November 2, 1997, by and among Arris, a
Delaware corporation, Beagle Acquisition Sub, Inc., a California corporation and
a wholly-owned subsidiary of Arris ("Merger Sub"), and Sequana Therapeutics,
Inc., a California corporation ("Sequana"). This opinion is being furnished in
connection with a Registration Statement on Form S-4 ("Registration Statement")
to be filed by the Company with the Securities Exchange Commission covering the
offer and sale of 15,666,978 shares of the Company's common stock, $0.001 par
value ("Common Stock"), to be issued in connection with the merger of Merger Sub
with and into Sequana.
In rendering this opinion, we have examined the following documents: (i) the
Company's Certificate of Incorporation and Bylaws, as amended and restated
since the inception of the Company, (ii) the minutes of the Board of Directors'
meeting on October 31, 1997 and the resolutions adopted by the Board of
Directors on November 10, 1997, (iii) the Registration Statement, and (iv) such
other documents, legal opinions and precedents, corporate and other records of
the Company, and certificates of public officials and officers of the Company
that we have deemed necessary or appropriate to provide a basis for the below
opinion. In rendering this opinion, we have assumed that the proposed
Amendment to the Amended and Restated Certificate of Incorporation of Arris is
approved by the stockholders of Arris and filed with the Delaware Secretary of
State before consummation of the Merger.
Based upon and subject to the foregoing, in our opinion, the shares of Common
Stock of the Company which are being offered and sold by the Company pursuant
to the Registration Statement, when sold in the manner and for the
consideration contemplated by the Registration Statement, will be legally
issued, fully paid and non-assessable.
We consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters."
Sincerely,
/s/ Michael R. Jacobson
-----------------------
Michael R. Jacobson
<PAGE> 1
EXHIBIT 8.1
[COOLEY GODWARD LLP LETTERHEAD]
November 26, 1997
Arris Pharmaceutical Corporation, and
Beagle Acquisition Sub, Inc.
180 Kimball Way
South San Francisco, CA 94080
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with the Form S-4
registration statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger and Reorganization dated as of November 2, 1997
(the "Reorganization Agreement") by and among Arris Pharmaceutical Corporation,
a Delaware corporation ("Parent"), Beagle Acquisition Sub, Inc., a California
corporation and wholly-owned subsidiary of Parent ("Merger Sub"), and Sequana
Therapeutics, Inc., a California corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to Parent and Merger Sub in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have
examined, and are relying upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in, the following documents
(including all exhibits and schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters dated November 26,
1997 delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters");
(c) Continuity of Interest Certificates dated November 26, 1997
delivered or to be delivered by certain shareholders of the Company in favor of
Parent, Merger Sub and the Company (the "Continuity of Interest Certificates");
and
(d) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the
<PAGE> 2
[COOLEY GODWARD LLP LETTERHEAD]
Arris Pharmaceutical Corporation
November 26, 1997
Page 2
Merger and the other transactions contemplated by the Reorganization Agreement
as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures
thereto) are authentic, documents submitted to us as copies conform to the
original documents, and that all such documents have been (or will be by the
Effective Time) duly and validly executed and delivered where due execution and
delivery are a prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made or agreed
to by Parent, Merger Sub and the Company, their managements, employees,
officers, directors and shareholders in connection with the Merger, including,
but not limited to, those set forth in the Reorganization Agreement (including
the exhibits thereto), the Tax Representation Letters and the Continuity of
Interest Certificates are true and accurate at all relevant times;
3. All covenants contained in the Reorganization Agreement
(including exhibits thereto), the Tax Representation Letters and the Continuity
of Interest Certificates are performed without waiver or breach of any material
provision thereof;
4. There is no plan or intention on the part of the shareholders
of the Company to engage in a sale, exchange, transfer, distribution, pledge,
or other disposition or any transaction which results in a reduction of risk of
ownership, or a direct or indirect disposition of shares of Parent Common Stock
to be received in the Merger that would reduce the Company's shareholders'
ownership of Parent Common Stock to a number of shares having an aggregate fair
market value, as of the Effective Time, of less than fifty percent (50%) of the
aggregate fair market value of all of the Company Common Stock outstanding
immediately prior to the Effective Time. (For purposes of the preceding
sentence, shares of Company Common Stock pursuant to which shareholders of the
Company exercise dissenters' rights in the Merger, which are exchanged for
consideration in the Merger other than shares of Parent Common Stock, including
being exchanged for cash in lieu of fractional shares of Parent Common Stock or
are sold, redeemed or disposed of in a transaction that is in contemplation of
or related to the Merger, shall be considered shares of the Company Common
Stock held by shareholders of the Company immediately prior to the Merger which
are exchanged for shares of Parent Common Stock in the Merger and then disposed
of pursuant to a plan); and
<PAGE> 3
[COOLEY GODWARD LLP LETTERHEAD]
Arris Pharmaceutical Corporation
November 26, 1997
Page 3
5. Any representation or statement made "to the best of
knowledge" or similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a)(1) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income
tax issues contained in the Registration Statement. We have reviewed the
discussion entitled "Certain Federal Income Tax Consequences" contained in the
Registration Statement and believe that such information fairly presents the
current federal income tax law applicable to the Merger and the material
federal tax consequences to Parent, Merger Sub, the Company and the Company's
shareholders as a result of the Merger.
We consent to the reference to our firm under the caption "Certain Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the filing of this opinion as an exhibit to the Proxy
Statement and to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as
specifically set forth herein, and this opinion may not be relied upon except
with respect to the consequences specifically discussed herein. Furthermore,
this opinion only relates to the holders of Company stock who hold such stock
as a capital asset. No opinion is expressed as to the federal income tax
treatment that may be relevant to a particular investor in light of personal
circumstances or to certain types of investors subject to special treatment
under the federal income tax laws (for example, life insurance companies,
dealers in securities, taxpayers subject to the alternative minimum tax, banks,
tax-exempt organizations, non-United States persons, and shareholders who
acquired their shares of Company Common Stock pursuant to the exercise of
options or otherwise as compensation or who hold their Company Common Stock as
part of a straddle or risk reduction transaction). Further, no opinion is
expressed as to the federal income tax treatment with respect to holders of
warrants for Company Common Stock.
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any other transaction
whatsoever, including the Merger, if
<PAGE> 4
[COOLEY GODWARD LLP LETTERHEAD]
Arris Pharmaceutical Corporation
November 26, 1997
Page 4
all of the transactions described in the Reorganization Agreement are not
consummated in accordance with the terms of the Reorganization Agreement and
without waiver of any material provision thereof. To the extent that any of
the representations, warranties, statements and assumptions material to our
opinion and upon which we have relied are not accurate and complete in all
material respects at all relevant times, our opinion would be adversely
affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service
or any court of law, tribunal, administrative agency or other governmental
body. The conclusions are based on the Code, existing judicial decisions,
administration regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered in connection with the filing of the
Registration Statement. It is intended for the benefit of Parent, Merger Sub
and their stockholders and may not be relied upon or utilized for any other
purpose or by any other person and may not be made available to any other
person without our prior written consent.
Sincerely,
COOLEY GODWARD LLP
/s/ Webb B. Morrow III
----------------------
Webb B. Morrow III
WBM:dp
<PAGE> 1
Exhibit 8.2
[WSGR Letterhead]
November 26, 1997
Sequana Therapeutics, Inc.
11099 North Torrey Pines Road, Suite 160
La Jolla, CA 92037
Ladies and Gentlemen:
We have acted as counsel for Sequana Therapeutics, Inc., a
California corporation ("Sequana") in connection with the preparation and
execution of the Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") dated as of November 2, 1997, among Arris Pharmaceutical
Corporation, a Delaware corporation ("Arris"), Beagle Acquisition Sub, Inc., a
California corporation and a wholly-owned subsidiary of Arris ("Merger Sub"),
and Sequana. This opinion is being delivered to you in connection with the
filing of a Form S-4 Registration Statement with the Securities and Exchange
Commission (the "Registration Statement") and pursuant to Section 7.5(b) of the
Merger Agreement. Pursuant to the Merger Agreement, Merger Sub will merge with
and into Sequana (the "Merger"), and Sequana will become a wholly-owned
subsidiary of Arris. Unless otherwise defined, capitalized terms referred to
herein have the meanings set forth in the Merger Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
You have requested our opinion regarding certain United States
federal income tax consequences of the Merger. In delivering this opinion, we
have reviewed and relied upon the facts, statements, descriptions and
representations set forth in the Registration Statement, and the Joint Proxy
Statement included therewith, the Merger Agreement (including Exhibits), and
such other documents pertaining to the Merger as we have deemed necessary or
appropriate. We have also relied upon tax representation letters of Arris and
Merger Sub, and Sequana, respectively (the "Tax Representation Letters") as well
as continuity of interest certificates executed and delivered by certain
shareholders of Sequana (the "Continuity of Interest Certificates").
In connection with rendering this opinion, we have also assumed
(without any independent investigation) that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time)
<PAGE> 2
due execution and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof;
2. Any statement made in any of the documents referred to herein,
"to the best of the knowledge" of any person or party is correct without such
qualification;
3. All statements, descriptions and representations contained in any
of the documents referred to herein or otherwise made to us are true and correct
in all material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
4. The Merger will be reported by Arris and Sequana on their
respective federal income tax returns in a manner consistent with the opinion
set forth below; and
5. There is no plan or intention on the part of the shareholders of
Sequana to engage in a sale, exchange, transfer, distribution, pledge, or other
disposition or any transaction which results in a reduction of risk of
ownership, or a direct or indirect disposition of shares of Parent Common Stock
to be received in the Merger that would reduce the Sequana shareholders'
ownership of Parent Common Stock to a number of shares having an aggregate fair
market value, as of the Effective Time, of less than fifty percent (50%) of the
aggregate fair market value of all of the Company Common Stock outstanding
immediately prior to the Effective Time. (For purposes of the preceding
sentence, shares of Company Common Stock pursuant to which shareholders of the
Company exercise dissenters' rights in the Merger, which are exchanged for
consideration in the Merger other than shares of Parent Common Stock or are
sold, redeemed or disposed of in a transaction that is in contemplation of or
related to the Merger, shall be considered shares of the Company Common Stock
held by shareholders of the Company immediately prior to the Merger which are
exchanged for shares of Parent Common Stock in the Merger and then disposed of
pursuant to a plan).
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the Merger
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and the statements set forth in the Tax Representation Letters and the
Continuity of Interest Certificates are true and correct as of the date hereof,
at the effective date of the Registration Statement and at the Effective Time,
then: (a) For federal income tax purposes, the Merger will qualify as a
"reorganization" as defined in Section 368(a) of the Code; and (b) The
discussion entitled "Certain Federal Income Tax Consequences" in the Prospectus
constituting a part of the Registration Statement, insofar as it relates to
statements of law or legal conclusions, is correct in all material respects and
we confirm our opinions as set forth therein.
This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no
<PAGE> 3
responsibility to advise you of any new developments in the application or
interpretation of the Federal income tax laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
Federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger). Furthermore, this opinion relates only to the
holders of Company Common Stock who hold such stock as a capital asset. No
opinion is expressed as to the Federal income tax treatment that may be relevant
to a particular investor in light of personal circumstances or to certain types
of investors subject to special treatment under the Federal income tax laws (for
example, life insurance companies, dealers in securities, taxpayers subject to
the alternative minimum tax, banks, tax-exempt organizations, non-United States
persons, persons who hold their shares as part of a hedging, straddle,
conversion or other risk reduction transaction, and shareholders who acquired
their shares of Company Common Stock pursuant to the exercise of options or
otherwise as compensation). Further, no opinion is expressed as to the Federal
income tax treatment with respect to holders of warrants for Company Common
Stock.
No opinion is expressed as to any transaction other than the Merger
as described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion is solely for the benefit of Sequana and its
shareholders, and may not be relied upon or provided to any other party,
including, but not limited to, Arris and the Arris shareholders without our
express written consent. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement, and to the reference to the opinion in
the Prospectus under the caption "The Merger--Certain Federal Income Tax
Consequences."
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Arris Pharmaceutical
Corporation and to the incorporation by reference therein of our report dated
February 10, 1997, with respect to the consolidated financial statements of
Arris Pharmaceutical Corporation included in its Annual Report (Form 10-K) for
the year ended December 31, 1996, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Palo Alto, California
November 25, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the captions "Experts" and to use
of our report dated February 6, 1997 related to the consolidated financial
statements of Sequana Therapeutics, Inc. incorporated by reference in the Joint
Proxy/Prospectus of Arris Pharmaceutical Corporation, that is made a part of
the Registration Statement (Form S-4) for the registration of shares of its
common stock.
/s/ Ernst & Young LLP
San Diego, California
November 24, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
November 25, 1997
Arris Pharmaceutical Corporation
180 Kimball Way
South San Francisco, California 94080
Dear Sirs:
We hereby consent to the inclusion of the Registration Statement on Form
S-4 of Arris Pharmaceutical Corporation ("Arris") relating to the proposed
merger of Beagle Acquisition Corp., a wholly owned subsidiary of Arris with and
into Sequana Therapeutics, Inc., of our opinion letter to the Board of Directors
of Arris included as Appendix C-1 to the Joint Proxy Statement/Prospectus which
is a part of the Registration Statement and to the references to such letter and
our firm name in such Joint Proxy Statement/Prospectus. In giving such consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations adopted by the Securities and Exchange Commission
thereunder not do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Catherine J. Friedman
-------------------------------
Catherine J. Friedman
Principal
<PAGE> 1
Exhibit 23.4
CONSENT OF LEHMAN BROTHERS
We hereby consent to the use of our opinion letter dated November 2, 1997 to the
Board of Directors of Sequana Therapeutics, Inc. included as Appendix C-2 to the
Proxy Statement which forms a part of the Registration Statement in Form S-4
relating to the proposed merger of Beagle Acquisition Sub. Inc., a wholly owned
subsidiary of Arris Pharmaceutical Corporation, with and into Sequana
Therapeutics, Inc. and to the references to such opinion in such Proxy Statement
under the captions "Summary -- The Merger -- Opinion of Financial Advisor to
Sequana," "Approval of the Merger and Related Transactions- Background of the
Merger," "--Sequana's Reasons for the Merger," and "--Opinion of Financial
Advisor to Sequana." In giving such consent, we do not admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder and we do not thereby admit that
we are experts with respect to any part of the Registration Statement under the
meaning of the term "expert" as used in the Securities Act.
Very truly yours,
November 25, 1997 LEHMAN BROTHERS
By /s/ Rodney K.B. Young
-------------------------
Senior Vice President
<PAGE> 1
EXHIBIT 99.3
PROXY
ARRIS PHARMACEUTICAL CORPORATION
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR THE SPECIAL MEETING [JANUARY 7], 1998
The undersigned stockholder of Arris Pharmaceutical Corporation (the "Company"
or "Arris") hereby appoints John P. Walker and Frederick J. Ruegsegger and each
of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Arris which the undersigned
may be entitled to vote at the Special Meeting of Stockholders of Arris to be
held at the Company's offices located at 180 Kimball Way, South San Francisco,
California on [January 7], 1998, at 9:00 a.m. local time, and at any and all
postponements, continuations and adjournments thereof, with all powers that the
undersigned would possess if personally present, upon and in respect of the
following matters and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSALS
1, 2, 3, 4, 5 AND 6. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE
VOTED IN ACCORDANCE THEREWITH.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE> 2
PLEASE MARK YOUR VOTE AS INDICATED IN THIS EXAMPLE. [X]
1. Approval of issuance of shares of Common Stock pursuant to the Agreement and
Plan of Merger and Reorganization, dated as of November 2, 1997, among Arris
Pharmaceutical Corporation, Sequana Therapeutics, Inc. and Beagle Acquisition
Sub, Inc. a wholly owned subsidiary of Arris Pharmaceutical Corporation:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
2. Approval of the Certificate of Amendment to Amended and Restated Certificate
of Incorporation:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
3. Approval of the 1997 Equity Incentive Plan:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
4. Approval of the 1994 Non-Employee Directors' Stock Option Plan, as amended:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
5. Approval of the Employee Stock Purchase Plan, as amended:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
6. Upon any other matters which might come before the meeting.
Unless a contrary direction is
indicated, this Proxy will be
voted FOR Proposals 1, 2, 3, 4, 5
and 6. If specific instructions
are indicated, this Proxy will be
voted in accordance therewith.
Signature(s) ______________________________________________ Dated ______, 1997
Please sign exactly as name appears on this proxy. If signing for estates,
trusts or corporations, title or capacity should be stated. If shares are held
jointly, each holder should sign.
PLEASE MARK, DATE, SIGN AND RETURN.
- -------------------------------------------------------------------------------
[ARROW UP] FOLD AND DETACH HERE [ARROW UP]
<PAGE> 1
EXHIBIT 99.4
SEQUANA THERAPEUTICS, INC.
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [JANUARY 7], 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING
OF SHAREHOLDERS OF SEQUANA THERAPEUTICS, INC. TO BE HELD ON [JANUARY 7], 1998
The undersigned shareholder of SEQUANA THERAPEUTICS, INC. ("Sequana"), a
California corporation, hereby appoints M. Scott Salka and Michael J. O'Donnell,
and each of them, proxies and attorneys-in-fact, with full power to each of
substitution, on behalf and in the name of the undersigned, to attend the
Special Meeting of Shareholders of Sequana to be held on [January 7], 1998 at
9:00 a.m. local time, at the Sheraton Grande Torrey Pines, 10950 North Torrey
Pines Road, La Jolla, California and at any adjournment thereof, and to vote all
shares of Common Stock, on the matters set forth below, with all powers the
undersigned would possess if personally present at the meeting.
1. PROPOSAL TO (i) ADOPT AND APPROVE THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION, DATED AS OF NOVEMBER 2, 1997, AMONG SEQUANA, ARRIS
PHARMACEUTICAL CORPORATION, A DELAWARE CORPORATION ("ARRIS"), AND BEAGLE
ACQUISITION SUB, INC., A CALIFORNIA CORPORATION AND WHOLLY OWNED SUBSIDIARY
OF ARRIS ("MERGER SUB"), AND (ii) APPROVE THE MERGER OF MERGER SUB WITH AND
INTO SEQUANA PURSUANT TO WHICH SEQUANA WILL BECOME A WHOLLY OWNED SUBSIDIARY
OF ARRIS (THE "MERGER").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy will be voted or withheld from being voted in accordance with
the instructions specified. Where no choice is specified, this proxy will confer
discretionary authority and will be voted FOR approval of the Merger. This proxy
confers authority for the above named persons to vote in his discretion with
respect to amendments or variations to the matters identified in the notice of
the meeting accompanying this proxy and other matters which may properly come
before the meeting. A shareholder has the right to appoint a person, who need
not be a shareholder, to attend and act on his behalf at the meeting, other than
the person designated in this form of proxy, such right may be exercised by
inserting the name of such person in the blank space provided.
Dated:
- ------------------------ , 1997 --------------------------------------------
Signature
--------------------------------------------
Signature
(This Proxy should be marked, dated and signed by the shareholder(s) exactly as
his or her name appears hereon. Persons signing in a fiduciary capacity should
so indicate. If shares are held by joint tenants or as community property, both
should sign.)
