-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K1GSd/31MrLB0TGikAVhpKsQvXSJd0XYAWZyW2CqdiihM5P1F+v0/ruEbp9Gxykz KvqeuRNcW//qCQL/1LtCRw== 0000912057-96-015934.txt : 19960801 0000912057-96-015934.hdr.sgml : 19960801 ACCESSION NUMBER: 0000912057-96-015934 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARRIS PHARMACEUTICAL CORP/DE/ CENTRAL INDEX KEY: 0000913056 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222969941 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-09307 FILM NUMBER: 96602004 BUSINESS ADDRESS: STREET 1: 385 OYSTER POINT BLVD STREET 2: SUITE 3 CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4157378600 MAIL ADDRESS: STREET 1: 385 OYSTER POINT BLVD STREET 2: SUITE 3 CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 S-3 1 S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1996 REGISTRATION NO. ___-_____ ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ARRIS PHARMACEUTICAL CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 22-2969941 (I.R.S. Employer Identification Number) -------------------- 385 OYSTER POINT BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 (415) 829-1000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) -------------------- DANIEL H. PETREE EXECUTIVE VICE PRESIDENT, CORPORATION DEVELOPMENT AND CHIEF FINANCIAL OFFICER ARRIS PHARMACEUTICAL CORPORATION 385 OYSTER POINT BOULEVARD, SUITE 3 SOUTH SAN FRANCISCO, CALIFORNIA 94080 (415) 829-1000 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------- COPIES TO: MICHAEL R. JACOBSON, ESQ. COOLEY GODWARD CASTRO HUDDLESON & TATUM FIVE PALO ALTO SQUARE PALO ALTO, CALIFORNIA 94306 (415) 843-5000 FAX (415) 857-0663 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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(c) 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 delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------------- TITLE OF EACH AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF CLASS OF BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION FEE SECURITIES TO REGISTERED PER SHARE(1) PRICE(1) BE REGISTERED - -------------------------------------------------------------------------------------------------------- Common Stock $0.001 par value. . . . . . 161,418 shares $11.32 $1,827,251.80 $630.09 - --------------------------------------------------------------------------------------------------------
(1) Estimated in accordance with Rule 457(c) solely for the purpose of computing the amount of the registration fee based on the average of the high and low prices of the Company's Common Stock as reported on the Nasdaq National Market on July 26, 1996. -------------------- 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. ============================================================================== INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 31, 1996 PROSPECTUS 161,418 SHARES ARRIS PHARMACEUTICAL CORPORATION COMMON STOCK ___________________ This Prospectus relates to 161,418 shares of Arris Pharmaceutical Corporation ("Arris" or the "Company") Common Stock, par value $.001 (the "Common Stock"), which are being offered and sold by certain stockholders of the Company (the "Selling Stockholders"). The Selling Stockholders, directly or through agents, broker-dealers or underwriters, may sell the Common Stock offered hereby from time to time on terms to be determined at the time of sale, in transactions on the Nasdaq National Market or in privately negotiated transactions or in a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing prices or at negotiated prices. The Selling Stockholders may effect such transactions by selling shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders or the purchasers of the shares for whom such broker-dealers may act as agents or to whom they sell as principal or both (which compensation to a particular broker- dealer may be in excess of customary commissions). The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. See "Selling Stockholders" and "Plan of Distribution." The Common Stock of the Company is quoted on the Nasdaq National Market under the symbol "ARRS." The last reported sales price of the Company's Common Stock on the Nasdaq National Market on July 26, 1996 was $11.13 per share. ____________________ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS _____________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. No underwriting commissions or discounts will be paid by the Company in connection with this offering. Expenses payable by the Company in connection with this offering are estimated to be $55,000. The aggregate proceeds to the Selling Stockholders from the Common Stock will be the purchase price of the Common Stock sold less the aggregate agents' commissions and underwriters' discounts, if any, and other expenses of issuance and distribution not borne by the Company. See "Plan of Distribution." The Selling Stockholders and any agents, broker-dealers or underwriters that participate in the distribution of the Common Stock may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Act"), and any commission received by them and any profit on the resale of the Common Stock purchased by them may be deemed to be underwriting discounts or commissions under the Act. The Company has agreed to indemnify the Selling Stockholders and certain other persons against certain liabilities, including liabilities under the Act. July 31, 1996 AVAILABLE INFORMATION The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the Commission's Public Reference Section, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common Stock of the Company traded on the Nasdaq National Market and reports and other information concerning the Company may be inspected at the offices of The National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. ADDITIONAL INFORMATION A registration statement on Form S-3 with respect to the Common Stock offered hereby (the "Registration Statement") has been filed with the Commission under the Act. This Prospectus does not contain all of the information contained in such Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus regarding the contents of any contract or any other documents are not necessarily complete and, in each instance, reference is hereby made to the copy of such contract or document filed as an exhibit to the Registration Statement. The Registration Statement, including exhibits thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section, Securities and Exchange Commission, Washington, D.C., 20549, upon payment of the prescribed fees. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission pursuant to the Exchange Act are by this reference incorporated in and made a part of this Prospectus: (1) The Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (including all material incorporated by reference therein); (2) The Quarterly Report on Form 10-Q, as amended, for the quarter ended March 31, 1996; (3) The Current Report on Form 8-K filed on January 5, 1996, as amended on February 5, 1996; and (4) The description of the Company's Common Stock set forth in the Company's Registration Statement on Form 8-A filed with the Commission on November 4, 1993. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference herein and to be a part of this Prospectus from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference 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 Prospectus. Copies of all documents which are incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents or into this Prospectus) will be provided without charge to each person, including any beneficial owner to whom this Prospectus is delivered, upon a written or oral request to Arris Pharmaceutical Corporation, Attention: Daniel H. Petree, Executive Vice President, Corporation Development and Chief Financial Officer, 385 Oyster Point Boulevard, Suite 3, South San Francisco, California 94080, telephone number (415) 829-1000. -------------------- Arris-Registered Trademark- is a registered service mark, and Khepri-TM- and Delta Technology-TM- are trademarks of the Company. This Prospectus also contains trademarks of companies other than the Company. 2. RISK FACTORS THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY SHARES OF THE COMMON STOCK OFFERED HEREBY. EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY All of the Company's potential products are in an early stage of development, and no revenues have been generated from the sale of such products. To achieve profitable operations, the Company, alone or with collaborators, must successfully develop, manufacture, introduce and market its potential products. The time necessary to achieve market success for any individual product is long and uncertain. Most of the compounds currently under development by the Company will require significant additional research, development and preclinical testing, and all compounds currently under development will require extensive clinical testing prior to commercialization. To date, the Company has not requested or received regulatory clearance for any potential product from the United States Food and Drug Administration ("FDA") or any other regulatory body. 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. The Company's first clinical compound, APC 366, has not been proven to be safe and effective in humans. In addition, a significant portion of the Company's receptor-based research program is based on the Company's belief that small molecule therapeutics have the potential to replace naturally occurring hormones in causing dimerization of receptor subunits, thereby causing cell signaling. This concept has not been proven to have a therapeutic effect. There can be no assurance that the Company's research or product development efforts or those of its collaborators will be successfully completed or that interim milestones will be achieved, that the products currently under development will be successfully made into drugs, 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 products is not expected for a number of years, if at all. DEPENDENCE ON COLLABORATIVE RELATIONSHIPS The Company's strategy for the development, clinical testing, manufacturing and commercialization of certain of its potential products includes entering into collaborations with corporate partners, licensors, licensees and others. To date, the Company has entered into significant collaborations with Bayer AG ("Bayer"), Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn"), Amgen Inc. ("Amgen") and SmithKline Beecham Corporation ("SmithKline"). Substantially all of the Company's revenues to date have resulted from such collaborations, and the Company is dependent on the activities of its collaborators with respect to the eventual commercialization of the potential products subject to such collaborations. The Company's collaborators are entitled to determine which potential products, if any, are to be commercialized under the collaborations. The Bayer collaboration provides that research and development expenses related to the Company's first clinical compound, APC 366, will be borne by the Company, at least through Phase IIa clinical trials. Thereafter, if Bayer does not elect to develop APC 366, the Company could elect to do so at its own expense. However, the Company would not be able to commercialize APC 366 without Bayer's consent. 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 the Company. There can be no assurance that such partners will perform their obligations as expected or that the Company will derive additional revenue from such arrangements beyond the minimum contractual commitments. Moreover, the collaboration agreements may be terminated under certain circumstances, including failure by the Company to perform under the terms of such agreements. The Company's collaboration with Bayer for tryptase and chymase inhibitors and with Pharmacia & Upjohn for clotting enzymes expire in November 1999 and September 2000, respectively, but may be terminated at the discretion of the collaborator in November 1997 and September 1998, respectively. The Company's collaborations with Pharmacia & Upjohn for hGH and with Amgen for EPO expire in April 1997 and February 1997, respectively. The agreement with SmithKline for exploration of the application of the Company's proprietary Delta Technology to intracellular antiviral protease targets incorporates an initial proof-of-concept phase expiring in June 1997 which, assuming success in the proof-of-concept phase, would be followed by a research and development collaboration expiring in June 1999. The inability of the Company to renew any of these collaborations may have a material adverse effect on the Company's business, financial condition and results of operations. If any of the Company's collaborators breach or elect to terminate their agreements with the Company 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 the Company may be required to devote additional resources to product development and commercialization, or to terminate certain development programs. There can 3. 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 and the Company 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 the Company's business, financial condition and results of operations. Arris' collaborators in some cases are developing, either alone or with others, products that may compete with the development and marketing of the Company's potential products. In addition, some of these collaborators, such as Amgen, 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 therapeutics being developed in collaboration with the Company. In addition, there can be no assurance that the Company's collaborators will pay any additional option or license fees to the Company or that they will develop and market any potential products under the collaborations. There can be no assurance that the Company will be able to negotiate additional collaborations in the future on acceptable terms, if at all, or that any such collaborations will be successful. To the extent that the Company chooses not to or is unable to establish such arrangements, the Company may experience increased capital requirements to undertake research, development and marketing of its potential products at its own expense or may encounter significant delays or termination of such products. In addition, the Company may encounter significant delays in introducing its potential products into certain markets or find that the development, manufacture or sale of its potential products in such markets is adversely affected by the absence of such collaborations. UNCERTAINTIES RELATED TO CLINICAL TRIALS Before obtaining regulatory clearance for the commercial sale of any of its potential products under development, the Company 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 may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the Company's 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 the Company'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 the Company's potential products. The appearance of any such unacceptable toxicities or side effects in toxicology studies or in clinical trials could cause the Company or regulatory authorities to interrupt, limit, delay or abort the development of any of the Company's potential products and could ultimately prevent their 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 the Company will be safe or effective when administered to patients. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to submit a new drug application as scheduled if clinical trials are completed, or that any such application will be reviewed and cleared by the FDA in a timely manner, or at all. The Company currently has one compound, APC 366, in Phase IIa clinical trials in the United Kingdom. There can be no assurance that the Company will be able to complete these or other clinical trials of APC 366 successfully, or at all, or that other drug candidates entering clinical trials, if any, will successfully complete such trials, or that the Company 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 the Company's business, financial condition and results of operations. UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in large part on its 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 4. their enforceability cannot be predicted. There can be no assurance that any of the Company'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 the Company. The commercial success of the Company also will depend, in part, on the Company not infringing patents issued to others and not breaching the technology licenses upon which any of the Company'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 the Company's programs. In addition, patent applications relating to the Company's potential products or technology, including the area of dimerization, may currently be pending. Some of these applications or patents may limit or preclude the Company's applications, or conflict in certain respects with claims made under the Company's patents, if issued. Furthermore, the Company in the past has been, and may from time to time in the future be, notified of claims that the Company may be infringing patents or other intellectual property rights owned by third parties. The Company has obtained one license under a patent, and if necessary or desirable the Company may seek additional licenses under other patents or intellectual property rights. The Company's breach of an existing license or failure to obtain a license to technology required to commercialize its potential products could have a material adverse impact on the Company business, financial condition or results of operations. Litigation, which could result in substantial costs to the Company, also may be necessary to enforce any patents issued to the Company or to determine the scope and validity of third-party proprietary rights. If competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the Patent and Trademark Office ("PTO") to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. An adverse outcome could subject the Company to significant liabilities to third parties and require the Company to license disputed rights from third parties or to cease using such technology. The Company also relies on trade secrets to protect its technology, especially where patent protection is not believed to be appropriate or obtainable. The Company protects its proprietary technology and processes, in part, by confidentiality agreements with its employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING The Company has experienced significant operating losses since its inception. As of March 31, 1996, the Company had an accumulated deficit of approximately $ 58.4 million. The Company has not generated revenues from any products and expects that it will incur significant operating losses over at least the next several years as its research and development efforts and preclinical and clinical testing activities expand. The Company expects research and development expenses to increase significantly in the future, especially in light of the recent acquisition of Khepri Pharmaceuticals, Inc. ("Khepri"). In addition, as part of the acquisition of Khepri, the Company agreed to pay to former Khepri stockholders, on December 30, 1996, at the Company's option either approximately $6.2 million or 518,701 additional shares of Common Stock, subject to adjustment if the average of the closing sale prices of the Common Stock on the Nasdaq National Market during the ninety trading days ending on December 27, 1996 is less than $10.14 or greater than $13.71. The development of the Company'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, to bring any such potential products to market and, ultimately, to establish manufacturing and marketing capabilities. The Company's future capital requirements will depend on many factors, including continued scientific progress in the research and development of the Company's technology and drug development programs, the ability of the Company to establish new and maintain existing collaborations with others for drug development and to achieve certain milestones under such collaborations, progress with preclinical and clinical trials, the time and cost involved in obtaining regulatory approvals, the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and the ability to secure effective product commercialization activities and arrangements. The Company expects that its existing capital resources, including research and development revenues from existing collaborations, will enable the Company to maintain current and planned operations through 1999. The Company may need to raise substantial additional capital to fund its operations before the end of such period. The Company expects that it will seek such additional funding through new collaborations, or the extension of existing collaborations, or through public or private equity or debt financings. There can be no assurance that additional financing 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, the Company may be required to delay, reduce the scope of or eliminate one or more of its research or development programs or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies or products that the Company would otherwise seek to develop or commercialize itself. 5. GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY CLEARANCE The manufacturing and marketing of the Company's potential products and its 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 may 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 the Company or its potential products. Prior to marketing in the United States, any drug developed by the Company 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 conformance with the FDA's good laboratory practice ("GLP") regulations. Before commencing clinical investigations in humans, the Company 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. The Company does 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, the Company or the FDA may suspend clinical trials at any time if it believes 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, the Company may 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 the Company. 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, a marketed product, its manufacturer and its 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. There can be no assurance that any compound developed by the Company 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 Company's ability 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 Community ("EC") certain registration procedures are available to companies wishing to market a product in more than one EC member state. If the 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. NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS The Company is highly dependent on the principal members of its scientific and management staff. Retaining and attracting qualified personnel, consultants and advisors is critical to the Company's success. To pursue its product research and development plans, the Company will be required, and currently is 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. The Company faces intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other research institutions. There can be no assurance that the Company will be able to attract and retain such individuals on acceptable terms or at all. The Company's academic collaborators are not employees of the Company. As a result, the Company has limited control over their activities and can expect that only limited amounts of their time will be dedicated to the 6. activities of the Company. The Company's academic collaborators may have relationships with other commercial entities, some of which could compete with the Company. INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE The pharmaceutical industry is intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively engaged in the research and development of products in the Company's targeted areas. Many of these companies have substantially greater financial, technical and marketing resources than the Company. In addition, some of these companies have considerable experience in preclinical testing, clinical trials and other regulatory approval procedures. Moveover, certain academic institutions, governmental agencies and other research organizations are conducting research in areas in which the Company is 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 the Company in recruiting highly qualified scientific personnel. The Company is pursuing areas of product development in which there is a potential for extensive technological innovation in relatively short periods of time. The Company's first clinical compound, APC 366, is in clinical trials in the United Kingdom for the treatment of asthma. Currently, Schering-Plough, Astra and Glaxo-Wellcome, among others, produce therapeutics for the treatment of asthma. The Company's competitors may succeed in developing technologies or products that are more effective than those of the Company. Rapid technological change or developments by others may result in the Company's technology or potential products becoming obsolete or noncompetitive. There can be no assurance that the Company'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 the Company. LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON CONTRACT MANUFACTURERS The Company has no manufacturing facilities. The Company's potential products have never been manufactured on a commercial scale. Furthermore, the Company must rely on its collaborators, such as Bayer, Pharmacia & Upjohn, Amgen and SmithKline, to manufacture potential products created by the collaborations. Although the Company believes that it, or its collaborators or contract manufacturers, will be able to manufacture its compounds in a commercially viable manner, there can be no assurance that such compounds can be manufactured at a cost or in quantities necessary to make them commercially viable. If the Company and its collaborators are unable to manufacture or contract with others for a sufficient supply of its compounds on acceptable terms, or if they should encounter delays or difficulties in their relationships with third party manufacturers, the Company's preclinical and clinical testing schedule 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 the Company. Moreover, the Company and its collaborators and contract manufacturers must adhere to current good manufacturing practices ("GMP") regulations enforced by the FDA through its 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 The Company currently has no sales, marketing or distribution capability. The Company will rely on its collaborative relationships, such as those with Bayer, Pharmacia & Upjohn, Amgen and SmithKline, to market certain of its potential products, may enter into future collaborations by which the Company will come to rely on the collaborators to market its products, and may decide to market other potential products directly. To market any of its potential products directly, the Company must develop a marketing and sales force with technical expertise and with supporting distribution capability. There can be no assurance that the Company 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 its potential products. Under its existing collaborations, and to the extent that the Company enters into future co-promotion or other licensing arrangements, any revenues received by the Company 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 the Company'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 the Company'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 the Company. 7. UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT 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 on prescription pharmaceuticals is subject to governmental control. In the United States there have been, and the Company expects 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. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business, the announcement of such proposals or efforts could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals or efforts could have a material adverse effect on the Company's 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 the Company, the Company's ability to establish a strategic alliance may be adversely affected. In addition, in both domestic and foreign markets, sales of the Company'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 the Company's potential products will be considered cost-effective or that adequate third-party reimbursement will be available to enable the Company to maintain price levels sufficient to realize an appropriate return on its investment in product development. RISKS OF PRODUCT LIABILITY; UNCERTAIN AVAILABILITY OF INSURANCE The use of any of the Company's potential products in clinical trials and the sale of any approved products, including the testing and commercialization of APC 366, may expose the Company to liability claims resulting from the use of such products. These claims might be made directly by consumers, pharmaceutical companies or others. The Company maintains product liability insurance coverage for claims arising from the use of its products. However, coverage is becoming increasingly expensive. No assurance can be given that the Company will be able to maintain insurance or, if maintained, that insurance can be acquired at a reasonable cost or in sufficient amounts to protect the Company against losses due to liability. There can be no assurance that the Company will be able to obtain commercially reasonable product liability insurance for any product approved for marketing in the future or that insurance coverage and the resources of the Company would be sufficient to satisfy any liability resulting from product liability claims. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on its business, financial condition and results of operations. HAZARDOUS MATERIALS The Company's research and development programs involve the controlled use of hazardous materials, chemicals and various radioactive compounds. The Company may incur substantial costs to comply with environmental regulations if the Company develops manufacturing capacity. Although the Company believes that its 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, the Company could be held liable for any damages that result and any such liability which could have a material adverse effect on the Company's business, financial condition and results of operations. ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation and Bylaws require that any action required or permitted to be taken by stockholders of the Company 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 the Company may be called only by the Board of Directors, the Chairman of the Board or the President of the Company. These and other charter provisions may discourage certain types of transactions involving an actual or potential change in control of the Company, 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 Board of Directors has 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 the Company. PRICE VOLATILITY IN PUBLIC MARKET The Company's Common Stock currently trades on the Nasdaq National 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 prices of the common stock of many publicly traded biopharmaceutical companies have in the past been, and can in the future be expected to be, especially volatile. Announcements of technological innovations or new products of the Company or its competitors, developments or disputes concerning patents or proprietary rights, publicity regarding actual or potential medical results relating to products under development by the Company or its 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 8 factors, as well as period-to-period fluctuations in the Company's operating and product development results, may have a significant impact on the market price of the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Substantially all of the Company's shares are eligible for sale in the public market. An aggregate of 1,050,000 shares cannot be sold until January 1997 pursuant to contractual limitations entered into in connection with the acquisition of Khepri. In addition, as part of the acquisition of Khepri, the Company agreed to pay to former Khepri stockholders, on December 30, 1996, at the Company's option either approximately $6.2 million or 518,701 additional shares of Common Stock, subject to adjustment if the average of the closing sale prices of the Common Stock on the Nasdaq National Market during the ninety trading days ending on December 27, 1996 is less than $10.14 or greater than $13.71. If such additional shares are issued they may be traded immediately. ABSENCE OF DIVIDENDS; DILUTION; ACQUISITION OF KHEPRI The Company has not paid any cash dividends since its inception and does not intend to pay any cash dividends in the foreseeable future. The public offering price is substantially higher than the book value per share of the outstanding Common Stock. Investors purchasing shares of Common Stock in this offering will therefore incur immediate, substantial dilution. In addition, dilution will occur upon the exercise of outstanding stock options and warrants of the Company and may occur upon future equity financings of the Company. Furthermore, in connection with acquisition of Khepri, the Company may issue an additional 518,701 shares of Common Stock to the former Khepri stockholders, subject to adjustment, which would result in further dilution to purchasers in the offering. THE COMPANY Arris Pharmaceutical 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-based discovery programs targeting the inhibition of enzymes implicated in inflammatory and certain other diseases such as asthma, blood clotting disorders, arthritis, osteoporosis, cancer and various infectious disease; and receptor-based discovery programs, including those designed to discover small molecule drugs that mimic therapeutically important proteins, such as erythropoietin, human growth hormone, granulocyte colony stimulating factors and thrombopoietin, and research programs to develop drugs that modulate the activity of receptors involved in diseases such as cancer and diabetes. Arris Pharmaceutical Corporation was incorporated in Delaware in April 1989. The Company's executive offices are located at 385 Oyster Point Boulevard, Suite 3, South San Francisco, California 94080, and its telephone number is (415) 829-1000. Unless the context otherwise requires, references to "Arris" or "the Company" refer to Arris Pharmaceutical Corporation, a Delaware corporation and its wholly-owned subsidiaries, Arris Protease, Inc. and Arris Pharmaceuticals Canada, Inc. USE OF PROCEEDS The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders in the offering. DIVIDEND POLICY Arris has never paid any cash dividends on its Common Stock. The Company presently intends to retain any earnings for use in its business and therefore does not anticipate paying cash dividends in the foreseeable future. 9 SELLING STOCKHOLDERS The following table sets forth the names of the Selling Stockholders, the number of shares of Common Stock owned beneficially by each of them as of July 15, 1996 and the number of shares which may be offered pursuant to this Prospectus. This information is based upon information provided by the Selling Stockholders. The Selling Stockholders may sell all, some or none of their Common Stock being offered. SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO NUMBER OWNED AFTER OFFERING(1) OF SHARES OFFERING(1)(3) ------------------------------ BEING -------------------------------- NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2) - --------------------------- ---------- ------------ ------------- --------- ------------- Sofinov Societe Financiere D'Innovation Inc.(4) 80,709(5) * 80,709 0 * Societe Innovatech du Grand Montreal(4) 80,709(5) * 80,709 0 *
- -------------- * Less than one percent. (1) Unless otherwise indicated below, the persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them, subject to community property laws where applicable. (2) Applicable percentage of ownership is based on 14,016,236 shares of Common Stock outstanding on July 15, 1996. (3) Assumes the sale of all shares offered hereby. (4) Until the completion of the exchange for the Company's Common Stock, each of the selling stockholders holds 632,211 Class B shares of the Canadian subsidiary of Khepri and has a representative on such entity's five person board of directors. (5) Shares to be issued prior to this offering pursuant to certain contractual exchange rights granted in connection with the acquisition of Khepri. See "Plan of Distribution." 10 PLAN OF DISTRIBUTION In connection with the acquisition of Khepri Pharmaceuticals, Inc. ("Khepri"), Arris entered into amendments to existing agreements relating to a Canadian subsidiary of Khepri ("Khepri Canada"), of which Khepri held 50% of the voting stock and two Canadian investors the remainder. Pursuant to the Khepri Canada Agreements, defined below, in June 1996, the Company terminated the parties' obligation to make additional equity investment in Khepri Canada. The Canadian investors then exercised their right to exchange all of their shares of Khepri Canada stock for an aggregate of 161,418 shares of Arris Common Stock and to have the Company file a registration statement registering such shares. Specifically, the Company is registering the shares of Common Stock offered by the Selling Stockholders hereunder pursuant to contractual registration rights contained in the Subscription Agreement among Khepri, Khepri Canada, the Selling Stockholders hereunder dated as of March 24, 1995, as amended by the Agreement and First Amendment to Subscription Agreement among Khepri, Khepri Canada, the Selling Stockholders hereunder and Arris dated as of November 7, 1995, and the Stock Exchange Agreement among Khepri and the Selling Stockholders hereunder dated March 24, 1995, as amended by the First Amendment to Stock Exchange Agreement among Khepri, the Selling Stockholders hereunder and Arris dated November 7, 1995 (the "Khepri Canada Agreements"). Sales may be made by the Selling Stockholders or their successors in interest on the Nasdaq National Market or in private transactions or in a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Selling Stockholders and any persons who participate in the distribution of the Common Stock offered hereby may be deemed to be underwriters within the meaning of the Act, and any discounts, commissions or concessions received by them and any provided pursuant to the sale of shares by them might be deemed to be underwriting discounts and commissions under the Act. In order to comply with the securities laws of certain states, if applicable, the Common Stock may be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the Common Stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with. The Company has agreed in the Khepri Canada Agreements to register the shares of Arris Common Stock received by the Selling Stockholders under applicable Federal and state securities laws under certain circumstances and at certain times. Pursuant to such agreements, the Company has filed a registration statement related to the shares offered hereby and has agreed to keep such registration statement effective until the earliest of (i) one hundred twenty (120) days after the effective date of the registration statement relating to the shares offered hereby, or (ii) the sale of all the securities registered thereunder. The Company will pay substantially all of the expenses incident to the offering and sale of the Common Stock to the public, other than commissions, concessions and discounts of underwriters, dealers or agents. Such expenses (excluding such commissions and discounts), are estimated to be $55,000. The Company and the Selling Stockholders have agreed to cross-indemnification to the extent permitted by law, for losses, claims, damages, liabilities and expenses arising, under certain circumstances, out of any registration of the Common Stock. LEGAL MATTERS The validity of the issuance of the Common Stock offered hereby will be passed upon for the Company by Cooley Godward Castro Huddleson & Tatum, Palo Alto, California. As of the date of this Prospectus, Cooley Godward and certain members of Cooley Godward beneficially owned an aggregate of approximately 13,000 shares of Common Stock. In addition, Alan C. Mendelson, a partner of Cooley Godward, is the Secretary of Arris. EXPERTS The consolidated financial statements of Arris Pharmaceutical Corporation as December 31, 1995 and 1994 and for the three years ended December 31, 1995 incorporated by reference herein, and the financial statements of Khepri Pharmaceuticals, Inc. at December 31, 1994 and 1993 and for the period from inception (April 24, 1992) to December 31, 1992 and the two years ended December 31, 1994 also incorporated by reference herein have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon included therein. Such financial statements of Arris and Khepri are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ---------------------- 11 No dealer, salesman or other ---------------- person has been authorized to give any information or to 161,418 make any representations other than those contained in this Common Stock Prospectus and, if given or made, such other information ARRIS PHARMACEUTICAL and representations must not CORPORATION be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer or solicitation by anyone in any state in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. The delivery of this Prospectus at any time does not imply that the information herein is correct as of any time subsequent to the date hereof. --------------- TABLE OF CONTENTS Page PROSPECTUS Available Information . . . . . . . . 2 Additional Information . . . . . . . . 2 -------------- Incorporation of Certain Documents by Reference . . . . . . . . 2 Risk Factors . . . . . . . . . . . . . 3 The Company. . . . . . . . . . . . . . 9 Use of Proceeds. . . . . . . . . . . . 9 Dividend Policy. . . . . . . . . . . . 9 July 31, 1996 Selling Stockholders . . . . . . . . . 9 Plan of Distribution . . . . . . . . .11 Legal Matters. . . . . . . . . . . . .11 Experts . . . . . . . . . . . . . . .11 ------------- 12 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates except for the registration fee. Registration fee.................. $ 630.07 Legal fees and expenses........... 35,000.00 Accounting Fees and Expenses...... 15,000.00 Miscellaneous..................... 4,369.93 -------------- Total......................... $ 55,000.00 -------------- -------------- ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also provide that the Registrant will indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent not prohibited by Delaware law. The Registrant's Certificate of Incorporation provides for the elimination of liability for monetary damages for breach of the directors' fiduciary duty of care to the Registrant and its stockholders. These provisions do not eliminate the directors' duty of care and, in appropriate circumstances, equitable remedies such an injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for any transaction from which the director derived an improper personal benefit, and for payment of dividends or approval of stock repurchases or redemption that are unlawful under Delaware law. The provision does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into agreements with its directors and executive officers that require the Registrant to indemnify such persons against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or officer of the Registrant or any of its affiliated enterprises, provided such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. II-1 ITEM 16. EXHIBITS 5.1 Opinion of Cooley Godward Castro Huddleson & Tatum 10.1 Collaborative Research and License Agreement between SmithKline Beecham Corporation and Arris Pharmaceutical Corporation, dated June 27, 1996. (1) 10.2 Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of March 29, 1996. 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Ernst & Young LLP, Independent Auditors 23.3 Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see page II-4). - --------------------- (1) Portions omitted pursuant to a request for confidentiality filed separately with the Commission. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or 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 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. The undersigned registrant hereby undertakes: (1) To file, during any period during which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or any decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low end or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for purposes of determining 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 to be offered therein, and the offering of such securities at that time shall be deemed to be an initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which shall remain unsold at the termination of the offering. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of South San Francisco City, County of San Francisco, State of California, on the ____ day of July, 1996. ARRIS PHARMACEUTICAL CORPORATION By /s/Daniel H. Petree ------------------- Daniel H. Petree Executive Vice President, Corporate Development and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John P. Walker and Daniel H. Petree, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. II-3 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ----- /s/John P. Walker Chief Executive Officer July 31, 1996 - ---------------------------- President, Chairman of the John P. Walker Board and Director (Principal Executive Officer /s/Daniel H. Petree Executive Vice President, Corporate July 31, 1996 - ---------------------------- President, Chairman of the Daniel H. Petree Board and Director (Principal Executive Officer /s/Brook H. Byers Director July 31, 1996 - ---------------------------- Brook H. Byers /s/Anthony B. Evnin Director July 31, 1996 - ---------------------------- Anthony B. Evnin /s/Vaughn M. Kailian Director July 31, 1996 - ---------------------------- Vaughn M. Kailian /s/Michael J. Ross Director July 31, 1996 - ---------------------------- Michael J. Ross Director July 31, 1996 - ---------------------------- Hans Sivertsson
II-4 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 5.1 Opinion of Cooley Godward Castro Huddleson & Tatum 10.1 Collaborative Research and License Agreement between SmithKline Beecham Corporation and Arris Pharmaceutical Corporation, dated June 27, 1996. (1) 10.2 Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of March 29, 1996. 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Ernst & Young LLP, Independent Auditors 23.3 Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see page II-4). - ---------------------- (1) Portions omitted pursuant to a request for confidentiality filed separately with the Commission. EX-5.1 2 EXHIBIT 5.1 EXHIBIT 5.1 [LOGO] ATTORNEYS AT LAW SAN FRANCISCO, CA 415 693-2000 Five Palo Alto Square MENLO PARK, CA 3000 El Camino Real 415 843-5000 Palo Alto, CA 94306-2155 SAN DIEGO, CA MAIN 415 843-5000 619 550-6000 FAX 415 857-0663 WEB http://www.cooley.com BOULDER, CO 303 546-4000 DENVER, CO 303 606-4800 July 31, 1996 Arris Pharmaceutical Corporation 385 Oyster Point Boulevard South San Francisco, CA 94080 Ladies and Gentlemen: You have requested our opinion with respect to certain matters in connection with the filing by Arris Pharmaceutical Corporation (the "Company") of a Registration Statement on Form S-3 on or about July 31, 1996 (the "Registration Statement") with the Securities and Exchange Commission covering the offering of up to One Hundred Sixty One Thousand Four Hundred Eighteen (161,418) shares of the Company's Common Stock, $.001 par value (the "Shares"). In connection with this opinion, we have examined the Registration Statement and related Prospectus, your Restated Certificate of Incorporation and Bylaws, as amended, and such other documents, records, certificates, memoranda and other instruments as we deem necessary as a basis for this opinion. We have assumed the genuineness and authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies thereof, and the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares, when sold and issued in accordance with the Registration Statement and related Prospectus, will be validly issued, fully paid, and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, COOLEY GODWARD CASTRO HUDDLESON & TATUM /s/ Gregory C. Smith Gregory C. Smith EX-10.1 3 EXHIBIT 10.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT 10.1 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN SMITHKLINE BEECHAM CORPORATION AND ARRIS PHARMACEUTICAL CORPORATION []= Confidential Treatment Requested - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN SMITHKLINE BEECHAM CORPORATION AND ARRIS PHARMACEUTICAL CORPORATION l. DEFINITIONS 2. PROOF OF CONCEPT PHASE AND RESEARCH PHASE 3. GRANT 4. PAYMENTS AND ROYALTIES 5. COMPULSORY LICENSES AND THIRD PARTY LICENSES 6. DEVELOPMENT 7. TERM AND TERMINATION 8. RIGHTS AND DUTIES UPON TERMINATION 9. EXCHANGE OF INFORMATION AND CONFIDENTIALITY 10. INVENTIONS, PATENTS AND PATENT LITIGATION 11. TRADEMARKS AND NON-PROPRIETARY NAMES 12. STATEMENTS AND REMITTANCES 13. WARRANTIES AND REPRESENTATIONS 14. FORCE MAJEURE 15. GOVERNING LAW 16. DISPUTE RESOLUTION 17. SEPARABILITY 18. ENTIRE AGREEMENT 19. NOTICES 20. ASSIGNMENT 21. RECORDING 22. EXECUTION IN COUNTERPARTS SIGNATURES APPENDIX A - DELTA FACTOR PATENTS AND PRODUCT PATENTS APPENDIX B - DELTA FACTOR COMPOUND STATUS AND COLLABORATION COMPOUND STATUS CRITERIA APPENDIX C - RESEARCH APPENDIX D - SELECTION FILTERS FOR PRE-PROJECT STATUS DESIGNATION APPENDIX E - ANIMAL MODELS []= Confidential Treatment Requested - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (hereinafter referred to as "AGREEMENT"), made as of the 27th day of June, 1996, between Arris Pharmaceutical Corporation, a company organized under the laws of the state of Delaware and having its principal place of business at 385 Oyster Point Boulevard, Suite 3, South San Francisco 94080, U.S.A. and SmithKline Beecham Corporation, a corporation of the Commonwealth of Pennsylvania, having a place of business at One Franklin Plaza, Philadelphia, Pennsylvania 19101, U.S.A., WITNESSETH THAT: WHEREAS, the parties desire to collaborate on the application of DELTA FACTOR TECHNOLOGY (as hereinafter defined) to identify inhibitors of viral proteases [ ] (as hereinafter defined); and WHEREAS, ARRIS is the owner of all right, title and interest in certain patents, identified in Appendix A hereto, and know-how relating to such DELTA FACTOR TECHNOLOGY; and WHEREAS, SB desires to obtain certain worldwide licenses from ARRIS under the aforesaid patents and know-how, and ARRIS is willing to grant to SB such licenses; NOW, THEREFORE, in consideration of the covenants and obligations expressed herein, and intending to be legally bound, and otherwise to be bound by proper and reasonable conduct, the parties agree as follows: 1. DEFINITIONS 1.01 "AFFILIATES" shall mean any corporation, firm, partnership or other entity, whether DE JURE or DE FACTO, which directly or indirectly owns, is owned by or is under common ownership with a party to this AGREEMENT where "owns" or "ownership" means possession of at least fifty percent (50%) of the equity (or such lesser percentage which is the maximum allowed to be owned by a foreign corporation in a particular jurisdiction) having the power to vote on or direct the affairs of the entity and any person, firm, partnership, corporation or other entity actually controlled by, controlling or under common control with a party to this AGREEMENT. 1.02 "ARRIS" shall mean Arris Pharmaceuticals Corporation, a company organized under the laws of the state of Delaware and having its principal place of business at 385 Oyster Point Boulevard, Suite 3, South San Francisco 94080, U.S.A. 1.03 "BAYER" shall mean Bayer AG, a corporation of the country of Germany, having a place of business at D-51368 Leverkusen, Germany. 1.04 "COMBINATION PRODUCT" shall mean a product that includes a PRODUCT and one or more other therapeutically or prophylactically active compositions of matter. []= Confidential Treatment Requested 3. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.05 "COLLABORATION COMPOUND(S)" shall mean: (a) any DELTA FACTOR COMPOUND that is synthesized by SB or ARRIS in connection with the RESEARCH and that is shown to satisfy the parameters set forth in Appendix B (Part 2), provided that such showing occurs [ ]; or (b) any DELTA FACTOR COMPOUND that: [ ]. 1.06 "DELTA FACTOR" shall mean that factor whose presence enables the indication of enhanced potency of a serine or cysteine protease inhibitor, which factor is described in detail in the side letter to this AGREEMENT, which side letter is executed by the parties contemporaneously with this AGREEMENT. 1.07 "DELTA FACTOR COMPOUND" shall mean any compound that meets the parameters outlined in Appendix B (Part 1). 1.08 "DELTA FACTOR PATENTS" shall mean all patents and patent applications in which ARRIS has, now or in the future, the right to grant the licenses provided under this AGREEMENT, which generically or specifically claim an invention related to DELTA FACTOR TECHNOLOGY, improvements on DELTA FACTOR TECHNOLOGY or a use of DELTA FACTOR TECHNOLOGY, but only to the extent that such claims relate to the FIELD, certain DELTA FACTOR COMPOUNDS (limited to those compounds which are synthesized by SB or ARRIS in furtherance of this AGREEMENT, during the course of the PROOF OF CONCEPT PHASE, the course of the RESEARCH PHASE, or during one (1) year thereafter, as a result of which an intellectual property right arises for either or both parties, and which meet the parameters outlined in Appendix B (Part 1)), COLLABORATION COMPOUND, and/or PRODUCT. In addition, included within the definition of DELTA FACTOR PATENTS are any continuations, continuations-in-part, divisions, patents of addition, reissues, renewals or extensions thereof and all SPCS. The current list of patent applications and patents is set forth in APPENDIX A attached hereto. APPENDIX A shall be updated by ARRIS on a semi-annual basis. 1.09 "DELTA FACTOR KNOW-HOW shall mean all information and expertise which relates to DELTA FACTOR TECHNOLOGY. 1.10 "DELTA FACTOR TECHNOLOGY" shall mean that technology which is described in detail in the side letter to this AGREEMENT, which side letter is executed by the parties contemporaneously with this AGREEMENT. []= Confidential Treatment Requested 4. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.11 "EFFECTIVE DATE" shall mean the date as of which this AGREEMENT is effective and shall be the date of this AGREEMENT first written above. 1.12 "FDA" shall mean the United States Food and Drug Administration. 1.13 "FIELD" shall mean the identification of inhibitors of proteases of any [ ]. 1.14 [ ]. 1.15 "NET SALES" shall mean the gross receipts representing sales of PRODUCT under this AGREEMENT by SB, its AFFILIATES or sublicensees ("the Selling Party") to THIRD PARTIES: (a) in finished product form (i.e., packaged and labeled for sale to the ultimate consumer); and (b) in any product form other than finished product form (such as final stage bulk material ready for conversion to final form, or bulk tablets, bulk capsules, bulk ampoules or bulk vials) to distributors who subsequently convert such product into finished product form and sell to THIRD PARTIES, provided that such distributors shall not be considered sublicensees for purposes of this NET SALES definition, and further provided that for purposes of this Paragraph, such sales of PRODUCT in final stage bulk material form shall only occur where such sales are due to local country requirements as such requirements are determined by SB; less deductions actually allowed or specifically allocated to PRODUCT by the Selling Party using generally accepted accounting standards for: [ ]. In the event that SB or any AFFILIATE or any of its sublicensees shall sell or supply any PRODUCT to any THIRD PARTY for a consideration other than a monetary consideration or at a price [ ], the royalties payable pursuant to Article 4 shall be calculated by reference to the NET SALES at which such PRODUCT(S) would have []= Confidential Treatment Requested 5. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- been sold had they been sold to a THIRD PARTY entering [ ] with SB or the AFFILIATE or the sublicensee in question to purchase such PRODUCT(S). It is hereby agreed for the sake of absolute clarity and understanding that any sales between SB, its AFFILIATES and its or their sublicensees shall be excluded from the computation of NET SALES and no royalties will be payable on such sales. Notwithstanding the immediately preceding sentence, it is hereby nevertheless expressly agreed that any transactions between SB or any of its AFFILIATES or any of its sublicensees on the one hand and PSB on the other hand will be deemed to be [ ] for the purposes of computing NET SALES, provided that the conditions of such sales to PSB, including any and all rebates and discounts allocated to transactions with any such PSB, shall be [ ] and shall be [ ]. In the event that any PSB type activity is within SB or within any of its AFFILIATES or sublicensees as only part of its or their total activities rather than in a separate AFFILIATE a notional Net Sales figure will be calculated [ ] to cover such activities. 1.16 "PRODUCT" shall mean COLLABORATION COMPOUND and shall include pharmaceutical compositions comprising such COLLABORATION COMPOUND. 1.17 "PRODUCT KNOW-HOW" shall mean all information and expertise which relates to PRODUCT and shall include, without limitation, all chemical, pharmacological, toxicological, clinical, assay, control and manufacturing data and any other information and reagents relating to PRODUCT and useful or required for the development and commercialization of PRODUCT, to the extent that ARRIS is free to disclose such and grant SB the licenses provided by this AGREEMENT. 1.18 "PRODUCT PATENT(S)" shall mean all patents and patent applications, including all continuations, continuations-in-part, divisions, patents of addition, reissues, renewals or extensions thereof and all SPCS, which are or become owned by ARRIS and under which ARRIS has the right to grant licenses, or to which ARRIS otherwise has, now or in the future, the right to grant licenses, which generically or specifically claim PRODUCT, a process for manufacturing PRODUCT, or an intermediate used in such process or a use of PRODUCT. Also included within the definition of PATENTS are any patents or patent applications which generically or specifically claim any improvements on PRODUCT or intermediates or manufacturing processes required or useful for production of PRODUCT which are developed by ARRIS and which ARRIS has the right to grant licenses, or which ARRIS otherwise has the right to grant licenses, now or in the future, during the term of this AGREEMENT. The current list of patent applications and patents encompassed within PATENTS is set forth in APPENDIX A attached hereto. APPENDIX A shall be updated by ARRIS on a semi-annual basis. 1.19 "PROOF OF CONCEPT PHASE" shall mean the period of time, such period to be determined according to Paragraphs 2.01 together with Paragraph 2.02, during which ARRIS and/or SB shall carry out work in furtherance of this AGREEMENT to prove that the DELTA FACTOR TECHNOLOGY is applicable to identification of inhibitors of intracellular serine proteases. []= Confidential Treatment Requested 6. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.20 "PSB" shall mean any present or future AFFILIATE of SB or its sublicensees which conducts a Pharmaceutical Service Business for or on behalf of THIRD PARTIES, including Pharmaceutical Benefits Management Services (hereinafter "PBM"), wholesaler distribution, pharmacy distribution, managed care services, disease management services, hospital services, or mail order prescription pharmacy services (hereinafter "PPS"). As of the EFFECTIVE DATE, an AFFILIATE of SB which is included within the definition of PBM is Diversified Pharmaceutical Services, a corporation of the state of Minnesota and having a place of business at 3600 West 80th Street, Seventh Floor, Bloomington, Minnesota 55431-1085. As of the EFFECTIVE DATE, an AFFILIATE of SB which is included within the definition of PPS is Diversified Prescription Delivery, a corporation of the Commonwealth of Pennsylvania and having a place of business at 206 Welsh Road, Horsham, Pennsylvania 19044, U.S.A. 1.21 "PUBLIC DISCLOSURE" shall mean any publication or presentation, either by ARRIS or any THIRD PARTY, of either: [ ]. 1.22 "RELEVANT FACTOR" shall mean a factor which is physiologically relevant to DELTA FACTOR, which relevant factor is described in detail in the side letter to this AGREEMENT, which side letter is executed by the parties contemporaneously with this AGREEMENT 1.23 "RESEARCH" shall mean the collaborative research program undertaken by the parties pursuant to this AGREEMENT which is directed to the application of DELTA FACTOR TECHNOLOGY to identify inhibitors of viral proteases of [ ], which program is conducted during the PROOF OF CONCEPT PHASE and the RESEARCH PHASE. The scope of the RESEARCH is further elaborated in Appendix C which is attached hereto and fully incorporated into this AGREEMENT as such may be amended in accordance with Paragraph 2.05. 1.24 "RESEARCH PHASE" shall mean the period of time, determined in accordance with Paragraph 2.03(b), after SB has made an election in accordance with Paragraph 2.03(b) to have such period commence, during which ARRIS and/or SB shall carry out work in furtherance of this AGREEMENT in accordance with the relevant section of Appendix C. 1.25 "RESEARCH STEERING COMMITTEE" shall mean a committee containing senior research members from both parties which the parties shall set up, promptly after the EFFECTIVE DATE, to facilitate the RESEARCH. The responsibilities of the RESEARCH STEERING COMMITTEE are set forth in Paragraph 2.05. []= Confidential Treatment Requested 7. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.26 "SB" shall mean SmithKline Beecham Corporation, a corporation of the Commonwealth of Pennsylvania, having a place of business at One Franklin Plaza, Philadelphia, Pennsylvania 19101, U.S.A. 1.27 "SB PRODUCT PATENT" shall mean all patents, including all continuations, continuations-in-part, divisions, patents of addition, reissues, renewals or extensions thereof and all SPCS, which are owned by SB which generically or specifically claim PRODUCT. 1.28 "SPC(S)" shall mean a right which is not a PRODUCT PATENT or an SB PRODUCT PATENT but which is based upon a PRODUCT PATENT or an SB PRODUCT PATENT to exclude others from making, using or selling PRODUCT, such as a Supplementary Protection Certificate. 1.29 "TERRITORY" shall mean all the countries and territories of the world. 1.30 "THIRD PARTY(IES)" shall mean any party other than a party to this AGREEMENT except as otherwise provided in Paragraph 1.15. 2. PROOF OF CONCEPT PHASE AND RESEARCH PHASE 2.01 During the PROOF OF CONCEPT PHASE, ARRIS shall carry out work to prove that the DELTA FACTOR TECHNOLOGY is applicable to the identification of inhibitors of intracellular serine proteases. The PROOF OF CONCEPT PHASE shall commence upon the EFFECTIVE DATE and continue until the expiration of [ ] thereafter, unless such period is earlier terminated or extended as provided in this AGREEMENT. SB shall provide funding to ARRIS to assist ARRIS in carrying out ARRIS' responsibilities during the PROOF OF CONCEPT PHASE. Such funding shall be provided based upon each full time scientific person directly devoted to carrying out the PROOF OF CONCEPT PHASE work ("FTE(S)") at ARRIS, provided that [ ]. Such funding shall be provided at a level of [ ] per ARRIS FTE for a [ ], or at a pro rata level for any portion of such period, provided that the number of ARRIS FTES during such period to be funded by SB shall be [ ]. The funding by SB to ARRIS shall be provided in [ ] installments during the PROOF OF CONCEPT PHASE, with the first installment to be paid, on a [ ] basis, no later than [ ] after the EFFECTIVE DATE, and each installment thereafter to be paid no later than [ ] in advance of the first day of the [ ], with the last installment to be paid on a pro rata [ ] basis. Notwithstanding the above, in the event that the Proof of Concept milestone (as defined in Paragraph 4.01(4)) is achieved prior to the expiration of such [ ] period, ARRIS shall promptly reimburse SB, on a pro rata basis, for any excess funding paid by SB to ARRIS under this Paragraph, and SB's funding obligations for PROOF OF CONCEPT PHASE work shall terminate effective as of the date of such achievement. Such funding is provided by SB to ARRIS as the full extent of SB's responsibility for paying the direct and indirect costs to ARRIS associated with ARRIS' PROOF OF 8. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONCEPT PHASE responsibilities, including, but not limited to, [ ]. Any additional costs which may arise in connection with ARRIS' PROOF OF CONCEPT PHASE responsibilities shall be ARRIS' sole responsibility. 2.02 If ARRIS does not achieve Proof of Concept (as defined in Paragraph 4.01(4)) by the end of the initial [ ] period of the PROOF OF CONCEPT PHASE, SB may elect, at its sole discretion, within [ ] after the end of such initial period: (a) to extend the PROOF OF CONCEPT PHASE for up to [ ], after the end of the initial [ ] period of the PROOF OF CONCEPT PHASE ("Additional Period"), in which event [ ] additional funding during such Additional Period to assist ARRIS' continued work, such funding to be based upon the same terms and conditions set out in Paragraph 2.01, provided that all funding provided [ ] during such Additional Period shall be fully creditable against any funding for the RESEARCH PHASE to be provided by SB to ARRIS under Paragraph 2.03, such credit to be taken at SB's discretion as provided in Paragraph 2.03. If ARRIS does not achieve Proof of Concept (as defined in Paragraph 4.01(4)) by the end of the [ ] of the Additional Period, SB may elect, at its sole discretion, no later than [ ] after the end of the first [ ] of the Additional Period to fund the [ ] of the Additional Period or to make the election outlined in Paragraph 2.02(c), provided that, in such event SB may continue the PROOF OF CONCEPT PHASE work only for an additional [ ] period. (1) If SB elects not to fund the [ ] of the Additional Period or makes the election outlined in Paragraph 2.02(c) but does not achieve Proof of Concept (as defined in Paragraph 4.01(4)) by the end of the [ ], or if SB does elect to fund such [ ] but ARRIS does not achieve Proof of Concept (as defined in Paragraph 4.01(4)) by the end of the [ ] Additional Period, the AGREEMENT shall terminate [ ] and SB shall have no obligation to make the milestone payment provided in Paragraph 4.01(b) or any other payments under this AGREEMENT which have not accrued as of the effective date of such termination, except as otherwise provided in Paragraph 2.06; provided that (i) all of the license rights in Paragraphs 3.01, 3.02 and 3.03 shall immediately terminate and revert back to the granting party, (ii) the license rights granted under Paragraph 3.04 and Paragraph 3.05 shall forever and irrevocably survive such termination, and (iii) ARRIS shall have an irrevocable, exclusive right to make, have made, use and sell, in the FIELD, all COLLABORATION COMPOUNDS in existence as of the effective date of such termination, under a license to any SB PRODUCT PATENTS which arose as a result of work performed in furtherance of this AGREEMENT which claim the making, use or sale of such COLLABORATION COMPOUNDS in the FIELD. (2) If SB funds the [ ] of the Additional Period, but ARRIS does not achieve Proof of Concept (as defined in Paragraph 4.01(4)) by the end of the [ []= Confidential Treatment Requested 9. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ] of the Additional Period, SB may, at its sole discretion, no later than [ ] after the end of the [ ] of the Additional Period make the election outlined in Paragraph 2.02(c), provided that, in such event, SB may continue the PROOF OF CONCEPT PHASE work only for an additional [ ] period. If SB does not make the election outlined in Paragraph 2.02(c), the AGREEMENT shall terminate retroactive to [ and SB shall have no obligation to make the milestone payment provided in Paragraph 4.01(b) or any other payments under this AGREEMENT which have not accrued as of the effective date of such termination, except as otherwise provided in Paragraph 2.06 ; provided that (i) all of the license rights in Paragraphs 3.01, 3.02 and 3.03 shall immediately terminate and revert back to the granting party, (ii) the license rights granted under Paragraph 3.04 and Paragraph 3.05 shall forever and irrevocably survive such termination, and (iii) ARRIS shall have an irrevocable, exclusive right to make, have made, use and sell, in the FIELD, all COLLABORATION COMPOUNDS in existence as of the effective date of such termination, under a license to any SB PRODUCT PATENTS which arose as a result of work performed in furtherance of this AGREEMENT which claim the making, use or sale of such COLLABORATION COMPOUNDS in the FIELD. (3) If SB does make the election outlined in Paragraph 2.02(c), the AGREEMENT shall terminate retroactive to the last day of the [ ] period after the Additional Period and SB shall have no obligation to make the milestone payment provided in Paragraph 4.01(b) or any other payments under this AGREEMENT which have not accrued as of the effective date of such termination, except as otherwise provided in Paragraph 2.06 ; provided that (i) all of the license rights in Paragraphs 3.01, 3.02 and 3.03 shall immediately terminate and revert back to the granting party, (ii) the license rights granted under Paragraph 3.04 and Paragraph 3.05 shall forever and irrevocably survive such termination, and (iii) ARRIS shall have an irrevocable, exclusive right to make, have made, use and sell, in the FIELD, all COLLABORATION COMPOUNDS in existence as of the effective date of such termination, under a license to any SB PRODUCT PATENTS which arose as a result of work performed in furtherance of this AGREEMENT which claim the making, use or sale of such COLLABORATION COMPOUNDS in the FIELD; or (b) to terminate the AGREEMENT, such termination to be retroactively effective to the last day of the [ ] period of the PROOF OF CONCEPT PHASE, provided that SB shall have no obligation to make the milestone payment provided in Paragraph 4.01(b) or any other payments under this AGREEMENT which have not accrued as of the effective date of such termination, except as otherwise provided in Paragraph 2.06 : (i) SB's license rights under Paragraph 3.01 and ARRIS' license rights under Paragraph 3.03 shall survive for [ ] after the effective date of such termination. (ii) SB's license rights under Paragraph 3.02 shall immediately terminate, subject to Paragraph 2.02(b)(iii) and Paragraph 2.02(b)(iv). []= Confidential Treatment Requested 10. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (iii) the license rights granted under Paragraph 3.04 and Paragraph 3.05 shall forever and irrevocably survive such termination. (iv) the RESEARCH STEERING COMMITTEE shall survive for one (1) year after the effective date of such termination for the sole purpose of determining whether or not the potential inhibitors identified by the parties during the PROOF OF CONCEPT PHASE meet the parameters outlined in Appendix B (Part 1) and/or Appendix B (Part 2). (v) ARRIS shall not be permitted to enter into an agreement with any THIRD PARTY related to the FIELD for [ ] after the effective date of such termination. (vi) At any time during the [ ] after the effective date of such termination, SB, at its sole discretion, may reactivate the AGREEMENT, upon provision of written notice thereof to ARRIS, in which event all terms and conditions of the AGREEMENT shall be reinstated, and SB shall provide ARRIS with additional funding as follows: (A) during the period from the date SB provides written notice of reinstatement to ARRIS until the end of the PROOF OF CONCEPT PHASE, to assist ARRIS' continued work such additional funding shall be based upon the same terms and conditions set out in Paragraph 2.01, and (B) SB shall reimburse ARRIS for work performed by ARRIS [ ], such reimbursement to be based on the FTE rate set out in Paragraph 2.01, provided that ARRIS shall submit a report to SB which shall set forth ARRIS' determination of the actual number of ARRIS FTES conducting PROOF OF CONCEPT PHASE work during the period from the effective date of the termination to the date SB provided written notice of reinstatement, such number to be confirmed by the RESEARCH STEERING COMMITTEE, provided that all funding provided by SB to ARRIS during the period after the effective date of the termination, i.e., all funding provided under this Paragraph 2.02(b)(vi), shall, at SB's discretion, be [ ]; (vii) If SB elects not to reinstate the AGREEMENT by the end of the [ ], the AGREEMENT shall remain terminated and SB shall have no obligation to make the milestone payment provided in Paragraph 4.01(b) or any other payments under this AGREEMENT which have not accrued as of the effective date of such termination, except as otherwise provided in Paragraph 2.06 ; provided that (a) all of the license rights in Paragraphs 3.01, 3.02 and 3.03 shall immediately terminate and revert back to the granting party, (b) the license rights granted under Paragraph 3.04 and Paragraph 3.05 shall forever and irrevocably survive such termination, and (c) ARRIS shall have an irrevocable, exclusive right to make, have made, use and sell, in the FIELD, all COLLABORATION COMPOUNDS in existence as of the effective date of such termination, under a license to any SB PRODUCT PATENTS which arose as a result of work performed in furtherance of this AGREEMENT which claim the making, use or sale of such COLLABORATION COMPOUNDS in the FIELD; or []= Confidential Treatment Requested 11. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (c) to continue the PROOF OF CONCEPT PHASE work by performing any remaining work at SB research facilities using internal SB resources, in which event any funding owed by SB to ARRIS for the entirety of the period of the PROOF OF CONCEPT PHASE would be limited to that funding to be provided to ARRIS for the [ ] period of the PROOF OF CONCEPT PHASE as provided in Paragraph 2.01 and any portion of the Additional Period elected by SB as provided in Paragraph 2.02(a), provided that SB may continue such PROOF OF CONCEPT PHASE work only for a period of up to [ ] after the end of the [ ], or for any shorter period as provided in Paragraph 2.02(a), and further provided that SB may terminate the AGREEMENT at any time during such [ ] or such shorter period upon [ ] written notice to ARRIS. In the event Proof of Concept (as defined in Paragraph 4.01(4)) is achieved by either party during such [ ] period or such shorter period, SB, at its sole discretion, may elect not to make the milestone payment provided in Paragraph 4.01(b) until such time as SB decides to initiate the RESEARCH PHASE, provided that SB shall make such decision by providing written notice thereof to ARRIS no later than [ ] after such achievement. In the event that SB decides not to initiate the RESEARCH PHASE or does not provide such written notice within such time period, (i) the AGREEMENT shall be terminated and SB shall have no obligation to make the milestone payment provided in Paragraph 4.01(b) or any other payments under this AGREEMENT which have not accrued as of the effective date of such termination, except as otherwise provided in Paragraph 2.06 , (ii) all of the license rights in Article 3 shall immediately terminate and revert back to the granting party but the license rights granted under Paragraph 3.04 and Paragraph 3.05 shall forever and irrevocably survive such termination, (iii) SB shall not have the first right to a license as outlined in Paragraph 2.06(c), and (iv) ARRIS shall have an irrevocable, exclusive right to make, have made, use and sell, in the FIELD, all COLLABORATION COMPOUNDS in existence as of the effective date of such termination, under a license to any SB PRODUCT PATENTS which arose as a result of work performed in furtherance of this AGREEMENT which claim the making, use or sale of such COLLABORATION COMPOUNDS in the FIELD. 2.03 Once Proof of Concept (as defined in Paragraph 4.01(4)) has been achieved, SB shall [ ]. Furthermore, within [ ] after such achievement, SB shall elect, in writing, at its sole discretion, either: (a) to terminate the AGREEMENT, such termination to be effective upon ARRIS' receipt of such written election, in which case such termination shall terminate all of SB's outstanding financial obligations under this AGREEMENT except for any payment obligations which became due prior to the effective date of such termination, except as otherwise provided in Paragraph 2.06 , and all of the license rights in Article 3 shall terminate and revert back to the granting party, except that (i) the license rights granted under Paragraph 3.04 and Paragraph 3.05 shall forever and irrevocably survive such termination; and (ii) ARRIS shall have an irrevocable, exclusive right to make, have made, use and sell, in the FIELD, all COLLABORATION []= Confidential Treatment Requested 12. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMPOUNDS in existence as of the effective date of such termination, under a license to any SB PRODUCT PATENTS which arose as a result of work performed in furtherance of this AGREEMENT which claim the making, use or sale of such COLLABORATION COMPOUNDS in the FIELD; or (b) to have the RESEARCH PHASE commence. In the event that SB elects to have the RESEARCH PHASE commence, SB shall [ ] and SB and ARRIS shall jointly carry out the RESEARCH PHASE in accordance with the plan attached hereto as Appendix C during a period of [ ], such period to commence upon the date of ARRIS' receipt of SB's election, unless such RESEARCH PHASE period is terminated earlier as provided by this AGREEMENT or by the mutual agreement of the parties because, for example, [ ]. The period for carrying out the RESEARCH PHASE may be extended by up to [ ] at SB's option upon prior written notice of [ ]. SB shall provide funding to ARRIS to assist ARRIS in carrying out ARRIS' responsibilities during the RESEARCH PHASE until the expiration of the RESEARCH PHASE period. Such funding shall be subject to any credit which may be due SB in accordance with Paragraph 2.02, provided in the event such credit is taken, [ ]. Such funding shall be provided based upon each full time scientific personnel directly devoted to carrying out the RESEARCH PHASE work ("FTE(S)") at ARRIS, provided that [ ]. Such funding shall be provided at a level of [ ] per ARRIS FTE per year of the RESEARCH PHASE period, or at a pro rata level for any portion of a year, provided that the number of ARRIS FTES during such period to be funded by SB shall be [ ]. The funding by SB to ARRIS shall be provided in [ ] installments during the RESEARCH PHASE, with the first installment to be paid, on a pro rata [ ]basis, no later than [ ] after the initiation of the RESEARCH PHASE, and each installment thereafter to be paid no later than [ ] in advance of the first day of the respective [ ], with the last installment to be paid on a pro rata [ ] basis. Such funding is provided by SB to ARRIS as the full extent of SB's responsibility for paying the direct and indirect costs to ARRIS associated with ARRIS' RESEARCH PHASE responsibilities, including, but not limited to, [ ]. Any additional costs which may arise in connection with ARRIS' RESEARCH PHASE responsibilities shall be ARRIS' sole responsibility, provided that if the RESEARCH PHASE funding is terminated early as provided in this Paragraph, then ARRIS' responsibility to provide FTE support in the performance of the []= Confidential Treatment Requested 13. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RESEARCH PHASE work shall [ ] , but all other RESEARCH PHASE activities, such as the RESEARCH STEERING COMMITTEE, shall continue for the full term of the RESEARCH PHASE. 2.04 In the event that a THIRD PARTY or ARRIS makes a PUBLIC DISCLOSURE, SB may, at its option, terminate the RESEARCH, upon [ ] prior written notice, at any time during the later of (a) the PROOF OF CONCEPT PHASE, or (b) the [ ] after the commencement of the PROOF OF CONCEPT PHASE. In the event of termination of the RESEARCH, (i) the license rights under Paragraphs 3.01 and 3.03 shall survive for [ ] after the effective date of such termination, and thereafter such license rights shall reverse back to the granting party; and (ii) the remaining license rights under Article 3 shall survive such termination. In addition, in the event of termination of the RESEARCH, such termination shall terminate all of SB's outstanding financial obligations related to the RESEARCH except for any payment obligations which became due prior to the effective date of such termination. 2.05 Promptly after EFFECTIVE DATE, the parties shall set up a committee, containing senior research members from both parties, to facilitate the PROOF OF CONCEPT PHASE and the RESEARCH PHASE (hereinafter "RESEARCH STEERING COMMITTEE"). The RESEARCH STEERING COMMITTEE shall consist of six (6) members, three (3) of whom shall be appointed by SB and three (3) of whom shall be appointed by ARRIS. The RESEARCH STEERING COMMITTEE shall meet at such times and places as it may select but, in any event, it shall meet at least three (3) times per calendar year after the EFFECTIVE DATE, provided that the first such meeting shall be held as soon as practicable, but in no event later than ninety (90) days, after the EFFECTIVE DATE. Prior to the conclusion of each four (4) month period after the initiation of the PROOF OF CONCEPT PHASE and the RESEARCH PHASE, the parties shall agree as to any changes in the direction and scope of the PROOF OF CONCEPT PHASE and the RESEARCH PHASE as well as the primary responsibilities of each party in the conduct of the PROOF OF CONCEPT PHASE and the RESEARCH PHASE for the subsequent four (4) months, and Appendix C shall be amended by the RESEARCH STEERING COMMITTEE to reflect such direction and scope, and such amended Appendix C shall thereafter be part of this AGREEMENT. In addition, the RESEARCH STEERING COMMITTEE shall determine whether or not the potential inhibitors synthesized by the parties during the PROOF OF CONCEPT PHASE and the RESEARCH PHASE or within [ ] after the end of the term of the PROOF OF CONCEPT PHASE and the RESEARCH PHASE [ ]. In addition, the RESEARCH STEERING COMMITTEE shall determine whether or not each particular DELTA FACTOR COMPOUND [ ]. All decisions for which the RESEARCH STEERING COMMITTEE cannot reach consensus shall be submitted for resolution to senior ARRIS and SB management, provided that SB shall make the final []= Confidential Treatment Requested 14. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- determination with respect to any such issue that still remains unresolved, except that in no event shall SB be permitted to [ ] or to [ ] or to determine any issues regarding which party may have [ ]. 2.06 (a) With respect to a DELTA FACTOR COMPOUND subject to Paragraph 3.05(b)(ii)(b), in the event that SB subsequently identifies such DELTA FACTOR COMPOUND as having therapeutic activity of interest to SB pursuant to its license rights under Paragraph 3.05(b)(ii)(b), and provided that [ ], and further provided that ARRIS has not [ ], in the event that ARRIS owns any patents claiming the making, use or sale of such DELTA FACTOR COMPOUND [ ], which patents are in addition to those outlined in Paragraph 3.05(b)(ii)(b) which claim the making, use or sale of such DELTA FACTOR COMPOUND, SB shall, upon written notice to ARRIS, have a worldwide, exclusive license, with the right to grant sublicenses, under all such patents, to the extent ARRIS is legally able to do so, to make, have made, use and sell such DELTA FACTOR COMPOUND in the TERRITORY [ ], but SB shall not exercise such right with respect to [ ], and ARRIS shall be entitled to [ ] of the royalty payments outlined in Paragraphs 4.02, 4.06, and 4.07 with respect to net sales of such DELTA FACTOR COMPOUND by SB, its AFFILIATES and its sublicensees in the TERRITORY. (b) With respect to a DELTA FACTOR COMPOUND subject to Paragraph 3.05(a)(ii) for which SB has an ownership interest as a result of work performed in furtherance of this AGREEMENT or with respect to a DELTA FACTOR COMPOUND subject to Paragraph 3.05(b)(ii)(a), in the event that ARRIS identifies such DELTA FACTOR COMPOUND as having therapeutic activity of interest to ARRIS pursuant to its license rights under Paragraph 3.05(a)(ii) or Paragraph 3.05(b)(ii)(a), and provided that, in the case of a DELTA FACTOR COMPOUND subject to Paragraph 3.05(b)(ii)(a), [ ], and further provided if SB has not [ ], ARRIS shall, upon written request to SB, receive an exclusive license, with the right to grant sublicenses, under all patents and know-how owned by SB which arose as a result of this AGREEMENT, to the extent SB is legally able to do so, to make, have made, use and sell such DELTA FACTOR COMPOUND, in the TERRITORY [ ], but in []= Confidential Treatment Requested 15. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- the case of a DELTA FACTOR COMPOUND subject to Paragraph 3.05(b)(ii)(a), ARRIS shall exercise such right only with respect to [ ], and in the event that ARRIS markets such DELTA FACTOR COMPOUND itself, ARRIS shall pay SB royalties on the net sales of such DELTA FACTOR COMPOUND by ARRIS and its AFFILIATES [ ]. (c) In the event that ARRIS should elect to license a DELTA FACTOR COMPOUND referenced in Paragraph 2.06(b), or any composition of matter derived therefrom, SB shall have the first right to a worldwide, exclusive license, with the right to grant sublicenses, under any applicable patents and know-how owned by ARRIS, to the extent ARRIS is legally able to do so, to make, have made, use and sell such DELTA FACTOR COMPOUND, or composition of matter derived therefrom, in the TERRITORY [ ], upon terms to be mutually agreed upon by the parties in good faith. ARRIS shall provide SB with written notification of the availability of such license and shall deliver to SB all relevant information in ARRIS' possession (subject to THIRD PARTY binders of confidentiality, if any) related to such DELTA FACTOR COMPOUND, or composition of matter derived therefrom, and related research program(s) that would be useful to SB in its evaluation of the desirability of entering into such license arrangement. At the request of SB, ARRIS shall negotiate, in good faith, with SB to determine whether or not there are mutually acceptable terms and conditions under which the parties may proceed with such license arrangement. If the parties have not determined such mutually acceptable terms and conditions within [ ] after the delivery to SB of all relevant information outlined above, ARRIS shall be free to enter into a license with a THIRD PARTY with respect to such DELTA FACTOR COMPOUND, or composition of matter derived therefrom, provided that [ ]. In the event that SB shall determine it does not want to exercise such first right, ARRIS shall be free to either license such DELTA FACTOR COMPOUND, or composition of matter derived therefrom, to any THIRD PARTY or to market such itself, provided that in the event that ARRIS do not elect to market on its own such DELTA FACTOR COMPOUND, or composition of matter derived therefrom, and ARRIS is also unable to complete a THIRD PARTY agreement with respect to licensing such DELTA FACTOR COMPOUND, or composition of matter derived therefrom, within [ ] after the end of the [ ] period referenced above in this Paragraph 2.06(c), SB's first right to such a license shall be reinstated in accordance with the mechanism outlined in Paragraph 2.06(c). Furthermore, notwithstanding Paragraph 2.06(c), [ ]. []= Confidential Treatment Requested 16. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (d) In the event that ARRIS grants a license to any THIRD PARTY to any DELTA FACTOR COMPOUND referenced in Paragraph 2.06(b), or composition of matter derived therefrom, for any of the reasons outlined in Paragraph 2.06(c), SB shall be entitled to [ ] of [ ] that ARRIS shall receive from such THIRD PARTY as a result of such license to the extent that [ ] are [ ]. (e) ARRIS warrants and represents that it will [ ] with any such THIRD PARTY for the purpose of [ ]. (f) In the event of the reasons outlined in Paragraph 2.06(c), ARRIS elects to market any such DELTA FACTOR COMPOUND or composition of matter derived therefor itself, ARRIS shall pay SB royalties on the net sales of such by ARRIS, its AFFILIATES, and its sublicensees, [ ]. (g) The rights and obligations of the parties under the entirety of Paragraph 2.06 shall survive the termination of the AGREEMENT. 2.07 The principal scientists who will direct the carrying out of the respective responsibilities of each party are, for ARRIS: [ ], and for SB: [ ], or such other person as may be designated by ARRIS for ARRIS or by SB for SB. All data relating to information developed in furtherance of this AGREEMENT during the PROOF OF CONCEPT PHASE, the RESEARCH PHASE, DELTA FACTOR TECHNOLOGY and DELTA FACTOR KNOW-HOW disclosed pursuant to the AGREEMENT, and all other communications concerning the PROOF OF CONCEPT PHASE and the RESEARCH PHASE, shall be directed to said principal scientists to the extent reasonably practicable. 2.08 During the term of the PROOF OF CONCEPT PHASE, the RESEARCH PHASE, and for a [ ] thereafter, unless ARRIS is under a superseding contractual obligation with a THIRD PARTY in existence as of the EFFECTIVE DATE, and only in the event that ARRIS wants to enter into a collaborative research effort with a THIRD PARTY, provided that such [ ] shall not be applicable in the event that SB has terminated the PROOF OF CONCEPT PHASE in accordance with Paragraph 2.02(c), or in the event that the Proof of Concept payment has been made as provided in Paragraph 4.01(b) but SB has not made the RESEARCH PHASE commencement election outlined in Paragraph 2.03(b), ARRIS shall, in writing, notify SB of any and all new research programs ARRIS may have which are reasonably expected, based on existing knowledge, to be: (a) applicable to the use of DELTA FACTOR TECHNOLOGY to identify intracellular protease inhibitors which are not already part of the PROOF OF CONCEPT PHASE or the RESEARCH PHASE at such time; or (b) applicable to the use of DELTA FACTOR COMPOUNDS [ ] for a particular []= Confidential Treatment Requested 17. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- therapeutic target irrespective of whether or not DELTA FACTOR TECHNOLOGY would be applicable to such research program. For a period of [ ] after SB's receipt of such notification, SB shall have the first right to negotiate with ARRIS, in good faith, for the purpose of entering into a mutually acceptable collaborative research and license agreement related to such research program. During such [ ], ARRIS shall submit all relevant information in ARRIS' possession (subject to THIRD PARTY binders of confidentiality, if any) related to any such research program that is reasonably required to enable SB's full consideration thereof. In the event that, after the end of such [ ] period, the parties have failed to reach agreement on the material terms of such agreement, and ARRIS has exercised good faith in such negotiations, ARRIS shall thereafter be free to enter into such an agreement with a THIRD PARTY. The rights and obligations of the parties under this Paragraph shall survive the termination of the AGREEMENT. 3. GRANT 3.01 ARRIS hereby grants to SB a co-exclusive license, to the extent of ARRIS' rights and interests, under DELTA FACTOR PATENTS and DELTA FACTOR KNOW-HOW, to use DELTA FACTOR TECHNOLOGY and DELTA FACTOR COMPOUNDS, in the FIELD, in the TERRITORY, during the term of the PROOF OF CONCEPT PHASE, the RESEARCH PHASE, and for [ ] after the end of the term of the PROOF OF CONCEPT PHASE or the RESEARCH PHASE. 3.02 ARRIS hereby grants to SB an exclusive license, to the extent of ARRIS' rights and interests, with the right to grant sublicenses, under all PRODUCT PATENTS, PRODUCT KNOW-HOW, DELTA FACTOR PATENTS and DELTA FACTOR KNOW-HOW, to make, have made, use and sell PRODUCT in the TERRITORY, subject to the terms and conditions of this AGREEMENT. 3.03 SB hereby grants to ARRIS a co-exclusive license, to the extent of SB's rights and interests, without the right to grant sublicenses, in the TERRITORY, under any applicable patents and know-how owned by SB, to use any improvements made by SB which are exclusively and directly relevant to DELTA FACTOR TECHNOLOGY which arise during the term of the PROOF OF CONCEPT PHASE, the RESEARCH PHASE or within [ ] after the end of the term of the PROOF OF CONCEPT PHASE or the RESEARCH PHASE, to identify inhibitors of proteases [ ], provided that such use shall be made only during the term of the PROOF OF CONCEPT PHASE, the RESEARCH PHASE, and for [ ] thereafter. 3.04 Subject to Paragraph 3.03, SB hereby grants to ARRIS an exclusive license, to the extent of SB's rights and interests, with the right to grant sublicenses, in the TERRITORY, under any applicable patents and know-how, to use any improvements made by SB which are exclusively and directly relevant to DELTA FACTOR TECHNOLOGY for the purpose of identifying inhibitors of intracellular or extracellular proteases, provided that in the event there is []= Confidential Treatment Requested 18. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- a PUBLIC DISCLOSURE, the exclusive license to ARRIS outlined in this Paragraph shall become non-exclusive. 3.05 Subject to the other provisions of Article 3 and this AGREEMENT, the following shall apply to compounds which are synthesized by SB or ARRIS in furtherance of this AGREEMENT, during the course of the PROOF OF CONCEPT PHASE, the course of the RESEARCH PHASE, or during [ ] thereafter, as a result of which an intellectual property right arises for either or both parties (provided that any questions concerning such intellectual property right shall be referred to the RESEARCH STEERING COMMITTEE for resolution): (a) if such compound is [ ] the following shall apply: (i) if the RESEARCH STEERING COMMITTEE determines that such compound does not meet the criteria for DELTA FACTOR COMPOUND set forth in Appendix B (Part I), such compound shall no longer be subject to this AGREEMENT, except that the rights to make, have made, use and sell such compound shall be governed by Paragraph 10.02. (ii) if the RESEARCH STEERING COMMITTEE determines that such compound does meet the criteria for DELTA FACTOR COMPOUND set forth in Appendix B (Part I), but the RESEARCH STEERING COMMITTEE determines that such compound does not meet the criteria for COLLABORATION COMPOUND set forth in Appendix B (Part II), ARRIS shall have the exclusive right to make, have made, use and sell such compound [ ], and ARRIS shall have an exclusive, royalty-free license, with the right to grant sublicenses, to the extent of SB's rights and interests, under any [ ]. (b) if such compound is [ ] the following shall apply: (i) if the RESEARCH STEERING COMMITTEE determines that such compound does not meet the criteria for DELTA FACTOR COMPOUND set forth in Appendix B (Part I), such compound shall no longer be subject to this AGREEMENT, except that the rights to make, have made, use and sell such compound shall be governed by Paragraph 10.02. (ii) if the RESEARCH STEERING COMMITTEE determines that such compound does meet the criteria for DELTA FACTOR COMPOUND set forth in Appendix B (Part I), but the RESEARCH STEERING COMMITTEE determines that such compound does not meet the criteria for COLLABORATION COMPOUND set forth in Appendix B (Part II): (a) ARRIS shall have the exclusive right to make, have made, use and sell such compound for [ ], and ARRIS shall have an exclusive royalty-free license, with the right to grant sublicenses, to the extent of SB's rights and interests, under [ ], []= Confidential Treatment Requested 19. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [ ], and (b) SB shall have the exclusive right to make, have made, use and sell such compound [ ], and SB shall have an exclusive, royalty-free license, with the right to grant sublicenses, to the extent of ARRIS' rights and interests, and to the extent that ARRIS is legally able to do so, under [ ]. 4. PAYMENTS AND ROYALTIES 4.01 In consideration for the license under DELTA FACTOR PATENTS, DELTA FACTOR KNOW-HOW, PRODUCT PATENTS and PRODUCT KNOW-HOW granted to SB in this AGREEMENT, SB shall make the following milestone payments (in U.S. dollars) to ARRIS, except as otherwise provided in Paragraph 2.02(c), in the specified amounts, within [ ] after the occurrence of the following milestones: [ ]. provided that: []= Confidential Treatment Requested 20. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) each such payment for the events listed in Paragraph 4.01(a) through (d) shall be made only one time regardless of how many times such milestones are achieved, and no payment shall be owed for a milestone which is not reached; (2) each such payment shall be [ ] to SB; (3) [ ], provided that the full amount of such payment shall be fully creditable against the payment to be made by SB to ARRIS [ ]; (4) by the term "Proof of Concept" as used in this Paragraph is meant that the parties have determined that all of the following three (3) conditions have been satisfied: (a) DELTA FACTOR TECHNOLOGY is useful to identify inhibitors of viral [ ] which inhibitors have [ ]; (b) such activity has been demonstrated by compounds that are [ ]; and (c) the compounds satisfying the conditions set forth in Paragraphs 4.01(4)(a) and 4.01(4)(b) show [ ]. (5) by the term [ ] as used in this Paragraph is meant [ ], that the [ ] should commence. (6) by the term [ ] as used in this Paragraph is meant [ []= Confidential Treatment Requested 21. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ] as outlined in Appendix E. In the event that there is [ ] and SB decides to [ ], then the payment due under this Paragraph 4.01(6) shall be made upon the earlier of [ ] by such PRODUCT or [ ]; (7) by the term [ ] as used in this Paragraph is meant [ ]; (8) by the term [ ] as used in this Paragraph is meant [ ]; (9) by the term "Pre-Project Status' as used in this Paragraph is meant a determination by[ ] that a [ ], whichever is applicable, is [ ], provided that it is understood that [ ]; (10) by the term "IND Acceptance" as used in this Paragraph shall mean the acceptance by the U.S. Food and Drug Administration (hereinafter "FDA") of an Investigational New Drug Application (hereinafter "IND") for a [ ], whichever is applicable, [ ], or the equivalent occurrence in any country of the Territory; (11) by the term "Phase III Initiation" as used in this Paragraph shall mean the [ ] in the [ ] required for the filing of a New Drug Application (hereinafter "NDA") with the FDA for a [ ], whichever is applicable, or [ ]; (12) by the term "NDA Acceptance" as used in this Paragraph is meant the FDA's acceptance of an NDA filed by or on behalf of SB for approval to market a [ ], whichever is applicable, in the U.S.A.; (13) by the term "MAA Filing" as used in this Paragraph is meant the filing with the appropriate regulatory and pricing authorities in at least [ ] Major European Markets of a Marketing Authorization Application ("MAA") [ ] for []= Confidential Treatment Requested 22. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- approval to market a [ ], whichever is applicable, in such country; (14) by the term "Major European Market" as used in this Paragraph is meant the following countries United Kingdom, Germany, France, and Italy. (15) by the term "NDA Approval" as used in this Paragraph is meant the FDA's approval of an NDA [ ] for marketing a [ ], whichever is applicable, in the U.S.A.; (16) by the term "MAA Approval" as used in this Paragraph is meant the approval by all of the requisite regulatory and pricing authorities in at least [ ] Major European Markets of an MAA [ ] for approval to market a [ ], whichever is applicable, in such country; (17) if a [ ] (hereinafter referred to, depending on context, as "Agent") is [ ], and SB subsequently [ ], the only applicable milestone payments outlined in Paragraph 4.01(e) through (r) due for such subsequent [ ], provided that [ ]; (18) in the event SB progresses development of [ ] subsequent Agents against the same target, i.e., [ ] or [ ] against the same [ ], the milestone payments outlined in Paragraph 4.01(e) through (r) shall [ ] unless [ ]. In the event such [ ], payment for the milestones outlined in Paragraphs 4.01(e) through (r) for [ ], in which event all such milestones shall be paid to ARRIS by SB [ ]. 4.02 In further consideration for the license under PRODUCT PATENTS and PRODUCT KNOW-HOW granted to SB under the AGREEMENT, SB shall make the following royalty payments to ARRIS, [ ]: [ ] of annual NET SALES up to and including [ ]; [ ] of annual NET SALES in excess of [ ] up to and including [ ]; []= Confidential Treatment Requested 23. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [ ] of annual NET SALES in excess of [ ]; provided that, for purposes of this Paragraph, achievement of the NET SALES thresholds recited above shall be determined by adding the total annual NET SALES in all countries of the TERRITORY in which there is [ ]. 4.03 In further consideration for the license under PRODUCT KNOW-HOW granted to SB under the AGREEMENT, royalties on annual NET SALES in those countries of the TERRITORY which are not subject to the royalty obligation outlined in Paragraph 4.02 shall be calculated separately for each annual period, on a [ ] basis, at [ ] royalty rate paid for the same PRODUCT under Paragraph 4.02 for the same annual period, provided that royalty obligations under this Paragraph in each country of the TERRITORY shall expire upon the [ ] anniversary of the date of PRODUCT availability for commercial sale by SB, its AFFILIATES, or its sublicensees in such country. 4.04 SB's royalty obligations under Paragraph 4.02 shall become effective in each country in the TERRITORY at such time as a particular PRODUCT is launched and available for commercial sale in such country by or on behalf of SB, its AFFILIATES, or its sublicensees and [ ]. In the event that in any particular country of the TERRITORY there are NET SALES during the time in which there is a [ ] in such country, and such [ ], SB shall pay to ARRIS, within [ ] after issuance, royalties on such NET SALES in accordance with Paragraph 4.02 less any royalties on such NET SALES already paid to ARRIS under Paragraph 4.03, provided that in the event there was [ ] during any [ ], the royalty differential owed by SB to ARRIS shall be [ ] such that it shall be owed only for the period of time [ ]. Notwithstanding the above, in the event that any person or party initiates any legal or administrative proceeding challenging the validity, scope or enforceability of an ISSUED PRODUCT PATENT in any country in the TERRITORY, such as by opposing the grant of the ISSUED PRODUCT PATENT in the European Patent Office, and in the event such challenge were successful there would be no ISSUED PRODUCT PATENT claiming the PRODUCT in such country, then such royalty obligation on NET SALES in such country outlined in Paragraph 4.02 shall be [ ]. If the enforceability of at least one claim in the ISSUED PRODUCT PATENT claiming the PRODUCT is upheld by a court or other legal []= Confidential Treatment Requested 24. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- or administrative tribunal from which no appeal is or can be taken, and there are no other ISSUED PRODUCT PATENTS which claim the PRODUCT in such country, then the amount of royalties [ ]. If the claims in the ISSUED PRODUCT PATENT are held to be invalid or otherwise unenforceable by a court or other legal or administrative tribunal from which no appeal is or can be taken, then the amount of royalties [ ]. 4.05 (a) In the event that a THIRD PARTY or ARRIS makes a PUBLIC DISCLOSURE prior to the expiration of [ ] after the commencement of the RESEARCH PHASE, and SB elects to terminate further funding of the RESEARCH in accordance with Paragraph 2.04, SB shall pay the following percentage of the milestone payments and royalties outlined in Article 4 with respect to any PRODUCT [ ] the time periods set forth below: Timing After PUBLIC DISCLOSURE Milestone and Royalty Percentage -------------------------------- Within [ [ ] ] After [ ] but prior to [ [ ] ] (b) In the event that a THIRD PARTY or ARRIS makes a PUBLIC DISCLOSURE after the expiration of [ ] after the commencement of the RESEARCH PHASE, and SB elects to terminate further funding of the RESEARCH in accordance with Paragraph 2.04, SB shall pay the following percentage of the milestone payments and royalties outlined in Article 4 with respect to any PRODUCT [ ] the time periods set forth below: []= Confidential Treatment Requested 25. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Timing After PUBLIC DISCLOSURE Milestone and Royalty Percentage -------------------------------- Within [ [ ] ] After [ [ ] ] (c) In the event that a THIRD PARTY or ARRIS makes a PUBLIC DISCLOSURE prior to the expiration of [ ] after the commencement of the RESEARCH PHASE, and SB elects not to terminate further funding of the RESEARCH in accordance with Paragraph 2.04, SB shall pay the following percentage of the milestone payments and royalties outlined in Article 4 with respect to any PRODUCT [ ] the time periods set forth below: Timing After PUBLIC DISCLOSURE Milestone and Royalty Percentage -------------------------------- Within [ [ ] ] After [ [ ] ] (d) In the event that a THIRD PARTY or ARRIS makes a PUBLIC DISCLOSURE after the expiration of [ ] after the commencement of the RESEARCH PHASE, and SB elects not to terminate further funding of the RESEARCH in accordance with Paragraph 2.04, SB shall pay the following percentage of the milestone payments and royalties outlined in Article 4 with respect to any PRODUCT [ ] the time periods set forth below Timing After PUBLIC DISCLOSURE Milestone and Royalty Percentage ------------------------------ -------------------------------- Within [ [ ] ] After [ [ ] ] []= Confidential Treatment Requested 26. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4.06 Determination of royalties for the sale of COMBINATION PRODUCT by SB shall be [ ]. 4.07 Royalties on NET SALES for veterinary use, diagnostic use or any other use other than a human ethical pharmaceutical use shall be calculated separately at [ ] the royalty rates set forth in Paragraphs 4.02, 4.03 and 4.05. 5. COMPULSORY LICENSES AND THIRD PARTY LICENSES 5.01 In the event that a governmental agency in any country or territory grants or compels ARRIS to grant a license to any THIRD PARTY for PRODUCT, SB shall have the benefit in such country or territory of the terms granted to such THIRD PARTY to the extent that such terms are more favorable to the THIRD PARTY than those of this AGREEMENT. 5.02 If, during the term of this AGREEMENT, SB, in its sole reasonable discretion, deems it necessary to seek a license from any THIRD PARTY in order to avoid infringement of such THIRD PARTY's intellectual property rights during the exercise of the license herein granted hereunder related to DELTA FACTOR TECHNOLOGY, DELTA FACTOR COMPOUND, COLLABORATION COMPOUND, or PRODUCT, [ ] of any royalties or other fees paid to such THIRD PARTY under such license may be deducted from royalties otherwise due ARRIS under this Agreement, [ ]. 6. DEVELOPMENT 6.01 SB shall have full control, authority and responsibility for the development of PRODUCT within the TERRITORY, including, but not limited to, the selection of any PRODUCT for development or the termination of any PRODUCT's development and commercialization thereof. Attainment and maintenance of regulatory approvals and price registrations for PRODUCT within the TERRITORY shall also be the sole responsibility of SB. 6.02 SB will exercise its reasonable efforts and diligence in development, registration and commercialization of any PRODUCT selected for development in accordance with SB's business, legal, medical and scientific judgment and SB's normal practices and procedures for compounds having similar technical and commercial potential. All such activity shall be undertaken at SB's expense. 6.03 SB shall keep ARRIS reasonably informed, on a semi-annual basis, of the progress of SB's efforts to develop and commercialize PRODUCT in the TERRITORY. In addition, SB shall promptly provide additional summary information to ARRIS in response to ARRIS' reasonable request for additional information on SB's efforts in this regard. 7. TERM AND TERMINATION 7.01 Unless otherwise terminated, this AGREEMENT shall expire upon the later of (a) the expiration, lapse or invalidation of the last remaining PRODUCT PATENT and SB PRODUCT PATENT which claims PRODUCT; or (b) [ ] from the date of first []= Confidential Treatment Requested 27. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- marketing in the last country in the TERRITORY in which a PRODUCT is marketed by SB. Expiration of the AGREEMENT under this provision shall not preclude SB from continuing to market PRODUCT and to use PRODUCT KNOW-HOW in the TERRITORY without further royalty payments or any other remuneration to ARRIS. 7.02 (a) SB's royalty obligations for a particular PRODUCT under Paragraph 4.02 in each country of the TERRITORY [ ]. Expiration of SB's royalty obligations under Paragraph 4.02 for a particular PRODUCT under this provision shall not preclude SB from continuing to market such PRODUCT and to use PRODUCT KNOW-HOW in such country without further royalty payments or any other remuneration to ARRIS, except to the extent that Paragraph 4.03 is still applicable to the NET SALES of the particular PRODUCT in the particular country. (b) SB's royalty obligations for a particular PRODUCT under Paragraph 4.03 in each country of the TERRITORY shall commence upon the date of first marketing of such PRODUCT in such country and shall expire upon the expiration of [ ] from the date of first marketing of such PRODUCT in such country. Expiration of SB's royalty obligations for a particular PRODUCT under this provision shall not preclude SB from continuing to market such PRODUCT and to use PRODUCT KNOW-HOW in such country without further royalty payments or any other remuneration to ARRIS. 7.03 If either party materially fails or neglects to perform its obligations set forth in this AGREEMENT and if such default is not corrected within sixty (60) days after receiving written notice from the other party with respect to such default, such other party shall have the right to terminate this AGREEMENT by giving written notice to the party in default provided the notice of termination is given within six (6) months of the default and prior to correction of the default. 7.04 SB may terminate this AGREEMENT with respect to any country in the TERRITORY by giving ARRIS at least [ ] written notice thereof based on a reasonable determination by SB, using the same standards SB would use in assessing whether or not to continue development and marketing of a product of its own making, that the patent, medical/scientific, technical, regulatory or commercial profile of every PRODUCT does not justify continued development or marketing of any PRODUCT in such country, provided that the earliest such termination can be effective shall be [ ] after the commencement of the RESEARCH PHASE, except as otherwise provided in Paragraphs 2.02, 2.03, 20.01 or Article 7. Termination of this AGREEMENT with respect to any country in the TERRITORY under this provision shall terminate all licenses granted to SB in such country under Article 3 with full reversion to ARRIS of all ARRIS' interest and rights in PRODUCT PATENTS and PRODUCT KNOW-HOW in such country. Termination of this AGREEMENT with respect to all countries shall effectively terminate this AGREEMENT. []= Confidential Treatment Requested 28. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 7.05 Either party may terminate this AGREEMENT if, at any time, the other party shall file in any court or agency pursuant to any statute or regulation of any state or country, a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the party or of its assets, or if the other party proposes a written agreement of composition or extension of its debts, or if the other party shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof, or if the other party shall propose or be a party to any dissolution or liquidation, or if the other party shall make an assignment for the benefit of creditors. 7.06 Notwithstanding the bankruptcy of ARRIS, or the impairment of performance by ARRIS of its obligations under this AGREEMENT as a result of bankruptcy or insolvency of ARRIS, SB shall be entitled to retain the licenses granted herein, subject to ARRIS' rights to terminate this AGREEMENT for reasons other than bankruptcy or insolvency as expressly provided in this AGREEMENT, and subject to performance by SB of its preexisting obligations under this AGREEMENT. 7.07 All rights and licenses granted under or pursuant to this AGREEMENT by ARRIS to SB, are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101(52) of the U.S. Bankruptcy Code. The parties agree that SB, as a licensee of such rights under this AGREEMENT, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code, subject to performance by SB of its preexisting obligations under this AGREEMENT. The parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against ARRIS under the U.S. Bankruptcy Code, SB shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, and same, if not already in its possession, shall be promptly delivered to SB (a) upon any such commencement of a bankruptcy proceeding upon written request therefor by SB, unless ARRIS elects to continue to perform all of its obligations under this AGREEMENT, or (b) if not delivered under (a) above, upon the rejection of this AGREEMENT by or on behalf of ARRIS upon written request therefor by SB, provided, however, that upon ARRIS' (or its successor's) written notification to SB that it is again willing and able to perform all of its obligations under this AGREEMENT, SB shall promptly return all such tangible materials to ARRIS, but only to the extent that SB does not require continued access to such materials to enable SB to perform its obligations under this AGREEMENT. 7.08 SB may terminate the AGREEMENT as provided in Paragraph 2.02 or Paragraph 2.03(a) or Paragraph 20.01 in accordance with the provisions thereof. 8. RIGHTS AND DUTIES UPON TERMINATION []= Confidential Treatment Requested 29. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 8.01 Upon termination of this AGREEMENT, ARRIS shall have the right to retain any sums already paid by SB hereunder, and SB shall pay all sums accrued hereunder which are then due. 8.02 Upon termination of this AGREEMENT in its entirety or with respect to any country under Article 7, SB shall notify ARRIS of the amount of PRODUCT SB and its sublicensees and distributors then have on hand, the sale of which would, but for the termination, be subject to royalty, and SB and its sublicensees and distributors shall thereupon be permitted to sell that amount of PRODUCT provided that SB shall pay the royalty thereon at the time herein provided for. 8.03 Termination or expiration of this AGREEMENT shall terminate all obligations and rights between the parties arising from this AGREEMENT except those described in Paragraphs 2.02(a)(1)(ii)-(iii), 2.02(a)(2)(ii)-(iii), 2.02(a)(3)(ii)-(iii), 2.02(b)(i) (for the time period provided therein), 2.02(b)(iii), 2.02(b)(v) (for the time period provided therein), 2.02(b)(vi) (for the time period provided therein), 2.02(b)(vii)(b)-(c), 2.02(c)(ii), 2.02(c)(iv), 2.03(a)(i), 2.03(a)(ii), 2.05 (last sentence), 2.06, 3.05, 7.08 (last sentence), 9.02 (for the time period provided therein), 9.03, 9.04, 9.05, 9.06, 10.01(a) (first sentence), 10.01(b) (first sentence), 10.02, 10.03, 10.04, 10.05, 10.06, 10.08, 10.09, and Articles 8, and 11-21, as well as any other provision which, by its terms, is stated to survive the termination or expiration of this AGREEMENT. In addition, any other provision required to interpret and enforce the parties' rights and obligations under this AGREEMENT also shall survive to the extent required for the full observation and performance of this AGREEMENT by the parties hereto. Except as otherwise expressly set forth in this AGREEMENT, termination of this AGREEMENT shall [ ]. 8.04 Termination of this AGREEMENT under Paragraph 7.03 for a default by ARRIS shall terminate SB's obligation to make any remaining payments required by Articles 2 and 4 for the period effective as of the date ARRIS received written notice from SB with respect to such default if after the elapse of sixty (60) days from receipt of such notice such default is not corrected. Termination of this AGREEMENT with respect to all countries of the TERRITORY under Paragraph 7.04 shall terminate SB's obligation to make any remaining payments required by Article 4 for the period after the effective date of termination. 8.05 If, as a result of the happening of any event described in Paragraph 7.05 above, any tangible or intangible asset owned by ARRIS relating to PRODUCT (e.g., intellectual property) is offered for sale or license, in addition to other remedies in law or equity which may be available to SB, SB shall have a right of first refusal with respect to the asset, with the proviso that, to the extent the asset also relates to subject matter other than PRODUCT, SB's right of first refusal shall extend only to so much of the asset as relates to PRODUCT. []= Confidential Treatment Requested 30. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 8.06 All rights to terminate, and rights upon termination, provided for either party in this AGREEMENT are in addition to other remedies in law or equity which may be available to either party. 8.07 In the event that SB shall terminate all research and development efforts which are being conducted by or on behalf of SB under the AGREEMENT related to [ ], SB shall grant ARRIS an exclusive license, with the right to grant sublicenses, to the extent of SB's rights and interests, [ ], any COLLABORATION COMPOUND [ ], provided that nothing in this provision shall be construed to require SB to transfer any such know-how to ARRIS, and further provided that such license shall not apply to [ ]. ARRIS shall be free to exclusively screen such COLLABORATION COMPOUND using any technology for [ ] provided that, to the extent ARRIS is legally able to do so, SB shall [ ] or composition of matter derived therefrom, in the event that ARRIS should elect to license such COLLABORATION COMPOUND, or composition of matter derived therefrom, for [ ] other than the treatment or prophylaxis of infection by [ ], upon such terms as the parties may mutually agree upon in good faith. In the event that SB shall determine it does not want to [ ] or in the event that the parties cannot agree on terms within [ ] of commencing negotiations, (a) ARRIS shall be free to license such COLLABORATION COMPOUND, or composition of matter derived therefrom, to any third party, provided that SB shall be entitled to [ ] of all such milestone payments, royalties or other compensation that ARRIS shall receive from such third party as a result of such license to the extent that such milestone payments, royalties or other compensation is directly related to such COLLABORATION COMPOUND or composition of matter derived therefrom, and/or (b) ARRIS shall be free to market such COLLABORATION COMPOUND, or composition of matter derived therefrom, by itself, in which event SB shall be entitled to [ ] of the royalty payments outlined in Paragraphs 4.02, 4.06, and 4.07 with respect to net sales of such COLLABORATION COMPOUND, or composition of matter derived therefrom by ARRIS or its AFFILIATES in the TERRITORY. ARRIS warrants and represents that it will [ ] for the purpose of [ ]. In the event that ARRIS is not legally able to grant SB such first right because a third party has a superseding right to such COLLABORATION COMPOUND or composition of matter derived therefrom, SB shall be entitled to [ ] of all remuneration that ARRIS shall receive from such third party for such rights to the extent that such remuneration is directly related to []= Confidential Treatment Requested 31. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- such COLLABORATION COMPOUND or composition of matter derived therefrom, provided that ARRIS warrants and represents that it will [ ]. 9. EXCHANGE OF INFORMATION AND CONFIDENTIALITY 9.01 Promptly after the EFFECTIVE DATE, and during the term of the PROOF OF CONCEPT PHASE or the RESEARCH PHASE, and for [ ] after the end of the term of the PROOF OF CONCEPT PHASE or the RESEARCH PHASE, each party shall disclose to the other and/or supply the other with DELTA FACTOR KNOW-HOW and information concerning the identification of COLLABORATION COMPOUNDS. During the term of the AGREEMENT, ARRIS shall promptly disclose to SB and/or supply SB with any PRODUCT KNOW-HOW which is or may become known to ARRIS. 9.02 Following termination or expiration of the RESEARCH, irrespective of any termination earlier than the expiration of this AGREEMENT, and except as otherwise provided in Article 2, Paragraph 3.04, Paragraph 8.07, or any other provision of this AGREEMENT, ARRIS and SB shall not be entitled to use, reveal and disclose with and to THIRD PARTIES any information received from the other party or otherwise developed by either party in the performance of activities in furtherance of this AGREEMENT without first obtaining the written consent of the party which originally disclosed the information. Notwithstanding the preceding sentence, during the term of this AGREEMENT and for five (5) years thereafter, irrespective of any termination earlier than the expiration of the term of this AGREEMENT, ARRIS and SB shall not use or reveal or disclose to THIRD PARTIES any information received from the other party or otherwise developed by either party in the performance of activities in furtherance of this AGREEMENT which relates directly to a PRODUCT that the other party has in development or is commercializing without first obtaining the written consent of the party which originally disclosed the information, except as may be otherwise provided herein, or as may be required for purposes of investigating, developing, manufacturing or marketing PRODUCT or for securing essential or desirable authorizations, privileges or rights from governmental agencies, or is required to be disclosed to a governmental agency or is necessary to file or prosecute patent applications concerning PRODUCT or to carry out any litigation concerning PRODUCT. This confidentiality obligation shall not apply to such information which is or becomes a matter of public knowledge through no act or omission of the receiving party, or is already in the possession of the receiving party, or is disclosed to the receiving party by a THIRD PARTY having the right to do so, or is subsequently and independently developed by employees of the receiving party or AFFILIATES thereof who had no knowledge of the confidential information disclosed. The parties shall take reasonable measures to assure that no unauthorized use or disclosure is made by others to whom access to such information is granted. 9.03 Nothing herein shall be construed as preventing a receiving party from disclosing any information received from the other party to an AFFILIATE, sublicensee or distributor of the []= Confidential Treatment Requested 32. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- receiving party, provided such AFFILIATE, sublicensee or distributor has undertaken, in writing, a similar obligation of confidentiality with respect to the confidential information. 9.04 All confidential information disclosed by one party to the other shall remain the intellectual property of the disclosing party. In the event that a court or other legal or administrative tribunal, directly or through an appointed master, trustee or receiver, assumes partial or complete control over the assets of a party to this AGREEMENT based on the insolvency or bankruptcy of such party, the bankrupt or insolvent party shall promptly notify the court or other tribunal (a) that confidential information received from the other party under this AGREEMENT remains the property of the other party and (b) of the confidentiality obligations under this AGREEMENT. In addition, the bankrupt or insolvent party shall, to the extent permitted by law, take all steps necessary or desirable to maintain the confidentiality of the other party's confidential information and to insure that the court, other tribunal or appointee maintains such information in confidence in accordance with the terms of this AGREEMENT. 9.05 No public announcement or other disclosure to THIRD PARTIES concerning the existence of or terms of this AGREEMENT shall be made, either directly or indirectly, by any party to this AGREEMENT, except as may be legally required or as may be required for recording purposes, without first obtaining the approval of the other party and agreement upon the nature and text of such announcement or disclosure. The party desiring to make any such public announcement or other disclosure shall inform the other party of the proposed announcement or disclosure in reasonably sufficient time prior to public release, and shall provide the other party with a written copy thereof, in order to allow such other party to comment upon such announcement or disclosure. Each party agrees that it shall cooperate fully with the other with respect to all disclosures regarding this AGREEMENT to the Securities Exchange Commission and any other governmental or regulatory agencies, including requests for confidential treatment of proprietary information of either party included in any such disclosure. 9.06 Neither SB nor ARRIS shall submit for written or oral publication any manuscript, abstract or the like which includes data or other information generated and provided by the other party or developed by either party in furtherance of the RESEARCH without first obtaining the prior written consent of the other party, which consent shall not be unreasonably withheld. ARRIS shall not submit for written or oral publication any manuscript, abstract or the like which includes data or other information related to PRODUCT without first obtaining the prior written consent of SB, which consent shall not be unreasonably withheld. The contribution of each party shall be noted in all publications or presentations by acknowledgment or coauthorship, whichever is appropriate. 9.07 Nothing in this AGREEMENT shall be construed as preventing or in any way inhibiting SB or ARRIS from complying with statutory and regulatory requirements governing the development, manufacture, use and sale or other distribution of PRODUCT in any manner which it reasonably deems appropriate, including, for example, by disclosing to regulatory authorities confidential or other information received from the other party or THIRD PARTIES. []= Confidential Treatment Requested 33. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 10. INVENTIONS, PATENTS AND PATENT LITIGATION 10.01 (a) ARRIS warrants that, as of the EFFECTIVE DATE, it has disclosed to SB the complete texts of all DELTA FACTOR PATENTS and PRODUCT PATENTS, if any, filed by ARRIS prior to the EFFECTIVE DATE, as well as all information received concerning the institution or possible institution of any interference, opposition, re-examination, reissue, revocation, nullification or any official proceeding involving a DELTA FACTOR PATENT or PRODUCT PATENT anywhere in the TERRITORY. SB shall have the right to review all such DELTA FACTOR PATENTS and PRODUCT PATENTS and all proceedings related thereto and make recommendations to ARRIS concerning them and their conduct. ARRIS agrees to keep SB promptly and fully informed of the course of patent prosecution or other proceedings of such DELTA FACTOR PATENTS and PRODUCT PATENTS including, without limitation, providing SB with copies of substantive communications, search reports and THIRD PARTY observations submitted to or received from patent offices within the TERRITORY. SB shall provide such patent consultation to ARRIS related to such DELTA FACTOR PATENTS and PRODUCT PATENTS at no cost to ARRIS. (b) SB shall hold all information disclosed to it under this section as confidential subject to the provisions of Article 9. SB shall have the right to assume responsibility for any such DELTA FACTOR PATENT or PRODUCT PATENT or any part of any such DELTA FACTOR PATENT or PRODUCT PATENT which ARRIS intends to abandon or otherwise cause or allow to be forfeited provided that the claims of such PRODUCT PATENT covers PRODUCT. 10.02 Each party shall have and retain sole and exclusive title to all inventions, discoveries and know-how which are made, conceived, reduced to practice or generated by its employees, agents, or other persons acting under its authority in the course of or as a result of this AGREEMENT. Each party shall own a [ ] percent ([ ]) undivided interest in all such inventions, discoveries and know-how made, conceived, reduced to practice or generated jointly by employees, agents, or other persons acting under the authority of both parties in the course of or as a result of this AGREEMENT. Except as expressly provided in this AGREEMENT, each joint owner may make, use, sell, keep, license, assign, or mortgage such jointly owned inventions, discoveries and know-how, and otherwise undertake all activities a sole owner might undertake with respect to such inventions, discoveries and know-how, without the consent of and without accounting to the other joint owner. 10.03 Each party shall promptly notify the other upon the making, conceiving or reducing to practice of any invention or discovery referred to in Paragraph 10.02. With respect to any such invention, (i) SB shall have the first right, using in-house or outside legal counsel selected at SB's sole discretion, to prepare, file, prosecute, maintain and extend patent applications and patents concerning all such inventions and discoveries owned in whole by SB or jointly by SB and ARRIS in countries of SB's choice throughout the world with appropriate credit to ARRIS representatives, including the naming of such parties as inventors where []= Confidential Treatment Requested 34. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- appropriate and in accordance with the relevant legal requirements, for which SB shall bear the costs relating to such activities which occur at SB's request or direction. SB shall solicit ARRIS' advice and review of the nature and text of any such patent applications which are related to DELTA FACTOR TECHNOLOGY and important prosecution matters related thereto in reasonably sufficient time prior to filing thereof, and SB shall take into account ARRIS' reasonable comments related thereto. (ii) ARRIS shall have the first right, using in-house or outside legal counsel selected at ARRIS' sole discretion, to prepare, file, prosecute, maintain and extend patent applications and patents concerning all such inventions and discoveries owned in whole by ARRIS in countries of ARRIS' choice throughout the world, for which ARRIS shall bear the costs. ARRIS shall solicit SB's advice and review of the nature and text of such patent applications and important prosecution matters related thereto in reasonably sufficient time prior to filing thereof, and ARRIS shall take into account SB's reasonable comments related thereto. (iii) If SB, prior or subsequent to filing certain patent applications on any inventions or discoveries which are owned in whole or in part by ARRIS, elects not to file, prosecute or maintain such patent applications or ensuing patents or certain claims encompassed by such patent applications or ensuing patents in any country of the TERRITORY, SB shall give ARRIS notice thereof within a reasonable period prior to allowing such patent applications or patents or such certain claims encompassed by such patent applications or patents to lapse or become abandoned or unenforceable, and ARRIS shall thereafter have the right, at its sole expense, to prepare, file, prosecute and maintain patent applications and patents or divisional applications related to such certain claims encompassed by such patent applications or patents concerning all such inventions and discoveries in countries of its choice throughout the world. (iv) If ARRIS, prior or subsequent to filing certain patent applications on any inventions or discoveries which are owned in whole by ARRIS, elects not to file, prosecute or maintain such patent applications or ensuing patents or certain claims encompassed by such patent applications or ensuing patents in any country of the TERRITORY, ARRIS shall give SB notice thereof within a reasonable period prior to allowing such patent applications or patents or such certain claims encompassed by such patent applications or patents to lapse or become abandoned or unenforceable, and SB shall thereafter have the right, at its sole expense, to prepare, file, prosecute and maintain patent applications and patents or divisional applications related to such certain claims encompassed by such patent applications or patents concerning all such inventions and discoveries in countries of its choice throughout the world. (v) The party filing patent applications for jointly owned inventions and discoveries shall do so in the name of and on behalf of both SB and ARRIS. Each of ARRIS and SB shall hold all information it presently knows or acquires under this Paragraph 10.03 which is related to all such patents and patent applications as confidential subject to the provisions of Article 9. 10.04 Each party on behalf of itself and its AFFILIATES, and the directors, employees, officers, shareholders, agents, successors and assigns of any of them, hereby waives any and all 35. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- actions and causes of action, claims and demands whatsoever, in law or equity of any kind it or they may have against the other party and its AFFILIATES, and their officers, directors, employees, shareholders, agents, successors and assigns, which may arise in any way except as a result of the other party's gross negligence, recklessness, or willful misconduct in the performance of its rights under Paragraph 10.03. 10.05 Notwithstanding the provisions of Paragraph 10.03, each party shall, at its own expense, provide reasonable assistance to the other party to facilitate filing of all patent applications covering inventions referred to in Paragraph 10.02 and shall execute all documents deemed necessary or desirable therefor. 10.06 In the event of the institution of any suit by a THIRD PARTY against ARRIS, SB, an AFFILIATE, and/or their sublicensees for patent infringement involving the manufacture, use, sale, distribution or marketing of PRODUCT anywhere in the TERRITORY, the party sued shall promptly notify the other party in writing. SB shall have the right but not the obligation to defend such suit at its own expense. If SB does not commence a defense of such suit by [ ], ARRIS, after notifying SB in writing, shall be entitled to defend such suit at ARRIS' expense. ARRIS and SB shall assist one another and cooperate in any such litigation at the other's reasonable request without expense to the requesting party. 10.07 In the event that ARRIS or SB becomes aware of actual or threatened infringement of a PRODUCT PATENT related to PRODUCT, anywhere in the TERRITORY, that party shall promptly notify the other party in writing. SB shall have the first right but not the obligation to bring, at its own expense, an infringement action or file any other appropriate action or claim directly related to infringement of a PRODUCT PATENT, wherein such infringement relates to PRODUCT, against any THIRD PARTY and to use ARRIS' name in connection therewith and to include ARRIS' name as a party thereto. If SB does not commence a particular infringement action within ninety (90) days after it received such written notice, ARRIS after notifying SB in writing, shall be entitled to bring such infringement action or any other appropriate action or claim at its own expense and to use SB's name in connection therewith. The party conducting such action shall have full control over its conduct, including settlement thereof, subject to Paragraph 10.09. In any event, ARRIS and SB shall assist one another and cooperate in any such litigation at the other's request without expense to the requesting party. 10.08 ARRIS and SB shall recover their respective actual out-of-pocket expenses, or equitable proportions thereof, associated with any litigation or settlement thereof from any recovery made by any party. Any excess amount shall be [ ]. 10.09 The parties shall keep one another informed of the status of and of their respective activities regarding any litigation or settlement thereof concerning PRODUCT, provided []= Confidential Treatment Requested 36. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- however that no settlement or consent judgment or other voluntary final disposition of any suit defended or action brought by a party pursuant to this Article 10 may be entered into without the consent of the other party if such settlement would require the other party to be subject to an injunction or to make a monetary payment or would otherwise adversely affect the other party's rights under this AGREEMENT. 10.10 SB shall have the right but not the obligation to seek extensions of the terms of PRODUCT PATENTS. At SB's request, ARRIS shall either authorize SB to act as ARRIS' agent for the purpose of making any application for any extensions of the term of PATENTS and provide reasonable assistance therefor to SB or shall diligently seek to obtain such extensions, in either event, at SB's expense. 10.11 At SB's request, ARRIS shall seek to obtain SPCS based on PRODUCT PATENTS or authorize SB to obtain SPCS based on PRODUCT PATENTS on ARRIS' behalf. Where SB holds a relevant Marketing Authorization, SB shall at its sole discretion provide to ARRIS a copy of said Marketing Authorization and any information necessary for the purpose of obtaining an SPC based on a PRODUCT PATENT. 10.12 At SB's request, ARRIS shall cooperate with SB to obtain "pipeline" protection for PRODUCT PATENTS which may be available under the patent laws of countries the patent laws of which are amended to provide improved protection for PRODUCT. 11. TRADEMARKS AND NON-PROPRIETARY NAMES 11.01 SB shall be responsible for the selection of all trademarks which it employs in connection with PRODUCT in the TERRITORY and shall own and control such trademarks. SB shall be responsible for registration and maintenance of all such trademarks. Nothing in this AGREEMENT shall be construed as a grant of rights, by license or otherwise, to ARRIS to use such trademarks or any other trademarks owned by SB for any purpose. SB shall own such tradenames and trademarks and shall retain such ownership upon termination or expiration of this AGREEMENT. 11.02 SB, at its expense, shall be responsible for the selection and registration of non-proprietary names for PRODUCT in the TERRITORY. 12. STATEMENTS AND REMITTANCES 12.01 SB shall keep and require its AFFILIATES and sublicensees to keep complete and accurate records of all gross invoices and NET SALES of PRODUCT under the licenses granted herein. ARRIS shall have the right, at ARRIS' expense, through a certified public accountant or like person reasonably acceptable to SB, to examine such records during regular business hours during the life of this AGREEMENT and for six (6) months after its termination; provided, however, that such examination shall not take place more often than once a year and shall not cover such records for more than the preceding [ ] and provided further that such accountant shall report to ARRIS only as to the accuracy of the royalty statements and payments. []= Confidential Treatment Requested 37. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 12.02 Within [ ] after the close of each calendar quarter, SB shall deliver to ARRIS a true accounting of all PRODUCT sold by SB, its AFFILIATES, and its sublicensees during such quarter and shall at the same time pay all royalties due. Such accounting shall show sales on a country-by-country and PRODUCT-by-PRODUCT basis. 12.03 Any tax, duty or other levy paid or required to be withheld by SB on account of royalties payable to ARRIS under this AGREEMENT shall be deducted from the amount of royalties otherwise due. SB shall secure and send to ARRIS proof of any such taxes, duties or other levies withheld and paid by SB or its sublicensees for the benefit of ARRIS. 12.04 All royalties due under this AGREEMENT shall be payable in U.S. dollars. If governmental regulations prevent remittances from a foreign country with respect to sales made in that country, the obligation of SB to pay royalties on sales in that country shall be suspended until such remittances are possible. ARRIS shall have the right, upon giving written notice to SB, to receive payment in that country in local currency. 12.05 Monetary conversion from the currency of a foreign country, in which PRODUCT is sold, into United States currency shall be calculated at the actual average rates of exchange for the year to date as used by SB in producing its quarterly and annual accounts, as confirmed by SB's auditors. 13. WARRANTIES AND REPRESENTATIONS 13.01 As of the EFFECTIVE DATE, ARRIS warrants and represents that, to the best of its belief and knowledge, it owns the entire right and title interest in DELTA FACTOR PATENTS, DELTA FACTOR KNOW-HOW, PRODUCT PATENTS, and PRODUCT KNOW-HOW, or otherwise has the right to grant the license outlined in Article 3 with respect to DELTA FACTOR PATENTS, DELTA FACTOR KNOW-HOW, PRODUCT PATENTS, and PRODUCT KNOW-HOW, and has the right to enter into this AGREEMENT. ARRIS further warrants and represents that there is nothing in any THIRD PARTY agreement ARRIS has entered into as of the EFFECTIVE DATE, including, but not limited to, any such agreement between ARRIS and the Regents of the University of California, or between ARRIS and [ ], which, in any way, will limit ARRIS' ability to perform all of the obligations undertaken by ARRIS hereunder. ARRIS further warrants and represents that there is nothing in any agreement ARRIS has entered into as of the EFFECTIVE DATE with [ ] any rights to any compounds owned by ARRIS which are prepared by ARRIS in furtherance of any such agreement which compounds do not inhibit [ ]. ARRIS further warrants and represents that the Regents of the University of California, a corporation organized under the laws of the state of California, and having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California, 94612-3550, U.S.A. (hereinafter "Regents"), has authorized ARRIS, or ARRIS is otherwise permitted, to sublicense to SB, to the extent outlined in this AGREEMENT, all DELTA FACTOR PATENTS, DELTA FACTOR KNOW-HOW, PRODUCT PATENTS and PRODUCT KNOW-HOW which were licensed to ARRIS under the []= Confidential Treatment Requested 38. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- terms of the Exclusive License Agreement between ARRIS and the Regents dated February 27, 1995. ARRIS warrants and represents that it: (a) shall pay all royalties and other payments which ARRIS may owe to the Regents, and any other THIRD PARTY by virtue of this AGREEMENT, and shall perform and observe all of the other obligations outlined in all present and future agreements between ARRIS and the Regents, and any other THIRD PARTY related to such DELTA FACTOR PATENTS, DELTA FACTOR KNOW-HOW, PRODUCT PATENTS and PRODUCT KNOW-HOW; and (b) In the event that ARRIS receives notice from the Regents, or any other such THIRD PARTY, that ARRIS has committed a breach of its obligations thereto related to such DELTA FACTOR PATENTS, DELTA FACTOR KNOW-HOW, PRODUCT PATENTS and PRODUCT KNOW-HOW, or if ARRIS anticipates such breach, such as may give rise to a right by such THIRD PARTY to terminate or otherwise diminish ARRIS' rights to such DELTA FACTOR PATENTS, DELTA FACTOR KNOW-HOW, PRODUCT PATENTS and PRODUCT KNOW-HOW, ARRIS shall immediately notify SB of such situation, and ARRIS shall promptly cure such breach. However, if ARRIS is unable to cure such breach, ARRIS shall, to the extent possible, permit SB to cure such breach and to negotiate directly with such THIRD PARTY regarding the cure of such breach. 13.02 SB warrants and represents that, to the best of its belief and knowledge, it has the right to enter into this AGREEMENT. 13.03 ARRIS warrants and represents that it has disclosed to SB the complete texts of all DELTA FACTOR PATENTS and PRODUCT PATENTS, if any, as well as all information received concerning the institution or possible institution of any interference, opposition, re-examination, reissue, revocation, nullification or any official proceeding involving a PRODUCT PATENT anywhere in the TERRITORY. Nothing in this AGREEMENT shall be construed as a warranty that DELTA FACTOR PATENTS or PRODUCT PATENTS are valid or enforceable or that their exercise does not infringe any valid patent rights of THIRD PARTIES. ARRIS hereby warrants and represents that it has no present knowledge from which it can be inferred that DELTA FACTOR PATENTS and PRODUCT PATENTS are invalid or that their exercise would infringe valid patent rights of THIRD PARTIES. A holding of invalidity or unenforceability of any PRODUCT PATENT, from which no further appeal is or can be taken, shall not affect any obligation already accrued hereunder, except as otherwise provided by Paragraph 4.04. 13.04 ARRIS acknowledges that, in entering into this AGREEMENT, SB has relied upon information supplied by ARRIS and information which ARRIS has caused to be supplied to SB by ARRIS' agents and/or representatives, pursuant to that certain Confidentiality Agreement, dated June 20, 1995, between the parties, (all of such information being hereinafter referred to collectively as "Delta Factor Technology Information") and ARRIS warrants and represents that, to the best of its belief and knowledge, the Delta Factor Technology Information is timely and accurate in all material respects. ARRIS further warrants and represents that to the best of its knowledge, it has not, up through and including the EFFECTIVE DATE, omitted to 39. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- furnish SB with any information available to ARRIS concerning Delta Factor Technology Information or the transactions contemplated by this AGREEMENT, which would be material to SB's decision to enter into this AGREEMENT and to undertake the commitments and obligations set forth herein. 14. FORCE MAJEURE 14.01 If the performance of any part of this AGREEMENT by either party, or of any obligation under this AGREEMENT, is prevented, restricted, interfered with or delayed by reason of any cause beyond the reasonable control of the party liable to perform, unless conclusive evidence to the contrary is provided, the party so affected shall, upon giving written notice to the other party, be excused from such performance to the extent of such prevention, restriction, interference or delay, provided that the affected party shall use its reasonable best efforts to avoid or remove such causes of non-performance and shall continue performance with the utmost dispatch whenever such causes are removed. When such circumstances arise, the parties shall discuss what, if any, modification of the terms of this AGREEMENT may be required in order to arrive at an equitable solution. 15. GOVERNING LAW 15.01 This AGREEMENT shall be deemed to have been made in the Commonwealth of Pennsylvania and its form, execution, validity, construction and effect shall be determined in accordance with the laws of the Commonwealth of Pennsylvania, U.S.A. 16. DISPUTE RESOLUTION 16.01 Any dispute, controversy or claim arising out of or relating to this AGREEMENT (hereinafter collectively referred to as "Dispute") shall be attempted to be settled by the parties, in good faith, by submitting each such Dispute to appropriate senior management representatives of each party in an effort to effect a mutually acceptable resolution thereof. In the event no mutually acceptable resolution is achieved, then each party shall be entitled to seek relief for such Dispute by using any appropriate mechanism which may be available, such as, but not limited to, judicial relief. 17. SEPARABILITY 17.01 In the event any portion of this AGREEMENT shall be held illegal, void or ineffective, the remaining portions shall remain in full force and effect. 17.02 If any of the terms or provisions of this AGREEMENT are in conflict with any applicable statute or rule of law, then such terms or provisions shall be deemed inoperative to the extent that they may conflict therewith and shall be deemed to be modified to conform with such statute or rule of law. 40. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 17.03 In the event that the terms and conditions of this AGREEMENT are materially altered as a result of Paragraphs 17.01 or 17.02, the parties will renegotiate the terms and conditions of this AGREEMENT to resolve any inequities. 18. ENTIRE AGREEMENT 18.01 This AGREEMENT, entered into as of the EFFECTIVE DATE, constitutes the entire agreement between the parties relating to the subject matter hereof and supersedes all previous writings and understandings. No terms or provisions of this AGREEMENT shall be varied or modified by any prior or subsequent statement, conduct or act of either of the parties, except that the parties may amend this AGREEMENT by written instruments specifically referring to and executed in the same manner as this AGREEMENT. 19. NOTICES 19.01 Any notice required or permitted under this AGREEMENT shall be sent by air mail, postage pre-paid, to the following addresses of the parties: ARRIS Arris Pharmaceutical Corporation 385 Oyster Point Boulevard Suite 3 South San Francisco, California 94080 Attention: Chief Executive Officer copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square 3000 El Camino Real Palo Alto, California 94306-2155 Attention: Robert L. Jones, Esq/Barclay Kamb, Esq. SB SMITHKLINE BEECHAM CORPORATION One Franklin Plaza P.O. Box 7929 Philadelphia, Pennsylvania 19101 U.S.A. Attention: Senior Vice President, Worldwide Business Development 41. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- copy to: SMITHKLINE BEECHAM CORPORATION One Franklin Plaza P.O. Box 7929 Philadelphia, Pennsylvania 19101 U.S.A. Attention: Corporate Law-U.S. (FP2225) 19.02 Any notice required or permitted to be given concerning this AGREEMENT shall be effective upon receipt by the party to whom it is addressed. 20. ASSIGNMENT 20.01 This AGREEMENT and the licenses herein granted shall be binding upon and inure to the benefit of the successors in interest of the respective parties. Neither this AGREEMENT nor any interest hereunder shall be assignable by either party without the written consent of the other provided, however, that either party may assign this AGREEMENT or any patent owned by it to any AFFILIATE, or to any corporation with which it may merge or consolidate or to which it may transfer all or substantially all of its assets to which this AGREEMENT relates, without obtaining the consent of the other party. Notwithstanding the above, in the event that ARRIS is acquired by a THIRD PARTY during the PROOF OF CONCEPT PHASE or during the term of the RESEARCH PHASE, SB can, [ ] upon [ ] written notice to ARRIS. In the event of termination of the [ []= Confidential Treatment Requested 42. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ]. 21. RECORDING 21.01 SB shall have the right, at any time, to record, register, or otherwise notify this AGREEMENT in appropriate governmental or regulatory offices anywhere in the TERRITORY, and ARRIS shall provide reasonable assistance to SB in effecting such recording, registering or notifying. 22. EXECUTION IN COUNTERPARTS 22.01 This AGREEMENT may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. []= Confidential Treatment Requested 43. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties, through their authorized officers, have executed this AGREEMENT as of the date first written above. SMITHKLINE BEECHAM CORPORATION BY: /s/ Jean-Pierre Garnier, Ph.D. -------------------------------- Jean-Pierre Garnier, Ph.D. TITLE: Chief Operating Officer & President, Pharmaceuticals & Consumer Healthcare ---------------------------------------------------- ARRIS PHARMACEUTICAL CORPORATION BY: /s/ Daniel H. Petree --------------------------- TITLE: E.V.P., C.F.O. ------------------------ 44. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT SMITHKLINE BEECHAM CORPORATION-ARRIS PHARMACEUTICAL CORPORATION APPENDIX A-DELTA FACTOR PATENTS AND PRODUCT PATENTS SERIAL NO. COUNTRY FILING DATE STATUS PATENT NO. [ ]. []= Confidential Treatment Requested 45. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT SMITHKLINE BEECHAM CORPORATION-ARRIS PHARMACEUTICAL CORPORATION APPENDIX B DELTA FACTOR COMPOUND STATUS AND COLLABORATION COMPOUND STATUS CRITERIA PART 1 DELTA FACTOR COMPOUND STATUS CRITERIA IN ORDER TO BE CONSIDERED A DELTA FACTOR COMPOUND, A COMPOUND MUST MEET BOTH OF THE FOLLOWING [ ] CRITERIA UNLESS A COMPOUND IS OTHERWISE DESIGNATED TO BE A DELTA FACTOR COMPOUND BY THE RESEARCH STEERING COMMITTEE: [ ]. PART 2 COLLABORATION COMPOUND STATUS CRITERIA IN ORDER TO BE CONSIDERED A COLLABORATION COMPOUND, A DELTA FACTOR COMPOUND MUST MEET ALL OF THE FOLLOWING [ ] CRITERIA UNLESS A DELTA FACTOR COMPOUND IS OTHERWISE DESIGNATED TO BE A COLLABORATION COMPOUND BY THE RESEARCH STEERING COMMITTEE: [ []= Confidential Treatment Requested 46. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ]. []= Confidential Treatment Requested 47. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT SMITHKLINE BEECHAM CORPORATION-ARRIS PHARMACEUTICAL CORPORATION APPENDIX C-RESEARCH PROOF OF CONCEPT PHASE PLAN AND RESEARCH PHASE PLAN I. PROOF OF CONCEPT PHASE PLAN ARRIS RESPONSIBILITIES SB RESPONSIBILITIES [ ]. II. RESEARCH PHASE PLAN ARRIS RESPONSIBILITIES SB RESPONSIBILITIES [ []= Confidential Treatment Requested 48. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ] []= Confidential Treatment Requested 49. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT SMITHKLINE BEECHAM CORPORATION-ARRIS PHARMACEUTICAL CORPORATION APPENDIX D-ISSUES (TECHNICAL SELECTION FILTERS) WHICH MUST BE ADEQUATELY ADDRESSED BEFORE A PRODUCT CAN BE CONSIDERED WITHIN SB FOR PRE-PROJECT STATUS DESIGNATION [ []= Confidential Treatment Requested 50. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ]. []= Confidential Treatment Requested 51. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES EXCHANGE ACT OF 1933, AS AMENDED. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT SMITHKLINE BEECHAM CORPORATION-ARRIS PHARMACEUTICAL CORPORATION APPENDIX E [ ]. []= Confidential Treatment Requested 52. EX-10.2 4 EXH 10.2 - -------------------------------------------------------------------------------- ARRIS PHARMACEUTICAL CORPORATION LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page 1. DEFINITIONS AND CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . 5 2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Equipment Advances . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Interest Rates, Payments, and Calculations . . . . . . . . . . . 6 2.3 Crediting Payments . . . . . . . . . . . . . . . . . . . . . . . 6 2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.5 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . 7 2.6 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.1 Conditions Precedent to Initial Advance. . . . . . . . . . . . . 8 3.2 Conditions Precedent to all Advances . . . . . . . . . . . . . . 8 4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . 8 4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . 8 4.2 Delivery of Additional Documentation Required. . . . . . . . . . 8 4.3 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . . 9 5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . 9 5.1 Due Organization and Qualification . . . . . . . . . . . . . . . 9 5.2 Due Authorization; No Conflict . . . . . . . . . . . . . . . . . 9 5.3 No Prior Encumbrances. . . . . . . . . . . . . . . . . . . . . . 9 5.4 Merchantable Inventory . . . . . . . . . . . . . . . . . . . . . 9 5.5 Name; Location of Chief Executive Office . . . . . . . . . . . . 9 5.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.7 No Material Adverse Change in Financial Statements . . . . . . . 9 5.8 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 Regulatory Compliance. . . . . . . . . . . . . . . . . . . . . . 9 5.10 Environmental Condition. . . . . . . . . . . . . . . . . . . . . 10 5.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.13 Government Consents. . . . . . . . . . . . . . . . . . . . . . . 10 5.14 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 10 6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . 10 6.1 Good Standing. . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.2 Government Compliance. . . . . . . . . . . . . . . . . . . . . . 10 6.3 Financial Statements, Reports, Certificates. . . . . . . . . . . 11 6.4 Inventory; Returns . . . . . . . . . . . . . . . . . . . . . . . 11 6.5 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.6 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.7 Principal Depository . . . . . . . . . . . . . . . . . . . . . . 12 6.8 Cash Balance . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.9 Debt-Net Worth Ratio (Quarterly) . . . . . . . . . . . . . . . . 12 6.10 Remaining Months Liquidity.. . . . . . . . . . . . . . . . . . . 12 6.11 Debt-Net Worth Ratio (Monthly) . . . . . . . . . . . . . . . . . 12 6.12 Profitability. . . . . . . . . . . . . . . . . . . . . . . . . . 12 i 6.13 FDA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.14 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 13 7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.2 Change in Business . . . . . . . . . . . . . . . . . . . . . . . 13 7.3 Mergers or Acquisitions. . . . . . . . . . . . . . . . . . . . . 13 7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.6 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.7 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.8 Transactions with Affiliates . . . . . . . . . . . . . . . . . . 13 7.9 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . . . 14 7.10 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.11 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8.1 Payment Default. . . . . . . . . . . . . . . . . . . . . . . . . 14 8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . . . 14 8.3 Material Adverse Change. . . . . . . . . . . . . . . . . . . . . 14 8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . 15 8.7 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . . . 15 8.8 Judgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.9 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . 15 9. BANK'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . 15 9.1 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . 15 9.2 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 16 9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . . . 16 9.4 Bank Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 17 9.5 Bank's Liability for Collateral. . . . . . . . . . . . . . . . . 17 9.6 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . 17 9.7 Demand; Protest. . . . . . . . . . . . . . . . . . . . . . . . . 17 10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. . . . . . . . . . . . . . 18 12. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 18 12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 18 12.2 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 18 12.3 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . 18 12.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . 18 12.5 Amendments in Writing, Integration . . . . . . . . . . . . . . . 18 12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 19 12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 12.8 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . 19 ii This LOAN AND SECURITY AGREEMENT is entered into as of March 29, 1996, by and between SILICON VALLEY BANK ("Bank") and Arris Pharmaceutical Corporation ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a cash advance under Section 2.1. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Cash Balance" means cash, plus marketable securities, less balance sheet acquisition liabilities that will, as represented to Bank by Borrower, be satisfied by cash payment, less other liabilities that arise outside the normal course of business. "Cash Burn" means the Unrestricted Cash Reserves for a prior period minus the Unrestricted Cash Reserves for the period being measured, plus/minus change in short and long term liabilities (excluding changes in deferred revenues), plus/minus change in equity or Subordinated Debt. Note: when calculating Cash Burn, an increase in short and long term liabilities (excluding changes in deferred revenue) would be added to the calculated change in cash (as would an increase in equity or Subordinated Debt), while a 1 decrease in these accounts would be subtracted from the calculated change in cash. Changes in equity shall be calculated exclusive of changes in retained earnings. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on EXHIBIT A attached hereto. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means inventory comprised of finished goods held for sale, bulk manufactured material prior to its processing into finished goods, materials used or consumed in Borrower's business (and commonly referred to as supplies), whether or not the same is in Borrower's custody or possession or in transit, and including any and all such inventory returned to or reclaimed by Borrower upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and any books and records relating to any of the foregoing, but specifically excluding, without limitation, any compounds, molecules, assays, cell lines, reagents or other material transferred or licensed to any third party for value in connection with collaborative or other research, development and clinical activities. 2 "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Liquidity Coverage" means the Unrestricted Cash Reserves plus fifty percent (50%) of Borrower's net accounts receivable or the amounts available under a line of credit. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Maturity Date" means October 31, 2000. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Net Cash Losses" means, with respect to any period of determination, determined on a consolidated basis in accordance with GAAP for such period for Borrower and its consolidated Subsidiaries, the sum of (i) net income (loss), PLUS (ii) non-cash depreciation and amortization expenses, MINUS (iii) increases in gross fixed assets, PLUS (iv) increases (decreases) in long term debt or capital leases. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Subordinated Debt; and (d) Indebtedness to trade creditors incurred in the ordinary course of business. 3 "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than thirty (30) months from the date of creation thereof and currently having a minimum rating of A-2/P-2 or AA/Aa obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, and (iv) money market and mutual funds described in the Schedule; and (c) Other Investments, not otherwise permitted pursuant to clauses (a) and (b) above, approved by a majority of disinterested directors of Borrower, and not materially adversely affecting the financial condition or business operations of Borrower. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, PROVIDED the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, PROVIDED that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, PROVIDED that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and (e) Liens of carriers, warehousemen, mechanics and materialmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Remaining Months Liquidity" or "RML" means, at any time of determination, the ratio of (i) Liquidity Coverage at such time to (ii) Cash Burn. 4 "Responsible Officer" means each of the Chief Executive Officer, the Chief Financial Officer, the Director of Finance and Treasurer of Borrower. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the consolidated total assets of Borrower and its Subsidiaries MINUS, without duplication, (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (c) all reserves not already deducted from assets, AND (ii) Total Liabilities. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. "Unrestricted Cash Reserves" means, at any time of determination, the sum of Borrower's (i) cash balance of deposit accounts and investment accounts, PLUS (ii) market value of all readily marketable securities beneficially owned by Borrower, MINUS (iii) cash value of any certificates of deposit or securities encumbered and/or restricted by any Person. 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT 2.1 EQUIPMENT ADVANCES. (a) At any time from the date hereof through October 31, 1996 (the "Equipment Availability Date"), Borrower may from time to time request Advances from Bank in an aggregate principal amount of up to Two Million, Five Hundred Thousand Dollars ($2,500,000); provided that not more than Seven Hundred Fifty Thousand Dollars ($750,000) may be used to finance the purchase or licensing of software. The Advances shall be used to purchase Equipment approved from time to time by Bank and shall not exceed one hundred percent (100%) of the cost of such Equipment, excluding installation expense, freight discounts, warranty charges and taxes. For so long as Borrower maintains a Cash Balance of not less than Twenty Million Dollars ($20,000,000), Borrower may request Advances before Borrower acquires the Equipment to be financed. (b) Interest shall accrue from the date of each Advance at the rate specified in Section 2.2(a), and shall be payable monthly for each month through the month in which the Equipment Availability Date falls. The aggregate Advance or Advances that are outstanding on the Equipment Availability Date will be payable in forty-eight (48) equal monthly installments of principal, plus accrued interest, beginning on November 28, 1996, and continuing on the last Business Day of each month thereafter through the Maturity Date. On the Maturity Date, all amounts outstanding hereunder shall be immediately due and payable. 5 (c) When Borrower desires to obtain an Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission received no later than 3:00 p.m. California time one (1) Business Day before the day on which the Advance is to be made. Such notice shall be in substantially the form of EXHIBIT B. The notice shall be signed by a Responsible Officer. Not later than the Equipment Availability Date, Borrower shall deliver to Bank a copy of the invoices representing equipment purchases in an amount not less than the balance of the outstanding Advances as of the Equipment Availability Date. 2.2 INTEREST RATES, PAYMENTS, AND CALCULATIONS. (a) INTEREST RATE. Except as set forth in Section 2.2(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to one (1.0) percentage point above the Prime Rate; provided the interest rate shall be one and one half (1.5) percentage points above the Prime Rate from and after the date that the Cash Balance is less than Thirty Million Dollars ($30,000,000) (b) DEFAULT RATE. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) PAYMENTS. Interest hereunder shall be due and payable on the last Business Day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) COMPUTATION. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.3 CREDITING PAYMENTS. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon California time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.4 FEES. Borrower shall pay to Bank the following: (a) FACILITY FEE. A Facility Fee equal to Twenty Five Thousand Dollars ($25,000), which fee shall be due on the Closing Date and shall be fully earned and nonrefundable; (b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary fees and out-of-pocket expenses for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents, not to exceed one examination for each fiscal year unless an Event of Default has occurred and is continuing; 6 (c) BANK EXPENSES. Upon the date hereof, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses (which attorneys' fees and expenses shall not exceed $_______), and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.5 ADDITIONAL COSTS. In case any change in any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law), in each case after the date of this Agreement: (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.6 TERM. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Advances under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Bank to make the initial Advance is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) an amendment of intercreditor agreement; (d) financing statement (Form UCC-1) (e) evidence of Borrower's receipt of at least Thirty Million Dollars ($30,000,000) from the sale of equity securities; 7 (f) insurance certificate; (g) payment of the fees and Bank Expenses then due specified in Section 2.4 hereof; and (h) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank to make each Advance, including the initial Advance, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Advance as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Advance. The making of each Advance shall be deemed to be a representation and warranty by Borrower on the date of such Advance as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral, which inspection and appraisal shall not be required more often than annually, unless an Event of Default has occurred or is continuing. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 8 5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 MERCHANTABLE INVENTORY. All Inventory is in all material respects of good and marketable quality, free from all material defects. 5.5 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.6 LITIGATION. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. 5.7 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 5.8 SOLVENCY. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 5.9 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.10 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any 9 Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.11 TAXES. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.12 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.13 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 5.14 FULL DISCLOSURE. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make an Advance hereunder, Borrower shall do all of the following: 6.1 GOOD STANDING. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver to Bank: (a) at any time after the Cash Balance is less than Twelve Million Dollars ($12,000,000), as soon as available, but in any event within thirty (30) days after the end of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, certified by a Responsible Officer; (b) as soon as available, but in any event within forty-five (45) days after the end of Borrower's fiscal quarter, Borrower's report on Form 10-Q for such quarter; (c) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, Borrower's report on Form 10-K for such year, together with audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, and an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (d) within five (5) days upon becoming available, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt; (e) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Five Hundred Thousand Dollars ($500,000) or more; and (f) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Borrower shall deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto. 10 6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Two Hundred Thousand Dollars ($200,000). 6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 INSURANCE. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its operating accounts with Bank. 6.8 CASH BALANCE. Beginning March 31, 1996, Borrower shall maintain a minimum Cash Balance of Twenty Million Dollars ($20,000,000); PROVIDED that a failure to comply with this Section 6.8 shall not constitute an Event of Default, but will only cause Sections 6.10, 6.11 and 6.12 to become effective. 6.9 DEBT-NET WORTH RATIO (QUARTERLY). Beginning March 31, 1996, Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Total Liabilities (excluding deferred revenue) less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 2.0 to 1.0 IF ANY TIME THE CASH BALANCE FALLS BELOW TWENTY MILLION DOLLARS ($20,000,000) THE FOLLOWING COVENANTS (SECTIONS 6.10, 6.11 AND 6.12) SHALL APPLY. 6.10 REMAINING MONTHS LIQUIDITY. Beginning March 31, 1996, if at any time the Cash Balance falls below Twenty Million Dollars ($20,000,000) Borrower shall maintain Remaining Months Liquidity, based on average monthly Cash Burn during the quarter just ended, of twelve (12) months. If the Remaining Months Liquidity is less than twelve (12) months, Borrower shall pledge cash or a certificate of deposit to Bank (or 11 provide a guaranty by a guarantor and on terms acceptable to Bank) in an amount not less than twenty-five percent (25%) of the outstanding principal balance of the Advances. If the Remaining Months Liquidity is less than nine (9) months, Borrower shall pledge cash or a certificate of deposit to Bank (or provide a guaranty by a guarantor and on terms acceptable to Bank) in an amount not less than fifty percent (50%) of the outstanding principal balance of the Advances. If the Remaining Months Liquidity is less than seven (7) months, Borrower shall pledge cash or a certificate of deposit to Bank (or provide a guaranty by a guarantor and on terms acceptable to Bank) in an amount not less than one hundred percent (100%) of the outstanding principal balance of the Advances. 6.11 DEBT-NET WORTH RATIO (MONTHLY). Beginning March 31, 1996, if the Cash Balance falls below Twelve Million Dollars ($12,000,000), Borrower shall maintain as of the last day of each month, a ratio of Total Liabilities (excluding deferred revenue) less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 2.0 to 1.0. 6.12 PROFITABILITY. Beginning March 31, 1996, if at any time the Cash Balance falls below Twenty Million Dollars ($20,000,000) and Borrower's Tangible Net Worth is less than Ten Million Dollars ($10,000,000), then Borrower shall not suffer a loss for the fiscal quarter ending March 31, 1996 or for any subsequent fiscal quarter in excess of One Million Five Hundred Thousand Dollars ($1,500,000). 6.13 FDA COMPLIANCE. To the extent required by law, Borrower shall cause its manufacturing and quality controls to conform to FDA Good Manufacturing Practices ("GMP") regulations and such other regulations applicable to Borrower with respect to advertising, labeling and reporting of adverse experiences with the use of any of Borrower's products, and those concerning recordkeeping, reporting, product testing, design, safety and labeling of products, except where non-compliance would not have a material adverse effort on the financial condition or business operations of Borrower. To the extent necessary to conduct its business, Borrower shall register with the Food and Drug Branch of the California Department of Health Services and the Food and Drug Administration, and Borrower shall register its manufacturing facilities in accordance with GMP regulations. 6.14 FURTHER ASSURANCES. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of licenses and similar arrangements in the ordinary course of Borrower's business for the use of the property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment. 7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership. Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. 12 7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 SUBORDINATED DEBT. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 COMPLIANCE. Become an "investment company" controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of, or any interest on, any Advances when due and payable; or fails to pay any portion of any other Obligations not constituting such principal or interest, including without limitation Bank Expenses, within thirty (30) days of receipt by Borrower of an invoice for such other Obligations; 8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any 13 default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Advances will be required to be made during such cure period); 8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within ten (10) days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 8.6 OTHER AGREEMENTS. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000) or that could have a Material Adverse Effect; 8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 JUDGMENTS. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of twenty (20) days (provided that no Advances will be made prior to the satisfaction or stay of such judgment); or 8.9 MISREPRESENTATIONS. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: 14 (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (e) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (h) Bank may credit bid and purchase at any public sale; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; provided Bank may 15 exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 ACCOUNTS COLLECTION. At any time after the occurrence of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: 16 If to Borrower: Arris Pharmaceutical Corporation 385 Oyster Point Blvd., Suite 3 South San Francisco, CA 94080 Attn: Chief Financial Officer FAX: (415) 737-8590 If to Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054 Attn: Debra Bowman FAX: (408) 748-9478 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17 12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 CONFIDENTIALITY. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. ARRIS PHARMACEUTICAL CORPORATION By: /s/ Daniel H. Petree ----------------------------- Title: Vice President, Corporate Development & CFO SILICON VALLEY BANK By: /s/ D. S. Bowman ------------------------------- Title: Vice President 18 EXHIBIT A Any and all of the Personal Property (as that term is hereinafter defined) together with any and all other right, title and interest of Borrower in and to the following: (i) all other goods (except for goods constituting inventory, which is limited as provided in clause (iii) below) and equipment located at the Premises now owned or hereafter acquired, including, without limitation, all scientific instrumentation, laboratory and test equipment, motors and standby power supply equipment, telecommunications equipment and cabling, refrigerators and refrigeration units, computers and computer peripherals (including, without limitation, desk-top and network equipment, and printers), vehicles (including motor vehicles and trailers), and furniture and furnishings (including, without limitation, cubicles and movable partitions); (ii) all other fixtures (including trade fixtures) and improvements attached, affixed or installed in the Premises, whether or not an interest in them arises under real estate law, including, without limitation, cold rooms, chillers, any and all fume hoods, exhaust fans, laboratory caseworks (including, without limitation, cabinets, shelves, racks, and lab sinks), laboratory doors and frames; (iii) solely that inventory comprised of finished goods held for sale, bulk manufactured material prior to its processing into finished goods, materials used or consumed in Borrower's business (and commonly referred to as supplies), whether or not the same is in Borrower's custody or possession or in transit, and including any and all such inventory returned to or reclaimed by Borrower upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and any books and records relating to any of the foregoing, but specifically excluding, without limitation, any compounds, molecules, assays, cell lines, reagents, or other materials transferred or licensed to any third party for value in connection with collaborative or other research, development and clinical activities; (iv) except as hereinafter provided, all contract rights and general intangibles now or hereinafter acquired, including, without limitation, any and all franchise agreements, grants, purchase orders, warranties, customer lists, computer software and programs, all governmental approvals, permits and licenses, any and all rights to insurance proceeds or condemnation awards or compensation, any and all books and records relating to any of the foregoing, but specifically excluding any and all copyrights, patents and trademarks, whether registered or unregistered, foreign or domestic, and all applications and recordings in the United States Copyright Office, the United States Patent and Trademark Office or any similar office or agency of the United States, any state thereof or any other country, and all continuations, renewals or extensions of the same, and all trade secrets, inventions (whether or not patentable), scientific processes, technologies, procedures, models and designs (in whatever form maintained or recorded, including , without limitation, computer software and programs) (any of the foregoing excluded property, and any and all books and records relating to the foregoing, being hereinafter referred to as "Intellectual Property"), and all contracts (but NOT excluding rights to payment thereunder which are included as Collateral under clause (v) below), including, without limitation, license agreements, joint venture agreements and other collaborative agreements, in each case providing for the use or license of any Intellectual Property; (v) all accounts (including accounts receivable and deposit accounts), reserves, refunds, deposits, and all royalties, distributions, fees, payments and other monetary obligations owing to Borrower and arising out of the sale, transfer or licensing of goods and/or services, including, without limitation, Intellectual Property, whether or not earned by performance, and whether now existing or hereinafter arising, and any and all claims for damages by way of any past, present or future infringement of any Intellectual Property, and all books and records relating to any of the foregoing; (vi) all documents of title, cash deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereinafter acquired by Borrower or in which Borrower has an interest and Borrower's books and records relating to the foregoing; and (vii) any and all claims, rights, and interests in any of the above and all substitutions and replacements for, all additions and accessions to, and all proceeds thereof. As used herein, the term "Personal Property" shall mean: (a) EQUIPMENT. Certain equipment located and used in connection with Borrower's business operations at the Premises and described in SCHEDULES 1, 3 and 4 attached hereto. (b) FIXTURES AND TENANT IMPROVEMENTS. Those certain fixtures and tenant improvements installed in or affixed to the Premises and described in SCHEDULE 2 attached hereto. EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ___________________ FAX#: (408) 496-2426 TIME: ___________________ - -------------------------------------------------------------------------------- FROM: --------------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: ------------------------------------------------------------------- AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: ---------------------------------------------------------- PHONE NUMBER: ------------------------------------------------------------------- FROM ACCOUNT # TO ACCOUNT # --------------- ---------------------------------- REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT - -------------------------- --------------------- PRINCIPAL INCREASE (ADVANCE) $ -------------------------------------------- PRINCIPAL PAYMENT (ONLY) $ -------------------------------------------- INTEREST PAYMENT (ONLY) $ -------------------------------------------- PRINCIPAL AND INTEREST (PAYMENT) $ -------------------------------------------- OTHER INSTRUCTIONS: ------------------------------------------------------------- - -------------------------------------------------------------------------------- All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. - ----------------------------------- ------------------------- Authorized Requester Phone # - ----------------------------------- ------------------------- Received By (Bank) Phone # --------------------------------- Authorized Signature (Bank) EXHIBIT C COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: ARRIS PHARMACEUTICAL CORPORATION The undersigned authorized officer of Arris Pharmaceutical Corporation hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending __________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN. REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- -------- Monthly financial statements Monthly within 30 days (if cash LESS THAN $12,000,000) Yes No Form 10K and Auditor's Statement FYE within 90 days Yes No Form 10Q Quarterly within 45 days Yes No COVENANTS: BEGINNING: 3/31/96 REQUIRED ACTUAL - -------------------------------------------------------------------------------- Minimum Cash Balance* $20,000.00 $____________ Yes No - -------------------------------------------------------------------------------- Maximum Debt (excluding 2.0 ______: 1.0 Yes No deferred revenue/TNW) - -------------------------------------------------------------------------------- IN THE EVENT THAT MINIMUM CASH AS DEFINED BELOW FALLS BELOW $20,000.0, THE FOLLOWING COVENANTS SHALL BE MEASURED ON A QUARTERLY BASIS: - -------------------------------------------------------------------------------- Maximum Debt (excluding 2.00 ______: 1.0 Yes No deferred revenue/TNW) - -------------------------------------------------------------------------------- Loss Limitation In the event that TNW falls below $10,000.0, quarterly losses shall be limited as follows: - Maximum Quarterly Loss of $1,500.0 ($__________) Yes No - -------------------------------------------------------------------------------- RML** 12 months liquidity (based on average monthly cash burn during the quarter just ended). If RML falls below: - 12 months, 25% cash collateral or guaranty will be required. - 9 months, 50% cash collateral or guaranty will be required. - 7 months, 100% cash collateral or guaranty will be required. - -------------------------------------------------------------------------------- * Minimum Cash is defined as Cash plus marketable securities, less balance sheet acquisition liabilities that will, as represented by the Company, be satisfied by cash payment, less other liabilities that arise outside the normal course of business. ** RML is defined as Liquidity Coverage divided by Cash Burn. Liquidity Coverage is defined as cash and marketable securities plus 50% of net accounts receivable or net available under a line of credit. Cash Burn is defined as Cash (prior period) minus cash (current period) plus/minus change in short and long term liabilities (excluding changes in deferred revenue) plus/minus change in equity (or subordinated debt). Note: When calculating cash burn, an increase in short & long term liabilities (excluding changes in deferred revenue) would be added to the calculated change in cash (as would an increase in equity or subordinated debt) while a decrease in these accounts would be subtracted from the calculated change in cash. Changes in equity shall be calculated exclusive of changes in retained earnings. COMMENTS REGARDING EXCEPTIONS: BANK USE ONLY See Attached. Sincerely, Received by: ----------------------- - ------------------------------------- AUTHORIZED SIGNER SIGNATURE Date: ------------------------------ - ------------------------------------- Verified: TITLE -------------------------- AUTHORIZED SIGNER - ------------------------------------- Date: DATE ------------------------------ Compliance Status: Yes No DISBURSEMENT REQUEST AND AUTHORIZATION Borrower: Arris Pharmaceutical Corporation Bank: Silicon Valley Bank - -------------------------------------------------------------------------------- LOAN TYPE. This is a Variable Rate, Equipment Term Loan of a principal amount up to $2,500,000. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business. SPECIFIC PURPOSE. The specific purpose of this loan is: Equipment Acquisition. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Bank's conditions for making the loan have been satisfied. Please disburse the loan proceeds as follows: Equipment Loan -------------- Amount paid to Borrower directly: $ 0.00 --------- Undisbursed Funds $ 2,500,000.00 ----- Principal $2,500,000 CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: Charges Paid in Cash: $25,000 Loan Fee $ 5,000 Outside Counsel Fees and Expenses (Estimate) ------- Total Charges Paid in Cash $ 30,000.00 --------------- AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from Borrower's account numbered ____________ the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Bank shall not be obligated to advance funds to cover the payment. FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS AUTHORIZATION IS DATED AS OF April 24, 1996. BORROWER: Arris Pharmaceutical Corporation /s/ Daniel H. Petree - ----------------------------- Authorized Officer - -------------------------------------------------------------------------------- AGREEMENT TO PROVIDE INSURANCE GRANTOR: Arris Pharmaceutical Corporation BANK: Silicon Valley Bank - -------------------------------------------------------------------------------- INSURANCE REQUIREMENTS. Arris Pharmaceutical Corporation ("Grantor") understands that insurance coverage is required in connection with the extending of a loan or the providing of other financial accommodations to Grantor by Bank. These requirements are set forth in the Loan Documents. The following minimum insurance coverages must be provided on the following described collateral (the "Collateral"): Collateral: All Inventory, Equipment and Fixtures. Type: All risks, including fire, theft and liability. Amount: Full insurable value. Basis: Replacement value. Endorsements: Loss payable clause to Bank with stipulation that coverage will not be canceled or diminished without a minimum of twenty (20) days' prior written notice to Bank. INSURANCE COMPANY. Grantor may obtain insurance from any insurance company Grantor may choose that is reasonably acceptable to Bank. Grantor understands that credit may not be denied solely because insurance was not purchased through Bank. FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or before closing, evidence of the required insurance as provided above, with an effective date of March 29, 1996, or earlier. Grantor acknowledges and agrees that if Grantor fails to provide any required insurance or fails to continue such insurance in force, Bank may do so at Grantor's expense as provided in the Loan and Security Agreement. The cost of such insurance, at the option of Bank, shall be payable on demand or shall be added to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS. AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor authorizes Bank to provide to any person (including any insurance agent or company) all information Bank deems appropriate, whether regarding the Collateral, the loan or other financial accommodations, or both. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MARCH 29, 1996. GRANTOR: Arris Pharmaceutical Corporation /s/ Daniel H. Petree - --------------------------------- Authorized Officer FOR BANK USE ONLY INSURANCE VERIFICATION DATE: PHONE: -------------------------- ------------------- AGENT'S NAME: -------------------------------------------------------------- INSURANCE COMPANY: --------------------------------------------------------- POLICY NUMBER: ------------------------------------------------------------- EFFECTIVE DATES: ----------------------------------------------------------- COMMENTS: ------------------------------------------------------------------ CORPORATE RESOLUTIONS TO BORROW - -------------------------------------------------------------------------------- BORROWER: Arris Pharmaceutical Corporation - -------------------------------------------------------------------------------- I, the undersigned Secretary or Assistant Secretary of Arris Pharmaceutical Corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation and Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES -------------------------------------------------------------------- Daniel H. Petree Vice President, CFO /s/ Daniel H. Petree - --------------------- ---------------------- ------------------------ John P. Walker President, CEO /s/ John P. Walker - --------------------- ---------------------- ------------------------ - --------------------- ---------------------- ------------------------ - --------------------- ---------------------- ------------------------ - --------------------- ---------------------- ------------------------ - --------------------- ---------------------- ------------------------ acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Silicon Valley Bank ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Loan and Security Agreement dated as of March 29, 1996 (the "Loan Agreement"). EXECUTE NOTES. To execute and deliver to Bank the promissory note or notes of the Corporation, on Lender's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Bank, and also to execute and deliver to Lender one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. LETTERS OF CREDIT; FOREIGN EXCHANGE. To execute letters of credit applications, foreign exchange agreements and other related documents pertaining to Bank's issuance of letters of credit and foreign exchange contracts. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on March ____, 1996 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: /s/ Daniel H. Petree ----------------------------------------- Daniel H. Petree, Assistant Secretary - -------------------------------------------------------------------------------- EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3) of Arris Pharmaceutical Corporation for the registration of 161,418 shares of its Common Stock and to the incorporation by reference therein of our reports dated April 18, 1994 and March 31, 1995 with respect to the financial statements of Khepri Pharmaceuticals, Inc. included in Arris' Current Report on Form 8-K filed on January 5, 1996, as amended by Amendment No. 1 on Form 8-K/A dated February 2, 1996, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Palo Alto, California July 29, 1996 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3) of Arris Pharmaceutical Corporation for the registration of 161,418 shares of its Common Stock and to the incorporation by reference therein of our report dated January 20, 1996, 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, 1995, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Palo Alto, California July 29, 1996 -----END PRIVACY-ENHANCED MESSAGE-----