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ARRAY BIOPHARMA, INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2012, 2011 and 2010
The Company accounted for the amendments to the 2008 Loan in May 2009 and to both credit facilities in
May 2011 as modifications rather than extinguishments of the applicable credit facilities.
Terms of the Credit Facilities
As of June 30, 2012, the Company had $92.6 million in principal outstanding under the Deerfield credit
facilities, which includes approximately $6.8 million of accrued interest under the 2008 Loan that was
converted to principal when the 2009 Loan was entered into. Interest and principal may be repaid at the
Company's option at any time with cash or shares of the Company's Common Stock that have been
registered under the Securities Act of 1933, as amended, with certain restrictions. The Company is also
required, subject to certain exceptions and conditions, to make payments of principal equal to 15% of
certain amounts it receives under new licensing, partnering and other similar arrangements entered into
after January 1, 2011 limited to of the principal and accrued interest outstanding.
Prior to the disbursement of the 2009 Loan, simple interest of 2% annually was paid quarterly and
compound interest accrued at an additional 6.5% annually on the 2008 Loan. Upon disbursement of the
2009 Loan, compound interest stopped accruing and interest became payable monthly at a rate of 7.5%
per annum, subject to adjustments based on the Company's total Cash and Cash Equivalents and
Marketable Securities balance as outlined below:
Total Cash, Cash Equivalents and Marketable
Securities
Interest Rate
$60 million or greater
7.5%
Between $50 million and $60 million
8.5%
Between $40 million and $50 million
9.5%
Between $30 million and $40 million
12.0%
Less than $30 million
14.5%
The May 2011 Modification lowered the interest rate structure as follows:
Total Cash, Cash Equivalents and Marketable
Securities
Interest Rate
$50 million or greater
7.5%
Between $40 million and $50 million
8.5%
Between $30 million and $40 million
11.5%
Less than $30 million
13.5%
If the Company's total Cash, Cash Equivalents and Marketable Securities at the end of a fiscal quarter
falls below $20 million, all amounts outstanding under the credit facilities become immediately due and
payable.
The credit facilities are secured by a second priority security interest in the Company's assets, including
accounts receivable, equipment, inventory, investment property and general intangible assets, excluding
copyrights, patents, trademarks, service marks and certain related intangible assets. This security
interest and the Company's obligations under the credit facilities are subordinate to the Company's
obligations to Comerica Bank and to Comerica's security interest under the Loan and Security Agreement
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ARRAY BIOPHARMA, INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2012, 2011 and 2010
between the Company and Comerica Bank dated June 28, 2005, as amended, which is discussed below
under the caption
``Term Loan and Equipment Line of Credit.''
The Facility Agreements contain representations, warranties and affirmative and negative covenants that
are customary for credit facilities of this type. The Facility Agreements restrict the Company's ability to,
among other things, sell certain assets, engage in a merger or change in control transaction, incur debt,
pay cash dividends and make investments. The Facility Agreements also contain events of default that
are customary for credit facilities of this type, including payment defaults, covenant defaults, insolvency
type defaults and events of default relating to liens, judgments, material misrepresentations and the
occurrence of certain material adverse events.
Debt Issuance Costs
The Company paid Deerfield transaction fees of $1 million on each of the two disbursements under the
2008 Loan, and of $500 thousand on July 10, 2009 and $500 thousand when the funds were drawn under
the 2009 Loan. The transaction fees are included in Other Long-term Assets in the accompanying
Balance Sheets. Prior to the May 2011 Modification, the Company amortized these transaction fees to
Interest Expense in the accompanying Statements of Operations and Comprehensive Loss over the
respective terms of each of the credit facilities.
There were no transaction fees paid to Deerfield for the May 2011 Modification. However, due to the
prepayment of $30 million of principal, the Company charged off a proportional amount of the
unamortized debt issuance costs totaling $426 thousand to Loss on Prepayment of Debt, Net in the
accompanying Statements of Operations and Comprehensive Loss. The remaining unamortized debt
issuance costs are being amortized to Interest Expense from the May 3, 2011 Modification date through
the end of the debt term of June 2016 in the Statements of Operations and Comprehensive Loss.
Other direct issuance costs in connection with these transactions were expensed as incurred and were
not significant.
Embedded Derivatives
The credit facilities contain two embedded derivatives: (1) the variable interest rate structure described
above and (2) Deerfield's right to accelerate the loan upon certain changes of control of the Company or
an event of default, which is considered a significant transaction contingent put option. As discussed in
Note 1 Overview and Basis of Presentation under the caption Long-term Debt and Embedded
Derivatives,
these derivatives are valued and reported as Derivative Liabilities in the Company's financial
statements and are collectively referred to as the ``Embedded Derivatives.'' Under the fair value
hierarchy, the Company measured the fair value of the Embedded Derivatives using Level III, or
unobservable inputs, as there is no active market for them.
To estimate the fair value of the variable interest rate feature, the Company makes assumptions as to the
interest rates that may be in effect during the term, which in turn depends on the Company's Cash and
Cash Equivalent and Marketable Securities balance as noted above. Therefore, the Company must
project its monthly cash balances over the term of the Credit Facilities. Such forecasts are inherently
subjective and may not reflect actual results, although management believes the assumptions upon
which they are based are reasonable. If any assumptions underlying such forecasts change or prove to
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