-----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, ETOPmORBC3fhDl4y+Q+ClAtu2HZrdSC+RcwoIcq0xOKcq7IOMjR9Z0RcRoG0jNqH lJxhfA2jIIVh0T3JH8hRRQ== 0000950129-03-001625.txt : 20030328 0000950129-03-001625.hdr.sgml : 20030328 20030327214833 ACCESSION NUMBER: 0000950129-03-001625 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS BIOTECHNOLOGY CORP /DE/ CENTRAL INDEX KEY: 0000887023 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 133532643 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20117 FILM NUMBER: 03622391 BUSINESS ADDRESS: STREET 1: 7000 FANNIN STREET 2: 20TH FLR CITY: HOUSTON STATE: TX ZIP: 77030 BUSINESS PHONE: 7137968822 10-K 1 h03454e10vk.txt TEXAS BIOTECHNOLOGY CORP.- DECEMBER 31, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-20117 TEXAS BIOTECHNOLOGY CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 13-3532643 (State of Incorporation) (I.R.S. Employer Identification Number) 7000 FANNIN, 20TH FLOOR HOUSTON, TEXAS 77030 (713) 796-8822 (Address and telephone number of principal executive offices and zip code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $.005 PER SHARE ----------------------------- TITLE OF CLASS PREFERRED STOCK PURCHASE RIGHTS ------------------------------- TITLE OF CLASS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate iby check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The approximate aggregate market value of voting stock held by nonaffiliates of the registrant is $169,054,000 as of June 28, 2002. The number of shares outstanding of each of the registrant's classes of common stock as of March 12, 2003: TITLE OF CLASS NUMBER OF SHARES ------------------------ ---------------- Common Stock, 43,916,898 $.005 par value Documents incorporated by reference: DOCUMENT FORM 10-K PARTS ------------------------ ---------------- Definitive Proxy Statement, III to be filed within 120 days of December 31, 2002 (specified portions) ================================================================================ CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in and incorporated by reference into this Form 10-K are forward-looking statements. These forward-looking statements include, without limitation, statements regarding our estimate of the sufficiency of our existing capital resources and our ability to raise additional capital to fund cash requirements for future operations, and regarding the uncertainties involved in the drug development process and the timing of regulatory approvals required to market these drugs. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot give any assurance that such expectations reflected in these forward-looking statements will prove to have been correct. When used in this Form 10-K, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Additional Risk Factors" and elsewhere in this Form 10-K. You should read these statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other "forward-looking" information. You should be aware that the occurrence of any of the events described in the risk factors and elsewhere in this Form 10-K could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline, and you could lose all or part of your investment. We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-K after the date of this Form 10-K. This Form 10-K may contain trademarks and service marks of other companies. 2 PART I ITEM 1 -- BUSINESS OVERVIEW Texas Biotechnology Corporation was incorporated in Delaware in 1989 and is sometimes referred to in this report as TBC, we or us. We are a biopharmaceutical company focused on the discovery, development and commercialization of novel, synthetic, small molecule compounds for the treatment of a variety of cardiovascular, vascular and related inflammatory diseases. Our research and development programs are focused on inhibitors (also referred to as antagonists or blockers) that can interrupt certain disease processes. Our programs seek to address unmet medical needs in areas where our compounds will have the greatest likelihood of improving the lives of patients suffering from cardiovascular diseases, thrombocytopenia, pulmonary arterial hypertension ("PAH"), heart failure and inflammatory diseases such as asthma. Argatroban is our first marketed product. Argatroban was approved by the U.S. Food and Drug Administration ("FDA") in 2000 for the prophylaxis or treatment of thrombosis in patients with heparin-induced thrombocytopenia ("HIT") and for patients with or at risk for HIT undergoing percutaneous coronary intervention ("PCI"). Argatroban was approved in Canada in 2002 for use as anticoagulant therapy in patients with heparin-induced thrombocytopenia syndrome ("HITS"). The drug is being marketed in the U.S. and Canada by GlaxoSmithKline, plc ("GSK") and has been on the market in the U.S. and Canada since November 2000 and June 2002, respectively. GSK is our development, manufacturing and marketing partner for Argatroban. Presently, we have four major product development programs. - Endothelin Antagonist Program. We are developing sitaxsentan, an endothelin(A) receptor antagonist, or ET(A), for the treatment of PAH. During June 2000, we formed a partnership, ("ICOS-TBC"), with ICOS Corporation ("ICOS") to develop and commercialize ET(A) receptor antagonists. During 2002, ICOS-TBC successfully completed a Phase IIb/III clinical trial in PAH with sitaxsentan. TBC3711, a second generation ET(A), has previously completed Phase I clinical trials and may be developed for cardiovascular or other diseases. In January 2003, ICOS announced that they had reached a conclusion that joint development of the endothelin receptor antagonist program by ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which TBC could independently continue the program. The financial terms of this transaction are subject to ongoing negotiations between the two companies. - Thrombosis. During 2002, we completed a Phase II human clinical trial for Argatroban as a mono-therapy treatment for acute ischemic stroke. The clinical trial met the primary endpoint based on safety. In light of a lack of a positive overall efficacy trend and the high risk and high costs associated with stroke trials, it is unlikely that we will proceed independently with a full Phase III program. Currently, Argatroban is being evaluated, in a clinical trial, in combination with recombinant tissue Plasminogen Activator ("rt-PA") as a new approach to the treatment of acute ischemic stroke by an investigator at the University of Texas Medical School at Houston. - Vascular Inflammation Program. Revotar Biopharmaceuticals AG ("Revotar"), our majority owned German affiliate located in Berlin is developing a selectin antagonist, bimosiamose, for the treatment of asthma and psoriasis. The intravenous form of the drug demonstrated positive anti-inflammatory effects in Phase II clinical trials. Revotar was formed during 2000, to further the development of this program. Revotar has completed Phase I clinical trials for asthma utilizing an inhaled form of bimosiamose. A Phase IIa clinical trial is currently being conducted with an inhaled form of bimosiamose and a Phase IIa clinical trial in psoriasis is planned to commence during 2003, using a topical formulation. A Phase IIa proof-of-concept clinical trial in psoriasis, completed during 2002 with an injectable form of bimosiamose, demonstrated signs of activity. We are also conducting research with respect to other cell adhesion molecules including vascular cell adhesion molecule, or VCAM, junctional adhesion molecules, or JAM 2/3 and several integrins including very late antigen 4, or VLA-4, (alpha)4(beta)7 and others to develop antagonists for the treatment of asthma, rheumatoid arthritis, multiple sclerosis, restenosis and inflammatory bowel disease. We have signed a collaboration and license agreement for the VLA-4 program with Schering-Plough LTD and 3 Schering-Plough Corporation (collectively "Schering-Plough") and have received a milestone from Schering-Plough for nominating a compound as a clinical candidate. Additionally, we are conducting research on backup VLA-4 antagonists for Schering-Plough under this agreement. - Vascular Disease. Many disease processes involve changes in blood vessels and heart tissue. There are numerous mediators, like endothelin, which may contribute to the development of these diseases. Several of these act through G-protein coupled receptors, GPCRs, to carry out their action. We are conducting research on urotensin and other GPCRs to identify inhibitors which could be useful in treating diseases including congestive heart failure, ("CHF"), ischemic stroke and acute myocardial infarction. BUSINESS STRATEGY The key elements of our business strategy are as follows: Maximize sales of Argatroban Our marketing, manufacturing and distribution partner, GSK, began selling Argatroban in the U.S. during November 2000, and in Canada during June 2002, as an anticoagulant for prophylaxis or treatment of thrombosis in patients with HIT. In addition: - during 2002, we received approval from the FDA on our supplementary New Drug Application ("sNDA") for Argatroban for use in patients, with or at risk for HIT, undergoing PCI; - during 2002, GSK created a hospital based sales force and initiated programs to increase its sales efforts on Argatroban in the U.S. and Canada that could have a positive effect on our royalties from GSK; - Argatroban is currently being evaluated, in a clinical trial, in combination with rt-PA as a new approach to the treatment of acute ischemic stroke by an investigator at the University of Texas Medical School at Houston. Argatroban is approved and sold in Japan by Mitsubishi Pharma Corporation ("Mitsubishi"), the licensor of Argatroban as mono-therapy for an indication of acute ischemic stroke; and - we have completed initial studies to evaluate the use of Argatroban in hemodialysis patients and in PCI. Complete the clinical development of sitaxsentan and commercialize the compound worldwide We intend to initiate a pivotal Phase III clinical trial with sitaxsentan in 2003 with the goal of filing a new drug application with the FDA for use of sitaxsentan in patients with PAH. We intend to commercialize the compound on a worldwide basis by ourselves or through licensee arrangements: - During 2002, ICOS-TBC completed a Phase IIb/III clinical trial to assess the safety and efficacy of sitaxsentan in patients with New York Heart Association ("NYHA") class II, III and IV PAH. Based on the results of this clinical trial and meeting with the FDA, TBC believes that development of sitaxsentan should be continued. - In January 2003, ICOS announced that they had reached a conclusion that joint development of the endothelin receptor antagonist program, through ICOS-TBC, should not continue. ICOS has indicated that it is willing to transfer the endothelin antagonist program in its entirety, including sitaxsentan, to us. The financial terms of this transaction are subject to ongoing negotiations between the two companies. This will allow us to increase our ownership and the potential commercial benefit of the program from 50% to 100%. Focus on the identification and development of new drugs for the treatment of diseases involving the vascular endothelium Injury to the vascular endothelium is a common cause of many of the most profound diseases affecting patients today, such as ischemic heart disease, hypertension, congestive heart failure, and asthma. By concentrating on this area, we can be relatively efficient in our drug discovery, development and commercialization efforts. This efficiency extends to the following areas: 4 - Research -- Our efforts are predominantly focused toward the treatment and prevention of interrelated diseases of the vascular endothelium, exploiting our research group's expertise in the area of vascular biology; - Computer aided drug design -- We utilize computers to rapidly develop drug candidates derived from our vascular biological efforts and to identify new targets from information discovered by the Human Genome Project; and - Clinical investigators and consultants -- We work with key opinion leaders and consultants experienced in vascular diseases to assist in clinical development, product planning and the regulatory approval process. Focus on the identification and development of small molecule drug candidates Synthetic, small molecule therapeutics have several advantages over protein and peptide based large molecules. Small molecules generally are not immunogenic, can typically be protected with composition-of-matter patents and can be produced by conventional lower cost pharmaceutical manufacturing methods. Participate in the sales and marketing in the United States and Canada of the drugs we develop In the biopharmaceutical industry, a substantial percentage of the profits generated from successful drug development are typically retained by the entity directly involved in the sales and marketing of the drug. Licensing our drug candidates to a third party who will complete development and provide sales and marketing resources in exchange for upfront payments, milestone payments and a royalty on sales may reduce some of our risks, particularly for diseases outside our strategic interest or in territories outside of the United States and Canada. In the future, however, we may decide that the risk-return profile favors developing and then marketing and selling products on a co-promotion basis or by ourselves. Therefore, when and if we deem it appropriate, we intend to participate in the sales and marketing of our products in the United States and Canada. 5 THERAPEUTIC PROGRAMS AND PRODUCTS IN DEVELOPMENT The following table summarizes the potential therapeutic indications and development status for certain of our clinical, preclinical and research product candidates and is qualified in its entirety by the more detailed information appearing elsewhere in this Form 10-K.
TARGET COMPOUND/ PROGRAM DOSE FORM INDICATION STATUS(1) - -------------------- -------------------------- ------------------------------- ----------------- THROMBOSIS ARGATROBAN Intravenous Anticoagulant therapy for Marketed product prophylaxis or treatment of patients with HIT Intravenous Anticoagulant therapy for Marketed product patients, with or at risk for HIT, undergoing PCI - -------------------------------------------------------------------------------------------------------------- VASOSPASM/ ENDOTHELIN(A) RECEPTOR HYPERTENSION ANTAGONIST Sitaxsentan (TBC11251) Oral Pulmonary Arterial Hypertension Phase III TBC3711 Oral Pulmonary Arterial Hypertension Phase I completed UROTENSIN RECEPTOR Various Research ANTAGONIST OTHER GPCRS Various Research - -------------------------------------------------------------------------------------------------------------- VASCULAR SELECTIN ANTAGONIST (BEING INFLAMMATION DEVELOPED BY REVOTAR) Bimosiamose (TBC1269) Inhaled Asthma Phase IIa Topical Psoriasis and atopic dermatitis Phase IIa VCAM/VLA-4 ANTAGONIST TBC4746 Oral Asthma Preclinical Multiple Sclerosis Preclinical Rheumatoid Arthritis Preclinical (ALPHA)4(BETA)7 ANTAGONIST TBC3804 Oral Inflammatory Bowel Disease Research OTHER CELL ADHESION Various Research MOLECULES - --------------------------------------------------------------------------------------------------------------
(1) Preclinical compounds are compounds undergoing toxicology and pharmaceutical development in preparation for human clinical testing. Research compounds are compounds undergoing basic evaluation and optimization to establish a lead clinical candidate. 6 THROMBOSIS PROGRAM ARGATROBAN Background. Thrombosis, the lodging of a blood clot in a vessel, causes various vascular diseases, depending on the location of the clot. An arterial clot may lead to heart attack if lodged in a coronary artery, or stroke if lodged in an artery that supplies oxygen to the brain. Venous clots occur principally in the arms or legs (deep vein thrombosis), and may cause local inflammation, chronic pain and other complications. In some cases, a venous clot can cause lung injury (pulmonary embolism) by migrating from the veins to the lungs. Thrombosis can be treated surgically or through drug therapy with anticoagulant and thrombolytic drugs. Anticoagulant drugs prevent clots from forming. Heparin and aspirin are the most widely used antithrombotic drugs. Heparin, first discovered over 80 years ago, is the most widely used injectable anticoagulant. In the U.S., approximately ten million patients annually receive therapeutic heparin to treat a variety of conditions that require inhibition of the body's natural clotting mechanism. Each year over 300,000 of these patients develop a profound immunological reaction to heparin that is known as heparin-induced thrombocytopenia. The condition is characterized by a paradoxical tendency to form clots. That puts the patient at risk of major complications such as acute myocardial infarction, ischemic stroke, amputation or death. It is also very difficult to administer heparin dosages. Current Therapies. In conjunction with GSK, we obtained approval for Argatroban as an anticoagulant for prophylaxis or treatment of thrombosis in patients with HIT in the U.S. and Canada. GSK began marketing Argatroban in the U.S. in November 2000. Argatroban is a synthetic direct thrombin inhibitor that directly and selectively binds to and inactivates thrombin in the blood plasma. Argatroban is manufactured and marketed in Japan by Mitsubishi where it is approved as a treatment for ischemic stroke, peripheral arterial occlusion and hemodialysis in patients with antithrombin III deficiency, a clotting disorder that does not respond to heparin. Since the product's introduction in 1990, more than 200,000 patients have been treated with Argatroban in Japan. Other measures, such as inline filters, are sometimes used to remove clots, but are highly invasive and involve patient trauma. Simply stopping heparin alone may be insufficient, as a significant number of patients will progress to experience severe outcomes. Clinical studies that we conducted in the U.S. have shown a significant correlation between the administered dose of Argatroban and the degree of anticoagulation achieved. This is potentially important as it suggests that the relationship between dose and effect of Argatroban is generally very predictable over the expected dose-range. As a result, we believe there is little risk of either insufficient or excessive anticoagulation occurring from small dose changes of Argatroban. Other product advantages for Argatroban include a rapid onset of action, a relatively short half-life and an absence of immunogenicity. Clinical Trial Status. During 2002, we completed a multi-center, placebo-controlled Phase II clinical trial (ARGIS-I) for the use of Argatroban, as monotherapy, in patients with ischemic stroke. During February 2003, we reported the Phase II trial results that met the primary endpoint related to safety. In light of a lack of an overall efficacy trend, and the high risk and high costs associated with stroke trials, it is unlikely that Texas Biotechnology will proceed independently with a full Phase III program. However, given the relatively positive safety outcome, and the high rate of stroke occurrence in HIT patients, some physicians may choose to use Argatroban in place of heparin in some patient populations. Currently, Argatroban is being evaluated in a clinical trial, in combination with rt-PA as a new approach to the treatment of acute ischemic stroke by an investigator at the University of Texas Medical School at Houston. Argatroban is approved and sold in Japan by Mitsubishi, the licensor of Argatroban, as mono-therapy for an indication of acute ischemic stroke. With GSK, we are conducting clinical trials to evaluate the use of Argatroban in hemodialysis patients and for use in PCI. Competition in HIT. Primary competitors for Argatroban in its initial indication are Refludan(R) (lepirudin), marketed by Berlex Laboratories, Orgaran(R) (danaparoid sodium), manufactured by N.V. Organon, a unit of Akzo Nobel, and Angiomax (R) (bivalirudin) manufactured by The Medicines Company. Refludan(R) (lepirudin, Berlex). This product received approval in Europe in 1997 and in the U.S. in 1998 for anticoagulation in patients with HIT to prevent further thromboembolic (clotting) complications. Refludan(R) has been associated with the development of an adverse immune response in up to 40% of patients receiving Refludan(R). Several cases of anaphylaxis have been reported upon re-exposure to Refludan(R). Although the full clinical impact of development of these antibodies is unknown, we understand that the anticoagulant effects of Refludan(R) may 7 become unpredictable in patients developing these antibodies. Additionally Refludan(R) is renally excreted while Argatroban is hepatically excreted. Berlex has stated they plan to submit for a HIT prevention label claim in the future. Orgaran(R) (danaparoid sodium, N.V. Organon). This product is a low molecular weight heparinoid, a heparin-like compound extracted from pigs. The product was approved in the U.S. in 2001 for prevention of deep venous thrombosis following hip surgery. However, approximately one in ten HIT patients receiving Orgaran(R) will develop the HIT syndrome exactly as if the patient received heparin. Orgaran(R) is not approved in the U.S. for HIT and is used on an off-label basis only. Angiomax(R) (bivalirudin, The Medicines Company). This product received approval in the U.S. in 2001 for use as an anticoagulant in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty ("PTCA"). Angiomax(R) represents the third direct thrombin inhibitor approved in the U.S. Angiomax(R) is not approved for the treatment of HIT. The Medicines Company has stated their intention to expand the Angiomax(R) label to include the treatment and prevention of HIT. Other Indications. Argatroban may be useful in other disease settings where predictable anticoagulation is desired. Argatroban may be effective in hemodialysis and PCI, particularly in patients who develop problems when given heparin. Competition for Argatroban in Other Indications. Competitors for Argatroban in other applications include: - Revasc(R) (desirudin, Aventis/Novartis A.G.), recombinant hirudin, is approved in Europe for the prevention of deep vein thrombosis following hip surgery, but has been associated with intracranial hemorrhage and antibody production; - Melagatran (AstraZeneca plc) is in Phase III trials and is being developed as a treatment for deep vein thrombosis. They have stated that they intend to file an NDA during 2003; and - Arixtra(R) (pentasaccharide, Sanofi-Synthelabo) was approved in the U.S. in 2002 for the prevention of deep vein thrombosis and pulmonary embolism. 8 VASOSPASM/HYPERTENSION PROGRAM Background. Smooth muscle cells in the blood vessel are responsible directly for mediating vessel diameter. The regulation of blood flow depends on a delicate balance between physical and chemical stimuli that cause smooth muscle cells to relax (vasodilatation) or contract (vasoconstriction). Chronic periods of excessive vasoconstriction in the peripheral circulation can lead to disturbances in blood pressure (hypertension) or heart function (congestive heart failure), whereas acute episodes of intense vasoconstriction (vasospasm) can restrict blood flow leading to severe tissue damage and organ failure (myocardial infarction or kidney failure). It has been determined that the vascular endothelium (innermost lining) plays a pivotal role in maintaining normal blood vessel tone, including blood flow, by producing substances that regulate the balance between vasodilatation and vasoconstriction. Endothelin is a peptide that is believed to play a critical role in the control of blood flow. The action of endothelin can be explained by its interactions on cell surfaces with two distinct receptors, endothelin-A (ET(A)) and endothelin-B (ET(B)). In general, ET(A) receptors are associated with vasoconstriction, while ET(B) receptors are primarily associated with vasodilatation. There is substantial evidence that endothelin is involved in a variety of diseases where blood flow is important. These include vasospasm, congestive heart failure and certain types of hypertension. Our research program in the vasospasm/hypertension area is aimed at developing small molecules that inhibit the binding of endothelin to its cell surface receptors. Our scientists believe that specific agents for each receptor subtype may provide the best clinical utility and safety. Our initial focus has been to develop a highly potent and selective small molecule based ET(A) receptor antagonist. An antagonist, or inhibitor, blocks the effects of a ligand at its receptor. A ligand is a chemical messenger, which binds to a specific site on a target molecule or cell. Our scientists have discovered a novel class of low molecular weight compounds that antagonize endothelin binding to the ET(A) receptor with high potency. We identified lead compounds which mimicked the ability of endothelin to bind to the ET(A) receptor. We then used further optimization techniques to develop more potent compounds until the current series of lead candidates were identified. In addition to their ability to block endothelin, binding to its receptor, these compounds functionally inhibit endothelin action on isolated blood vessels in vitro acting as full, competitive antagonists. The lead compounds in this series have been shown to exhibit in vivo efficacy using various animal models. In addition, sitaxsentan and bosentan have demonstrated efficacy in human clinical trials, including patients with pulmonary hypertension. Current Therapies. Current treatments for PAH remain unsatisfactory and new treatments are needed. At present, epoprostenol (Flolan(R)-GSK), bosentan (Tracleer(R)-Actelion), and treprostinil (Remodulin(R)-United Therapeutics) are approved treatments for patients with PAH. Epoprostenol, a vasodilator requiring continuous infusion through a central venous catheter and special infusion pump, is costly, is associated with significant adverse events including those related to its delivery, and is typically reserved by clinicians for patients with NYHA functional class IV status. Bosentan, a nonselective ET-1 receptor antagonist, is the first oral agent approved for the treatment of PAH, and is indicated in patients with World Health Organization (WHO) functional class III and IV symptoms. Bosentan is also associated with significant potential for hepatotoxicity, teratogenicity, and reduction of male fertility. Treprostinil, a prostaglandin analog requiring administration through a chronic subcutaneous pump, is associated with a high incidence of local injection site reactions. A selective oral endothelin antagonist, if successful, may provide a significant benefit to these patients. Partnership. During 2000, we formed ICOS-TBC, a partnership with ICOS, to co-develop and commercialize endothelin antagonist compounds. As part of the agreement, ICOS made an upfront payment and a milestone payment to ICOS-TBC, which in turn distributed these payments to TBC. In January 2003, ICOS announced that they had reached a conclusion that joint development of the endothelin receptor antagonist program, through ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which we could independently continue the program. The financial terms of this transaction are subject to ongoing negotiations between the two companies. This could allow us to increase our ownership and the potential commercial benefit of the program from 50% to 100%. The partners equally funded the cost of research and development through the end of 2002. After 2002, we are responsible for all costs of the program. Product Candidate -- TBC11251 - Sitaxsentan. The lead endothelin antagonist, sitaxsentan, is being developed for the indication of PAH. PAH is a disease with high mortality and an average survival time of approximately four 9 years from the time of diagnosis. Sitaxsentan, a highly selective endothelin-A receptor antagonist, may provide a distinct advantage over current therapies including the non-specific endothelin receptor antagonist Tracleer(R). Clinical Trial Status. -- We filed an investigational new drug application, also referred to as an IND, with the FDA for sitaxsentan in late 1996. To date, three Phase IIa clinical trials have been completed, one in congestive heart failure patients, one in essential hypertension patients and one in pulmonary arterial hypertension patients. In a follow-on extension trial, treatment-related hepatitis was observed in two patients and one of these patients died. Following analysis of the open-label Phase IIa clinical trial and extension studies and discussions with the FDA, ICOS-TBC initiated a Phase IIb/III clinical trial (STRIDE) of sitaxsentan, at lower doses, for the treatment of PAH in the second quarter of 2001. During 2002, ICOS-TBC completed the STRIDE clinical trial to assess the safety and efficacy of sitaxsentan in patients with NYHA class II, III and IV pulmonary arterial hypertension. The trial enrolled 178 patients who were randomized to either sitaxsentan 100 mg, sitaxsentan 300 mg, or placebo treatment once a day. The primary endpoint of the Phase IIb/III STRIDE trial was change in percent of predicted peak VO2 from baseline to week 12. The results showed a statistically significant improvement for the 300 mg dose group compared with placebo treatment (7% relative improvement). The primary endpoint was not statistically significant for the 100 mg dose group. A secondary endpoint was change in 6-minute walk distance from baseline to week 12. The results showed statistically significant improvement for both the sitaxsentan 100 mg and 300 mg groups, compared with placebo treatment. The 6-minute walk test is the most widely used efficacy test for drugs treating PAH. The clinical effectiveness of each of the two sitaxsentan dose groups was equivalent for 6- minute walk distance (9% relative improvement). NYHA class improvement, another important measure that reflects limitations in physical activity, was also statistically significant for the sitaxsentan 100 mg and 300 mg dose groups compared with placebo treatment. Based on the results of this clinical trial and meeting with the FDA, TBC believes that development of sitaxsentan should be continued. Based on concerns the FDA has raised regarding the class, such as hepatic toxicity and reproductive abnormalities, which may or may not be associated with our compounds, we are pursuing indications with unmet medical needs such as PAH. Product Candidate -- TBC3711. TBC3711 is our second endothelin antagonist compound and has been selected as the next clinical candidate. We believe TBC3711 is more selective and more potent than sitaxsentan and that a potential market opportunity for TBC3711 exists for the treatment of PAH and other diseases. ICOS-TBC has completed Phase I clinical studies with TBC3711 and is evaluating the development plan for the compound. Other Indications. We believe endothelin antagonist compounds may provide therapeutic value in several other indications. Competition. A number of companies including Abbott Laboratories, and Myogen, Inc., have ET(A) receptor selective antagonist compounds in clinical development. ET(A) receptor-selective compounds from Abbott are in early Phase III development. They have reported mixed results from a Phase III trial in severe hormone resistant prostate cancer patients. The compound reduced pain and PSA levels, but failed to delay disease progression. They are conducting additional studies in other cancer groups. Myogen has begun a Phase IIa trial for their ET(A) compound in PAH. We believe our compounds are competitive with those from the other companies in terms of bioavailability (how much reaches the appropriate body system), half-life (how long the drugs last in the body) and potency. Several companies have non-selective endothelin antagonists in development. Actelion Ltd., a biotechnology company located in Switzerland, and Genentech, Inc. received approval from the FDA to market Tracleer (R) (bosentan) for the treatment of PAH during 2001. We believe that selective endothelin blockers like sitaxsentan will be preferred by physicians since selective ET(A) blockers block the negative effects of endothelin at the ET(A) receptor, and do not block the beneficial effects of endothelin at the ET(B) receptor. Non-selective antagonists block both the ET(A) and the ET(B) receptors. Abbott/Knoll's development of darusentan and Actelion's development of Tracleer for heart failure have generated negative data. It is not known if the negative clinical data is due to a class effect, trial design or specific to the compounds themselves. In addition to endothelin antagonists, Pfizer is conducting a Phase II trial in the use of Viagra (R) in PAH. If phosphodiesterase 5 inhibitors ("PDE-5 inhibitor") demonstrate a benefit in PAH patients, we believe they will be used as additive therapy with endothelin antagonists. 10 VASCULAR INFLAMMATION PROGRAM Background. Inflammation is the body's natural defense mechanism that fends off bacterial, viral and parasitic infections. The inflammatory response involves a series of events by which the body attempts to limit or destroy a foreign agent. These steps include the production of proteins that attract white blood cells, or leukocytes, to the site of inflammation, the production of chemicals to destroy the foreign agent and the removal of the resulting debris. This process is normally self-limiting and not harmful to the individual. However, in certain instances, the process may be overly active, such as during an acute asthma attack where an immediate inflammatory reaction occurs. In addition, in diseases such as atherosclerosis or rheumatoid arthritis, the inflammatory reaction leads to a build up of white blood cells and debris at the inflammation site that causes tissue damage over longer periods of time. The initial interaction between white blood cells and the endothelial cell layer is mediated by a group of adhesion molecules known as selectins. The selectins are a family of three proteins, two of which are found on inflamed endothelium, which bind to the carbohydrate sialyl Lewis x, also referred to as sLe(X), found on the surface of white blood cells. White blood cells are able to migrate into inflamed areas because sLe(X) present on the surface of white blood cells binds to selectin molecules present on activated endothelium. This binding slows the flow of white blood cells or leukocytes through the bloodstream. This is one of the first steps in the movement of white blood cells from the blood into the tissue. The second step in this process is vascular cell adhesion molecule, referred to as VCAM, mediated white blood cell attachment and migration which helps to localize white blood cells in areas of injury or infection. The presence of VCAM at sites of endothelial injury leads to an accumulation at these sites of the integrin very late antigen-4, or VLA-4, which are contained in white blood cells. Such accumulation can provoke an inflammatory response. Current Therapies. The major anti-inflammatory compounds are corticosteroids, leukotriene blockers and immunosuppressants such as cyclosporin. While effective, the time to onset of action of these compounds may be significant. Corticosteroids also have significant side effects including growth suppression in children, cataract formation, and general intolerance. The antagonist compounds we are developing may provide efficacy with fewer of these side effects. Product Candidate -- Bimosiamose is being developed by Revotar, our majority owned affiliate. Our scientists have developed a computer model of the selectin/sLe(X) complex and used it to produce a novel class of synthetic, small molecule compounds that inhibit the selectin-mediated cellular adhesion that occurs during inflammation. The lead compound in the series, bimosiamose, has shown efficacy both in cell-based and biochemical assays, and in animal models of inflammation. A Phase IIa clinical trial for bimosiamose's intravenous use in asthma was completed in 1998. Results of this trial, which involved 21 patients, demonstrated significant reductions in cellular inflammation and allowed improved breathing. The inhaled form of bimosiamose has been tested in Phase I clinical trials completed during 2001 for the treatment of asthma and a Phase IIa clinical trial was completed and showed signs of activity, utilizing an injectable form of bimosiamose as a proof-of-concept for psoriasis. During 2002, Revotar began a Phase II clinical trial in asthma, utilizing the inhaled form and intends to commence a Phase IIa clinical trial in psoriasis utilizing the topical form during 2003. German Affiliate -- Revotar Biopharmaceuticals, AG. During 2000, Revotar Biopharmaceuticals, AG, a German affiliate, was formed and we retained a 55.2% ownership percentage. With headquarters in Berlin, Germany, Revotar was formed to perform research and development of novel small molecule compounds and to develop and commercialize selectin antagonists that TBC licensed to Revotar. Upon formation, Revotar received certain development and commercialization rights to the Company's selectin antagonist compounds as well as rights to certain other TBC research technology for use in certain territories. Revotar also received approximately $5 million in funding from three German venture capital funds and has access to certain German government scientific grants. During 2001, Revotar entered into a research agreement regarding macrophage migration inhibitory factor (MIF) with the Fraunhofer Institute in Stuttgart, Germany. We amended our license and research agreement with Revotar during 2003 to better reflect the commercial priorities of each company. Under the amended agreement, Revotar will have exclusive worldwide rights to bimosiamose for the treatment of asthma and other inflammatory indications as well as rights outside of North America for topical indications. Texas Biotechnology will have exclusive worldwide rights for the use of bimosiamose in organ transplant as well as exclusive North American rights to all topical indications. Under the amended agreement, each party has certain revenue sharing and royalty obligations. In 2002, the stockholders of Revotar executed an agreement to provide approximately $4.5 million in unsecured loans, of which our commitment was approximately $3.4 million. Under the loan agreement, we have advanced approximately $1.2 11 million to Revotar during 2002. We believe that Revotar's existing funds, the remaining commitments under the loan agreement and proceeds under German government scientific grants will be sufficient to fund Revotar into the first quarter of 2004. In order to continue to operate beyond that time, Revotar will need to seek additional funding through collaborative arrangements and/or through public or private financings in the future. Clinical Trial Status. - The inhaled form of bimosiamose has been tested by Revotar in Phase I clinical trials completed during 2001 for the treatment of asthma and a Phase IIa clinical trial was completed in Germany utilizing an injectable form of bimosiamose as a proof-of-concept for psoriasis. During 2002, Revotar began a Phase IIa clinical trial in asthma, utilizing the inhaled form and intends to initiate a Phase IIa clinical trial in psoriasis utilizing the topical form during 2003. Product Candidate -- VCAM/VLA-4 Antagonists. We have also identified antagonists for the VCAM-dependent intercellular adhesion observed in asthma, which blocks the ability of white blood cells to interact through VCAM and VLA-4. VLA-4 antagonists represent a new class of compounds that has shown promise in multiple preclinical animal models of asthma. These lead compounds are being modified in an attempt to develop an orally available clinical candidate. In preclinical animal studies, our scientists have demonstrated that a small molecule VLA-4 antagonist can be effective in blocking acute inflammation, suggesting that VCAM/VLA-4 plays a role in this disease process. During 2002, TBC4746 was nominated as a clinical candidate and pursuant to our agreement with Schering-Plough, we received a milestone payment. Product Candidate -- (alpha)4(beta)7 Antagonists. The integrin (alpha)4(beta)7, which is closely related to VLA-4, is present on leukocytes which locate in the gastrointestinal system. Inhibitors of (alpha)4(beta)7 may be useful in treating inflammatory conditions of the gut such as inflammatory bowel disease (estimated 300,000 U.S. patients). Research Collaboration with Schering-Plough. -- On June 30, 2000, we entered into a worldwide research collaboration and license agreement to discover, develop and commercialize VLA-4 antagonists with Schering-Plough. The primary focus of the collaboration will be to discover orally available VLA-4 antagonists as treatments for asthma. Under the terms of the agreement, Schering-Plough obtains the exclusive worldwide rights to develop, manufacture and market all compounds from TBC's library of VLA-4 antagonists, as well as the rights to a second integrin antagonist. TBC is responsible for optimizing a lead compound and additional follow-on compounds. Schering-Plough is supporting research at TBC and will be responsible for all costs associated with the worldwide product development program and commercialization of the compound. In addition to reimbursing research costs, Schering-Plough paid an upfront license fee and will pay development milestones and royalties on product sales resulting from the agreement. Total payments to TBC for both the VLA-4 and an additional program, excluding royalties, could reach $87.0 million. During 2002, TBC4746 was nominated as a clinical candidate and pursuant to our agreement with Schering-Plough, we received a milestone payment. Competition. Several companies have programs aimed at inhibiting cell adhesion molecules and integrins, like (alpha)4(beta)7 and VCAM/VLA-4. We are not aware of any competing product antagonists of these classes, which are currently in clinical development. While no oral VCAM/VLA-4 inhibitors are in clinical development, Biogen, Inc. and Elan Corporation plc have obtained positive Phase II data with Antegren(R), a monoclonal antibody against VLA-4, in multiple sclerosis and inflammatory bowel disease. They are planning to conduct Phase III studies with this product. VASCULAR DISEASE Background and current status. Many disease processes involve changes in blood vessels and heart tissue. There are numerous mediators, like endothelin, which may contribute to the development of these diseases. Several of these act though G-protein coupled receptors, GPCRs, to carry out their action. We are conducting research on urotensin and other GPCRs to identify inhibitors which could be useful in treating diseases including CHF, ischemic stroke and acute myocardial infarction. There are numerous companies studying these and other GPCRs. We believe our projects are competitive with these other programs. 12 RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSING AGREEMENTS We have established, and intend to continue to establish, collaborations with a number of corporations, research institutions and scientists to further our research and development objectives and expedite the commercialization of our products. Our major licensing and collaboration agreements are summarized below: Mitsubishi Pharma Corporation ("Mitsubishi"). We entered into an agreement with Mitsubishi to license Mitsubishi's rights and technology relating to Argatroban and to license Mitsubishi's own proprietary technology developed with respect to Argatroban (the "Mitsubishi Agreement"). Under the agreement with Mitsubishi, we have an exclusive license to use and sell Argatroban in the U.S. and Canada for all cardiovascular, renal, neurological and immunological purposes other than use for the coating of stents. We are required to pay Mitsubishi specified royalties on net sales of Argatroban by us and our sublicensees after its commercial introduction in the U.S. and Canada. Either party may terminate the agreement with Mitsubishi on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or becomes insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner, the agreement with Mitsubishi expires on the later of termination of patent rights in a particular country or 20 years after first commercial sale of products in a particular country. Under the Mitsubishi Agreement, we have access to an improved formulation patent granted in the U.S. in 1993, which expires in 2010, and a use patent in the U.S., which expires in 2009. We have agreed to pay a consultant involved in the negotiation of this agreement a royalty based on net sales of Argatroban. During 2000, we signed an additional agreement with Mitsubishi that provides us with royalties on sales of Argatroban in certain European countries, up to a total of $5.0 million in milestones for the development of ischemic stroke and certain other provisions. During 2001, we received $2.0 million of these milestones less certain Japanese withholding taxes. Additional milestones are dependent on further development of Argatroban in the indication of ischemic stroke. During 2002, we completed a Phase II human clinical trial for Argatroban as a monotherapy treatment for acute ischemic stroke. The clinical trial met the primary safety endpoint and showed positive results in the secondary safety endpoint. In light of a lack of an overall efficacy trend and the high risk and high costs associated with stroke trials, it is unlikely that we will proceed independently with a full Phase III program. GlaxoSmithKline. In connection with our development and commercialization of Argatroban, on August 5, 1997, we entered into an agreement with GSK whereby GSK was granted an exclusive sublicense in the U.S. and Canada for the indications of Argatroban that we have licensed from Mitsubishi. GSK has paid $8.5 million in upfront license fees and $12.5 million in milestone payments and has agreed to pay up to an additional $7.5 million in additional milestone payments based on the clinical development and FDA approval of Argatroban for the acute myocardial infarction indication. We are evaluating the feasibility of development of Argatroban for other indications including use in hemodialysis and PCI. The agreement with GSK provides for the formation of a joint development committee to analyze the development of additional Argatroban indications (such as PCI) covered by our license from Mitsubishi. The joint development is to be funded 60% by GSK, except Phase IV trials are paid 100% by GSK. Except as discussed below, GSK has the exclusive right to commercialize all products arising out of the collaboration, subject to the obligation to pay royalties on net sales to us and our rights to co-promote these products through our own sales force in certain circumstances. We will retain the rights to any indications that GSK determines it does not wish to pursue (such as ischemic stroke), subject to the requirement that we may not grant marketing rights to any third parties, and must use our own sales force to commercialize any such indications. Any indications that GSK and TBC elect not to develop will be returned to Mitsubishi, subject to the rights of GSK and TBC to commercialize these indications at TBC's election, with GSK having the first opportunity to commercialize. Mitsubishi may also request the joint development committee to develop new indications inside or outside the licensed field of use, and if the joint development committee determines that it does not want to proceed with any such indication, all rights under the agreement with Mitsubishi regarding such indication will revert to Mitsubishi subject to our and GSK's right to commercialize the indication, with GSK having the first opportunity to commercialize. The agreement with GSK generally terminates on a country-by-country basis upon the earlier of the termination of our rights under the agreement with Mitsubishi, the expiration of applicable patent rights, or in the case of certain royalty payments, the commencement of substantial third-party competition. GSK also has the right to terminate the agreement on a country by country basis by giving us at least three months written notice that the commercial profile of the product in question would not justify continued development or marketing in that country. In addition, either party may terminate the agreement on 60 days notice if the other party defaults in its obligations under the agreement, 13 declares bankruptcy or becomes insolvent. We agreed to pay an agent involved in the negotiation of this agreement a fee based on a percentage of all consideration we receive, including royalties, from sales of Argatroban. At present, Mitsubishi is the only manufacturer of Argatroban, and has entered into an agreement with GSK to supply Argatroban in bulk to meet GSK's needs. Should Mitsubishi fail during any consecutive nine-month period to supply GSK at least 80% of its requirements, and such requirements cannot be satisfied by existing inventories, the agreement provides for the nonexclusive transfer of the production technology to GSK. If GSK cannot commence manufacturing of Argatroban in a timely manner or if alternate sources of supply are unavailable or uneconomical, our results of operations would be harmed. GSK has informed us that they will be finishing and packaging in a GSK facility in the future. In connection with the execution of our agreement with GSK, GSK purchased 176,922 shares of common stock for $1.0 million and an additional 400,000 shares of common stock for $2.0 million in connection with the secondary public offering, which closed on October 1, 1997. ICOS-TBC L.P. In June 2000, we entered into a limited partnership agreement with ICOS to form ICOS-TBC. The partnership was formed to develop and globally commercialize endothelin-A receptor antagonists from the TBC endothelin antagonist program. ICOS-TBC has made an upfront license fee payment and milestone payment for the development and commercialization of products resulting from the collaboration and the partners equally funded the cost of research and development through the end of 2002. In January 2003, ICOS announced that they had reached a conclusion that joint development of the endothelin receptor antagonist program, through ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which TBC could independently continue the program. The financial terms of this transaction are subject to ongoing negotiations between the two companies. If TBC is successful in obtaining 100% ownership of the program, TBC's share of the costs and potential commercial benefit of the program will increase from 50% to 100%. See Note 8 to the Consolidated Financial Statements for a discussion of this transaction. Schering-Plough. In June 2000, TBC and Schering-Plough entered into a worldwide research collaboration and license agreement to discover, develop and commercialize VLA-4 antagonists, with Schering-Plough having rights to a second integrin antagonist target. In addition to funding research costs, Schering-Plough paid TBC an upfront license fee and milestone payment, and will pay us additional development milestones and royalties on product sales resulting from the agreement. Total payments to us for both programs, excluding royalties, could reach $87.0 million. See Note 8 to the Consolidated Financial Statements for a discussion of this transaction. Revotar Biopharmaceuticals, AG. During September 2000, Revotar was formed and we transferred to Revotar certain development and commercialization rights to our selectin antagonist program as well as rights to other proprietary technology. See Note 9 to the Consolidated Financial Statements for a discussion of this transaction. The primary focus of Revotar has been on the design and initiation of a Phase I trial for bimosiamose using the inhaled formulation of the drug, which was completed during 2001. During 2002, Revotar began a Phase IIa clinical trial in asthma, utilizing the inhaled form and intends to commence a Phase IIa clinical trial in psoriasis utilizing the topical form in 2003. LICENSES AND PATENTS Because of the substantial length of time and expense associated with developing new pharmaceutical products, the biotechnology industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our policy is to file patent applications to protect technology, inventions and improvements that are important to the development of our business. We have 18 pending U.S. patent applications and 34 issued U.S. patents covering compounds including selectin inhibitors, endothelin antagonists and VCAM/VLA-4 antagonists. In addition, we have exclusive licenses to three patents covering rational drug design technology. We have also filed patent applications in certain foreign jurisdictions covering projects that are the subject of U.S. applications and intend to file additional patent applications as our research projects develop. We in-licensed the U.S. and Canadian rights to Argatroban in 1993, which included access to an improved formulation patent granted in 1993, which expires in 2012, and a use patent for the use of Argatroban as a fibrinolysis-enhancing agent, which expires in 2009. The Mitsubishi composition of matter patent on Argatroban has expired. We have access to other patents held by Mitsubishi, however, these are not being utilized currently. 14 Argatroban received FDA approval on June 30, 2000. We currently market Argatroban and enjoy market exclusivity pursuant to the Waxman/Hatch Act that provides protection from competition until June 30, 2005. We can obtain an extension under Waxman/Hatch until December 31, 2005 under certain circumstances pertaining to submission of pediatric data. Argatroban is currently marketed in a formulation that is covered under a formulation patent that expires in 2010. We will also be submitting a process patent, that expires in 2019, to the FDA for inclusion in the FDA Orange Book of Approved Drug Products. Following expiration of Waxman/Hatch protection, it is possible that generic manufacturers may be able to produce Argatroban without violating the formulation or process patents. The patent positions of biopharmaceutical firms, including us, are uncertain and involve complex legal and factual questions. Consequently, we do not know whether any of our applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the U.S. are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first creator of inventions covered by our pending patent applications or that we were the first to file patent applications for such inventions. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office, commonly known as the PTO, to determine priority of invention, which could result in substantial cost to us, even if the eventual outcome is favorable to us. We have no interference proceedings pending which involve compounds currently of commercial interest to us. We cannot assure you that our patents, if issued, would be held valid by a court of competent jurisdiction. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology. The development of therapeutic products for cardiovascular applications is intensely competitive. Many pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in this field. Some of these applications or patents may be competitive with our applications or conflict in certain respects with claims made under our applications. Such conflict could result in a significant reduction of the coverage of our patents, if issued. In addition, if patents are issued to other companies that contain competitive or conflicting claims and such claims are ultimately determined to be valid, we cannot assure you that we would be able to obtain licenses to these patents at a reasonable cost or develop or obtain alternative technology. We also rely upon trade secret protection for our confidential and proprietary information. We cannot assure you that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets. We require our employees, consultants, members of our scientific advisory board, outside scientific collaborators and sponsored researchers and certain other advisors to enter into confidentiality agreements with us that contain assignment of invention clauses. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreements provide that all inventions conceived by the employee are our exclusive property. We cannot assure you, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information. GOVERNMENT REGULATION The research, testing, manufacture and marketing of drug products are extensively regulated by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, promotion and marketing and distribution of pharmaceutical products. Failure to comply with applicable regulatory requirements may subject a company to administrative or judicially imposed sanctions such as: - warning letters; - civil penalties; 15 - criminal prosecution; - injunctions; - product seizure; - product recalls; - total or partial suspension of production; and - FDA refusal to approve pending New Drug Application ("NDA") applications or NDA supplements to approved applications. The steps ordinarily required before a new pharmaceutical product may be marketed in the United States include: - preclinical laboratory tests, animal tests and formulation studies; - the submission to the FDA of an IND, which must become effective before clinical testing may commence; - adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication; - the submission of an NDA to the FDA; and - FDA review and approval of the NDA prior to any commercial sale or shipment of the drug. Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal trials to assess the potential safety and efficacy of the product. Preclinical tests must be conducted in compliance with Good Laboratory Practice guidelines and compounds for clinical use must be formulated according to compliance with Good Manufacturing Practice, or cGMP, requirements. The results of preclinical testing are submitted to the FDA as part of the IND and NDA. A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not commented on or questioned the IND within this 30-day period, clinical trials may begin. If the FDA has comments or questions, the questions must be answered to the satisfaction of the FDA before initial clinical testing can begin. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND application process can result in substantial delay and expenses. Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practice guidelines, under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. The study protocol and informed consent information for patients in clinical trials must also be approved by the institutional review board at each institution where the trials will be conducted. Clinical trials to support NDAs are typically conducted in three sequential phases, which may overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves trials in a limited patient population to: - determine dosage tolerance and optimal dosage; - identify possible adverse effects and safety risks; and 16 - preliminarily support the efficacy of the drug in specific, targeted indications. If a compound is found to be effective and to have an acceptable safety profile in Phase II evaluation, Phase III trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites. There can be no assurance that Phase I, Phase II or Phase III testing of our product candidates will be completed successfully within any specified time period, if at all. After completion of the required clinical testing, generally an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing may begin in the United States. The NDA must include the results of extensive clinical and other testing and the compilation of data relating to the product's chemistry, pharmacology and manufacture. The cost of an NDA is substantial. The FDA has 60 days from its receipt of the NDA to determine whether the application will be accepted for filing based on the threshold determination that the NDA is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Currently, for a standard review, the FDA takes approximately twelve months in which to review the NDA and respond to the applicant. In 1997, Congress enacted the Food and Drug Administration Modernization Act, in part, to ensure the availability of safe and effective drugs by expediting the FDA review process for certain new products. This act establishes a statutory program for the approval of fast track products (those drugs which address unmet medical needs for serious and life-threatening conditions). Under this act, the FDA has six months in which to review the NDA and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may refer the application to the appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. If FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue an approval letter, or, in some cases, an approvable letter followed by an approval letter. The approvable letter may contain a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA's satisfaction, the FDA will issue an approval letter. The approval letter authorizes commercial marketing of the drug for specific indications. As a condition of NDA approval, the FDA may require post-marketing testing and surveillance to monitor the drug's safety or efficacy, or impose other conditions, commonly referred to as Phase IV trials. If the FDA's evaluation of either the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter. The not approvable letter outlines the deficiencies in the submission and often requires additional testing or information. Notwithstanding the submission of any requested additional data or information in response to an approvable or not approvable letter, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems occur following initial marketing. Manufacturing. Each domestic drug manufacturing facility must be registered with FDA. Domestic drug manufacturing establishments are subject to periodic inspection by the FDA and must comply with cGMP. Further, we or our third party manufacturer must pass a preapproval inspection of its manufacturing facilities by the FDA before obtaining marketing approval of any products. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP and are subject to periodic inspection by the FDA or corresponding regulatory agencies in countries under reciprocal agreements with the FDA. We use and will continue to use third party manufacturers to produce our products in clinical and commercial quantities. There can be no guarantee that future FDA inspections will proceed without any compliance issues requiring the expenditure of money or other resources. Foreign Regulation of Drug Compounds. Whether or not FDA approval has been obtained, approval of a product by comparable regulatory authorities is necessary in foreign countries prior to the commencement of marketing of the product in those countries. The approval procedure varies among countries and can involve additional testing. The time required may differ from that required for FDA approval. Although there are some procedures for unified filings for some European countries with the sponsorship of the country which first granted marketing approval, in general each country has its own procedures and requirements, many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from foreign regulatory authorities after the relevant 17 applications are filed. In Europe, marketing authorizations may be submitted at a centralized, a decentralized or a national level. The centralized procedure is mandatory for the approval of biotechnology products and provides for the grant of a single marketing authorization, which is valid in all European Union member states. As of January 1995, a mutual recognition procedure is available at the request of the applicant for all medicinal products, which are not subject to the centralized procedure. We will choose the appropriate route of European regulatory filing to accomplish the most rapid regulatory approvals. There can be no assurance that the chosen regulatory strategy will secure regulatory approvals on a timely basis or at all. Hazardous Materials. Our research and development processes involve the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. Although we believe that our safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely. In the event of an accident, we could be held liable for any damages that result. This liability could exceed our resources or not be covered by our insurance. Although we believe that we are in compliance in all material respects with applicable environmental laws and regulations, there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations in the future. There can also be no assurance that our operations, business or assets will not be materially adversely affected by current or future environmental laws or regulations. COMPETITION The development and sale of new drugs for the treatment of vascular and inflammatory diseases is highly competitive and we will face intense competition from major pharmaceutical companies and biotechnology companies all over the world. Competition is likely to increase as a result of advances made in the commercial application of technologies and greater availability of funds for investment in these fields. Companies that complete clinical trials, obtain required regulatory approvals and initiate commercial sales of their products before their competitors may achieve a significant competitive advantage. In addition, significant research in biotechnology and vascular medicine may occur in universities and other nonprofit research institutions. These entities have become increasingly active in seeking patent protection and licensing revenues for their research results. They also compete with us in recruiting talented scientists and business professionals. We believe that our ability to compete successfully will depend on our ability to create and maintain scientifically-advanced technology, develop proprietary products, attract and retain scientific and other personnel, obtain patent or other protection for our products, obtain required regulatory approvals and manufacture and successfully market products through other companies, through co-promotion agreements or alone. Many of our competitors have substantially greater financial, marketing, and human resources than we do. We expect to encounter significant competition. MANUFACTURING AND MARKETING We rely on our internal resources and third-party manufacturers to produce compounds for preclinical development. Currently, we have no manufacturing facilities for either the production of biochemicals or the manufacture of final dosage forms. We believe small molecule drugs are less expensive to manufacture than protein-based therapeutics, and that all of our existing compounds can be produced using established manufacturing methods, including traditional pharmaceutical synthesis. We have established supply arrangements with third-party manufacturers for certain clinical trials and have established and will establish supply arrangements ultimately for commercial distribution, although there can be no assurance that such arrangements will be established on reasonable terms. Our long-range plan may involve establishing internal manufacturing of small molecule therapeutics, including the ability to formulate, fill, label, package and distribute our products. However, for the foreseeable future we plan to outsource such manufacturing. We do not anticipate developing an internal manufacturing capability for some time, nor are we able to determine which of our potential products, if any, will be appropriate for internal manufacturing. The primary factors we will consider in making this determination are the availability and cost of third-party sources, the expertise required to 18 manufacture the product and the anticipated manufacturing volume. Pursuant to our agreement with GSK, GSK entered into an agreement with Mitsubishi regarding the manufacture and supply of Argatroban, and we will not, therefore, have any direct responsibility regarding the manufacture and supply of Argatroban as it relates to the agreement with GSK. EMPLOYEES As of December 31, 2002, we employed 104 individuals. During January 2003, we implemented a restructuring plan that reduced our work force to 82. Of our restructured work force, 66 employees are engaged directly in research and development activities and 16 in general and administrative positions. None of our employees are represented by a labor union. We have experienced no work stoppages and believe that relations with our employees are good. We also maintain consulting agreements with a number of scientists at various universities and other research institutions. CONSULTANTS AND SCIENTIFIC ADVISORS We have assembled a scientific advisory board composed of distinguished professors from some of the most prestigious medical schools. The scientific advisory board assists us in identifying research and development opportunities, in reviewing with management the progress of our projects and in recruiting and evaluating scientific staff. Although we expect to receive guidance from the members of our scientific advisory board, all of its members are employed on a full-time basis by others and, accordingly, are able to devote only a small portion of their time to us. Management expects to meet with its scientific advisory board members as a group approximately once each year and individually from time to time on an informal basis. We have entered into a consulting agreement with each member of the scientific advisory board. The Scientific Advisory Board includes James T. Willerson, M.D., as Chairman, and the following scientists. Ferid Murad, M.D., Ph.D. is Professor and Chairman of the Department of Integrative Biology and Pharmacology at the University of Texas-Houston Medical School and the Director of the Institute of Molecular Medicine. Dr. Murad has received many honors including the Nobel Prize in Medicine in 1998, the Ciba Award in 1988 and the Albert and Mary Lasker Award in Basic Medical Research in 1996. He is also a member of many professional and honorary societies and is the author or co-author of more than 300 scientific articles. Ajit Varki, M.D. has been a Professor of Medicine since 1991 and is currently serving in that position as well as leader of the glycobiology program at the University of California, San Diego. Dr. Varki served as Instructor in Medicine at Washington University School of Medicine from 1980 to 1982. He also served as Assistant Professor of Medicine from 1982 to 1987 and as Associate Professor of Medicine from 1987 to 1991 at the University of California, San Diego. In 1975, Dr. Varki received an M.D. from Christian Medical College and his Post-Doctorate in Biochemistry from Washington University from 1979 to 1982. He is a member of various professional societies and has won numerous awards since 1969. He is currently president of the American Society for Clinical Investigation. Dr. Varki is the author or co-author of 160 scientific publications. Denton Cooley, M.D., Surgeon-in-Chief of the Texas Heart Institute, acts as an advisory director to us. We also have agreements with various outside scientific consultants who assist us in formulating our research and development strategy. All of our consultants and advisors are employed by other employers and may have commitments to or consulting or advisory contracts with other entities that may affect their ability to work with us. INTERNET WEBSITE Our Internet website can be found at www.tbc.com. We make available free of charge, or through the "Investor Relations" section of our Internet website at www.tbc.com, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is filed, or furnished to the Securities and Exchange Commission. 19 ADDITIONAL RISK FACTORS Stockholders and potential investors in shares of our stock should carefully consider the following risk factors, in addition to other information in this Form 10-K. We are identifying these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by or on behalf of us. We are relying upon the safe-harbor for forward-looking statements and any such statements made by or on behalf of us are qualified by reference to the following cautionary statements, as well as to those set forth elsewhere in this Form 10-K. RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY THERE IS UNCERTAINTY IN THE DEVELOPMENT OF OUR PRODUCTS AND IF WE DO NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE WILL NOT BE PROFITABLE. In November 2000, we began to market our first product, Argatroban, through our agreement with GSK. However, the royalties produced to date by Argatroban have not made us profitable. To date, the majority of our resources have been dedicated to the research and development of Argatroban and other small molecule drugs for certain vascular and related inflammatory diseases. The commercial applications of our product candidates will require further investment, research, development, preclinical and clinical testing and regulatory approvals, both foreign and domestic. We cannot assure you that we will be able to develop, produce at reasonable cost, or market successfully, any of our product candidates. Further, these product candidates may require complex delivery systems that may prevent or limit their commercial use. All of our products will require regulatory approval before they may be commercialized. Products, if any, resulting from our research and development programs other than Argatroban, are not expected to be commercially available for a number of years, and we cannot assure you that any successfully developed products will generate substantial revenues or that we will ever be profitable. WE FACE SUBSTANTIAL COMPETITION THAT MAY RESULT IN OTHERS DEVELOPING AND COMMERCIALIZING PRODUCTS MORE SUCCESSFULLY THAN WE DO. The biopharmaceutical industry is highly competitive. Our success will depend on our ability to develop products and apply technology and to establish and maintain a market for our products. Potential competitors in the U.S. and other countries include major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. Many of our competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing and financial resources than we do. Accordingly, our competitors may develop products or other novel technologies that are more effective, safer or less costly than any that have been or are being developed by us or may obtain FDA approval for products more rapidly than we are able. We expect significant competition for Argatroban for the treatment of HIT. The products that compete with Argatroban include: - Refludan(R), which was approved by the FDA in 1997 for the treatment of HIT; - Orgaran(R), which is a low molecular weight heparinoid that has been approved for the treatment of deep vein thrombosis, but is believed to be used without an approved indication ("off-label") for the treatment of HIT in the U.S.; and - Angiomax(R), which is approved for use in the U.S. as an anticoagulant in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty. We may also face competition for Argatroban in indications other than HIT, when and if such indications are approved by the FDA, including: - Revasc(R), which is used in the treatment of deep vein thrombosis following hip surgery and has received regulatory approval in Europe; 20 - Angiomax(R), which is in Phase III clinical trials for acute coronary syndromes and conducting clinical trials in HIT patients; - Arixtra(R), which is approved for the prevention of deep vein thrombosis and pulmonary embolism; and - Melagatran, which is being developed as a treatment for deep vein thrombosis and is in Phase III trials. We cannot assure you that technological development by others will not render our products or product candidates uncompetitive or that we will be successful in establishing or maintaining technological competitiveness. WE ARE DEPENDENT ON THIRD PARTIES TO FUND, MARKET AND DEVELOP OUR PRODUCTS, INCLUDING ARGATROBAN. We rely on strategic relationships with our corporate partners to provide the financing, marketing and technical support and, in certain cases, the technology necessary to develop and commercialize certain of our product candidates. We have entered into an agreement with Mitsubishi to license rights and technology relating to Argatroban in the U.S. and Canada for specified therapeutic indications. Either party may terminate the Mitsubishi agreement on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or becomes insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner due to the above-described termination provisions, the agreement with Mitsubishi expires on the later of the termination of patent rights in a particular country or 20 years after the first commercial sale of products in a particular country. We also entered into an agreement with GSK in 1997 whereby we granted an exclusive sublicense to GSK relating to the continued development and commercialization of Argatroban. This agreement provides for the payment of royalties and certain milestone payments upon the completion of various regulatory filings and receipt of regulatory approvals. The agreement generally terminates on a country-by-country basis upon the earlier of the termination of our rights under the agreement with Mitsubishi, the expiration of applicable patent rights, or in the case of certain royalty payments, the introduction of a substantial competitor for Argatroban by another pharmaceutical company. GSK also has the right to terminate the agreement on a country by country basis by giving us at least three months written notice based on a reasonable determination by GSK that the commercial profile of the therapeutic indication in question would not justify continued development or marketing in that country. In addition, either we or GSK may terminate our agreement on 60 days notice if the other party defaults in its obligations under the agreement, declares bankruptcy or becomes insolvent. ICOS-TBC has the responsibility for developing endothelin antagonist compounds from our research program. Should the partners not be able to successfully conduct the research and clinical development of the compounds, we could be adversely affected. There is no guarantee that the partnership will have adequate funds to pursue its research and clinical goals or that the effort will be successful. In January 2003, ICOS announced that they had reached a conclusion that joint development of the endothelin receptor antagonist program, through ICOS-TBC should not continue. ICOS and we are currently negotiating the terms pursuant to which we could independently continue the program. We are entirely responsible for independently funding future development activities of ICOS-TBC subsequent to 2002 which we believe will be between $19 and $21 million in 2003. A delay in reaching an agreement with ICOS could adversely affect or delay the development of the endothelin receptor antagonist program. In 2002, the stockholders of Revotar executed an agreement to provide approximately $4.5 million in unsecured loans, of which our commitment was approximately $3.4 million. Under the loan agreement, we have advanced approximately $1.2 million to Revotar during 2002. We believe that Revotar's existing funds, the remaining commitments under the loan agreement and proceeds under German government scientific grants will be sufficient to fund Revotar into the first quarter of 2004. In order to continue to operate beyond that time, Revotar will need to seek additional funding through collaborative arrangements and/or through public or private financings in the future. Our collaboration and license agreement with Schering-Plough for VLA-4 antagonists contains a provision that allows for termination of the research program upon one hundred eighty days written notice to us. Our success will depend on these and any future strategic alliances. There can be no assurance that we will satisfy the conditions required to obtain additional research or milestone payments under the existing agreements or that we can prevent the termination of these agreements. We cannot assure you that we will be able to enter into 21 future strategic alliances on acceptable terms. The termination of any existing strategic alliances or the inability to establish additional collaborative arrangements may limit our ability to develop our technology and may have a material adverse effect on our business or financial condition. RISKS RELATING TO CLINICAL AND REGULATORY MATTERS THE REGULATORY APPROVAL PROCESS IS COSTLY AND LENGTHY AND WE MAY NOT BE ABLE TO SUCCESSFULLY OBTAIN ALL REQUIRED REGULATORY APPROVALS. The preclinical development, clinical trials, manufacturing, marketing and labeling of pharmaceuticals are all subject to extensive regulation by numerous governmental authorities and agencies in the U.S. and other countries. We must obtain regulatory approval for each of our product candidates before marketing or selling any of them. It is not possible to predict how long the approval processes of the FDA or any other applicable federal, state or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. Positive results in preclinical testing and/or early phases of clinical studies offer no assurance of success in later phases of the approval process. Generally, preclinical and clinical testing of products can take many years, and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretation that could delay, limit or prevent regulatory approval. Any delay in obtaining, or failure to obtain, approvals could adversely affect the marketing of our products and our ability to generate product revenue. The risks associated with the approval process include: - delays or rejections in the regulatory approval process based on the failure of clinical or other data to meet expectations, or the failure of the product to meet a regulatory agency's requirements for safety, efficacy and quality; and - regulatory approval, if obtained, may significantly limit the indicated uses for which a product may be marketed. OUR CLINICAL TRIALS COULD TAKE LONGER TO COMPLETE AND COST MORE THAN WE EXPECT, WHICH MAY RESULT IN OUR DEVELOPMENT PLANS BEING SIGNIFICANTLY DELAYED. We will need to conduct clinical studies of all of our product candidates. These studies are costly, time consuming and unpredictable. Any unanticipated costs or delays in our clinical studies could cause us to expend substantial additional funds or to delay or modify our plans significantly, which would harm our business, financial condition and results of operations. The factors that could contribute to such cost, delays or modifications include: - the cost of conducting human clinical trials for any potential product. These costs can vary dramatically based on a number of factors, including the order and timing of clinical indications pursued and the development and financial support from corporate partners; and - intense competition in the pharmaceutical market, which may make it difficult for us to obtain sufficient patient populations or clinician support to conduct our clinical trials as planned. EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO ONGOING REGULATORY OVERSIGHT, WHICH MAY AFFECT THE SUCCESS OF OUR PRODUCTS. Any regulatory approvals that we receive for a product may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up Phase IV studies. After we obtain marketing approval for any product, the manufacturer and the manufacturing facilities for that product will be subject to continual review and periodic inspections by the FDA and other regulatory authorities. The subsequent discovery of previously unknown problems with the product or with the manufacturer or facility may result in restrictions on the product or manufacturer, including withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. 22 RISKS RELATING TO FINANCING OUR BUSINESS WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY NOT BE SUCCESSFUL IN RAISING ADDITIONAL FUNDS IN THE FUTURE. We have been unprofitable to date and expect to incur operating losses for the next several years as we invest in product research and development, preclinical and clinical testing and regulatory compliance. We will require substantial additional funding to complete the research and development of our product candidates, to establish commercial scale manufacturing facilities, if necessary, and to market our products. We have accumulated approximately $148.2 million in net losses through December 31, 2002. Estimates of our future capital requirements will depend on many factors, including: - market acceptance and commercial success of Argatroban; - expenses and risks associated with clinical trials to expand the indications for Argatroban; - continued scientific progress in our drug discovery programs; - the magnitude of these programs; - progress with preclinical testing and clinical trials; - the time and costs involved in obtaining regulatory approvals; - the costs involved in filing, prosecuting and enforcing patent claims; - competing technological and market developments and changes in our existing research relationships; - our ability to maintain and establish additional collaborative arrangements; and - effective commercialization activities and arrangements. Subject to these factors, we anticipate that our existing capital resources and other revenue sources, should be sufficient to fund our cash requirements through 2004. Notwithstanding revenues, which may be produced through sales of potential future products if approved, we anticipate that we will need to secure additional funds to continue the required levels of research and development to reach our long-term goals. We intend to seek such additional funding through collaborative arrangements and/or through public or private financings. We cannot assure you that additional financing will be available or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing securities, further dilution of the equity ownership of existing stockholders will result. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our drug discovery or development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products that we would not otherwise relinquish. WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR OPERATING RESULTS. We have historically experienced, and expect to continue to experience for the foreseeable future, significant fluctuations in our operating results. These fluctuations are due to a number of factors, many of which are outside of our control, and may result in volatility of our stock price. Future operating results will depend on many factors, including: - demand for our products; - regulatory approvals for our products; 23 - the timing of the introduction and market acceptance of new products by us or competing companies; and - the timing and magnitude of certain research and development expenses. RISKS RELATED TO ONGOING OPERATIONS WE ARE DEPENDENT ON QUALIFIED PERSONNEL. Our success is highly dependent on our ability to attract and retain qualified scientific and management personnel. The loss of the services of the principal members of our management and scientific staff including Bruce D. Given, M.D., our President and Chief Executive Officer, and Richard A.F. Dixon, Ph.D., our Senior Vice President, Research and Chief Scientific Officer, may impede our ability to bring products to market. In order to commercialize products, we must maintain and expand our personnel as needs arise in the areas of research, clinical trial management, manufacturing, sales and marketing. We face intense competition for such personnel from other companies, academic institutions, government entities and other organizations. We cannot assure you that we will be successful in hiring or retaining qualified personnel. Managing the integration of new personnel and our growth in general could pose significant risks to our development and progress. We also rely on consultants and advisors to assist us in formulating our research and development strategy. All our consultants and advisors are either self-employed or employed by other organizations, and they may have other commitments such as consulting or advisory contracts with other organizations that may affect their ability to contribute to us. THE HAZARDOUS MATERIAL WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN SIGNIFICANT LIABILITIES, WHICH MAY EXCEED OUR INSURANCE COVERAGE. Our research and development activities involve the use of hazardous materials. While we believe that we are currently in substantial compliance with federal, state and local laws and regulations governing the use of these materials, accidental injury or contamination may occur. Any such accident or contamination could result in substantial liabilities, which could exceed the policy limits of our insurance coverage and financial resources. Additionally, the cost of compliance with environmental and safety laws and regulations may increase in the future. WE MAY BE SUED FOR PRODUCT LIABILITY, WHICH MAY PREVENT OR INTERFERE WITH THE DEVELOPMENT OR COMMERCIALIZATION OF OUR PRODUCTS. Because our products and product candidates are new treatments, with limited, if any, past use on humans, serious undesirable and unintended side effects may arise. We may be subject to product liability claims that are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products. These claims could expose us to significant liabilities that could prevent or interfere with the development or commercialization of our products and seriously impair our financial position. Product liability insurance is generally expensive for biopharmaceutical companies such as ours. We maintain product liability insurance coverage for claims arising from the use of our products in clinical trials prior to FDA approval. Under the agreements with Mitsubishi and GSK, we maintain product liability insurance to cover claims that may arise from the sale of Argatroban. Our existing coverage will not be adequate as we further develop products and continue to sell Argatroban. We cannot assure you that we will be able to maintain our existing insurance coverage or obtain additional coverage on commercially reasonable terms for liability arising from the use of our other products in the future. Also, this insurance coverage and our resources may not be sufficient to satisfy any liability resulting from product liability claims and a product liability claim may have a material adverse effect on our business, financial condition or results of operations. RISKS RELATING TO PRODUCT MANUFACTURING AND SALES WE HAVE VERY LIMITED MANUFACTURING, MARKETING OR SALES EXPERIENCE. We have very limited manufacturing, marketing or product sales experience. If we develop any additional commercially marketable products, we cannot assure you that contract manufacturing services will be available in sufficient capacity to supply our product needs on a timely basis. If we decide to build or acquire commercial scale manufacturing capabilities, we will require additional management and technical personnel and additional capital. 24 If in the future, we decide to perform sales and marketing activities ourselves, we would face a number of additional risks, including: - - we may not be able to attract and build a significant marketing or sales force; - - the cost of establishing a marketing or sales force may not be justifiable in light of product revenues; and - - our direct sales and marketing efforts may not be successful. WE CANNOT ASSURE YOU THAT THE RAW MATERIALS NECESSARY FOR THE MANUFACTURE OF OUR PRODUCTS WILL BE AVAILABLE IN SUFFICIENT QUANTITIES OR AT A REASONABLE COST. Complications or delays in obtaining raw materials or in product manufacturing could delay the submission of products for regulatory approval and the initiation of new development programs, each of which could materially impair our competitive position and potential profitability. We can give no assurance that we will be able to enter into any other supply arrangements on acceptable terms, if at all. WE ARE DEPENDENT ON A SINGLE SUPPLIER OF ARGATROBAN. At the present time, Mitsubishi is the only manufacturer of Argatroban in bulk form. Mitsubishi has entered into a supply agreement with GSK to supply Argatroban in bulk to meet GSK's and our needs. Should Mitsubishi fail during any consecutive nine-month period to supply GSK with at least 80 percent of its requirements, and such requirements cannot be satisfied by existing inventories, the supply agreement with Mitsubishi provides for the nonexclusive transfer of the production technology to GSK. However, in the event Mitsubishi terminates manufacturing Argatroban or defaults in its supply commitment, we cannot assure you that GSK will be able to commence manufacturing of Argatroban in a timely manner or that alternate sources of bulk Argatroban will be available at reasonable cost, if at all. If GSK cannot commence the manufacturing of Argatroban or alternate sources of supply are unavailable or are not available on commercially reasonable terms, it could harm our profitability. In addition, finishing and packaging has only been arranged with one manufacturing facility in the U.S. GSK has informed us that they will be finishing and packaging in a GSK facility sometime in the future. OUR PRODUCTS, EVEN IF APPROVED BY THE FDA OR FOREIGN REGULATORY AGENCIES, MAY NOT BE ACCEPTED BY HEALTH CARE PROVIDERS, INSURERS OR PATIENTS. If any of our products, including Argatroban, after receiving FDA or other foreign regulatory approval, fail to achieve market acceptance, our ability to become profitable in the future will be adversely affected. We believe that market acceptance will depend on our ability to provide acceptable evidence of safety, efficacy and cost effectiveness. In addition, market acceptance depends on the effectiveness of our marketing strategy and the availability of reimbursement for our products. THE SUCCESSFUL COMMERCIALIZATION OF OUR PRODUCTS IS DEPENDENT ON PHARMACEUTICAL PRICING AND THIRD-PARTY REIMBURSEMENT. In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that would limit or eliminate payments for medical procedures and treatments or subject the pricing of pharmaceuticals to government control. In addition, government and private third-party payors are increasingly attempting to contain health care costs by limiting both the coverage and the level of reimbursement of drug products. Consequently, the reimbursement status of newly approved health care products is highly uncertain, and there can be no assurance that third-party coverage will be available or that available third-party coverage will enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Our long-term ability to market products successfully may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available. Third-party payors are increasingly challenging the prices of medical products and services. Furthermore, inadequate third-party coverage may reduce market acceptance of our products. Significant changes in the health care system in the United States or elsewhere could have a material adverse effect on our business and financial performance. 25 Sitaxsentan is likely to require distribution through a limited access program which may make patient access and reimbursement more difficult. Tracleer(R) is distributed pursuant to such a program. RISKS RELATING TO INTELLECTUAL PROPERTY WE MAY NOT BE ABLE TO PROTECT PROPRIETARY INFORMATION AND OBTAIN PATENT PROTECTION. We actively seek patent protection for our proprietary technology, both in the U.S. and in other areas of the world. However, the patent positions of pharmaceutical and biotechnology companies, including us, are generally uncertain and involve complex legal, scientific and factual issues. Intellectual property is an uncertain and developing area of the law that is potentially subject to significant change. Our success will depend significantly on our ability to: - obtain patents; - protect trade secrets; - operate without infringing upon the proprietary rights of others; and - prevent others from infringing on our proprietary rights. We cannot assure you that patents issued to or licensed by us will not be challenged, invalidated or circumvented, or that the rights granted will provide competitive advantages to us. We cannot assure you that our patent applications or pending patent applications, if and when issued, will be valid and enforceable and withstand litigation. We cannot assure you that others will not independently develop substantially equivalent, generic equivalent or superseding proprietary technology or that an equivalent product will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights. We may experience a significant delay in obtaining patent protection for our products as a result of a substantial backlog of pharmaceutical and biotechnology patent applications at the PTO. Because patent applications in the U.S. are maintained in secrecy until patents issue, other competitors may have filed or maintained patent applications for technology used by us or covered by pending applications without our being aware of these applications. In addition, patent protection, even if obtained, is affected by the limited period of time for which a patent is effective. The Mitsubishi composition of matter patent on Argatroban has expired. Moreover, even if we have a patent or NDA exclusivity, we cannot assure you that generic pharmaceutical manufacturers will not ultimately enter the market and compete with us or that competitors might develop a different formulation of Argatroban. We could also incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by third parties, in a suit with another party. The PTO could institute interference proceedings involving us in connection with one or more of our patents or patent applications, and such proceedings could result in an adverse decision as to priority of invention. The PTO or a comparable agency in a foreign jurisdiction could also institute re-examination or opposition proceedings against us in connection with one or more of our patents or patent applications and such proceedings could result in an adverse decision as to the validity or scope of the patents. We may be required to obtain licenses to patents or other proprietary rights from third parties. We cannot assure you that any licenses required under any patents or proprietary rights would be made available on acceptable terms, if at all. If we are unable to obtain required licenses, we could encounter delays in product introductions while we attempt to design around blocking patents, or we could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. IF WE ARE UNABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US. We rely significantly on trade secrets, know-how and continuing technological advancement to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with our employees and consultants, which contain assignment of invention provisions. Notwithstanding these agreements, others may gain access to these trade secrets, such agreements may not be honored and we may not be able to protect effectively our rights to our unpatented trade secrets. Moreover, our trade secrets may otherwise become known or independently developed by our competitors. 26 RISKS RELATED TO OUR COMMON STOCK OUTSTANDING OUR STOCK PRICE COULD BE VOLATILE. The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In particular, the market price of our common stock, like that of the securities of other biopharmaceutical companies, has been and may be highly volatile. Factors such as announcements concerning technological innovations, new commercial products or procedures by us or our competitors, proposed governmental regulations and developments in both the U.S. and foreign countries, disputes relating to patents or proprietary rights, publicity regarding actual or potential medical results relating to products under development by us or our competitors, public concern as to the safety of biotechnology products, and economic and other external factors, as well as period-to-period fluctuations and financial results, may have a significant effect on the market price of our common stock. From time to time, there has been limited trading volume with respect to our common stock. In addition, there can be no assurance that there will continue to be a trading market or that any securities research analysts will continue to provide research coverage with respect to our common stock. It is possible that such factors will adversely affect the market for our common stock. On March 21, 2003, Nasdaq informed us that for the last 30 consecutive trading days, the bid price of our common stock has closed below the minimum $1.00 per share requirement for continued inclusion in The Nasdaq National Market. Therefore, in accordance with Nasdaq Rules, we will be provided 180 calendar days, or until September 17, 2003, to regain compliance. If, at any time before September 17, 2003, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, The Nasdaq will provide written notification that we have achieved compliance with this rule. If compliance with this rule cannot be demonstrated by September 17, 2003, the Nasdaq will provide written notification that our securities will be delisted. At that time, we may appeal this determination to a Listing Qualifications Panel or may apply to transfer our securities to The Nasdaq Small Cap Market. THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE, INCLUDING WARRANTS, WHICH ARE CURRENTLY EXERCISABLE, COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK. As of December 31, 2002, we have reserved approximately 6.0 million shares of common stock for issuance under outstanding options, warrants and other contingent agreements. Approximately 5.8 million of these shares of common stock are registered for sale or resale on currently effective registration statements, and the holders of substantially all of the remaining shares of common stock are entitled to registration rights. The issuance of a significant number of shares of common stock upon the exercise of stock options and warrants, or the sale of a substantial number of shares of common stock under Rule 144 or otherwise, could adversely affect the market price of the common stock. CERTAIN ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY DETER OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY, EVEN IF THAT CHANGE WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Our Certificate of Incorporation and the provisions of Section 203 of the Delaware General Corporation Law contain certain provisions that may delay or prevent an attempt by a third party to acquire control of us. Additionally, we adopted a Shareholder Rights Plan in January 2002 that may delay or prevent such attempt by a third party to acquire control of us. In addition, the severance provisions of employment agreements with certain members of management could impede an attempted change of control by a third party. ITEM 2 -- PROPERTIES We lease 15,490 square feet of office space in Bellaire, Texas for our administrative, marketing, clinical development and regulatory departments. The lease expires July 31, 2005 with an option to extend the lease to December 31, 2005, provided we give ninety (90) days prior written notice. We also lease 31,359 square feet of office and laboratory space in another building in Houston, Texas for our research department, including a 21,621 square foot laboratory facility and a 3,909 square foot animal facility. The 27 remaining area is being used for clinical development, computer modeling, storage space and additional offices for scientists. Our lease expires in December 2005. Additionally, we lease 658 square feet in the building for use as storage space on a monthly basis. Revotar leases 8,800 square feet of office and laboratory space in Berlin, Germany. Their lease expires in September 2006. We may require additional space to accommodate future research and laboratory needs as necessary to bring products into development and clinical trials. ITEM 3 -- LEGAL PROCEEDINGS None ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our shareholders during the fourth quarter of our fiscal year ended December 31, 2002. 28 PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock began trading on The Nasdaq National Market on June 19, 2001 under the symbol "TXBI" before which our common stock was traded on the American Stock Exchange under the symbol "TXB". On March 21, 2003, Nasdaq informed us that for the last 30 consecutive trading days, the bid price of our common stock has closed below the minimum $1.00 per share requirement for continued inclusion in The Nasdaq National Market. Therefore, in accordance with Nasdaq Rules, we will be provided 180 calendar days, or until September 17, 2003, to regain compliance. If, at any time before September 17, 2003, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, Nasdaq will provide written notification that we have achieved compliance with this rule. If compliance with this rule cannot be demonstrated by September 17, 2003, the Nasdaq will provide written notification that our securities will be delisted. At that time, we may appeal this determination to a Listing Qualifications Panel or may apply to transfer our securities to The Nasdaq Small Cap Market. The following table sets forth, for the periods indicated, the high and low sale prices for the common stock as reported by the consolidated transaction reporting system.
COMMON STOCK ---------------- HIGH LOW YEAR ENDED DECEMBER 31, 2001 ----- ---- First Quarter..................... 10.90 4.62 Second Quarter.................... 9.00 4.51 Third Quarter..................... 8.60 4.90 Fourth Quarter.................... 7.47 5.02 YEAR ENDED DECEMBER 31, 2002 First Quarter..................... 7.10 5.03 Second Quarter.................... 6.10 2.94 Third Quarter..................... 3.71 1.80 Fourth Quarter.................... 3.08 1.30
As of March 15, 2003 there were approximately 476 holders of record of our common stock and approximately 16,000 beneficial owners. EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES (a) REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) - ------------- ------------------------ -------------------- ---------------------------- Equity compensation plans approved by security holders 5,012,500 $6.72 745,913 Equity compensation plans not approved by security holders -- -- -- --------- ----- ------- Total 5,012,500 $6.72 745,913 ========= ===== =======
See Note 3 to the Consolidated Financial Statements, included herein. 29 DIVIDEND POLICY We have never declared or paid dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any future earnings to finance our growth strategy and ongoing business. Payment of future dividends, if any, will be at the discretion of the board of directors after reviewing various factors, including our financial condition and operating results, current and anticipated cash needs and restrictions which may be in effect in any future financing agreement. RECENT SALES OF UNREGISTERED SECURITIES None. 30 ITEM 6 -- SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The selected financial data set forth below for each of the years in the five-year period ended December 31, 2002 are derived from our audited consolidated financial statements. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our 2002, 2001 and 2000 financial statements and notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues ............................................................ $ 10,433 $ 8,917 $ 15,692 $ 2,083 $ 2,252 Expenses: Research and development ......................................... 20,066 17,861 13,513 13,080 14,399 Equity in loss of affiliate ...................................... 8,557 9,450 3,487 -- -- Charge for purchase of in-process research and development ............................................... -- -- -- -- 134 General and administrative ....................................... 8,976 6,733 6,552 5,512 4,321 -------- -------- -------- -------- -------- Total expenses ............................................. 37,599 34,044 23,552 18,592 18,854 -------- -------- -------- -------- -------- Operating loss ...................................................... (27,166) (25,127) (7,860) (16,509) (16,602) Investment income, net ........................................... 2,472 5,236 4,362 1,212 2,088 -------- -------- -------- -------- -------- Loss before minority interest and cumulative effect of change in accounting principle.................................... (24,694) (19,891) (3,498) (15,297) (14,514) Minority interest in loss of Revotar ................................ 1,225 749 209 -- -- -------- -------- -------- -------- -------- Loss before cumulative effect of change in accounting principle ............................................. (23,469) (19,142) (3,289) (15,297) (14,514) Cumulative effect of change in accounting principle ................. -- -- (2,366) -- -- -------- -------- -------- -------- -------- Net loss ............................................................ (23,469) (19,142) (5,655) (15,297) (14,514) Preferred dividend requirement ................................... -- -- -- -- (2) -------- -------- -------- -------- -------- Net loss applicable to common shares ............................. $(23,469) $(19,142) $ (5,655) $(15,297) $(14,516) ======== ======== ======== ======== ======== Net loss per share basic and diluted ................................ $ (0.54) $ (0.44) $ (0.14) $ (0.45) $ (0.43) ======== ======== ======== ======== ======== Weighted average common shares used to compute basic and diluted net loss per share ..................... 43,741 43,637 39,150 34,226 33,930 ======= ======= ======= ======= =======
DECEMBER 31, ------------------------------------------------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short and long-term investments .......................................... $ 68,005 $ 95,427 $ 92,533 $ 15,170 $ 30,376 Working capital .................................................. 44,965 52,322 85,041 14,477 27,907 Total assets ..................................................... 77,792 104,362 98,969 20,805 36,106 Shareholders' equity ............................................. 62,078 84,237 84,027 18,590 33,236
31 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to the financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements based on current expectations that are subject to risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. When used in this discussion, the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Our actual results and the timing of events could differ materially from those anticipated or implied by the forward-looking statements discussed here as a result of various factors, including, among others, those set forth under the "Cautionary Note Regarding Forward-Looking Statements", herein. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this discussion after the date of this report. OVERVIEW Since our inception in 1989, we have primarily devoted our resources to funding drug discovery, research and development. We are a biopharmaceutical company focused on the discovery, development and commercialization of novel, synthetic, small molecule compounds for the treatment of a variety of cardiovascular, vascular and related inflammatory diseases. Our research and development programs are focused on inhibitors (also referred to as antagonists or blockers) that can interrupt certain disease processes. Our programs seek to address unmet medical needs in areas where our compounds will have the greatest likelihood of improving the lives of patients suffering from cardiovascular diseases, thrombocytopenia, pulmonary arterial hypertension, heart failure and inflammatory diseases such as asthma. Our strategy is to identify and develop novel product candidates for underserved indications, and to commercialize those candidates through collaborations with other pharmaceutical and biotechnology companies. An important part of our strategy is the selection of corporate partners to enhance our drug discovery and development efforts. We and our partners currently have three products in clinical development. For additional information about our programs and business strategy, see "Overview" and "Business Strategy" in Item 1, "Business" included herein. MAJOR COMPOUNDS IN RESEARCH AND DEVELOPMENT PROGRAMS ARGATROBAN Argatroban is our first marketed product. Argatroban was approved by the U.S. FDA in 2000, is indicated for prophylaxis or treatment of thrombosis in patients with HIT for patients with or at risk of HIT undergoing PCI. Argatroban was approved in Canada in 2002 for use as anticoagulant therapy in patients with heparin-induced thrombocytopenia syndrome. The drug is being marketed in the U.S. and Canada by GSK and has been on the market in the U.S. and Canada since November 2000 and June 2002, respectively. GSK is our development, manufacturing and marketing partner for Argatroban. During 2002, we completed a Phase II human clinical trial for Argatroban as a mono-therapy treatment for acute ischemic stroke. The clinical trial met the primary endpoint and showed positive results in the secondary safety endpoint. In light of a lack of an overall efficacy trend and the high risk and high cost associated with stroke trials, it is unlikely that we will proceed independently with a full Phase II program. Currently, Argatroban is being evaluated by an investigator at the University of Texas Medical School at Houston in a clinical trial, in combination with recombinant tissue Plasminogen Activator (rt-PA) as a new approach to the treatment of acute ischemic stroke. Argatroban is approved and sold in Japan by Mitsubishi, the licensor of Argatroban and by their licensee as mono-therapy for an indication of acute ischemic stroke. 32 We, along with GSK, are continuing to evaluate the use of Argatroban for use in hemodialysis patients and for use in PCI. Presently, we have four major product development programs. - - Endothelin Antagonist Program. We are developing sitaxsentan, an endothelin(A) receptor antagonist, or ET(A), for the treatment of pulmonary arterial hypertension. During June 2000, we formed a partnership, ICOS-TBC, with ICOS Corporation to develop and commercialize ET(A) receptor antagonists. During 2002, ICOS-TBC successfully completed a Phase IIb/III clinical trial in pulmonary arterial hypertension with sitaxsentan. TBC3711, a second generation ET(A), has previously completed Phase I clinical trials and may be developed for cardiovascular or other diseases. In January 2003, ICOS announced that they had reached a conclusion that joint development of the endothelin receptor antagonist program by ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which TBC could independently continue the program. The financial terms of this transaction are subject to ongoing negotiations between the two companies. After 2002, we are responsible for all costs of the program. - - Thrombosis. During 2002, we completed a Phase II human clinical trial for Argatroban as a mono-therapy treatment for acute ischemic stroke. The clinical trial met the primary endpoint based on safety and showed positive results in the secondary safety endpoint. In light of a lack of a positive overall efficacy trend and the high risk and high costs associated with stroke trials, it is unlikely that we will proceed independently with a full Phase II program. Currently, Argatroban is being evaluated, in a clinical trial, in combination with recombinant tissue Plasminogen Activator (rt-PA) as a new approach to the treatment of acute ischemic stroke by an investigator at the University of Texas Medical School at Houston. - - Vascular Inflammation Program. Revotar, our majority owned German affiliate located in Berlin is developing a selectin antagonist, bimosiamose, for the treatment of asthma and psoriasis. The intravenous form of the drug demonstrated positive anti-inflammatory effects in Phase II clinical trials. Revotar was formed during 2000, to further the development of this program. Revotar completed Phase I clinical trials for asthma utilizing an inhaled form of bimosiamose. A Phase IIa clinical trial is currently being conducted with an inhaled form of bimosiamose and a Phase IIa clinical trial in psoriasis is planned to commence during the first half of 2003, using a topical formulation. A Phase IIa proof-of-concept clinical trial in psoriasis, completed during 2002 with an injectable form of bimosiamose, demonstrated efficacy. We are also conducting research with respect to other cell adhesion molecules including vascular cell adhesion molecule, or VCAM, junctional adhesion molecules, or JAM 2/3 and several integrins including very late antigen 4, or VLA-4, (alpha)4(beta)7 and others to develop antagonists for the treatment of asthma, rheumatoid arthritis, multiple sclerosis, restenosis and inflammatory bowel disease. We have signed a collaboration and license agreement for the VLA-4 program with Schering-Plough and have received a milestone payment from Schering-Plough for nominating a compound as a clinical candidate. Additionally, we are conducting research on backup VLA-4 antagonists for Schering-Plough under this agreement. - - Vascular Disease. Many disease processes involve changes in blood vessels and heart tissue. There are numerous mediators, like endothelin, which may contribute to the development of these diseases. Several of these act though G-protein coupled receptors, GPCRs, to carry out their action. We are conducting research on urotensin and other GPCRs to identify inhibitors which could be useful in treating diseases including congestive heart failure, CHF, ischemic stroke and acute myocardial infarction. RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Revenue Recognition - We recognize revenue from service contracts as services are performed. - Royalty revenue is recognized as products are sold by a licensee and we have received sufficient information to record a receivable. Our royalty revenue is based on net sales of product, that is, sales net of discounts, returns and allowances. We have estimated a percentage of gross sales, based on recent experience, as an allowance for future returns, however there can be no assurance that our estimate will be accurate. 33 - Revenue from collaborative research and development activities is recognized as services are performed. - We defer the recognition of milestone payments related to contractual agreements which are still in the development stage. Such deferred revenues are amortized into income over the estimated remaining development period. Milestone payments received under contractual agreements which have completed the development stage are evaluated, and either recognized into income when earned, or amortized over a future period, depending upon whether the Company continues to have obligations under the terms of the arrangement. - License fees received under the terms of licensing agreements for our intellectual property are deferred, and amortized into income over the estimated development period of the licensed item or items. - Revenue from grants is recognized as earned under the terms of the related grant agreements, typically as expenses are incurred. Amounts received in advance of services being performed under contracts are recorded as deferred revenue, and recognized as services are performed. We periodically evaluate our estimates of remaining development periods, and adjust the recognition of remaining deferred revenues over the adjusted development period remaining. Partnership Accounting We recognize our share of the operating results of ICOS-TBC in proportion to our ownership interest and record it as equity in loss of ICOS-TBC. Operating results of ICOS-TBC include reimbursed expenses related to our internal research staff that we recognize as revenue and record as collaborative research and development revenue from ICOS-TBC. Due to the nature of the ICOS-TBC collaborative agreement, our collaborative research and development revenue from ICOS-TBC largely depends on the continued progression of clinical trial and development activities, and can be expected to vary from quarter to quarter and year to year. In January 2003, ICOS informed us that they had reached the conclusion that joint development of the endothelin receptor antagonist program through ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which we could independently continue the program. The financial terms of this transaction are subject to ongoing negotiations between the two companies. This could allow us to increase our ownership and the potential commercial benefit of the program from 50% to 100%. The partners were responsible for the equal funding of the costs of research and development incurred through the end of 2002. After 2002, we are responsible for all costs of the program. Stock Options We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations ("APB 25") in accounting for our stock option plans and apply Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation", and related interpretations ("SFAS 123") in reporting for our stock option plans. APB 25 utilizes the "intrinsic value" of stock options, defined as the difference between the exercise price of an option and the market price of the underlying share of common stock, on the "measurement date" which is generally the date of grant. Since the exercise price of employee stock options issued under our plans is set to match the market price of our common stock, there is generally no compensation expense recognized upon grant of employee stock options. Options granted to non-employees, if any, are valued at the "fair value" of the option as defined by SFAS 123, utilizing the Black-Scholes option pricing model. We record compensation expense for the "fair value" of options granted to non-employees. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. GENERAL Our operating results have fluctuated significantly during each quarter and year, and we anticipate that such fluctuations, which are largely attributable to varying research and development commitments and expenditures, will continue for the next several years. 34 We have been unprofitable to date and expect to incur substantial operating losses for the next several years as we invest in product research and development, preclinical and clinical testing and regulatory compliance. We have sustained net losses of approximately $148.2 million from the date of our inception to December 31, 2002. We have primarily financed our operations to date through a series of private placements and public offerings of our common stock and several collaborative agreements with third parties to jointly pursue product research and development. See discussion of "Liquidity and Capital Resources" below. See also "Additional Risk Factors" in Item 1 "Business" herein. Year ended December 31, 2002 Compared with Year ended December 31, 2001 Revenues in the year ended December 31, 2002 increased $1,516,000, compared with the year ended December 31, 2001. The increase is primarily attributable to increased royalty income earned on sales of Argatroban by GSK and increased license fees, milestones and grants, partially offset by reduced research and development revenues, discussed below. Royalties earned on sales of Argatroban in 2002 were $3,514,000, an increase of $1,928,000 over year 2001. We earn royalties based upon sales by GSK to drug wholesalers. In October 2002, GSK initiated a broad-based HIT disease education media campaign designed to increase awareness of HIT, the life-threatening reaction to heparin for which Argatroban is approved. As medical education is key to growing Argatroban sales, we believe this initiative, along with increased selling efforts, are likely to have a positive impact on Argatroban sales. License fees, milestones and grants increased $712,000 in 2002, compared with 2001. Revotar has been awarded research grants from the German government and earned approximately $303,000 in year 2002. In addition to the grants received by Revotar, the increase in license fees, milestones and grants in 2002 was primarily comprised of revenues related to the milestone payment received from Mitsubishi in May 2001, the milestone payment received from ICOS in July 2001, and the milestone payment received from Schering-Plough in June 2002. See Note 8 to the Consolidated Financial Statements. Research agreement revenues, resulting from the Company's collaborative efforts with unrelated parties, declined $772,000 in 2002, compared with 2001, primarily resulting from reduced research and development effort under the Schering-Plough agreement during 2002. Most of our efforts toward development of an initial candidate for clinical development had been completed late in 2001. As discussed above, we received a milestone payment under the Schering-Plough agreement as a result of the nomination of an initial candidate for Schering-Plough's further development in the second quarter of 2002. Collaborative research and development revenues received from the ICOS-TBC partnership declined $352,000 in 2002, compared with 2001. The involvement of our research and development staff in the endothelin receptor antagonist program has been dependent upon the activities being performed by the partnership in any particular period, and was expected to fluctuate from quarter to quarter and year to year. In January 2003, ICOS announced that it had reached a conclusion that joint development of the endothelin receptor antagonist program by ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which TBC could independently continue the program. The financial terms of this transaction are subject to ongoing negotiations between the two companies. Research and development expenses increased $2,205,000 in 2002, compared with 2001. The increase is primarily due to costs of clinical trials which began to incur significant expenses early in year 2002 and were ongoing during year 2002. Trials ongoing during year 2002 included a Phase II study of Argatroban in ischemic stroke and a Phase II study of Argatroban in patients undergoing PCI. During 2002, Revotar completed a Phase IIa proof-of-concept clinical trial of bimosiamose in psoriasis, and completed a Phase I clinical trial for asthma utilizing an inhaled form of bimosiamose. See also the discussion of our ongoing research and development programs, above. Our equity in the loss of the ICOS-TBC partnership, primarily consisting of research and development expenses, declined $893,000 in 2002, compared with 2001. The principle activity of the partnership, a Phase IIb/III trial of sitaxsentan for PAH, completed enrollment in July 2002. General and administrative expenses increased $2,243,000 in 2002, compared with 2001. Insurance costs, 35 particularly product liability and general liability policies, increased both due to insurance market conditions, and as a result of increased sales of Argatroban. General and administrative expenses in 2002 included costs associated with the retirement, recruiting and hiring of key personnel, including a non-cash charge in the first quarter of 2002 of approximately $182,000 in compensation expense arising from modifications made to stock options previously issued to our retiring CEO. Investment income declined $2,764,000 in 2002, compared with 2001. The decline is due to a combination of lower prevailing interest rates during 2002, compared with 2001, and to reduced funds available for investment during year 2002. The interest of Revotar's minority shareholders in its losses increased approximately $476,000 in 2002, compared with 2001. Revotar's expenses increased in 2002, primarily due to the costs of clinical trials conducted in 2002. Under accounting principles generally accepted in the U.S., it is likely that the cumulative losses of Revotar will exceed the equity interest of its minority shareholders during 2004, and we will reflect 100% of its losses in our consolidated net income or loss thereafter. Our net loss in 2002 increased $4,327,000 in 2002, compared with 2001. The increase is due primarily to higher operating expenses and lower investment income during 2002, as discussed above. Year ended December 31, 2001 Compared with Year ended December 31, 2000 Revenues in the year ended December 31, 2001 decreased $6,775,000, compared with the year ended December 31, 2000. License fee and milestone income in year 2000 included a milestone payment of $7,500,000 from GSK which was earned upon the approval of Argatroban by the FDA in June 2000, and the recognition of $2,366,000 in remaining unrecognized license fees and milestones related to Argatroban. After taking the $9,866,000 in revenues related to Argatroban into consideration, revenues from other license fees and milestones increased $967,000, as a result of the recognition of a portion of the license fees and milestones received from Schering-Plough, Mitsubishi and ICOS-TBC in 2000 and 2001. See Notes 7 and 8 to the Consolidated Financial Statements, included herein. Revenues from sources other than license fees and milestones increased $2,124,000 in 2001, compared with 2000. Royalties earned on the sale of Argatroban, which was first shipped in the fourth quarter of 2000, increased $1,352,000 in year 2001 compared with year 2000. Research agreement revenues in year 2001 increased $453,000, which is comprised of payments received from Schering-Plough, partially offset by the loss of revenues received from LG Chemical in 2000, but not in 2001. Research payments from ICOS-TBC increased $319,000 in year 2001. The partnership was formed in June 2000, however, and as such, the year 2000 only included six months of operations. Research and development expenses increased $4,348,000 in year 2001, compared with year 2000. The increase is primarily due to costs associated with ongoing clinical trials. During year 2001, the Company and its research partners initiated two Phase II trials for Argatroban, for ischemic stroke and PCI, and a Phase I study of TBC1269 for asthma. Our equity in the losses of ICOS-TBC increased $5,963,000 in year 2001 compared with year 2000. Since the partnership was formed in June 2000, year 2000 results only included six months of operations. The increase, however, is primarily due to clinical trials conducted in year 2001. In 2001, ICOS-TBC initiated a Phase IIb/III clinical trial for sitaxsentan as a treatment of PAH, and two Phase I clinical studies of TBC3711. General and administrative expense increased $181,000 in year 2001, compared to year 2000. The increase is primarily due to the expenses of Revotar, which was formed in June of year 2000. Investment income increased $874,000 in year 2001, due to higher levels of invested funds in the current year. We received approximately $20.1 million in proceeds from the exercise of publicly traded warrants in January 2001. The effect on investment income of higher availability of funds was partially offset, however, by the lower interest rates which have prevailed during year 2001. The interest of the minority shareholders of Revotar, who collectively hold approximately 45% of the Revotar common stock, increased $540,000 in year 2001, compared with 2000, due to higher operating expenses of Revotar in 2001. As discussed above, Revotar was formed in June of year 2000. 36 Loss before cumulative effect of change in accounting principle increased $15,853,000 in year 2001, compared with year 2000. The increased loss in year 2001 is primarily due to (i) the $9,866,000 in license fee and milestone revenues related to Argatroban included in year 2000, discussed above, (ii) increased research and development costs of $4,348,000, discussed above, (iii) increased equity in loss of ICOS-TBC, primarily due to increased development costs, discussed above, and (iv) increased general and administrative costs of $181,000, primarily due to the expenses of Revotar, as discussed above. Partially offsetting the effect of reduced revenues and increased costs, investment income increased $874,000 in year 2001, due to higher levels of available funds, as discussed above. Net loss in year 2000 included a charge of $2,366,000 for the cumulative effect, on January 1, 2000, of the change in accounting principle resulting from our adoption of Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB101"). Such revenue is being recognized into income over future development periods. LIQUIDITY AND CAPITAL RESOURCES Year 2002 and 2001 At December 31, 2002, we had cash, cash equivalents, investment securities and accrued interest of $68,005,000, compared with $95,427,000 at December 31, 2001. We used $25,791,000 in cash on operating activities in year 2002, compared to cash used by operating activities of $12,980,000 in 2001. The primary operating uses of cash in 2002 and 2001 were to fund our general operating expenses and the ongoing research and development programs conducted by TBC, Revotar and ICOS-TBC, reduced by cash received from investment income, milestones, and research payments from our collaborative partners. Investing activities generated $36,351,000 in year 2002, compared with cash used of $44,269,000 in year 2001. Our capital expenditures declined $731,000 in 2002, compared with 2001. The cash generated by investing activities during 2002 reflects the use of invested funds to finance ongoing operations. Cash generated by financing activities in year 2002 was $486,000, compared with cash generated in year 2001 of $19,043,000. Year 2001 included proceeds from the exercise of publicly traded warrants in January 2001, for net proceeds of $20,143,000 and proceeds from the exercise of employee stock options and other warrants for proceeds of $502,000, partially reduced by the acquisition of 213,000 shares of treasury stock for total proceeds of $1,602,000. During 2002, we generated $486,000 in cash from the proceeds of stock option exercises, and the sale of common stock at market price to our new CEO. Material Commitments Our only material contractual commitments are comprised of a loan commitment to Revotar and office and laboratory facility leases. We and the minority shareholders of Revotar have committed to lend Revotar approximately $4.5 million of which our commitment will be approximately $3.4 million. The terms of the loans require quarterly interest payments and repayment of all principal on or before April 1, 2007, subject to certain loan provisions regarding profitability or liquidity. Our portion of the loan is denominated in U.S. dollars at an interest rate of seven percent fixed for the first two years and resets to the greater of seven percent or U.S. prime plus two and one-half percent on April 1, 2004. It is likely that Revotar may need to seek additional funding through collaborative arrangements and/or through public or private financings. The Company had long-term obligations under our office and laboratory leases as follows (in thousands):
Less than 1 1-3 4-5 Contractual Obligations Total year years years After 5 years Operating Leases $4,873 $1,616 $3,126 $131 --
37 Outlook for 2003 In 2003, we expect to have the following results: Net Sales of Argatroban by GSK.................................. $30.0 to $35.0 million Revenues........................................................ $10.5 to $12.0 million Expenses (net of Revotar minority interest)..................... $42.0 to $45.0 million Investment Income............................................... $0.9 to $1.1 million Estimated Net Loss.............................................. $30.0 to $33.0 million Cash and Investments at Year End................................ $32.0 to $35.0 million
In January 2003, ICOS announced that it had reached a conclusion that joint development of the endothelin receptor antagonist program by ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which TBC could independently continue the program. The financial terms of this transaction are subject to ongoing negotiations between the two companies. If we are successful in reaching an agreement, it is likely that we will be responsible for 100% of development expenses incurred after January 1, 2003 related to the endothelin receptor antagonist program, which we believe will be between $19 million and $21 million in 2003. A delay in reaching an agreement with ICOS could adversely affect or delay the development of the endothelin receptor antagonist program. Our estimates of results for 2003 will be impacted by the financial terms of the ongoing negotiations between ICOS and us. Longer-Term Outlook We expect to incur substantial research and development expenditures as we design and develop biopharmaceutical products for the prevention and treatment of cardiovascular and other diseases. We anticipate that our operating expenses will increase in subsequent years because: - - We expect to incur significant expenses in conjunction with additional clinical trial costs for sitaxsentan and research and clinical trial costs for development of bimosiamose compounds and expect to begin to incur costs for clinical trials related to additional compounds. These costs include: - hiring personnel to direct and carry out all operations related to clinical trials; - hospital and procedural costs; - services of a contract research organization; and - purchasing and formulating large quantities of the compound to be used in such trials. - - There may be additional costs in future periods related to Argatroban in complying with ongoing FDA requirements and possible clinical trial expenditures for additional therapeutic indications. - - Our administrative costs and costs to commercialize our products will increase as our products are further developed and marketed. We have been unprofitable to date and expect to incur operating losses for the next several years as we invest in product research and development, preclinical and clinical testing and regulatory compliance. We will require substantial additional funding to complete the research and development of our product candidates, to establish commercial scale manufacturing facilities, if necessary, and to market our products. Estimates of our future capital requirements will depend on many factors, including: - market acceptance and commercial success of Argatroban; - expenses and risks associated with clinical trials to expand the indications for Argatroban; 38 - continued scientific progress in our drug discovery programs; - the magnitude of these programs; - progress with preclinical testing and clinical trials; - the time and costs involved in obtaining regulatory approvals; - the costs involved in filing, prosecuting and enforcing patent claims; - competing technological and market developments and changes in our existing research relationships; - our ability to maintain and establish additional collaborative arrangements; and - effective commercialization activities and arrangements. Subject to these factors, we anticipate that our existing capital resources and other revenue sources, should be sufficient to fund our cash requirements through year 2004. Notwithstanding revenues, which may be produced through sales of potential future products, if approved, we anticipate that we will need to secure additional funds to continue the required levels of research and development to reach our long-term goals. We intend to seek such additional funding through collaborative arrangements and/or through public or private financings. In 2002, the stockholders of Revotar executed an agreement to provide approximately $4.5 million in unsecured loans, of which our commitment was approximately $3.4 million. Under the loan agreement, we have advanced approximately $1.2 million to Revotar during 2002. We believe that Revotar's existing funds, the remaining commitments under the loan agreement and proceeds under German government scientific grants will be sufficient to fund Revotar into the first quarter of 2004. In order to continue to operate beyond that time, Revotar will need to seek additional funding through collaborative arrangements and/or through public or private financings in the future. Off-Balance Sheet Arrangements We do not engage in off-balance sheet financing arrangements; however we have been obligated to fund our proportionate share (50%) of any contractual obligations of ICOS-TBC. After December 31, 2002, we are responsible for funding 100% of the expenses of ICOS-TBC. After December 31, 2002, ICOS-TBC is not obligated for any leases, long-term debt, or other fixed obligations. IMPACT OF INFLATION AND CHANGING PRICES The pharmaceutical research industry is labor intensive, and wages and related expenses increase in inflationary periods. The lease of space and related building services for the Houston facility contains a clause that escalates rent and related services each year based on the increase in building operating costs and the increase in the Houston Consumer Price Index, respectively. To date, inflation has not had a significant impact on our operations. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY EXCHANGE RISK We are exposed to market risk primarily from changes in foreign currency exchange rates. The following describes the nature of this risk that is not believed to be material to us. We have a majority-owned affiliate in Berlin, Germany and consolidate the results of operations into our consolidated financial results. Although not material to date, our reported expenses and cash flows from this affiliate are exposed to changing exchange rates. We also have contracts with entities in other areas outside the U.S. that are denominated in a foreign currency. To date, these currencies have not fluctuated materially. During 2003, Revotar engaged in a program of hedging the effect of foreign currency fluctuations on approximately $1.6 million in future loan payments from us. 39 ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The financial statements we are required to include in this Item 8 are set forth in Item 15 of this Form 10-K. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 40 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS Incorporated herein by reference to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2003. ITEM 11 -- EXECUTIVE COMPENSATION Incorporated herein by reference to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2003. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2003. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2003. ITEM 14 -- CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our chief executive officer and our vice president, finance and administration, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this annual report on Form 10-K, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate to ensure that material information relating to the registrant and its consolidated subsidiaries would be made known to them by others within those entities. (b) CHANGES IN INTERNAL CONTROLS To our knowledge, there were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date. 41 PART IV ITEM 15 -- EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reference is made to the Consolidated Financial Statements, the reports thereon, and the notes thereto commencing at Page F-1 of this Annual Report on Form 10-K. Set forth below is an index to such Financial Statements.
PAGE ---- Independent Auditors' Report............................................... F-1 Consolidated Balance Sheets................................................ F-2 Consolidated Statements of Operations and Comprehensive Loss............... F-3 Consolidated Statements of Stockholders' Equity............................ F-4 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
2. FINANCIAL STATEMENT SCHEDULES Independent Auditors' Report Balance Sheets of ICOS-Texas Biotechnology L.P. (A Development Stage Limited partnership) as of December 31, 2002 and 2001, and the related statements of operations, statements of partners' deficit and cash flows for each of the years in the two-year period ended December 31, 2002, the period from June 6, 2000 (inception) through December 31, 2000 and the period from June 6, 2000 (inception) through December 31, 2002, and notes thereto. All other schedules have been omitted since the information is not required or is not material to require submission of the schedule, or because the information is included in the financial statements or the notes thereto. 3. INDEX TO EXHIBITS Information with respect to this Item is contained in the attached Index to Exhibits. The Company will furnish a copy of any one or more of these exhibits to a shareholder who so requests upon receipt of payment for the costs of duplication and mailing the requested item. (b) REPORTS ON FORM 8-K Four reports on Form 8-K were filed during the quarter ended December 31, 2002. A report on Form 8-K dated October 2, 2002 was filed regarding the preliminary results for the use of Argatroban as a treatment for acute ischemic stroke. A report on Form 8-K dated October 21, 2002 was filed regarding the phase 2b/3 trial results for Sitaxsentan. A report on Form 8-K dated November 7, 2002 was filed regarding the Company's third quarter 2002 financial results, market growth for Argatroban and clinical trial status. A report on Form 8-K dated December 19, 2002 was filed regarding an update to shareholders on Sitaxsentan trials and sales of Argatroban. All schedules have been omitted since the information is not required or is not material to require submission of the schedule, or because the information is included in the financial statements or the notes thereto. 42 (d) FINANCIAL STATEMENTS OF 50-PERCENT-OR-LESS OWNED PERSONS ICOS - TEXAS BIOTECHNOLOGY L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP) TABLE OF CONTENTS
PAGE ---- Independent Auditors' Report ................................................... 2 Balance Sheets as of December 31, 2002 and 2001 ................................ 3 Statements of Operations for each of the years in the two-year period ended December 31, 2002, the period from June 6, 2000 (inception) through December 31, 2000, and the period from June 6, 2000 (inception) through December 31, 2002 ......................................................... 4 Statements of Partners' Deficit for each of the years in the two-year period ended December 31, 2002, and the period from June 6, 2000 (inception) through December 31, 2000 ................................................. 5 Statements of Cash Flows for each of the years in the two-year period ended December 31, 2002, the period from June 6, 2000 (inception) through December 31, 2000, and the period from June 6, 2000 (inception) through December 31, 2002 ......................................................... 6 Notes to Financial Statements .................................................. 7-9
INDEPENDENT AUDITORS' REPORT The Board of Directors ICOS - Texas Biotechnology L.P.: We have audited the accompanying balance sheets of ICOS - Texas Biotechnology L.P. (a development stage limited partnership) as of December 31, 2002 and 2001, and the related statements of operations, partners' deficit and cash flows for each of the years in the two-year period ended December 31, 2002, the period from June 6, 2000 (inception) to December 31, 2000, and the period from June 6, 2000 (inception) to December 31, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICOS - Texas Biotechnology L.P. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2002, the period from June 6, 2000 (inception) to December 31, 2000, and the period from June 6, 2000 (inception) to December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that ICOS - Texas Biotechnology L.P. will continue as a going concern. As discussed in note 6 to the financial statements, ICOS - Texas Biotechnology L.P. has experienced recurring losses from operations and has a partners' deficit which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 6. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Seattle, Washington January 30, 2003 2 ICOS - TEXAS BIOTECHNOLOGY L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP) BALANCE SHEETS
(in thousands) -------------- December 31, ------------ 2002 2001 ---- ---- ASSETS Current assets - cash ....................................... $ 1 $ 1 ======= ======= LIABILITIES AND PARTNERS' DEFICIT Current liabilities - accrued expenses payable to partners .. $ 5,235 $ 7,059 Partners' deficit: General partner interests: ICOS-ET-GP LLC ....................................... (47) (30) TBC-ET, Inc. ......................................... (47) (30) Limited partner interests: ICOS-ET-LP LLC ....................................... (2,570) (3,499) Texas Biotechnology Corporation ...................... (2,570) (3,499) ------- ------- Total partners' deficit ............................ (5,234) (7,058) ------- ------- $ 1 $ 1 ======= =======
3 ICOS - TEXAS BIOTECHNOLOGY L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS
(in thousands) -------------- Period from Period from Year ended Year ended June 6, 2000 (inception) June 6, 2000 (inception) December 31, December 31, through December 31, through December 31, 2002 2001 2000 2002 ---------- ---------- ---------- ---------- Revenue .................................. $ -- $ -- $ 547 $ 547 Operating expenses: Research and development: Contributed technology license from Texas Biotechnology Corporation .... -- 4,000 4,000 8,000 Texas Biotechnology Corporation ...... 2,312 6,190 4,706 13,208 ICOS Corporation ..................... 14,321 12,682 2,809 29,812 General and administrative: Texas Biotechnology Corporation ...... 153 -- -- 153 ICOS Corporation ..................... 330 26 8 364 ---------- ---------- ---------- ---------- Total operating expenses ........... 17,116 22,898 11,523 51,537 ---------- ---------- ---------- ---------- Net loss ................................. $ (17,116) $ (22,898) $ (10,976) $ (50,990) ========== ========== ========== ==========
4 ICOS - TEXAS BIOTECHNOLOGY L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' DEFICIT
(in thousands) -------------- Texas Biotechnology Partners' ICOS-ET-GP LLC TBC-ET, Inc. ICOS-ET-LP LLC Corporation Deficit -------------- ------------ -------------- ----------- ------- BALANCES AT JUNE 6, 2000 (INCEPTION) .. $ -- $ -- $ -- $ -- $ -- Partner contributions: Cash .............................. 4 4 4,031 2,031 6,070 Technology license ................ -- -- -- 4,000 4,000 Capital distribution .................. -- -- -- (2,000) (2,000) Net loss .............................. (11) (11) (5,477) (5,477) (10,976) ------------ ------------ ------------ ---------- ------------ BALANCES AT DECEMBER 31, 2000 ......... (7) (7) (1,446) (1,446) (2,906) Partner contributions: Cash .............................. -- -- 9,373 7,373 16,746 Technology license ................ -- -- -- 4,000 4,000 Capital distribution .................. -- -- -- (2,000) (2,000) Net loss .............................. (23) (23) (11,426) (11,426) (22,898) ------------ ------------ ------------ ---------- ------------ BALANCES AT DECEMBER 31, 2001 ......... (30) (30) (3,499) (3,499) (7,058) Partner contributions: Cash .............................. -- -- 9,470 9,470 18,940 Net loss .............................. (17) (17) (8,541) (8,541) (17,116) ------------ ------------ ------------ ---------- ------------ BALANCES AT DECEMBER 31, 2002 ......... $ (47) $ (47) $ (2,570) $ (2,570) $ (5,234) ============ ============ ============ ============ ============
5 ICOS - TEXAS BIOTECHNOLOGY L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS
(in thousands) -------------- Period from Period from June 6, 2000 June 6, 2000 Year ended Year ended (inception) (inception) December 31, December 31, through December 31, through December 31, 2002 2001 2000 2002 ---- ---- ---- ---- Cash flows from operating activities: Net loss ....................................... $ (17,116) $ (22,898) $ (10,976) $ (50,990) Adjustments to reconcile net loss to net cash used in operating activities: Contributed technology license ............. -- 4,000 4,000 8,000 Change in operating assets and liabilities: Receivable from Texas Biotechnology Corporation .............. -- 470 (470) -- Accrued expenses payable to partners ..... (1,824) 3,662 3,397 5,235 --------- --------- -------------- -------------- Net cash used in operating activities .. (18,940) (14,766) (4,049) (37,755) --------- --------- -------------- -------------- Cash flows from financing activities: Partner contributions .......................... 18,940 16,746 6,070 41,756 Capital distributions .......................... -- (2,000) (2,000) (4,000) --------- --------- -------------- -------------- Net cash provided by financing activities ........................... 18,940 14,746 4,070 37,756 --------- --------- -------------- -------------- Net increase (decrease) in cash .................... -- (20) 21 1 Cash at beginning of period .................... 1 21 -- -- --------- --------- -------------- -------------- Cash at end of period .............................. $ 1 $ 1 $ 21 $ 1 ========= ========= ============== ==============
6 ICOS - TEXAS BIOTECHNOLOGY L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP) Notes to Financial Statements December 31, 2002 and 2001 (Dollars in thousands, unless otherwise noted) (1) ORGANIZATION AND BUSINESS OPERATIONS ICOS-Texas Biotechnology L.P. (the "Partnership"), is a development stage limited partnership that was formed on June 6, 2000 by Texas Biotechnology Corporation, a Delaware corporation ("TBC"), and ICOS-ET-LP LLC, a Washington limited liability company ("ICOS-LP"), as limited partners, and TBC-ET, Inc., a Delaware corporation ("TBC-GP"), and ICOS-ET-GP LLC, a Washington limited liability company ("ICOS-GP"), as general partners. The Partnership was organized to develop and globally commercialize endothelin receptor antagonists. The Partnership is managed jointly by TBC-GP and ICOS-GP. Profits, losses and distributions, except for distributions for payment of TBC's exclusive license (see Note 3), are allocated based on respective ownership interests. ICOS Corporation ("ICOS") is the sole member of both ICOS-LP and ICOS-GP. TBC is the sole member of TBC-GP. Both TBC and ICOS provide the Partnership with research and development services. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) REVENUE RECOGNITION Revenue represents research payments received by TBC, which were assigned to the Partnership and recognized as the related services were performed. (c) RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. (d) INCOME TAXES No Federal income tax expense or benefit is included in the financial statements since such taxes, if any, are payable or recoverable by each partner. (e) OPERATING SEGMENTS The Partnership has one operating segment, the development and commercialization of endothelin receptor antagonist products for human therapeutic use. 7 (3) EQUITY TRANSACTIONS TBC made an initial capital contribution to the Partnership of an exclusive worldwide license of intellectual property associated with endothelin receptor antagonists, including patent rights and technical information, and ICOS-LP made an initial capital contribution to the Partnership of $2 million in cash. In exchange for their contributions, each party received a 49.9% limited partnership interest in the Partnership. ICOS-GP and TBC-GP each contributed $4 in exchange for a .1% general partnership interest in the Partnership. The technology license contributed to the Partnership by TBC was initially valued at $4 million, based on the cash contribution from ICOS-LP and the concurrent capital distribution to TBC discussed below. The contributed valuation of the technology license increased by $4 million in 2001, upon the achievement of certain development objectives, and may increase by up to $103 million in the future, if certain additional milestones are achieved as provided for in the Agreement of Limited Partnership of ICOS-Texas Biotechnology L.P. (the "Agreement"). Under the terms of the Agreement, TBC received a capital distribution of $2 million in conjunction with formation of the Partnership and received an additional $2 million capital distribution in October 2001 upon the achievement of certain development objectives. (4) LICENSE AGREEMENTS In connection with TBC's initial capital contribution, the Partnership entered into an Endothelin License Agreement with TBC, subject to the rights of an agreement with LG Chemical, Ltd. discussed below. Under the Endothelin License Agreement, the Partnership received an exclusive right and license to certain proprietary patent rights, technical information, technology and know-how relating to, and useful in, the manufacture, production and worldwide commercial sale of endothelin products for human therapeutic use. The value of the license was charged to development expense as the underlying technology represented incomplete product research and development. In October 1996, TBC entered into a Strategic Alliance Agreement with LG Chemical, Ltd. ("LG Chem"), a Korean corporation, (the "LG Chem Agreement"), pursuant to which TBC granted LG Chem certain technology rights and agreed to perform certain research and development activities on behalf of LG Chem in exchange for the right to receive research and royalty payments in the future. In conjunction with its formation, the Partnership was assigned and assumed certain of TBC's rights and obligations under the LG Chem Agreement. During 2000, the Partnership recognized $547 in revenue associated with services performed under the LG Chem Agreement. The LG Chem Agreement was terminated during 2001. The Partnership will not recognize any further revenue or receive any additional payments, and has no further obligations, under the LG Chem Agreement. (5) RESEARCH AND DEVELOPMENT SERVICE AGREEMENT In June 2000, the Partnership entered into a Research and Development Service Agreement (the "R&D Agreement") with TBC and ICOS, pursuant to which TBC and ICOS agreed to provide research and development services for, and on behalf of, the Partnership. The Partnership reimburses TBC and ICOS, at a per-hour amount, calculated on the basis of actual hours incurred by TBC and ICOS, plus certain development and administrative expenses. There is no minimum commitment for research and development, and the Partnership can contract with other parties to provide research and development services. (6) FINANCING ICOS-TBC has experienced recurring losses from operations and has a partners' deficit of $5.2 million at December 31, 2002, which raise substantial doubt about its ability to continue as a going concern. Pursuant to the Agreement, except as modified by a subsequent Letter Agreement between ICOS and TBC dated February 14, 2003 (the "Letter Agreement"), ongoing activities of the Partnership are to be funded by the limited partners in relation 8 to their limited partnership interests. Substantially all of the partners' deficit at December 31, 2002, was funded by capital contributions from the limited partners during the first quarter of 2003. Pursuant to the Letter Agreement, TBC has agreed to be responsible for 100% of all costs and expenses of the Partnership incurred after December 31, 2002, through June 30, 2003, or earlier termination of the Letter Agreement upon mutual consent of both parties. In January 2003, ICOS announced its conclusion that joint development of the endothelin receptor antagonist program, through the Partnership, should not continue. ICOS and TBC continue to negotiate the terms pursuant to which TBC might independently continue the endothelin receptor antagonist program. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston and State of Texas on the 27th day of March, 2003. TEXAS BIOTECHNOLOGY CORPORATION By: /s/ STEPHEN L. MUELLER -------------------------------------------- Stephen L. Mueller Vice President, Finance and Administration, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and in the capacities indicated on the 27th day of March, 2003.
SIGNATURE TITLE --------- ----- /s/ JOHN M. PIETRUSKI Chairman of the Board of Directors - ---------------------------- John M. Pietruski /s/ BRUCE D. GIVEN Director, President and Chief Executive Officer - ---------------------------- (Principal Executive Officer) Bruce D. Given, M.D. /s/ RICHARD A.F. DIXON Director and Senior Vice President, Research and - ---------------------------- Chief Scientific Officer Richard A.F. Dixon, Ph.D. /s/ STEPHEN L. MUELLER Vice President, Finance and Administration, - ---------------------------- Secretary and Treasurer Stephen L. Mueller (Principal Financial and Accounting Officer) /s/ RON J. ANDERSON Director - ---------------------------- Ron J. Anderson, M.D. /s/ FRANK C. CARLUCCI Director - ---------------------------- Frank C. Carlucci /s/ ROBERT J. CRUIKSHANK Director - ---------------------------- Robert J. Cruikshank /s/ SUZANNE OPARIL Director - ---------------------------- Suzanne Oparil, M.D. /s/ WILLIAM R. RINGO, JR. Director - ---------------------------- William R. Ringo, Jr. /s/ JAMES A. THOMSON Director - ---------------------------- James A. Thomson, Ph.D. /s/ JAMES T. WILLERSON Director - ---------------------------- James T. Willerson, M.D.
45 CERTIFICATIONS I, Bruce D. Given, M.D., certify that: 1. I have reviewed this annual report on Form 10-K of Texas Biotechnology Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report ("Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors [or persons performing the equivalent function]: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 By /s/ Bruce D. Given, M.D. ------------------------------------- Bruce D. Given, M.D. President and Chief Executive Officer
46 CERTIFICATIONS I, Stephen L. Mueller, certify that: 1. I have reviewed this annual report on Form 10-K of Texas Biotechnology Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report ("Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors [or persons performing the equivalent function]: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 By /s/ Stephen L. Mueller ------------------------------------------ Stephen L. Mueller Vice President, Finance and Administration Secretary and Treasurer
INDEPENDENT AUDITORS' REPORT The Board of Directors Texas Biotechnology Corporation: We have audited the accompanying consolidated balance sheets of Texas Biotechnology Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Biotechnology Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Houston, Texas March 5, 2003 F-1 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31, ------------ 2002 2001 --------- --------- Current assets: Cash and cash equivalents ............................................. $ 21,228 $ 10,086 Short-term investments ................................................ 26,533 46,465 Accounts receivable ................................................... 1,098 655 Other current receivables ............................................. 473 618 Receivable from related party under collaborative arrangement ......... 393 1,144 Prepaids .............................................................. 1,482 1,350 --------- --------- Total current assets ................................................ 51,207 60,318 Long-term investments ................................................... 20,244 38,876 Equipment and leasehold improvements, net ............................... 5,579 4,300 Other assets ............................................................ 762 868 --------- --------- Total assets ........................................................ $ 77,792 $ 104,362 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...................................................... $ 950 $ 2,187 Accrued expenses ...................................................... 3,774 3,902 Deferred revenue from related party ................................... 591 1,159 Deferred revenue from unrelated parties ............................... 927 748 --------- --------- Total current liabilities ........................................... 6,242 7,996 Liability to related party .............................................. 2,664 3,533 Deferred revenue from related party ..................................... 1,181 1,722 Deferred revenue from unrelated parties ................................. 3,019 3,041 Minority interest in Revotar ............................................ 2,608 3,833 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.005 per share. At December 31, 2002 and December 31, 2001, 5,000,000 shares authorized; none outstanding .... -- -- Common stock, par value $.005 per share. At December 31, 2002, 75,000,000 shares authorized; 44,015,364 shares issued At December 31, 2001, 75,000,000 shares authorized, 43,783,638 shares issued ............................................ 220 218 Additional paid-in capital ............................................ 211,847 210,616 Deferred compensation expense ......................................... (223) -- Treasury stock, 213,000 shares at December 31, 2002 and 2001 .......... (1,602) (1,602) Accumulated other comprehensive income (loss) ......................... 1 (299) Accumulated deficit ................................................... (148,165) (124,696) --------- --------- Total stockholders' equity .......................................... 62,078 84,237 --------- --------- Total liabilities and stockholders' equity .......................... $ 77,792 $ 104,362 ========= =========
See accompanying notes to consolidated financial statements. F-2 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------------- 2002 2001 2000 -------- -------- -------- Revenues: Research agreements .......................................... $ 3,570 $ 4,342 $ 3,889 Collaborative research and development from ICOS-TBC, L.P. ... 1,090 1,442 1,123 Royalty income ............................................... 3,514 1,586 234 License fees, milestones and grants .......................... 2,259 1,547 10,446 -------- -------- -------- Total revenues ............................................. 10,433 8,917 15,692 -------- -------- -------- Expenses: Research and development ..................................... 20,066 17,861 13,513 Equity in loss of ICOS-TBC, L.P. ............................. 8,557 9,450 3,487 General and administrative ................................... 8,976 6,733 6,552 -------- -------- -------- Total expenses ............................................. 37,599 34,044 23,552 -------- -------- -------- Operating loss ............................................. (27,166) (25,127) (7,860) Investment income, net ......................................... 2,472 5,236 4,362 -------- -------- -------- Loss before minority interest and cumulative effect of change in accounting principle ........................ (24,694) (19,891) (3,498) Minority interest in loss of Revotar ........................... 1,225 749 209 -------- -------- -------- Loss before cumulative effect of change in accounting principle ............................. (23,469) (19,142) (3,289) Cumulative effect of change in accounting principle .......... -- -- (2,366) -------- -------- -------- Net loss applicable to common shares ....................... $(23,469) $(19,142) $ (5,655) ======== ======== ======== Other comprehensive income: Unrealized income (loss) on foreign currency translation ..... 300 (284) (15) -------- -------- -------- Comprehensive loss ......................................... $(23,169) $(19,426) $ (5,670) ======== ======== ======== Net loss per share basic and diluted ........................... $ (0.54) $ (0.44) $ (0.14) ======== ======== ======== Weighted average common shares used to compute net loss per share basic and diluted ......................... 43,741 43,637 39,150 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 ($ IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL ------------ PAID-IN TREASURY COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) DEFICIT EQUITY ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at January 1, 2000 ....... 34,392,909 $ 172 $ 118,317 $ -- $ -- $ (99,899) $ 18,590 Issuance of common stock in public offering ............. 5,584,591 28 65,206 -- -- -- 65,234 Issuance of common stock for stock option exercises ...... 618,904 3 2,319 -- -- -- 2,322 Issuance of common stock for warrant exercises ........... 531,128 3 2,537 -- -- -- 2,540 Issuance of common stock in payment of expenses ......... 2,236 -- 30 -- -- -- 30 Issuance of common stock in payment for consulting services .................... 2,000 -- 16 -- -- -- 16 Issuance of common stock in payment for research and development ............. 71,429 -- 965 -- -- -- 965 Net loss ......................... -- -- -- -- -- (5,655) (5,655) Other comprehensive loss ......... -- -- -- -- (15) -- (15) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000 ..... 41,203,197 $ 206 $ 189,390 $ -- $ (15) $ (105,554) $ 84,027 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Issuance of common stock for stock option exercises ...... 12,268 -- 52 -- -- -- 52 Issuance of common stock for warrant exercises ........... 2,511,558 12 20,581 -- -- -- 20,593 Issuance of common stock in payment of expenses ......... 56,615 -- 530 -- -- -- 530 Compensation expense related to stock options ............... -- -- 63 -- -- -- 63 Purchase of treasury shares (213,000 shares) ............ -- -- -- (1,602) -- -- (1,602) Net loss ......................... -- -- -- -- -- (19,142) (19,142) Other comprehensive loss ......... -- -- -- -- (284) -- (284) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2001 ..... 43,783,638 $ 218 $ 210,616 $ (1,602) $ (299) $ (124,696) $ 84,237 ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Continued) F-4 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 ($ IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL DEFERRED OTHER TOTAL ------------ PAID-IN COMPENSATION TREASURY COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL EXPENSE STOCK INCOME (LOSS) DEFICIT EQUITY ------ ------ ------- ------- ----- ------------- ------- ------ Balance at December 31, 2001 ... 43,783,638 $218 $ 210,616 $ -- $(1,602) $(299) $(124,696) $ 84,237 Issuance of common stock for stock option exercises .... 129,860 1 454 -- -- -- -- 455 Issuance of common stock for warrant exercises ......... 500 -- -- -- -- -- -- -- Sale of unregistered common stock .............. 5,000 -- 31 -- -- -- -- 31 Issuance of common stock in payment of expenses ....... 51,429 1 271 -- -- -- -- 272 Compensation expense related to stock options .......... -- -- 202 -- -- -- -- 202 Amortization of deferred compensation expense ...... -- -- -- 85 -- -- -- 85 Deferred compensation expense related to issuance of stock ..................... 50,000 -- 308 (308) -- -- -- -- Cancellation of restricted shares .................... (5,063) -- (35) -- -- -- -- (35) Net loss ....................... -- -- -- -- -- -- (23,469) (23,469) Other comprehensive income ..... -- -- -- -- -- 300 -- 300 ----------- ---- --------- ----- ------- ----- --------- -------- Balance at December 31, 2002 ... 44,015,364 $220 $ 211,847 $(223) $(1,602) $ 1 $(148,165) $ 62,078 =========== ==== ========= ===== ======= ===== ========= ========
See accompanying notes to consolidated financial statements. F-5 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------- 2002 2001 2000 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................................................... $ (23,469) $ (19,142) $ (5,655) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization................................ 1,071 913 998 Equity in loss of ICOS-TBC, L.P. ............................ 8,557 9,450 3,487 Minority interest in loss of Revotar......................... (1,225) (749) (209) Expenses paid with stock..................................... 272 530 46 Compensation expense related to stock options................ 252 63 -- Loss on disposition of fixed assets.......................... -- 12 9 Decrease (increase) in interest receivable included in short-term and long-term investments....................... 265 131 (558) Changes in operating assets and liabilities: Increase in accounts receivable.............................. (443) (417) (237) (Increase) decrease in prepaids.............................. (128) (4) 104 Decrease in other current receivables........................ 144 6 443 Decrease (increase) in receivable from related party under collaborative arrangement...................... 751 (262) (882) (Decrease) increase in accounts payable and accrued expenses........................................... (1,460) 1,533 2,342 Decrease in liability to related party....................... (9,426) (7,293) (2,110) Increase in deferred revenue from unrelated parties ......... 157 1,062 2,727 (Decrease) increase in deferred revenue from related party... (1,109) 1,187 1,693 --------- --------- --------- Net cash (used in) provided by operating activities...... (25,791) (12,980) 2,198 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements................ (2,026) (2,757) (324) Purchase of investments.......................................... (85,608) (154,272) (104,002) Maturity of investments.......................................... 123,985 112,760 72,996 --------- --------- --------- Net cash provided by (used in) investing activities...... 36,351 (44,269) (31,330) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition of treasury stock.................................... -- (1,602) -- Contribution from minority interest in consolidated subsidiary... -- -- 4,502 Proceeds from issuance of common stock and option and warrant exercises, net..................................... 486 20,645 70,096 --------- --------- --------- Net cash provided by financing activities................ 486 19,043 74,598 --------- --------- --------- Effect of exchange rate changes on cash.............................. 96 (178) 200 --------- --------- --------- Net increase (decrease) in cash and cash equivalents............. 11,142 (38,384) 45,666 Cash and cash equivalents at beginning of year....................... 10,086 48,470 2,804 --------- --------- --------- Cash and cash equivalents at end of year............................. $ 21,228 $ 10,086 $ 48,470 ========= ========= ========= Supplemental schedule of noncash financing activities: Issuance of common stock for research and development, license fee and services..................................... $ 272 $ 530 $ 1,011 ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (a) Organization Texas Biotechnology Corporation (the "Company" or "TBC"), a Delaware Corporation, is a biopharmaceutical company focused on the discovery, development and commercialization of novel synthetic small molecule compounds for the treatment of a variety of cardiovascular, vascular and related inflammatory diseases. Since its formation in 1989, the Company has been engaged principally in research and drug discovery programs and clinical development of certain drug compounds. On July 25, 1994, the Company acquired all of the outstanding common stock of ImmunoPharmaceutics, Inc. ("IPI") in exchange for common stock, par value $.005 per share (the "Common Stock"), of the Company. On June 6, 2000, TBC, through its wholly owned subsidiary, TBC-ET, Inc., a Delaware Corporation, and ICOS Corporation, a Delaware Corporation, ("ICOS") entered into an agreement and formed ICOS-Texas Biotechnology L.P., a Delaware limited partnership ("ICOS-TBC"), to develop and globally commercialize endothelin-A receptor antagonists. TBC and ICOS are both 50% owners in ICOS-TBC. For further discussion of the ICOS-TBC partnership, see Note 8. During the third quarter of 2000, TBC formed Revotar Biopharmaceuticals AG ("Revotar"), a German corporation, to conduct research and development for novel small molecule compounds and to develop and commercialize TBC's selectin antagonists. The Company retained a majority interest in Revotar. The Company is presently working on a number of long-term development projects that involve experimental and unproven technology, which may require many years and substantial expenditures to complete, and which may or may not be successful. Sales of the Company's first product, for which it receives royalty income, Argatroban, began during November 2000. (b) Basis of Consolidation The Company's consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, IPI and TBC-ET, Inc., and its majority controlled subsidiary, Revotar. All material intercompany balances and transactions have been eliminated. F-7 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (c) Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments Cash equivalents are considered to be those securities or instruments with original maturities, when purchased, of three months or less. Short-term investments are those investments which have an original maturity of less than one year and greater than three months at the purchase date. Long-term investments consist of securities with a remaining maturity of one year or more. Cash equivalents, short-term and long-term investments are stated at cost plus accrued interest, which approximates market value. Interest income is accrued as earned. The Company classifies all short-term and long-term investments as held to maturity. Composition of cash and investments was as follows (in thousands):
December 31, 2002 December 31, 2001 ----------------- ----------------- Cash and cash equivalents: Demand and money market accounts $ 609 $ 690 Corporate commercial paper 20,619 9,396 ----------------- ----------------- Total cash and cash equivalents $ 21,228 $ 10,086 ================= ================= Short-term investments: U.S. Government agency securities $ 3,999 $ 817 Corporate commercial paper and loan participations 22,333 44,083 Time deposits -- 1,255 Accrued interest on above 201 310 ----------------- ----------------- Total short-term investments $ 26,533 $ 46,465 ================= ================= Long-term investments: U.S. Government agency securities $ 12,000 $ 30,989 Corporate commercial paper and loan participations 7,990 7,476 Accrued interest on above 254 411 ----------------- ----------------- Total long-term investments $ 20,244 $ 38,876 ================= =================
(d) Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is provided on the straight-line method over the estimated useful lives of the respective assets (3 to 10 years). Amortization of leasehold improvements is provided on the straight-line method over the remaining minimum lease term. (e) Investment in ICOS - TBC The Company accounts for the investment in ICOS-TBC using the equity method. Because the Company had no basis in the technology transferred to ICOS-TBC as the Company's original investment, the Company did not record an amount for its original investment. The Company records its share of the ICOS-TBC loss as a liability to related party until the Company funds its portion of the loss. ICOS-TBC paid a license fee and a milestone payment to the Company in 2000 and 2001, respectively. Because the Company has continuing obligations to ICOS-TBC, the Company deferred these amounts and is amortizing them into revenue over the estimated developmental period of the underlying technology. (f) Research and Development Costs All research and development costs are expensed as incurred and include salaries of research and development employees, certain rent and related building services, research supplies and services, clinical trial expenses and other associated costs. With respect to research and development, salaries and benefits for the years ended December 31, 2002, 2001 and 2000, of approximately $9,283,000, $7,296,000 and $5,902,000, respectively, were charged to research and development. Payments related to the acquisition of in-process research and development, if any, are expensed as incurred. F-8 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (g) Net Loss Per Common Share Basic net loss per common share is calculated by dividing the net loss applicable to common shares by the weighted average number of common and common equivalent shares outstanding during the period. For the years 2002, 2001 and 2000, there were no potential common equivalent shares used in the calculation of weighted average common shares outstanding.
Year Ended December 31, -------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Weighted average shares used to compute basic and diluted net loss per common share 43,741,258 43,636,548 39,149,882 ========== ========== ========== Securities convertible into common stock, not used because the effect would be antidilutive: Stock options 5,012,500 4,131,252 3,152,316 Warrants 246,586 247,858 2,772,371 ---------- ---------- ---------- Total 5,259,086 4,379,110 5,924,687 ========== ========== ==========
(h) Revenue Recognition Revenue from service contracts is recognized as services are performed. Royalty revenue is recognized as products are sold by a licensee and we have received sufficient information to record a receivable. The Company defers the recognition of milestone payments related to contractual agreements which are still in the development stage. Such deferred revenues are amortized into income over the estimated remaining development period. Milestone payments received under contractual agreements which have completed the development stage are evaluated, and either recognized into income when earned, or amortized over a future period, depending upon whether the Company continues to have obligations under the terms of the arrangement. License fees received under the terms of licensing agreements for the Company's intellectual property are similarly deferred, and amortized into income over the estimated development period of the licensed item or items. The Company periodically evaluates its estimates of remaining development periods, and adjusts the recognition of remaining deferred revenues over the adjusted development period remaining. Revenue from grants is recognized as earned under the terms of the related grant agreements, typically as expenses are incurred. Amounts received in advance of services being performed under contracts are recorded as deferred revenue, and recognized as services are performed. (i) Patent Application Costs Costs incurred in filing for, defending and maintaining patents are expensed as incurred. (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from these estimates. (k) Intangible Assets Intangible assets, consisting of amounts paid for products approved by the United States Food and Drug Administration ("FDA"), are amortized on a straight-line basis over their estimated useful lives. The Company periodically reviews the useful lives of its intangible and long-lived assets, which may result in future adjustments to the amortization periods. Related amortization expense for the years ended December 31, 2002, 2001 and 2000 was $106,000, $106,000 and $53,000, respectively. Amortization of intangible assets is included in general and administrative expense in the consolidated statements of operations and comprehensive loss. F-9 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (l) Treasury Stock Treasury stock is recorded at cost. On May 3, 2001, the Company announced that its Board of Directors had authorized a stock repurchase program to buy up to 3 million shares, or approximately 7 percent of the Company's outstanding Common Stock over an 18 month period. Pursuant to the stock repurchase program, the Company repurchased 213,000 shares for net proceeds of approximately $1,602,000 during the year ended December 31, 2001. No shares were repurchased during the year ended December 31, 2002. (m) Stock Based Compensation At December 31, 2002, the Company has six stock-based compensation plans for employees and non-employee directors, which are described more fully in Note 3. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Net loss in the years ended December 31, 2002 and 2001 included stock-based compensation expense as a result of modifications made to certain options previously issued to retiring employees. Net loss in the year ended December 31, 2002 also includes stock-based compensation expense related to the grant of shares of restricted stock to the Company's CEO. No other stock-based employee compensation expense is reflected in net loss, however, as all options granted under those plans had an exercise price equal to the market price of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS123) to stock-based employee compensation ($ in thousands, except for per share data).
Year Ended December 31, -------------------------------- 2002 2001 2000 -------- -------- -------- Net loss, as reported $(23,469) $(19,142) $ (5,655) -------- -------- -------- Add: Stock-based employee compensation expense included in reported net income 252 63 -- Deduct: Total stock-based employee compensation expense determined under fair value method for all awards (4,238) (4,118) (2,950) -------- -------- -------- Pro forma net loss $(27,455) $(23,197) $ (8,605) ======== ======== ======== Loss per share: As reported, basic and diluted $ (0.54) $ (0.44) $ (0.14) ======== ======== ======== Pro forma, basic and diluted $ (0.63) $ (0.53) $ (0.22) ======== ======== ========
F-10 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The per-share weighted average fair value of stock options granted during 2002, 2001 and 2000 was $3.45, $3.62 and $12.26, respectively, on the grant date using the Black-Scholes option pricing model with the following assumptions:
YEAR ENDED DECEMBER 31, ------------------------------- 2002 2001 2000 ------ ------ ------ Expected dividend yield 0.0% 0.0% 0.0% Rick-free interest rate 2.8% 4.2% 5.0% Expected volatility 74.3% 78.0% 77.0% Expected life in years 4.54 4.83 4.61
(n) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (o) Impairment of Long-lived Assets As circumstances dictate, the Company evaluates the recoverability of its long-lived tangible and intangible assets by comparing the projected undiscounted net cash flows associated with such assets against their respective carrying values. Impairment, if any, is based on the excess of the carrying value over the fair value. (p) New Accounting Pronouncements In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," (SFAS143) which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities that have legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the assets. SFAS143 is effective for all fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS143 to have a significant impact on its financial condition or results of operations. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statements No. 13 and Technical Corrections," (SFAS145). SFAS145 provides guidance for income statement classification of gains and losses on extinguishments of debt and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS145 is effective for the Company in January 2003. The Company does not expect the adoption of SFAS145 to have a significant impact on its financial condition or results of operations. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated With Exit or Disposal Activities," (SFAS146) which addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability Recognition of Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS146 is effective for the Company in January 2003. The Company does not expect the adoption of SFAS146 to have a significant impact on its financial condition or results of operations. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," (SFAS148). SFAS148 amends SFAS123 to provide alternative methods F-11 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS148 amends the disclosure requirements of SFAS123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS148 are effective for fiscal years ending after December 15, 2002. The adoption of SFAS148 did not have a material impact on the consolidated financial statements. (q) Reclassifications Certain reclassifications have been made to prior period financial statements to conform with the December 31, 2002 presentation with no effect on net loss previously reported. (2) CAPITAL STOCK In December 1993, the Company completed an initial public offering comprised of 4,082,500 units, each unit consisting of one share of Common Stock (par value $.005 per share) and one warrant to purchase one share of Common Stock. Proceeds to the Company were approximately $24.2 million, net of selling expenses of approximately $3.3 million. The securities included in the unit subsequently separated into its Common Stock and warrant components. The warrants were exercisable at $8.44 per share. On December 13, 1998, the expiration date of the warrants was extended from December 14, 1998 to September 30, 1999 for those warrant holders electing such extension. On September 13, 1999, the expiration date of the warrants was further extended to December 31, 2000. There were 2,386,645 warrants outstanding as of December 31, 2000 which were exercised on January 3, 2001 for proceeds of approximately $20.1 million. In April 2000, the Company sold 5,584,591 shares of Common Stock for $12.50 per share in an underwritten public offering. The net proceeds to the Company from this offering were approximately $65.2 million after deducting selling commissions and expenses of approximately $4.6 million related to the offering. The Company has reserved Common Stock for issuance as of December 31, 2002 as follows: Stock option plans................................... 5,758,413 Warrants outstanding................................. 246,586 ----------- Total shares reserved.......................... 6,004,999 ===========
Shareholders' Rights Plan In January 2002, the Company adopted a shareholder rights plan under which the Board of Directors declared a dividend of one preferred stock purchase right ("Right") for each outstanding share of the Company's common stock held of record as of the close of business on January 22, 2002. Each Right initially entitles a shareholder to purchase a one one-thousandth fraction of a share of Preferred Stock - Junior Participating Series A (the "Preferred Stock") for $55.00. Each such fraction of a share of Preferred Stock has terms designed to make it essentially equivalent to one share of Common Stock. The Rights will become exercisable only in the event a person or group acquires 15% or more of the Company's Common Stock or commences a tender or exchange offer which, if consummated, would result in that person or group owning 15% of the Common Stock. Prior to such an event, the Rights will be evidenced by and traded in tandem with the Common Stock. If a person or group acquires a 15% or larger position in the Company, each Right (except those held by the acquiring party) will then entitle its holder to purchase, fractional shares of Preferred Stock having twice the value of the $55 exercise price, with each fractional Preferred Share valued at the market price of the Common Stock. Also, if following an acquisition of 15% or more of the Company's Common Stock, the Company is acquired by that person or group in a merger or other business combination transaction, each Right would then entitle its holder to purchase Common Stock of the acquiring company having a value of twice the $55.00 exercise price. The effect will be to entitle the Company's shareholders to buy stock in the acquiring company at 50% of its market price. The Company may redeem the Rights at $.001 per Right at any time on or prior to the tenth business day following the acquisition of 15% or more of its Common Stock by a person or group or commencement of a tender offer for such 15% ownership. The Rights expire on January 2, 2012. F-12 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) STOCK OPTIONS AND WARRANTS The Company has in effect the following stock option plans: The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 102,635 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 712,641 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. The Amended and Restated Stock Option Plan for Non-Employee Directors ("Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 28,527 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non-employee members of the Board of Directors of the Company based on a formula. No new issuances are being made under the Director Plan. The Amended and Restated 1995 Stock Option Plan ("1995 Plan") allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to employees, officers, and non-employee independent contractors, pursuant to which 1,604,867 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. The Amended and Restated 1995 Non-Employee Director Stock Option Plan ("1995 Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 444,368 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non-employee members of the Board of Directors of the Company based on a formula. During 2003, the Board of Directors amended the 1995 Director Plan to allow a total of 800,000 shares of Common Stock to be reserved for issuance. The amendment is subject to approval of the stockholders at the Company's annual meeting in 2003. The Amended and Restated 1999 Stock Incentive Plan ("1999 Plan") allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to directors, employees, officers and non-employee independent contractors, pursuant to which 2,865,375 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. During 2003, the Board of Directors amended the 1999 Plan to allow a total of 4,750,000 shares of Common Stock to be reserved for issuance. The amendment is subject to approval of the stockholders at the Company's annual meeting in 2003. F-13 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of stock options as of December 31, 2002, follows:
EXERCISE PRICE EXERCISED/ AVAILABLE STOCK OPTION PLANS PER SHARE AUTHORIZED OUTSTANDING OTHER EXERCISABLE FOR GRANT ------------------ -------------- ---------- ----------- ----- ----------- --------- 1990 Plan............ $ 1.38-$21.59 285,715 102,635 183,080 86,805 --- 1992 Plan............ $ 1.41-$21.59 1,700,000 712,641 987,359 688,566 --- Director Plan........ $ 3.50-$ 4.54 71,429 28,527 42,902 28,527 --- 1995 Plan............ $ 1.31-$21.59 2,000,000 1,574,841 395,133 1,496,272 30,026 1995 Director Plan... $ 1.38-$11.31 500,000 386,596 55,632 324,096 57,772 1999 Plan............ $ 2.29-$20.13 3,000,000 2,207,260 134,625 504,085 658,115 ------------ ----------- --------- --------- --------- TOTALS........ 7,557,144 5,012,500 1,798,731 3,128,351 745,913 ============ =========== ========= ========= =========
A summary of the status of the Company's stock option plans as of December 31, 2002, 2001 and 2000 and the changes during the years then ended is presented below:
WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE ------- -------------- Outstanding at January 1, 2000...... 3,224,219 $4.53 Granted.......................... 624,160 18.66 Canceled......................... (77,159) 9.13 Exercised........................ (618,904) 3.75 ----------- Outstanding at December 31, 2000.... 3,152,316 7.36 Granted.......................... 1,042,700 5.69 Canceled......................... (51,496) 13.77 Exercised........................ (12,268) 4.15 ----------- Outstanding at December 31, 2001.... 4,131,252 6.87 Granted.......................... 1,272,225 5.74 Canceled......................... (261,117) 5.97 Exercised........................ (129,860) 3.50 ----------- Outstanding at December 31, 2002.... 5,012,500 $6.72 ===========
In 2002 and 2001, the Company issued 99,734 shares at a weighted average market price of $5.61 per share, and 51,051 shares at a weighted average market price of $9.69 per share, of restricted Common Stock, respectively, as compensation to certain of its employees, which will vest over the three year period subsequent to its issuance. In 2002, 5,063 shares of previously issued restricted Common Stock were cancelled, as a result of the termination of employment of the grantees before such shares had vested. F-14 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables summarize information about the Company's stock options outstanding as of December 31, 2002, 2001 and 2000, respectively:
WEIGHTED WEIGHTED OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE EXERCISE PRICE AS OF 12/31/2002 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2002 OF EXERCISABLE -------------- ---------------- ---------------- -------------- ---------------- -------------- $ 1.31 - $ 4.53 1,261,140 3.74 $ 3.53 1,195,140 $ 3.53 $ 4.54 - $ 5.63 1,749,644 6.24 $ 5.49 647,472 $ 5.37 $ 5.64 - $ 7.19 1,400,222 5.93 $ 6.41 845,222 $ 6.56 $ 7.20 - $21.59 601,494 6.69 $ 17.68 440,517 $ 17.45 ------------- ------------- $ 1.31 - $21.59 5,012,500 5.58 $ 6.72 3,128,351 $ 6.69 ============= =============
WEIGHTED WEIGHTED OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE EXERCISE PRICE AS OF 12/31/2001 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2001 OF EXERCISABLE -------------- ---------------- ---------------- -------------- ---------------- -------------- $ 1.31 - $ 4.19 1,050,454 3.68 $ 3.21 951,041 $ 3.11 $ 4.20 - $ 5.51 1,526,834 6.44 $ 5.17 734,486 $ 4.80 $ 5.52 - $11.31 1,035,970 6.07 $ 6.85 909,478 $ 6.79 $11.32 - $21.59 517,994 8.02 $ 19.36 194,418 $ 19.37 ------------- ------------- $ 1.31 - $21.59 4,131,252 5.84 $ 6.87 2,789,423 $ 5.89 ============= =============
WEIGHTED WEIGHTED OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE EXERCISE PRICE AS OF 12/31/2000 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2000 OF EXERCISABLE -------------- ---------------- ---------------- -------------- ---------------- -------------- $ 1.31 - $ 3.50 638,719 2.86 $ 2.64 637,886 $ 2.64 $ 3.51 - $ 5.88 1,459,624 6.09 $ 4.83 1,208,453 $ 4.98 $ 5.89 - $ 8.13 451,146 7.17 $ 7.19 297,282 $ 7.19 $ 8.14 - $21.59 602,827 9.36 $ 18.63 23,752 $ 13.86 ------------- ------------- $ 1.31 - $21.59 3,152,316 5.84 $ 7.36 2,167,373 $ 4.69 ============= =============
F-15 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warrants A summary of the status of the Company's warrants as of December 31, 2002, 2001 and 2000, and changes during the years then ended is presented below:
WEIGHTED-AVERAGE WARRANTS EXERCISE PRICE ------------- ---------------- Outstanding at January 1, 2000....... 4,760,972 $8.01 Canceled.......................... (1,457,473) 8.37 Exercised......................... (531,128) 4.76 ------------ Outstanding at December 31, 2000..... 2,772,371 8.33 Forfeited......................... (12,955) 4.40 Exercised......................... (2,511,558) 8.20 ------------ Outstanding at December 31, 2001..... 247,858 9.87 Exercised......................... (1,272) 4.25 ------------ Outstanding at December 31, 2002..... 246,586 $9.90 ============
On November 12, 1998, the Company announced an extension of the exercise period of the Company's publicly traded redeemable common stock purchase warrants from December 14, 1998 to September 30, 1999 for those warrant holders electing such extension. On September 13, 1999, the expiration date of the warrants was further extended to December 31, 2000. These publicly traded warrants comprised 2,386,645 of the 2,772,371 warrants outstanding at December 31, 2000. The exercise price of $8.44 remained unchanged. On January 3, 2001, publicly traded warrants to purchase 2,386,645 shares were exercised and the Company received cash proceeds of $20,143,000. In February 2001, warrants to purchase 124,913 shares at a weighted-average exercise price of $3.60, originally issued in 1996, were exercised for total cash proceeds of $450,000. (4) INCOME TAXES The Company did not incur any tax expense in any year due to operating losses and the related increase in the valuation allowance. The reconciliation of income taxes at the statutory rate of 35% applied to income before taxes is as follows ($ in thousands):
DECEMBER 31, 2002 2001 2000 -------- -------- -------- Computed "expected" tax expense $ (8,214) $ (6,700) $ (1,979) Effect of: Permanent differences 893 525 (2,020) Increase in valuation allowance 7,321 6,175 3,999 -------- -------- -------- Tax expense $ --- $ --- $ --- ======== ======== ========
F-16 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2002 and 2001 are as follows ($ in thousands):
DECEMBER 31, 2002 2001 -------- -------- Loss carryforwards $ 41,946 $ 30,726 Start-up costs 8,001 10,748 Property, plant and equipment (71) 814 Deferred revenue 2,053 2,393 Other 1,047 974 -------- -------- Gross deferred tax assets 52,976 45,655 Valuation allowance (52,976) (45,655) --------- --------- Net deferred tax assets $ --- $ --- ======== ========
The Company has established a valuation allowance for the full amount of these deferred tax assets, as management does not believe that it is more likely than not that the Company will recover these assets. Utilization of the Company's net operating loss carryforwards is subject to certain limitations due to specific stock ownership changes which have occurred or may occur. To the extent not utilized, the carryforwards will expire during the years beginning 2005 through 2022. (5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following ($ in thousands):
DECEMBER 31, DECEMBER 31, 2002 2001 ----------- ----------- Laboratory and office equipment................. $ 10,667 $ 8,407 Leasehold improvements.......................... 4,311 4,302 -------- -------- 14,978 12,709 Less accumulated depreciation and amortization.. 9,399 8,409 -------- -------- $ 5,579 $ 4,300 ======== ========
(6) ENTITY-WIDE GEOGRAPHIC DATA The Company operates in a single business segment that includes research and development of pharmaceutical products. The following table summarizes the Company's long-lived assets in different geographic locations ($ in thousands):
DECEMBER 31, 2002 2001 -------- -------- Long-lived assets: United States $ 4,884 $ 4,446 Germany 1,457 722 -------- -------- Total $ 6,341 $ 5,168 ======== ========
(7) RESEARCH AGREEMENTS On October 10, 1996, the Company signed a strategic alliance agreement with LG Chemical, a Korean corporation, to develop and market compounds derived from the Company's endothelin receptor antagonist and selectin antagonist programs for certain disease indications. Upon consummation of the transaction, LG Chemical purchased 1,250,000 shares of Common Stock for $4.00 per share for a total of $5 million. In addition, LG Chemical had committed to pay $10.7 million in research payments. Of this amount, $8.1 million had been paid as of December 31, 2000. Effective June 6, 2000, the Company assigned one-half of the research payment to ICOS-TBC which amounted to $577,000, before commissions, during the year 2000. In August 2001, the Company and LG Chemical mutually agreed to terminate the strategic alliance F-17 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS agreement. No research payments were received in 2002 or 2001 from LG Chemical and LG Chemical's rights under the agreement have ended. Under the terms of the Company's agreement with ICOS-TBC, the Company will provide, and be reimbursed for, research and development activities conducted on behalf of ICOS-TBC. In January 2003, ICOS announced that it had reached a conclusion that joint development of the endothelin antagonist program by ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which TBC could independently continue the program. The financial terms of the transaction are subject to ongoing negotiations between the two companies. See Note 8, below. The Company also receives reimbursement for certain research costs pursuant to its agreements with GlaxoSmithKline, plc ("GSK") (Note 10), Schering-Plough LTD. and Schering-Plough Corporation (collectively "Schering-Plough") (Note 8) and Revotar (Note 9). (8) LICENSE AGREEMENTS Mitsubishi-Pharma Agreement TBC has entered into an agreement with Mitsubishi Pharma Corporation, formerly Mitsubishi-Tokyo Pharmaceuticals, Inc. ("Mitsubishi") to license Mitsubishi's rights and technology relating to Argatroban and to license Mitsubishi's own proprietary technology developed with respect to Argatroban (the "Mitsubishi Agreement"). Under the Mitsubishi Agreement, the Company has an exclusive license to use and sell Argatroban in the U.S. and Canada for all specified indications. The Company is required to pay Mitsubishi specified royalties on net sales of Argatroban by the Company and its sublicensees after its commercial introduction in the U.S. and Canada. Either party may terminate the Mitsubishi Agreement on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or is insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner pursuant to the above described termination provisions, the Mitsubishi Agreement expires on the later of termination of patent rights in a particular country or 20 years after first commercial sale of products. Under the Mitsubishi Agreement, TBC has access to an improved formulation patent granted in 1993 which expires in 2010 and a use patent which expires in 2009. The Mitsubishi composition of matter patent on Argatroban has expired. During 2000, TBC signed an additional agreement with Mitsubishi that provides TBC with royalties on sales of Argatroban in certain European countries, up to a total of $5.0 million in milestones for the development of ischemic stroke and certain other provisions. The Company began enrolling patients in a clinical trial for ischemic stroke in April 2001, and received a $2.0 million milestone payment in May 2001, which is being recognized as revenues over the expected development period, and accordingly, revenues in years 2002 and 2001 include approximately $382,000 and $274,000, respectively, related to such milestone payment. In light of a lack of a positive overall efficacy trend and the high risk and high costs associated with stroke trials, it is unlikely that we will proceed independently with a full Phase III program. In conjunction with the Mitsubishi Agreement, a consulting firm involved in negotiations related to the agreement will receive a percentage of net sales received as a result of the agreement. Mitsubishi further agreed to supply the Company with its requirements of bulk Argatroban throughout the term of the Mitsubishi Agreement for TBC's clinical testing and commercial sales of Argatroban in the U.S. and Canada. In the event Mitsubishi should discontinue the manufacture of Argatroban, Mitsubishi and TBC have agreed to discuss in good faith the means by which, and the party to whom, Argatroban production technology will be transferred. The transferee may be a person or entity other than TBC. At present, Mitsubishi is the only manufacturer of Argatroban. See Note 10. In exchange for the license to the Genentech, Inc, (the "Former Licensor") Argatroban technology, TBC issued the Former Licensor 285,714 shares of Common Stock during 1993 and issued an additional 214,286 shares of Common Stock on October 9, 1997, after acceptance of the filing of the first New Drug Application ("NDA") with the United States Food and Drug Administration (the "FDA") for Argatroban. On June 30, 2000, the Company issued an additional 71,429 shares of Common Stock to Genentech in conjunction with the approval of the NDA for Argatroban in patients with HIT. The value of $965,000 has been recorded as an intangible asset and is being amortized over the estimated useful life of the asset. Amortization expense recorded in 2002, 2001 and 2000 was $105,000, $105,000 and $53,000, respectively and will be approximately $105,000 annually in future periods. Additionally, on October 9, 1997, upon acceptance of the filing of the first NDA for Argatroban with the FDA, the Company granted the Former Licensor a warrant to purchase an additional 142,858 shares of Common Stock at an exercise price of $14.00 per share, subject to adjustment, which expires on October 9, 2004. TBC has also granted the Former Licensor demand and piggyback registration rights with regard to shares of Common Stock issued to the Former Licensor. During the third quarter of 1997, the Company sublicensed certain rights to Argatroban to GSK. In conjunction with this agreement, the Company agreed to make certain payments to Mitsubishi, which are included in research and development expense, to pay an additional royalty to Mitsubishi, beginning January 1, 2002 and to provide access to certain F-18 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Argatroban clinical data to Mitsubishi in certain circumstances. In certain circumstances, Mitsubishi and TBC will share equally in all upfront payments and royalties should Mitsubishi use TBC's regulatory documents and data for registration in certain territories. See Note 10. ICOS Corporation Partnership On June 6, 2000, the Company and ICOS entered into the ICOS-TBC limited partnership agreement. The partnership was established to develop and globally commercialize ET(A) receptor antagonists. As a result of its contribution of technology, ICOS-TBC paid a license fee to TBC in June 2000. In July 2001, the Company earned a milestone, as a result of the achievement of an objective defined in the partnership agreement. The license fee is being amortized over the estimated development period of the licensed technology and the Company recognized approximately $464,000, $484,000 and $307,000 of it as revenue during 2002, 2001 and 2000, respectively. The milestone payment received in July 2001 is also being amortized over the estimated development period, and the Company recognized approximately $640,000 and $333,000 of it as revenue during 2002 and 2001, respectively. For further discussion of the Company's revenue recognition policies, see Note 1 (h), Revenue Recognition, above. In January 2003, ICOS announced that it had reached a conclusion that joint development of the endothelin antagonist program by ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms pursuant to which TBC could independently continue the program. The financial terms of the transaction are subject to ongoing negotiations between the two companies. After December 31, 2002, TBC has agreed to be responsible for 100% of the expenses of ICOS-TBC. During the years ended December 31, 2002, 2001 and 2000, the Company recognized losses of $8,557,000, $9,450,000 and $3,487,000, respectively, representing the Company's proportionate share of the losses of ICOS-TBC. The losses of ICOS-TBC includes amounts billed to the partnership by the Company, all of which were included in the loss of the partnership, as follows ($ in thousands):
Year Ended December 31, ------------------------------ 2002 2001 2000 ------ ------ ------ Charges for TBC labor costs $1,090 $1,442 $1,123 Direct research and development costs 1,375 4,748 3,583 ------ ------ ------ Total billed to ICOS-TBC by the Company $2,465 $6,190 $4,706 ====== ====== ======
Summarized unaudited financial information for ICOS-TBC is as follows ($ in thousands):
FINANCIAL POSITION - DECEMBER 31: 2002 2001 --------------------------------- ---- ---- Total assets - all current............................. $ 1 $ 1 ======== ======== Total liabilities - all current, payable to partners... $ 5,235 $ 7,059 Partners' deficit...................................... (5,234) (7,058) -------- -------- $ 1 $ 1 ======== ========
Period from June 6, 2000 (inception) Year Ended Year Ended through December 31, December 31, December 31, OPERATING RESULTS: 2002 2001 2000 --------------------------------------------------- ------------ ------------ ------------- Revenue................................................ $ --- $ --- $ 547 Research and development expenses, related parties..... (16,633) (18,872) (7,515) Contribution of technology, related party.............. --- (4,000) (4,000) Administrative expenses................................ (483) (26) (8) -------- -------- ---------- Net loss............................................... $(17,116) $(22,898) $ (10,976) ======== ======== ==========
Schering-Plough Research Collaboration and License Agreement On June 30, 2000, TBC and Schering-Plough entered into a worldwide research collaboration and license agreement to discover, develop and commercialize VLA-4 antagonists. VLA-4 antagonists represent a new class of compounds that has shown promise in multiple preclinical animal models of asthma. The primary focus of the collaboration will be to discover orally available VLA-4 antagonists as treatments for asthma. F-19 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under the terms of the agreement, Schering-Plough obtains the exclusive worldwide rights to develop, manufacture and market all compounds from TBC's library of VLA-4 antagonists, as well as the rights to a second integrin antagonist. TBC will be responsible for optimizing a lead compound and additional follow-on compounds. Schering-Plough is supporting research at TBC and will be responsible for all costs associated with the worldwide product development program and commercialization of the compound. In addition to reimbursing research costs, Schering-Plough paid an upfront license fee and will pay development milestones and royalties on product sales resulting from the agreement. This upfront license fee is being amortized into revenue over the expected development period, and the Company recognized $366,000, $456,000 and $273,000 of the license fee as revenues in years 2002, 2001 and 2000, respectively. Total payments to TBC for both programs, excluding royalties, could reach $87.0 million. In June 2002, the Company achieved a milestone under the Schering-Plough agreement as a result of the nomination of an initial candidate for Schering-Plough's further development. This milestone payment will be recognized into revenue over the expected development period, and approximately $104,000 was recognized as revenue during 2002. (9) FOREIGN SUBSIDIARY During the third quarter 2000, TBC formed Revotar to conduct research and development of novel small molecule compounds and to develop and commercialize selectin antagonists. Upon formation, Revotar received certain development and commercialization rights to the Company's selectin antagonist compounds as well as rights to certain other TBC research technology. Revotar also received approximately $5 million in funding from three German venture capital funds. The Company retained ownership of approximately 55% of the outstanding common stock of Revotar and has consolidated the financial results of Revotar into TBC's consolidated financial statements. Since the development and commercialization rights contributed by the Company to Revotar had no basis for financial reporting purposes, the Company assigned no value to its contribution of intellectual property rights. The Company's equity in the originally contributed assets by the minority shareholders is included with the minority interest in Revotar on the consolidated balance sheets at December 31, 2002 and 2001. The minority interest in Revotar at December 31, 2002 and December 31, 2001, was $2,608,000 and $3,833,000, respectively. The Company's consolidated net loss for the years ended December 31, 2002, 2001 and 2000 was reduced $1,225,000, $749,000 and $209,000, respectively, by the Revotar minority shareholders' approximately 45% interest in Revotar's losses. (10) COMMERCIALIZATION AGREEMENT In connection with TBC's development and commercialization of Argatroban, in August 1997, TBC entered into a Product Development, License and CoPromotion Agreement with GSK (the "GSK Agreement") whereby GSK was granted exclusive rights to work with TBC in the development and commercialization of Argatroban in the U.S. and Canada for specified indications. GSK paid $8.5 million in upfront license fees during August 1997, a $5 million milestone payment in October 1997, and a $7.5 million milestone payment in June 2000. Additional milestone payments may be earned upon the clinical development and FDA approval for the acute myocardial infarction indication. Future milestone payments for the acute myocardial infarction indication are subject to GSK's agreement to market Argatroban for such indication. The parties have also formed a joint development committee to analyze the development of additional Argatroban indications to be funded 60% by GSK except for certain Phase IV trials which shall be funded entirely by GSK. At this time, GSK has no plans to conduct development work for the acute myocardial infarction and stroke indications. GSK has the exclusive right to commercialize all products arising out of the collaboration, subject to the obligation to pay royalties on net sales to TBC and to the rights of TBC to co-promote these products through its own sales force in certain circumstances. TBC will retain the rights to any indications which GSK determines it does not wish to pursue (such as ischemic stroke), subject to the requirement that TBC must use its own sales force to commercialize any such indications. Any indications which TBC elects not to pursue will be returned to Mitsubishi. In conjunction with the GSK Agreement, a consulting firm involved in negotiations related to the agreement will receive a percentage of all consideration received by TBC as a result of the agreement. At present, Mitsubishi is the only manufacturer of Argatroban, and has entered into the Mitsubishi Supply Agreement with GSK to supply Argatroban in bulk in order to meet GSK and TBC's needs under the GSK Agreement. Should Mitsubishi fail during any consecutive nine-month period to supply GSK at least 80% of its requirements, and such requirements cannot be satisfied by existing inventories, the Mitsubishi Supply Agreement provides for the nonexclusive transfer of the production technology to GSK. If GSK cannot commence manufacturing of Argatroban or alternate sources of supply are unavailable or uneconomic, the Company's results of operations would be materially and adversely affected. F-20 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The GSK Agreement generally terminates on a country by country basis upon the earlier of the termination of TBC's rights under the Mitsubishi Agreement, the expiration of applicable patent rights or, in the case of royalty payments, the commencement of substantial third-party competition. GSK also has the right to terminate the agreement on a country by country basis by giving TBC at least three months written notice at any time before GSK first markets products in that country based on a reasonable determination by GSK that the commercial profile of the product in question would not justify continued development in that country. GSK has similar rights to terminate the GSK Agreement on a country by country basis after marketing has commenced. In addition, either party may terminate the GSK Agreement on 60 days notice if the other party defaults in its obligations under the agreement, declares bankruptcy or is insolvent. In connection with the execution of the GSK Agreement, GSK purchased 176,992 shares of TBC's Common Stock for $1.0 million and additional 400,000 shares of Common Stock for $2.0 million in connection with the secondary public offering, which closed on October 1, 1997. (11) 401(k) PLAN The Company adopted a 401(k) plan which became effective on September 1, 1993. Under the plan, all employees with three months of service are eligible to participate in the plan and may contribute up to 15 percent of their compensation, with a maximum of $11,000 per employee in 2002. The Compensation Committee of the Board of Directors approved an employer matching contribution of $0.50 on the dollar of employee contributions up to 6% of salaries and the 401(k) plan was amended effective January 1, 2001. The Compensation Committee approved matching contributions on the catch-up contribution made by employees 50 years of age or older by the end of the plan year and the 401(k) plan was amended effective January 1, 2002. Total cost of the employer match was $197,000 and $158,000 in 2002 and 2001, respectively. (12) COMMITMENTS AND CONTINGENCIES (a) Employment agreements The Company has entered into employment agreements with certain officers and key employees. Additionally, the Company has signed agreements with nine of its officers to provide certain benefits in the event of a "change of control" as defined in these agreements and the occurrence of certain other events. The agreements provide for a lump-sum payment in cash equal to eighteen months to three years of annual base salary and annual bonus, if any. The base salary and annual bonus portion of the agreements would aggregate approximately $4.9 million at the current rate of compensation. In addition, the agreements provide for gross-up for certain taxes on the lump-sum payment, continuation of certain insurance and other benefits for periods of eighteen months to three years and reimbursement of certain legal expenses in conjunction with the agreements. (b) Lease Agreements In April 2002, the Company leased a facility in Bellaire, Texas, that houses the Company's administrative, marketing, clinical development and regulatory staff. Under the terms of the lease, which expires on July 31, 2005, the Company is obligated to pay approximately $281,000 annually for base rent, related building services and parking. The Company has the right to extend the term of this lease agreement under the same terms and conditions to December 31, 2005, upon notice to the lessor. The Company could be subject to additional charges for related building services in years 2003 and thereafter, based upon increases in actual building costs, not to exceed six percent annually. The Company's lease on its laboratory facility in Houston, Texas expires on December 31, 2005 with an annual base rent of approximately $815,000. The Company also leases parking spaces at the facility established rate charged, which currently approximates $43,000 per year. The lease also includes a provision for the Company to pay certain additional charges to obtain utilities and building services during off-business hours. Currently, the amount of these charges is approximately $288,000 per annum, payable in monthly installments. These charges are subject to annual adjustments based on the local consumer price index. In October 2001, Revotar, the Company's majority-owned subsidiary, leased an 8,800 square foot office and laboratory facility in Berlin, Germany. The lease expires on September 30, 2006. Under the terms of the lease, the Company is obligated to pay $137,000 in year 2003 for rent and parking. Under the terms of the lease, base rent will increase at three F-21 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS percent per year on the anniversary date of the lease. In addition to the base rent and parking, the Company is obligated to pay $49,000 in year 2003 for related building services. The charge for related building services is subject to annual adjustments, based upon actual increases in costs, up to six percent per year. For the years ended December 31, 2002, 2001 and 2000, rent and related building services totaled approximately $1,600,000, $1,200,000 and $1,100,000, respectively. At December 31, 2002, the Company's minimum aggregate commitments under long-term, non-cancelable operating leases are as follows ($ in thousands): 2003..................................... $ 1,616 2004..................................... 1,620 2005..................................... 1,506 2006..................................... 131 ------- $ 4,873 =======
(c) Foreign Currency Exchange Risk The Company is exposed to market risk primarily from changes in foreign currency exchange rates. The Company has a majority-owned subsidiary in Germany and consolidates the results of operations into its consolidated financial results. Although not significant to date, the Company's reported expenses and cash flows from this subsidiary are exposed to changing exchange rates. The Company had an intercompany receivable from our German subsidiary at December 31, 2002; however this amount was denominated in U.S. dollars and was not exposed to exchange risk. The Company contracts with entities in other areas outside the U.S. that are denominated in a foreign currency. To date, the currencies of these countries have not fluctuated materially. Through December 31, 2002, management has not deemed it cost effective to engage in a program of hedging the effect of foreign currency fluctuations on the Company's operating results using derivative financial instruments. During 2003, Revotar engaged in a program of hedging the effect of foreign currency fluctuations on approximately $1.6 million in future loan payments from us. (d) Other Contingencies Like other biopharmaceutical companies, the Company is subject to other contingencies, including legal proceedings and claims arising out of its business that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, and product liability. The Company may be involved in legal actions from time to time. The Company has used various substances in its research and development which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers' compensation statutes, rules, regulations and case law is unclear. The Company is not a party to any legal actions. F-22 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results of operations (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 2002 -------------------------------------------------------------- QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- Total revenues $ 2,593 $ 2,626 $ 2,405 $ 2,809 Operating loss $(7,774) $(7,057) $(6,760) $(5,575) Net loss $(6,750) $(6,221) $(5,840) $(4,658) ======= ======= ======= ======= Net loss per share data: Basic and diluted $ (0.15) $ (0.14) $ (0.13) $ (0.11)
YEAR ENDED DECEMBER 31, 2001 -------------------------------------------------------------- QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- Total revenues $ 2,269 $ 2,463 $ 1,704 $ 2,481 Operating loss $(4,224) $(6,107) $(5,707) $(9,089) Net loss $(2,510) $(4,539) $(4,289) $(7,804) ======= ======= ======= ======= Net loss per share data: Basic and diluted $ (0.06) $ (0.10) $ (0.10) $ (0.18)
Because of the method used in calculating per share data, the quarterly per share data will not necessarily total to the per share data as computed for the year. (14) SUBSEQUENT EVENTS In January 2003, the Company implemented a restructuring plan to reduce its annual fixed operating expenses. The Company eliminated approximately 21 positions, primarily in its research area, and cancelled approximately 15 open positions. The Company will incur a charge of approximately $600,000 in 2003 related to the implementation of its restructuring plan. On March 21, 2003, Nasdaq informed us that for the last 30 consecutive trading days, the bid price of our common stock has closed below the minimum $1.00 per share requirement for continued inclusion in The Nasdaq National Market. Therefore, in accordance with Nasdaq Rules, we will be provided 180 calendar days, or until September 17, 2003, to regain compliance. If, at any time before September 17, 2003, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, Nasdaq will provide written notification that we have achieved compliance with this rule. If compliance with this rule cannot be demonstrated by September 17, 2003, the Nasdaq will provide written notification that our securities will be delisted. At that time, we may appeal this determination to a Listing Qualifications Panel or may apply to transfer our securities to The Nasdaq Small Cap Market. F-23 INDEX TO EXHIBITS
EXHIBIT NO DESCRIPTION OF EXHIBIT ---------- ---------------------- 3.1 -- Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10 (Commission File No. 0-20117) effective June 26, 1992 (as amended)) 3.2 -- Amendment to the Certificate of Incorporation dated November 30, 1993 (incorporated by reference to Exhibit 3.4 to the Company's Form 10-Q (Commission File No. 0-20117) filed with the Commission on November 14, 1994) 3.3 -- Amendment to the Certificate of Incorporation dated May 20, 1994 (incorporated by reference to Exhibit 3.5 to the Company's Form 10-Q (Commission File No. 0-20117) filed with the Commission on November 14, 1994) 3.4 -- Certificate of Amendment of Certificate of Incorporation dated May 3, 1996 (incorporated by reference to Exhibit 3.6 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1996) 3.5 -- Amended and Restated By-laws of Texas Biotechnology Corporation adopted September 6, 1996 (incorporated by reference to Exhibit 3.7 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended September 30, 1996) 3.6 -- Amendment to Article II of By-laws adopted June 29, 2000 (incorporated by reference to Exhibit 3.8 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 3.7 -- Certificate of Designations, Preferences, Limitations and Relative Rights of The Series A Junior Participating Preferred Stock of Texas Biotechnology Corporation (incorporated by reference to Exhibit 2 to the Company's Form 8-A (Commission File No. 0-20117) with the commission on January 3, 2002) 4.1 -- Rights Agreement, dated as of January 2, 2002, between Texas Biotechnology Corporation and The Bank of New York, as Rights Agent, including exhibits thereto. (incorporated by reference to Exhibit 1 to the Company's Form 8-A (Commission File No. 0-20117) with the commission on January 3, 2002) 4.2 -- Form of Rights Certificate (incorporated by reference to Exhibit 3 to the Company's Form 8-A (Commission File No. 0-20117) with the commission on January 3, 2002) 10.1 -- Consulting Agreement with John M. Pietruski dated January 1, 1992 (incorporated by reference to Exhibit 10.6 to the Company's Form 10 (Commission File No. 0-20117) effective June 26, 1992 (as amended)) 10.2+ -- Sixth amendment dated January 1, 2003 to Consulting Agreement with John M. Pietruski dated January 1, 1992. 10.3 -- Employment Agreement with David B. McWilliams dated July 15, 1992 (incorporated by reference to Exhibit 19.1 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1992) 10.4 -- Retirement Agreement between Texas Biotechnology Corporation and David B. McWilliams dated March 21, 2002 (incorporated by reference to Exhibit 10.28 to the Company's Form 10-K (Commission File No. 1-12574) for the year ended December 31, 2001 with the commission on March 29, 2002). 10.5+ -- Termination Agreement between Texas Biotechnology Corporation and Bruce D. Given, M.D. dated March 21, 2003. 10.6+ -- Termination Agreement between Texas Biotechnology Corporation and Richard A. F. Dixon dated March 17, 2003. 10.7+ -- Termination Agreement between Texas Biotechnology Corporation and Stephen L. Mueller dated March 20, 2003. 10.8+ -- Form of Termination Agreement between Texas Biotechnology Corporation and Tom Brock, Philip Brown, Heather Giles, Pam Mabry, Dan Thompson, and Patrick Ward. 10.9 -- Form of Indemnification Agreement between Texas Biotechnology Corporation and its officers and directors dated March 12, 2002 (incorporated by reference to Exhibit 10.27 to the Company's Form 10-K (Commission File No. 1-12574) for the year ended December 31, 2001 with the commission on March 29, 2002).
10.10 -- Amended and Restated 1990 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.33 to the Company's Form 10-K (Commission File No. 0-20117) for the year ended December 31, 1994) 10.11 -- Amended and Restated 1992 Incentive Stock Option Plan (as of March 3, 1995) (incorporated by reference to Exhibit 10.34 to the Company's Form 10-K (Commission File No. 0-20117) for the year ended December 31, 1994) 10.12 -- Amended and Restated Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.39 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1995) 10.13 -- 1995 Stock Option Plan (incorporated by reference to Exhibit 10.40 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1995) 10.14 -- Amendment to the 1995 Stock Option Plan of Texas Biotechnology Corporation dated March 4, 1997 (incorporated by reference to Exhibit 10.62 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1997 with the Commission on August 14, 1997) 10.15 -- Amended and Restated 1995 Non-Employee Director Stock Option Plan (as amended by the Board of Directors on June 30, 1996) (incorporated by reference to Exhibit 10.55 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1996) 10.16 -- Amendment to the 1995 Non-Employee Director Stock Option Plan of Texas Biotechnology Corporation dated March 4, 1997 (incorporated by reference to Exhibit 10.63 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1997 with the Commission on August 14, 1997) 10.17 -- Amendment to Amended and Restated 1995 Non-Employee Director Stock Option Plan, dated March 6, 2000 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Commission File No. 333-41864) with the commission on July 20, 2000) 10.18 -- Texas Biotechnology Corporation 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.71 to the Company's Form 10-Q (Commission File No. 1-12574) for the Quarter ended March 31, 1999 with the Commission on May 13, 1999) 10.19 -- Amendment to the 1999 Stock Incentive Plan adopted on March 13, 2001 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Commission File No. 333-72468) with the commission on October 30, 2001) 10.20 -- Lease Agreement dated, February 24, 1995 between Texas Biotechnology Corporation and Doctors Center, Inc. (incorporated by reference to Exhibit 10.31 to the Company's Form 10-K (Commission File No. 0-20117) for the year ended December 31, 1994) 10.21+ -- Third Amendment to Lease Agreement dated January 1, 2003 between Texas Biotechnology Corporation and the Board of Regents of The University of Texas System. 10.22+ -- Lease Agreement dated February 20, 2002 between Texas Biotechnology Corporation and FRM West Loop Associates #6, LTD. 10.23* -- Sublicense and License Agreement dated May 27, 1993 between Company and Genentech, Inc., together with exhibits (incorporated by reference to Exhibit 10.17 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1993 and incorporated by reference to Exhibit 10.17 to the Company's Form 10-Q/A-1 (Commission File No. 0-20117) for the quarter ended June 30, 1993) 10.24* -- Stock Agreement dated May 27, 1993 between the Company and Genentech, Inc. (incorporated by reference to Exhibit 10.18 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1993) 10.25 -- Agreement between Mitsubishi Chemical Corporation, Texas Biotechnology Corporation and SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission on August 25, 1997) 10.26* -- Product Development License and Co-Promotion Agreement between Texas Biotechnology Corporation and SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit 99.2 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission on August 25, 1997) 10.27* -- Common Stock Purchase Agreement between Texas Biotechnology Corporation and
SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit 99.3 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission on August 25, 1997) 10.28*+ -- Amended and Restated License and Research Development Agreement dated January 24, 2003 between Revotar Biopharmaceuticals AG and Texas Biotechnology Corporation. 10.29* -- Agreement of Limited Partnership of ICOS-Texas Biotechnology L.P. among ICOS-ET-LP LLC and Texas Biotechnology Corporation, as Limited Partners, and ICOS-ET-GP LLC and TBC-ET, Inc., as General Partners dated June 6, 2000. (incorporated by reference to Exhibit 99.4 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 10.30* -- Endothelin License Agreement by and between Texas Biotechnology Corporation and ICOS-Texas Biotechnology L.P. dated June 6, 2000. (incorporated by reference to Exhibit 99.5 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 10.31* -- Formation and Performance Agreement by and between ICOS Corporation and Texas Biotechnology Corporation dated June 6, 2000. (incorporated by reference to Exhibit 99.6 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 10.32* -- Research and Development Service Agreement by and between ICOS Corporation, Texas Biotechnology Corporation and ICOS-Texas Biotechnology L.P. dated June 6, 2000. (incorporated by reference to Exhibit 99.7 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 10.33* -- Research Collaboration and License Agreement by and between Texas Biotechnology Corporation and Schering-Plough LTD. dated June 30, 2000. (incorporated by reference to Exhibit 99.8 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 10.34* -- Research Collaboration and License Agreement by and between Texas Biotechnology Corporation and Schering Corporation dated June 30, 2000. (incorporated by reference to Exhibit 99.9 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 21.1+ -- Subsidiaries of the Registrant 23.1+ -- Independent Auditors' Consent of KPMG LLP, Seattle, Washington 23.2+ -- Independent Auditors' Consent of KPMG LLP, Houston, Texas 99.1+ -- Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002. 99.2+ -- Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------- * The Company has omitted certain portions of these agreements in reliance on Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. + Filed herewith EX-10.2 3 h03454exv10w2.txt 6TH AMENDMENT TO COUSULTING AGREEMENT Exhibit 10.2 SIXTH AMENDMENT TO CONSULTING AGREEMENT This SIXTH AMENDMENT TO CONSULTING AGREEMENT (the "Amendment") is made as of the 1st day of January 2003 (the "Effective Date"), by and between JOHN M. PIETRUSKI, an individual residing at 27 Paddock Lane, Colts Neck, New Jersey 07722 ("Consultant"), and TEXAS BIOTECHNOLOGY CORPORATION, a Delaware corporation located at 7000 Fannin Street, 20th Floor, Houston, Texas 77030 (the "Corporation"). WHEREAS, the Corporation and Consultant have entered into that certain Consulting Agreement, dated January 1, 1992 (the "Agreement"), as set forth in Exhibit "A" attached hereto and incorporated herein by reference; and WHEREAS, pursuant to the Agreement, the Corporation has retained Consultant to provide consulting services to the Corporation with respect to corporate governance, business development and other such matters; and WHEREAS, the Corporation and Consultant desire to amend the Agreement as herein set forth. NOW, THEREFORE, for and in consideration of the foregoing and of the mutual covenants contained herein, the parties hereto agree as follows: 1. Definitions. If not otherwise defined herein, all capitalized terms used herein shall have their respective meaning assigned to them in the Agreement. 2. Amendment to Section 2. Effective as of the date hereof, Section 2 of the Agreement is hereby amended by deleting paragraph (a) in its entirety and substituting the following in lieu thereof: "(a) Consultant's retention under this agreement shall commence on the date hereof (the "Commencement Date") and shall end on the earliest of: (i) the death or disability (as defined herein) of Consultant; (ii) the termination of Consultant's retention by the Corporation for cause (as defined herein); or (iii) two years after the Effective Date. After the expiration of such two-year period, this Agreement may be renewed for additional periods on all the remaining terms and conditions set forth herein upon mutual agreement of Consultant and the Corporation." 3. Amendment to Section 3. Effective as of October 1, 2002, Section 3 of this Agreement is hereby amended by amending the fee rate to be $60,000 per annum. 4. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement are ratified and confirmed and shall continue in full force and effect. Corporation and Consultant agree that the Agreement as amended shall continue to be legal, valid, binding and enforceable in accordance with its terms. 5. Except as expressly modified or amended hereby, the terms and provisions of the Agreement shall remain in force and effect in accordance with the terms hereof; provided, however, that from and after the date hereof any reference to the Agreement shall be deemed and construed as meaning the Agreement as amended and modified hereby. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first written above. CONSULTANT: /s/ John M. Pietruski ------------------------------------------- John M. Pietruski CORPORATION: TEXAS BIOTECHNOLOGY CORPORATION /s/ Bruce D. Given, M.D. ------------------------------------------- Bruce D. Given, M.D. President and Chief Executive Officer EX-10.5 4 h03454exv10w5.txt TERMINATION AGREEMENT - BRUCE D. GIVEN Exhibit 10.5 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (this "Agreement") is made and entered into this 21st day of March, 2003, by and between Texas Biotechnology Corporation, a Delaware corporation having its principal executive office at 7000 Fannin, Houston, Texas 77030 (hereinafter referred to as the "Company"), and Bruce D. Given, M.D. (hereinafter referred to as the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Executive in an executive capacity and the Executive desires to enter the Company's employ; and WHEREAS, the Company and the Executive entered into an Executive Employment Agreement dated March 21, 2002, which the parties desire to replace with this Agreement. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms have the meanings prescribed below: 1999 Plan shall have the meaning assigned thereto in Section 4.8(c) hereof. AAA shall have the meaning assigned thereto in Section 13.13 hereof. Affiliate is used in this Agreement to define a relationship to a person or entity and means a person or entity who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such person or entity. Agreement shall have the meaning assigned thereto in the preamble. Annual Bonus shall have the meaning assigned thereto in Section 4.2 hereof. Base Salary shall have the meaning assigned thereto in Section 4.1 hereof. Beneficial Owner shall have the meaning assigned thereto in Rule 13(d)-3 under the Exchange Act; provided, however, and without limitation, that any individual, corporation, partnership, group, association or other person or entity that has the right to acquire any Voting Stock at any time in the future, whether such right is (a) contingent or absolute or (b) exercisable presently or at any time in the future, pursuant to any agreement or understanding or upon the exercise or conversion of rights, options or warrants, or otherwise, shall be the Beneficial Owner of such Voting Stock. Board means the Board of Directors of the Company. Bonus Payment shall have the meaning assigned thereto in Section 11.2 hereof. Cause shall have the meaning assigned thereto in Section 5.3 hereof. Change in Control of the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: (a) any "person" (as defined in section 3(a)(9) of the Exchange Act, and as such term is modified in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this definition) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holder of securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following 2 which, in the judgment of the Compensation Committee of the Board, the holders of the Common Stock, immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. Except during a Potential Change in Control of the Company, the Board may (i) deem any other corporate event affecting the Company (other than those described in clauses (a)-(d) of this definition) to be a "Change in Control," and (ii) may amend this definition of "Change in Control" in connection with an identical amendment being made to termination agreements entered into by the Company and all of its senior executive officers. Code means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated by the Internal Revenue Service thereunder, all as in effect from time to time during the Employment Period. Common Stock means the Company's common stock, par value $.05 per share. Company means Texas Biotechnology Corporation, a Delaware corporation, the principal executive office of which is located at 7000 Fannin, Houston, Texas 77030. Competing Business means any individual, business, firm, company, partnership, joint venture, organization, or other entity that markets or has entered clinical development of any product addressing the same disease target as a product discovered by, or licensed to, the Company which is either (i) in Phase III of clinical development, (ii) pending approval at U.S. Food & Drug Administration or (iii) marketed by the Company or its licensee. Confidential Information shall have the meaning assigned thereto in Section 8.2 hereof. Date of Termination means the earliest to occur of (i) the date of the Executive's death or (ii) the date of receipt of the Notice of Termination, or such later date as may be prescribed in the Notice of Termination in accordance with Section 5.6 hereof. Disability means an illness or other disability that prevents the Executive from discharging his responsibilities under this Agreement for a period of 180 consecutive calendar days, or an aggregate of 180 calendar days in any calendar year, during the Employment Period, all as determined in good faith by the Board (or a committee thereof). Effective Date means March 25, 2002. Employment Period shall have the meaning assigned thereto in Section 3 hereof. Executive means Bruce D. Given, M.D., an individual residing in Pearland, Texas. Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder, all as in effect from time to time during the Employment Period. Excise Taxes shall have the meaning assigned thereto in Section 11.1 hereof. 3 Good Reason shall have the meaning assigned thereto in Section 5.5 hereof. Initial Term shall have the meaning assigned thereto in Section 3 hereof. Losses shall have the meaning assigned thereto in Section 11.8 hereof. Material Injury shall have the meaning assigned thereto in Section 5.3 hereof. Notice of Termination shall have the meaning assigned thereto in Section 5.6 hereof. Options shall have the meaning assigned thereto in Section 4.8(a) hereof. Potential Change in Control of the Company shall be deemed to have occurred if (a) the Company enters into an agreement the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or consider taking action which if consummated would constitute a Change in Control or (c) the Board adopts a resolution to the effect that a potential Change in Control of the Company has occurred. Proprietary Agreement shall have the meaning assigned thereto in Section 10.4 hereof. Rules shall have the meaning assigned thereto in Section 13.13 hereof. Successor Provisions shall have the meaning assigned thereto in Section 11.5 hereof. Tax Consultant shall have the meaning assigned thereto in Section 11.6 hereof. Vacation Time shall have the meaning assigned thereto in Section 4.3 hereof. Voting Stock means all outstanding shares of capital stock of the Company entitled to vote generally in an election of directors; provided, however, that if the Company has shares of Voting Stock entitled to more or less than one vote per share, each reference to a proportion of the issued and outstanding shares of Voting Stock shall be deemed to refer to the proportion of the aggregate votes entitled to be cast by the issued and outstanding shares of Voting Stock. Without Cause shall have the meaning assigned thereto in Section 5.4 hereof. 2. General Duties of the Company and the Executive. 2.1 (a) The Company agrees to employ the Executive, and the Executive agrees to accept employment by the Company and to serve the Company as its President and Chief Executive Officer. The Executive will also be elected as a member of the Board during the Employment Period. The Executive shall report to and be subject to the direction of the Board. The Executive shall have the authority, duties and responsibilities that are normally associated with and inherent in the executive capacity in which the Executive will be performing, and shall have such other or additional duties which are not inconsistent with the Executive's position, as may from time to time be reasonably assigned to the Executive by the Board (or a committee 4 thereof). While employed hereunder, the Executive shall devote full time and attention during normal business hours to the affairs of the Company and use his best efforts to perform faithfully and efficiently his duties and responsibilities. The Executive agrees to cooperate fully with the Board, and other executive officers of the Company, and not to engage in any activity which conflicts with or interferes with the performance of his duties hereunder. During the Employment Period, the Executive shall devote his best efforts and skills to the business and interests of the Company, do his utmost to further enhance and develop the Company's best interests and welfare, and endeavor to improve his ability and knowledge of the Company's business, in an effort to increase the value of his services for the mutual benefit of the parties hereto. During the Employment Period, it shall not be a violation of this Agreement for the Executive (i) serve on any corporate board or committee thereof with the approval of the Board, (ii) to serve on any civic, or charitable boards or committees (except for boards or committees of a Competing Business unless approved by the Board), (iii) deliver lectures, fulfill teaching or speaking engagements, (iv) testify as a witness in litigation involving a former employer or (v) manage personal investments; provided, however, any such activities must not materially interfere with performance of the Executive's responsibilities under this Agreement. (b) The Executive represents and covenants to the Company that he is not subject or a party to any employment agreement, noncompetition covenant, nondisclosure agreement, or any similar agreement or covenant that would prohibit the Executive from executing this Agreement and fully performing his duties and responsibilities hereunder, or would in any manner, directly or indirectly, limit or affect the duties and responsibilities that may now or in the future be assigned to the Executive hereunder. The Executive further represents and warrants that he is not presently subject to any legal actions, claims or administrative proceedings, including bankruptcy proceedings or IRS audits or proceedings, which would affect his ability to perform his responsibilities hereunder. The Executive and the Company agree that they have each reviewed and discussed with each other the Ortho-Clinical Diagnostics agreement dated January 8, 2000 signed by the Executive, and that the execution and performance of this Agreement by the Executive will not, to the best of their respective knowledge, violate or conflict with the Ortho-Clinical Diagnostics Agreement. 2.2 The Executive agrees and acknowledges that he owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to do no act and to make no statement, oral or written, which would injure the Company's business, its interests or its reputation. 2.3 The Executive agrees to execute and comply at all times during the Employment Period with all applicable policies, rules and regulations of the Company, including, without limitation, the Company's business ethics policy and the Company's policy regarding trading in the Common Stock, as each is in effect from time to time during the Employment Period. 2.4 The Executive will, as soon as possible, but in any event within six months of March 21, 2002, relocate his permanent residence to Houston, Texas. 3. Term. 5 Unless sooner terminated pursuant to other provisions hereof, the Executive's period of employment under this Agreement shall be a period of one year beginning on the Effective Date (the "Initial Term"). After the expiration of the Initial Term, the Executive's period of employment under this Agreement shall be automatically renewed for successive one-year terms on each anniversary of the Effective Date (the Initial Term and any and all renewals thereof are referred to herein collectively as the "Employment Period"), unless written notice of nonrenewal is delivered by one party to the other at least 60 days before the end of any such one-year renewal term. 4. Compensation and Benefits. 4.1 Base Salary. As compensation for services to the Company, the Company shall pay to the Executive from the Effective Date until the Date of Termination an annual base salary of $325,000 (the "Base Salary"). The Board (or a committee thereof) will conduct an annual review of the Executive's compensation and, in its discretion, may increase the Base Salary based upon relevant circumstances. The Executive's first annual review will occur on or before March 31, 2003, and any increases in compensation provided by the Board from that review will be effective as of March 1, 2003. The Base Salary shall be payable in equal semi-monthly installments or in accordance with the Company's established policy, subject only to such payroll and withholding deductions as may be required by law and other deductions (consistent with Company policy for all employees) relating to the Executive's election to participate in the Company's insurance and other employee benefit plans. The Executive will receive no additional compensation for serving as a director. 4.2 Bonus. In addition to the Base Salary, the Executive shall be awarded, for each fiscal year until the Date of Termination, an annual bonus to be determined by the Board (or a committee thereof), in its sole discretion (the "Annual Bonus"). Each such Annual Bonus shall be payable at a time to be determined by the Board (or a committee thereof) in its sole discretion. The Company's Incentive Program for senior executive officers, as presently in effect and which is subject to change at the sole discretion of the Board (or a committee thereof), is attached hereto as Exhibit A. The Company agrees that the Executive's Annual Bonus for calendar year 2002 will be a minimum of $244,000. 4.3 Vacation. Until the Date of Termination, the Executive shall be entitled to four weeks paid vacation during each one-year period commencing on the Effective Date (the "Vacation Time"). The use of any Vacation Time not taken during the applicable one-year period and will be subject to the Company's vacation policy as in effect from time to time. 4.4 Incentive, Savings and Retirement Plans. Until the Date of Termination, the Executive shall be eligible to participate in and shall receive all benefits under all executive incentive, savings and retirement plans and programs currently maintained or hereinafter established by the Company for the benefit of its senior executive officers and/or employees. 4.5 Benefit Plans. Until the Date of Termination, the Executive and/or the Executive's family, as the case may be, shall be eligible to participate in and shall receive all benefits under each welfare benefit plan of the Company currently maintained or hereinafter established by the Company for the benefit of its employees. Such welfare benefit 6 plans may include, without limitation, medical, dental, disability, group life, accidental death and travel accident insurance plans and programs. The Company shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any such employee benefit program or plan, so long as such actions are similarly applicable to covered employees generally. In addition, during the Employment Period, the Company will provide the Executive at no cost, a term life insurance policy in the amount of $500,000, assuming satisfactory evidence of insurability of the Executive. Upon request, the Executive agrees to take any physical exams, and to provide such information, which are reasonably necessary or appropriate to secure or maintain such benefits and insurance coverage. 4.6 Reimbursement of Expenses. The Executive may from time to time until the Date of Termination incur various business expenses customarily incurred by persons holding positions of like responsibility, including, without limitation, travel, entertainment and similar expenses incurred for the benefit of the Company. Subject to the Executive complying with the Company's policy regarding the reimbursement of such expenses as in effect from time to time during the Employment Period, which does not necessarily allow reimbursement of all such expenses, the Company shall reimburse the Executive for such expenses from time to time, at the Executive's request, and the Executive shall account to the Company for all such expenses. 4.7 Relocation Expenses. The Company will provide for reimbursement of moving and relocation expenses of the Executive and his family as set forth on Exhibit B attached hereto. 4.8 Stock Options/Stock Grants. (a) Effective as of March 21, 2002 (the date that the Executive was elected as a director of the Company), the Company granted to the Executive options to acquire 425,000 shares of Common Stock, with the exercise price to be the closing sales price for the Common Stock on The Nasdaq National Market on the trading day immediately preceding the date of his election as a director. These options provide for vesting of one-third of the shares covered by the options on each of the first, second and third anniversaries of the date of grant. Effective as of March 21, 2002, the Company also granted to the Executive additional options covering 125,000 shares of Common Stock. Because of the grant of these 125,000 options, the Executive will not be eligible for any option grants in 2003 as part of his annual compensation review of his performance in 2002, but will be eligible for any new stock option grants in 2004 as part of his annual compensation review of his performance in 2003. The 125,000 additional options granted pursuant to the preceding sentence will have an exercise price equal to the closing price on The Nasdaq National Stock Market on the trading day immediately preceding the Effective Date. These 125,000 options will also provide for vesting of one-third of the shares covered by these options on each of the second, third and fourth anniversaries of March 21, 2002. Any options granted under this Section 4.8(a) (the "Options") will be granted pursuant to, and will be governed by the terms of, the Company's incentive stock plans as then in effect, and the provisions of this Agreement (including Section 6.3(e) hereof). At the request of the Executive, the Company will cause the Options covering 125,000 shares to be granted as Incentive Stock Options under the Code, to the extent permitted, and subject to the terms provided under, the 7 Code. All Options will provide that they will not continue to vest after the breach (and failure to cure such breach as provided for therein) by the Executive of any of Sections 7, 8, 9, 10 or 12 of this Agreement. (b) The Company has granted the Executive ten shares of Common Stock for each one share of Common Stock the Executive bought from the Company or on the open market within 30 days after March 21, 2002 , up to a maximum grant amount of 50,000 shares. These shares granted by the Company were issued as of March 21, 2002 as "restricted stock" under the Company's incentive stock plans, and will vest on the third anniversary of May 21, 2002. Prior to vesting, these shares will be held by the Company and will bear the restrictive legends set forth in, and be governed by the terms of, the Company's incentive stock plans. This restricted stock will not be transferable or saleable until vested, and all unvested restricted stock will be forfeited and cancelled by the Company if the Executive terminates his employment for any reason or is terminated for Cause by the Company prior to the third anniversary of their grant. Upon death or Disability of the Executive, the restricted stock will vest in full. Upon the termination of Executive by the Company Without Cause prior to the third anniversary of their grant, the restricted shares will vest on a pro rata basis based on how much of the three year vesting period has expired prior to the Executive's termination Without Cause. All unvested shares of restricted stock will provide that they will be forfeited after the breach (and failure to cure such breach as provided for therein) by the Executive of any of Sections 7, 8, 9, 10 and 12 of this Agreement. Upon the vesting of these shares of restricted stock, the Company will cause the removal of the restrictive legends on the certificates representing such shares that relate to the vesting conditions described in this Section 4.8(b). (c) The Company will cause the Options and restricted stock to be issued under the Company's 1999 Incentive Stock Plan (the "1999 Plan") by the execution and delivery of agreements containing the terms and conditions set forth in this Agreement, and the other terms and conditions of the 1999 Plan that are not inconsistent herewith. The Compensation Committee has, pursuant to the 1999 Plan, authorized such agreements to be issued on the terms set forth herein pursuant to the authority granted to the Compensation Committee to alter appropriate terms and conditions of the 1999 Plan when granting incentive awards under the 1999 Plan. 4.9 Legal Expenses. The Company will reimburse the Executive for his reasonable legal expenses incurred in connection with the negotiation and execution of that certain Executive Employment Agreement dated as of March 21, 2002, between the Executive and the Company. 4.10 Indemnification Agreement. (a) The Company will enter into with the Executive an Indemnification Agreement regarding indemnification of the Executive, in the form attached hereto as Exhibit C. (b) The Company will also cause the Executive to be covered by its director and officer insurance policies as they are in effect from time to time. A summary of the Company's current director and officer insurance policy is attached hereto as Exhibit D. 8 The Company also represents and warrants that it is not presently subject to any legal actions, claims or administrative proceedings other than routine matters arising in the ordinary course of its business and the matter described on Exhibit D attached hereto, and to the best knowledge of the Company, no such legal actions, claims or administrative proceedings are threatened which would cause a Material Injury. 5. Termination. 5.1 Death. This Agreement shall terminate automatically upon the death of the Executive. 5.2 Disability. The Company may terminate this Agreement, upon written notice to the Executive delivered in accordance with Sections 5.6 and 13.1 hereof, upon the Disability of the Executive. 5.3 Cause. The Company may terminate this Agreement, upon written notice to the Executive delivered in accordance with Sections 5.6 and 13.1 hereof, for Cause. For purposes of this definition of "Cause," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, subject to the notice provisions set forth below, "Cause" means (i) the conviction (or plea of nolo contendere or equivalent plea) of the Executive of a felony (which, through lapse of time or otherwise, is not subject to appeal), (ii) the Executive having engaged in intentional misconduct causing a violation by the Company of any state or federal laws which results in a material injury to the business, condition (financial or otherwise), results of operations or prospects of the Company as determined in good faith by the Board or a committee thereof (a "Material Injury"), (iii) the Executive having engaged in a theft of corporate funds or corporate assets of the Company or in an act of fraud upon the Company, (iv) an act of personal dishonesty taken by the Executive that was intended to result in personal enrichment of the Executive at the expense of the Company, (v) the Executive's refusal, without proper legal cause, to perform his duties and responsibilities as contemplated in this Agreement or any other breach by the Executive of this Agreement, and (vi) the Executive's engaging in activities which would constitute a breach of the Company's business ethics policy, the Company's policies regarding trading in the Common Stock or any other applicable policies, rules or regulations of the Company which results in a Material Injury. If the Company desires to terminate the Executive for Cause pursuant to the provisions of this Section 5.3, the Executive will be given a written notice by the Board of the facts and circumstances providing the basis for termination for Cause, and the Executive will have 30 days from the date of such notice to remedy, cure or rectify the situation giving rise to termination for Cause to the reasonable satisfaction of the Board (except in the event of termination for Cause pursuant to subparagraph (i) above as to which no cure period will be permitted). 5.4 Without Cause. The Company may terminate this Agreement Without Cause, upon written notice to the Executive delivered in accordance with Sections 5.6 and 13.1 hereof. For purposes of this Agreement, the Executive will be deemed to have been terminated "Without Cause" if the Executive is terminated by the Company for any reason other than Cause, Disability or death or if the Company delivers a notice of nonrenewal of this Agreement pursuant to Section 3 hereof. 9 5.5 Good Reason. The Executive may terminate this Agreement for Good Reason, upon written notice to the Company delivered in accordance with Sections 5.6 and 13.1 hereof. For purposes of this definition of "Good Reason," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, "Good Reason" means (i) the assignment to the Executive of any duties materially inconsistent in any respect with the Executive's duties or responsibilities as contemplated in this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (ii) any other action by the Company which results in a material diminishment in the Executive's position (including status, offices, titles and reporting requirements or failure to nominate the Executive to the Board with respect to each meeting, or consent in lieu of meeting, of stockholders of the Company at which directors are to be elected during the Employment Period), authority, duties or responsibilities, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iii) any breach by the Company of any of the provisions of this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iv) requiring the Executive to relocate to any office or location other than Houston, Texas, without his consent; (v) a 5% or more reduction, or attempted reduction, at any time during the Employment Period, of the Base Salary of the Executive unless such reduction is also applied to all other senior executive officers of the Company; or (vi) the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits provided under Section 4.5 hereof, unless (A) there is substituted a comparable benefit that is at least economically equivalent (in terms of the benefit offered to the Executive) to the benefit in which the Executive's participation is being adversely affected or to the Executive's benefits that are being materially reduced, or (B) the taking of such action affects all other senior executive officers of the Company. Notwithstanding the preceding provisions of this Section 5.5, if the Executive desires to terminate his employment for Good Reason, he shall first give written notice of the facts and circumstances providing the basis for Good Reason to the Board or the Compensation Committee thereof, and allow the Company thirty (30) days from the date of such notice to remedy, cure or rectify the situation giving rise to Good Reason to the reasonable satisfaction of the Executive. 5.6 Notice of Termination. Any termination of this Agreement by the Company or the Executive, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, if such date is other than the date of receipt of such notice (which termination date shall not be more than 15 days after the giving of such notice, unless otherwise provided herein). Notwithstanding the foregoing, the Company may elect to consider the Executive as an employee after the Date of Termination for purposes of complying with the provisions of Section 6 hereof. 10 6. Obligations of the Company upon Termination. 6.1 Cause; Other Than Good Reason. If this Agreement shall be terminated either by the Company for Cause or by the Executive for any reason other than Good Reason (including delivery by the Executive of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof), the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Company. All other obligations of the Company and rights of the Executive hereunder shall terminate effective as of the Date of Termination, except as provided for in any benefit plans, incentive stock plans or other compensation plans and as otherwise provided in this Agreement. 6.2 Death or Disability. If this Agreement is terminated as a result of the Executive's death or Disability, the Company shall pay to the Executive or his estate, in a lump sum in cash within 30 days of the Date of Termination, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. In addition, in the event of the Executive's death or Disability, the Company will pay to the Executive or his estate the Annual Bonus the Executive would have received, if any, pursuant to Section 4.2 above during the year of his death or Disability, pursuant to and subject to the terms of any bonus plan then in effect in which the Executive is eligible to participate; provided, that such Annual Bonus, if any, will be paid at such time and in such amount as all other Annual Bonuses are paid pursuant to the applicable bonus plan, and that the amount of such Annual Bonus, if any, will be paid on a pro rata basis based on the number of months during the year in question prior to the Executive's death or Disability. The Executive or his estate shall also be entitled to receive those death and Disability benefits to which the Executive is entitled under the Company's benefit and insurance plans. All other obligations of the Company and rights of the Executive hereunder shall terminate effective as of the Date of Termination, except as provided for in any benefit plans, incentive stock plans or other compensation plans and as otherwise provided in this Agreement. 6.3 Good Reason; Without Cause; Nonrenewal. If this Agreement shall be terminated either by the Executive for Good Reason or by the Company Without Cause (which includes delivery by the Company of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof): (a) The Company shall pay to the Executive: (1) in a lump sum in cash within 30 days after the Date of Termination, if not theretofore paid, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination; (2) a lump sum equal to the product of (x) the Annual Bonus which would have been paid to the Executive for the full fiscal year during which the 11 Date of Termination occurred in an amount determined by the Board (or a committee thereof) pursuant to the bonus program then in effect for senior executive officers of the Company and (y) the fraction obtained by dividing (i) the number of days between the Date of Termination and the last day of the last full fiscal year preceding the Date of Termination and (ii) 365, which lump sum will be paid at the same time as bonuses are paid to all executives for such fiscal year; and (3) in a lump sum in cash within 30 days after the Date of Termination, in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. (b) The Company shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses (including moving and relocation expenses) paid or incurred by the Executive which would have been payable under Section 4.6 and 4.7 hereof if the Executive's employment had not terminated. (c) During the 12-month period commencing on the Date of Termination, the Company shall continue benefits (other than disability benefits), at the Company's expense, to the Executive and/or the Executive's family at least equal to those which would have been provided to them under Section 4.5 hereof if the Executive's employment had not been terminated. Benefits otherwise receivable by the Executive pursuant to this Section shall be reduced to the extent substantially similar benefits are actually received by or made available to the Executive by any other employer during the same time period for which such benefits would be provided pursuant to this Section at a cost to the Executive that is commensurate with the cost incurred by the Executive immediately prior to the Date of Termination (without giving effect to any increase in costs paid by the Executive after the Change in Control which constitutes or may constitute Good Reason); provided, however, that if the Executive becomes employed by a new employer which maintains a medical plan that either (i) does not cover the Executive or a family member or dependent with respect to a preexisting condition which was covered under the applicable Company medical plan, or (ii) does not cover the Executive or a family member or dependent for a designated waiting period, the Executive's coverage under the applicable Company medical plan shall continue (but shall be limited in the event of noncoverage due to a preexisting condition, to such preexisting condition) until the earlier of the end of the applicable period of noncoverage under the new employer's plan or the first anniversary of the Date of Termination. The Executive agrees to report to the Company any coverage and benefits actually received by the Executive or made available to the Executive from such other employer(s). The Executive shall be entitled to elect to change his level of coverage and/or his choice of coverage options (such as Executive only or family medical coverage) with respect to the benefits to be provided by the Company to the Executive to the same extent that actively employed senior executive officers of the Company are permitted to make such changes; provided, however, that in the event of any such changes the Executive shall pay the amount of any cost increase that would actually be paid by an actively employed senior 12 executive officer of the Company by reason of making the same change in his level of coverage or coverage options. (d) During the 12-month period following the Date of Termination, the Company shall pay to the Executive, in equal semi-monthly installments, the Executive's Base Salary (as in effect on the Date of Termination). (e) During the 12-month period after the Date of Termination, all stock options (including the Options) and restricted stock held by the Executive will continue to vest and be exercisable in accordance with their terms in effect on the Date of Termination. On the conclusion of said 12-month period, all unexpired, unexercised options will be fully vested and all restricted stock will be fully vested. Thereafter, all such fully vested stock options will be exercisable by the Executive until the earlier to occur of the expiration of the term of each stock option or 12 months after the date they become fully vested. Notwithstanding any of the above to the contrary, the Executive will not be entitled to any of the benefits or payments provided in Section 6.3 (a)(2), (c), (d) or (e) hereof if (i) the Executive breaches this Agreement including the provisions of Sections 8, 9, 10 and 12 hereof, or (ii) the Executive fails to execute a release from liability and waiver of right to sue the Company or its Affiliates in a form reasonably acceptable to the Company. 6.4 Termination of Employment Following a Change in Control. (a) If this Agreement shall be terminated within two years after a Change in Control which occurs during the term of this Agreement, provided such termination is for any reason other than Cause, Disability, death or the Executive retiring at age 65, in lieu of any obligation the Company may have pursuant to Section 6.3 hereof: (1) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Date of Termination, if not theretofore paid, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, and in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company.. (2) The Company shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses paid or incurred by the Executive which would have been payable under Sections 4.6 and 4.7 hereof if the Executive's employment had not terminated. (3) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Date of Termination a severance payment equal to three (3) times the sum of (i) the Executive's Base Salary (as in effect on Date of Termination) and (ii) the Executive's most recent Annual Bonus. If the most recent Annual Bonus was a stock option or a stock grant, the value of the bonus will be deemed to be the number of option shares times the closing price of the Common Stock for the 20 trading days prior to the Date of Termination. 13 (4) During the 36-month period commencing on the Date of Termination, the Company shall continue benefits (other than disability benefits), at the Company's expense to the Executive and/or the Executive's family at least equal to those which would have been provided to them under Section 4.5 hereof if the Executive's employment had not been terminated (without giving effect to any reduction in such benefits subsequent to the Change in Control which reduction constitutes or may constitute Good Reason). (b) The Company shall pay to the Executive all legal fees and expenses incurred by the Executive as a result of a termination which entitles the Executive to any payments under Section 6.4 hereof including all such fees and expenses, if any, incurred in contesting or disputing any Notice of Termination under Section 5.3 hereof or in seeking to obtain or enforce any right or benefit provided by Section 6.4 hereof. Such payments shall be made within five (5) days after delivery of the Executive's respective written requests for payment accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. (c) Any determination by the Executive pursuant to this Section 6.4 that Good Reason exists for the Executive's termination of employment and that adequate remedy has not occurred shall be presumed correct and shall govern unless the party contesting the determination shows by a clear preponderance of the evidence that it was not a good faith reasonable determination. (d) Notwithstanding any dispute concerning whether Good Reason exists for termination of employment or whether adequate remedy has occurred, the Company shall immediately pay to the Executive any amounts otherwise due under this Section 6.4. The Executive may be required to repay such amounts to the Company if any such dispute is finally determined adversely to the Executive. (e) The Executive shall not be required to mitigate damages with respect to the amount of any payment provided under this Section 6.4 by seeking other employment or otherwise, nor shall the amount of any payment provided under this Section 6.4 be reduced by retirement benefits, deferred compensation or any compensation earned by the Executive as a result of employment by another employer. 7. Executive's Obligation to Avoid Conflicts of Interest. For purposes of this Section 7, all references to the Company shall mean and include its Affiliates. The Executive further agrees to comply with the Company's conflict of interest policy, including the Company's business ethics policy, as in effect from time to time. 8. Executive's Confidentiality Obligation. 8.1 For purposes of this Section 8, all references to the Company shall mean and include its Affiliates. The Executive hereby acknowledges, understands and agrees that all Confidential Information, as defined in Section 8.2 hereof, whether developed by the Executive or others employed by or in any way associated with the Executive or the Company, is the exclusive and confidential property of the Company and shall be regarded, treated and 14 protected as such in accordance with this Agreement. The Executive acknowledges that all such Confidential Information is in the nature of a trade secret. Failure to mark any writing confidential shall not affect the confidential nature of such writing or the information contained therein. 8.2 For purposes of this Agreement, "Confidential Information" means information, which is used in the business of the Company and (i) is proprietary to, about or created by the Company, (ii) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company, (iii) is designated as Confidential Information by the Company, is known by the Executive to be considered confidential by the Company, or from all the relevant circumstances should reasonably be assumed by the Executive to be confidential and proprietary to the Company, or (iv) is not generally known by non-Company personnel. Confidential Information excludes, however, any information that is lawfully in the public domain or has been publicly disclosed by the Company. Such Confidential Information includes, without limitation, the following types of information and other information of a similar nature (whether or not reduced to writing or designated as confidential): (a) Internal personnel and financial information of the Company, vendor information (including vendor characteristics, services, prices, lists and agreements), purchasing and internal cost information, internal service and operational manuals, and the manner and methods of conducting the business of the Company; (b) Marketing and development plans, price and cost data, price and fee amounts, pricing and billing policies, quoting procedures, marketing techniques, forecasts and forecast assumptions and volumes, and future plans and potential strategies (including, without limitation, all information relating to any acquisition prospect and the identity of any key contact within the organization of any acquisition prospect) of the Company which have been or are being discussed; (c) Names of customers and their representatives, contracts (including their contents and parties), customer services, and the type, quantity, specifications and content of products and services purchased, leased, licensed or received by customers of the Company; (d) Confidential and proprietary information provided to the Company by any actual or potential customer, government agency or other third party (including businesses, consultants and other entities and individuals); and (e) Work product resulting from or related to the research, development or production of the drug development programs of the Company. 8.3 As a consequence of the Executive's acquisition or anticipated acquisition of Confidential Information, the Executive shall occupy a position of trust and confidence with respect to the affairs and business of the Company. In view of the foregoing and of the consideration to be provided to the Executive, the Executive agrees that it is reasonable and necessary that the Executive make each of the following covenants: 15 (a) At any time during the Employment Period and thereafter, the Executive shall not disclose Confidential Information to any person or entity, either inside or outside of the Company, other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent (unless such disclosure is compelled pursuant to court orders or subpoena, and at which time the Executive shall give prior written notice of such proceedings to the Company). (b) At any time during the Employment Period and thereafter, the Executive shall not use, copy or transfer Confidential Information other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent. (c) On the Date of Termination, the Executive shall promptly deliver to the Company (or its designee) all written materials, records and documents made by the Executive or which came into his possession prior to or during the Employment Period concerning the business or affairs of the Company, including, without limitation, all materials containing Confidential Information. 9. Disclosure of Information, Ideas, Concepts, Improvements, Discoveries and Inventions. As part of the Executive's fiduciary duties to the Company, the Executive agrees that during his employment by the Company and thereafter following the Date of Termination, the Executive shall promptly disclose in writing to the Company all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, and whether or not reduced to practice, which are conceived, developed, made or acquired by the Executive during the Employment Period, either individually or jointly with others, and which relate to the business, products or services of the Company or its Affiliates, irrespective of whether the Executive used the Company's time or facilities and irrespective of whether such information, idea, concept, improvement, discovery or invention was conceived, developed, discovered or acquired by the Executive on the job, at home, or elsewhere. This obligation extends to all types of information, ideas and concepts, including information, ideas and concepts relating to research and development of drugs, drug discovery and manufacturing processes, new types of services, corporate opportunities, acquisition prospects, prospective names or service marks for the Company's business activities, and the like. 10. Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship. 10.1 All references in this Section 10 to the Company shall mean and include its Affiliates. All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by the Executive or which are disclosed or made known to the Executive, individually or in conjunction with others, during the Executive's employment by the Company and which relate to the business, products or services of the Company or its Affiliates (including, without limitation, all such information relating to research and development of drugs, drug discovery and manufacturing processes, corporate opportunities, research, financial and sales data, pricing and trading terms, 16 evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customers' organizations, marketing and merchandising techniques, and prospective names and service marks) are and shall be the sole and exclusive property of the Company. Furthermore, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of the Company. 10.2 In particular, the Executive hereby specifically sells, assigns, transfers and conveys to the Company all of his worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor's certificates or other industrial rights which may be filed in respect thereof, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and applications for registration of such names and service marks. The Executive shall assist the Company and its nominee at all times, during the Employment Period and thereafter, in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, which assistance shall include, but shall not be limited to, the execution of all lawful oaths and all assignment documents requested by the Company or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and any application for the registration of such names and service marks. 10.3 In the event the Executive creates, during the Employment Period, any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as, videotapes, written presentations on acquisitions, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to the Company's business, products or services, whether such work is created solely by the Executive or jointly with others, the Company shall be deemed the author of such work if the work is prepared by the Executive in the scope of his employment; or, if the work is not prepared by the Executive within the scope of his employment but is specially ordered by the Company as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire, and the Company shall be the author of such work. If such work is neither prepared by the Executive within the scope of his employment nor a work specially ordered and deemed to be a work made for hire, then the Executive hereby agrees to sell, transfer, assign and convey, and by these presents, does sell, transfer, assign and convey, to the Company all of the Executive's worldwide right, title and interest in and to such work and all rights of copyright therein. The Executive agrees to assist the Company and its Affiliates, at all times, during the Employment Period and thereafter, in the protection of the Company's worldwide right, title and interest in and to such work and all rights of copyright therein, which assistance shall include, but shall not be limited to, the execution of all documents requested by the Company or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries. 17 10.4 The provisions of this Section 10 shall not supersede any proprietary information agreement (the "Proprietary Agreement") between the Executive and the Company which shall remain in full force and effect and, moreover, this Agreement, the Proprietary Agreement and any such other similar agreement between the parties shall be construed and applied as being mutually consistent to the fullest extent possible. 11. Certain Payments by the Company 11.1 In the event that the Executive is deemed to have received an "excess parachute payment" (as defined in Section 280G(b) of the Code) which is subject to the excise taxes (the "Excise Taxes") imposed by Section 4999 of the Code in respect of any payment pursuant to this Agreement or any other agreement, plan, instrument or obligation, in whatever form, the Company shall make the Bonus Payment (defined below) to the Executive notwithstanding any contrary provision in this Agreement or any other agreement, plan, instrument or obligation. 11.2 The term "Bonus Payment" means a cash payment in an amount equal to the sum of (i) all Excise Taxes payable by the Executive, plus (ii) all additional Excise Taxes and federal or state income taxes to the extent such taxes are imposed in respect of the Bonus Payment, such that the Executive shall be in the same after-tax position and shall have received the same benefits that he would have received if the Excise Taxes had not been imposed. For purposes of calculating any income taxes attributable to the Bonus Payment, the Executive shall be deemed for all purposes to be paying income taxes at the highest marginal federal income tax rate, taking into account any applicable surtaxes and other generally applicable taxes which have the effect of increasing the marginal federal income tax rate and, if applicable, at the highest marginal state income tax rate, to which the Bonus Payment and the Executive are subject. An example of the calculation of the Bonus Payment is set forth below. Assume that the Excise Tax rate is 20%, the highest federal marginal income tax rate is 40% and the Executive is not subject to state income taxes. Further assume that the Executive has received an excess parachute payment in the amount of $200,000, on which $40,000 ($200,000 x 20%) in Excise Taxes are payable. The amount of the required Bonus Payment is thus computed to be $100,000, i.e., the Bonus Payment of $100,000, less additional Excise Taxes on the Bonus Payment of $20,000 (i.e., 20% x $100,000) and income taxes of $40,000 (i.e., 40% x $100,000), yields $40,000, the amount of the Excise Taxes payable in respect of the original excess parachute payment. 11.3 The Executive agrees to reasonably cooperate with the Company to minimize the amount of the excess parachute payments, including, without limitation, assisting the Company in establishing that some or all of the payments received by the Executive that are "contingent on a change," as described in Section 280G(b)(2)(A)(i) of the Code, are reasonable compensation for personal services actually rendered by the Executive before the date of such change or to be rendered by the Executive on or after the date of such change. In the event that the Company is able to establish that the amount of the excess parachute payments is less than originally anticipated by the Executive, the Executive shall refund to the Company any excess Bonus Payment to the extent not required to pay Excise Taxes or income taxes (including those incurred in respect of receipt of the Bonus Payment). Notwithstanding the foregoing, the Executive shall not be required to take any action which his attorney or tax advisor advises him in writing (i) is improper or (ii) exposes the Executive to personal liability. The Executive may require the Company to deliver to the Executive an indemnification agreement in form and substance 18 reasonably satisfactory to the Executive as a condition to taking any action required by this Section 11.3. 11.4 The Company shall make any payment required to be made under Section 11 hereof in a cash lump sum after the date on which the Executive received or is deemed to have received any such excess parachute payment. Any payment required to be paid by the Company under Section 11 hereof which is not paid within 30 days of receipt by the Company of the Executive's written demand therefor, delivered in accordance with Section 13.1 hereof, shall thereafter be deemed delinquent, and the Company shall pay to the Executive immediately upon demand interest at the highest nonusurious rate per annum allowed by applicable law from the date such payment becomes delinquent to the date of payment of such delinquent sum with interest. 11.5 In the event that there is any change to the Code which results in the recodification of Section 280G or Section 4999 of the Code, or in the event that either such section of the Code is amended, replaced or supplemented by other provisions of the Code of similar import ("Successor Provisions"), then this Agreement shall be applied and enforced with respect to such new Code provisions in a manner consistent with the intent of the parties as expressed herein, which is to assure that the Executive is in the same after-tax position and has received the same benefits that he would have been in and received if any taxes imposed by Section 4999 (or any Successor Provisions) had not been imposed. 11.6 All determinations required to be made under Section 11 hereof including, without limitation, whether and when a Bonus Payment is required, and the amount of such Bonus Payment and the assumptions to be utilized in arriving at such determinations, unless otherwise expressly set forth in this Agreement, shall be made within 30 days from the Date of Termination by the independent tax consultant(s) selected by the Company and reasonably acceptable to the Executive (the "Tax Consultant"). The Tax Consultant must be a qualified tax attorney or certified public accountant. All fees and expenses of the Tax Consultant shall be paid in full by the Company. Any Excise Taxes as determined pursuant to Section 11 hereof shall be paid by the Company to the Internal Revenue Service or any other appropriate taxing authority on the Executive's behalf within five (5) business days after receipt of the Tax Consultant's final determination by the Company and the Executive. 11.7 If the Tax Consultant determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Taxes are payable by the Executive, the Tax Consultant shall furnish the Executive with a written opinion that failure to disclose or report the Excise Taxes on the Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or any other penalty. 11.8 The Company shall indemnify and hold harmless the Executive, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by the Executive with respect to the exercise by the Company of any of its rights under Section 11 hereof, including, without limitation, any Losses related to the Company's decision to contest a claim of any imputed income to the Executive. The Company shall pay all fees and expenses incurred under Section 11 hereof, and shall promptly reimburse the Executive for the reasonable 19 expenses incurred by the Executive in connection with any actions taken by the Company or required to be taken by the Executive hereunder. Any payments owing to the Executive and not made within 30 days of delivery, in accordance with Section 13.1 hereof, to the Company of evidence of the Executive's entitlement thereto shall be paid to the Executive together with interest at the maximum nonusurious rate permitted by law. 12. Executive's Non-Competition Obligation. 12.1 (a) All references in this Section 12 to the Company shall mean and include its Affiliates. During the Employment Period and for the 12-month period following the Date of Termination hereof, the Executive shall not, acting alone or in conjunction with others, directly or indirectly, in the United States and any other business territories in which the Company is presently or from time to time during the Employment Period conducting business, invest or engage, directly or indirectly, in any Competing Business or accept employment with or render services to such a Competing Business as a director, officer, agent, executive or consultant or in any other capacity; provided, however, that this Section 12.1(a) shall not be deemed violated if the Executive is or becomes the Beneficial Owner of up to three percent of the Voting Stock of any corporation subject to the periodic reporting requirements of the Exchange Act. Notwithstanding the above, the Executive may serve as an officer, director, agent, employee or consultant to a Competing Business whose business is diversified and which is, as to the part of its business to which the Executive is providing services, not a Competing Business; provided, that prior to accepting employment or providing services to such a Competing Business, the Executive and the Competing Business will provide written assurances satisfactory to the Company that the Executive will not render services directly or indirectly for a 12-month period to any portion of the Competing Business which competes directly or indirectly with the Company. (b) In addition to the other obligations agreed to by the Executive in this Agreement, the Executive agrees that for 12 months following the Date of Termination hereof, he shall not directly or indirectly, (i) hire or attempt to hire any employee of the Company, or induce, entice, encourage or solicit any employee of the Company to leave his or her employment, or (ii) contact, communicate or solicit any distributor, customer or acquisition or business prospect or business opportunity of the Company for the purpose of causing them to terminate or alter or amend their business relationship with the Company to the Company's detriment. Notwithstanding the foregoing, if the Company fails to make the payments to the Executive set forth in Section 6.3 or 6.4 hereof, then the terms of this Section 12.1 will not be effective from the date of such nonpayment; provided, that if the Company subsequently makes any such payments, this Section 12.1 will become effective in accordance with its terms for so long as the Company continues to make the payments required by Section 6.3 or 6.4 hereof. 12.2 (a) The Executive hereby specifically acknowledges and agrees that: (1) The Company expended and will continue to expend substantial time, money and effort in developing its business; 20 (2) The Executive will, in the course of his employment, be personally entrusted with and exposed to Confidential Information; (3) The Company, during the Employment Period and thereafter, will be engaged in its highly competitive business in which many firms compete; (4) The Executive could, after having access to the Company's financial records, contracts, and other Confidential Information and know-how and, after receiving training by and experience with the Company, become a competitor; (5) The Company will suffer great loss and irreparable harm if the Executive terminates his employment and enters, directly or indirectly, into competition with the Company; (6) The temporal and other restrictions contained in this Section 12 are in all respects reasonable and necessary to protect the business goodwill, trade secrets, prospects and other reasonable business interests of the Company; (7) The enforcement of this Agreement in general, and of this Section 12 in particular, will not work an undue or unfair hardship on the Executive or otherwise be oppressive to him; it being specifically acknowledged and agreed by the Executive that he has activities and other business interests and opportunities which will provide him adequate means of support if the provisions of this Section 12 are enforced after the Termination Date; and (8) The enforcement of this Agreement in general, and of this Section 12 in particular, will neither deprive the public of needed goods or services nor otherwise be injurious to the public. (b) The Executive agrees that if an arbitrator (pursuant to Section 13.13 hereof) or a court of competent jurisdiction determines that the length of time or any other restriction, or portion thereof, set forth in this Section 12 is overly restrictive and unenforceable, the arbitrator or court shall reduce or modify such restrictions to those which it deems reasonable and enforceable under the circumstances, and as so reduced or modified, the parties hereto agree that the restrictions of this Section 12 shall remain in full force and effect. The Executive further agrees that if an arbitrator or court of competent jurisdiction determines that any provision of this Section 12 is invalid or against public policy, the remaining provisions of this Section 12 and the remainder of this Agreement shall not be affected thereby, and shall remain in full force and effect. (c) In the event of any pending, threatened or actual breach of any of the covenants or provisions of Sections 8, 9, 10 or 12 hereof, as determined by a court of competent jurisdiction, it is understood and agreed by the Executive that the remedy at law for a breach of any of the covenants or provisions of these Sections may be inadequate and, therefore, the Company shall be entitled to a restraining order or 21 injunctive relief in addition to any other remedies at law and in equity, as determined by a court of competent jurisdiction. Should a court of competent jurisdiction or an arbitrator (pursuant to Section 13.13 hereof) declare any provision of Sections 8, 9, 10 or 12 hereof to be unenforceable due to an unreasonable restriction of duration or geographical area, or for any other reason, such court or arbitrator is hereby granted the consent of each of the Executive and the Company to reform such provision and/or to grant the Company any relief, at law or in equity, reasonably necessary to protect the reasonable business interests of the Company or any of its Affiliates. The Executive hereby acknowledges and agrees that all of the covenants and other provisions of Sections 8, 9, 10 or 12 hereof are reasonable and necessary for the protection of the Company's reasonable business interests. The Executive hereby agrees that if the Company prevails in any action, suit or proceeding with respect to any matter arising out of or in connection with Sections 8, 9, 10 or 12 hereof, the Company shall be entitled to all equitable and legal remedies, including, but not limited to, injunctive relief and compensatory damages, as determined by a court of competent jurisdiction. (d) It is acknowledged, understood and agreed by and between the parties hereto that the covenants made by the Executive in this Section 12 are essential elements of this Agreement and that, but for the agreement of the Executive to comply with such covenants, the Company would not have entered into this Agreement. 13. Miscellaneous. 13.1 Notices. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when (i) delivered by hand or sent by facsimile, or (ii) on the third business day following deposit in the United States mail by registered or certified mail, return receipt requested, to the addresses as follows (provided that notice of change of address shall be deemed given only when received): If to the Company to: Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Attention: Chairman of the Board Facsimile No.: (713) 782-8232 If to the Executive to: Bruce D. Given, M.D. Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Facsimile No.: (713) 782-8232 or to such other names or addresses as the Company or the Executive, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section 13.1. 22 13.2 Waiver of Breach. The waiver by any party hereto of a breach of any provision of this Agreement shall neither operate nor be construed as a waiver of any subsequent breach by any party. Except as expressly provided for herein, the failure of either party hereto to take any action by reason of any breach will not deprive such party of the right to take action at any time while such breach occurs. 13.3 Assignment. This Agreement shall be binding upon and inure to the benefit of the Company, its successors, legal representatives and assigns, and upon the Executive, his heirs, executors, administrators, representatives and assigns; provided, however, the Executive agrees that his rights and obligations hereunder are personal to him and may not be assigned without the express written consent of the Company. Any reference to "Company" herein shall mean the Company as well as any successors thereto. 13.4 Entire Agreement; No Oral Amendments. This Agreement, together with any exhibit attached hereto and any document, policy, rule or regulation referred to herein, replaces all previous agreements and discussions relating to the same or similar subject matter between the Executive and the Company (including, but not limited to, that certain Executive Employment Agreement dated as of March 21, 2002, between the Executive and the Company and that certain Termination Agreement dated as of March 21, 2002, between the Executive and the Company which are hereby terminated) and constitutes the entire agreement between the Executive and the Company with respect to the subject matter of this Agreement. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by any executive, officer, or representative of the Company or by any written agreement unless signed by an officer of the Company who is expressly authorized by the Company to execute such document. 13.5 Enforceability. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 13.6 Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. 13.7 Corporate Authority. The Company has all corporate power and authority necessary to enter into this Agreement and to perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by the Company. 13.8 Defense of Claims. The Executive agrees that, during the Employment Period and for a period of two (2) years after his Termination Date, upon request from the Company, he will reasonably cooperate with the Company and its Affiliates in the defense of any claims or actions that may be made by or against the Company or any of its Affiliates that affect his prior areas of responsibility, except if the Executive's reasonable interests are adverse to the Company or Affiliates in such claim or action. To the extent travel is required to comply with the requirements of this Section 13.8, the Company shall, to the extent possible, provide the 23 Executive with notice at least 10 days prior to the date on which such travel would be required. The Company agrees to promptly pay or reimburse the Executive upon demand for all of his reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply, with his obligations under this Section 13.8. 13.9 Withholdings: Right of Offset. The Company may withhold and deduct from any benefits and payments made or to be made pursuant to this Agreement (a) all federal, state, local and other taxes as may be required pursuant to any law or governmental regulation or ruling, (b) all other employee deductions made with respect to the Company's employees generally, and (c) any advances made to the Executive and owed to the Company. 13.10 Nonalienation. The right to receive payments under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by the Executive, his dependents or beneficiaries, or to any other person who is or may become entitled to receive such payments hereunder. The right to receive payments hereunder shall not be subject to or liable for the debts, contracts, liabilities, engagements or torts of any person who is or may become entitled to receive such payments, nor may the same be subject to attachment or seizure by any creditor of such person under any circumstances, and any such attempted attachment or seizure shall be void and of no force and effect. 13.11 Incompetent or Minor Payees. Should the Board determine that any person to whom any payment is payable under this Agreement has been determined to be legally incompetent or is a minor, any payment due hereunder may, notwithstanding any other provision of this Agreement to the contrary, be made in any one or more of the following ways: (a) directly to such minor or person; (b) to the legal guardian or other duly appointed personal representative of the person or estate of such minor or person; or (c) to such adult or adults as have, in the good faith knowledge of the Board, assumed custody and support of such minor or person; and any payment so made shall constitute full and complete discharge of any liability under this Agreement in respect to the amount paid. 13.12 Title and Headings; Construction. Titles and headings to Sections hereof are for the purpose of reference only and shall in no way limit, define or otherwise affect the provisions hereof. Any and all Exhibits referred to in this Agreement are, by such reference, incorporated herein and made a part hereof for all purposes. The words "herein", "hereof", "hereunder" and other compounds of the word "here" shall refer to the entire Agreement and not to any particular provision hereof. 13.13 Arbitration. (a) If any dispute or controversy arises between the Executive and the Company relating to (1) this Agreement in any way or arising out of the parties' respective rights or obligations under this Agreement on (2) the employment of the Executive or the termination of such employment, then either party may submit the dispute or controversy to arbitration under the then-current Commercial Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA"); provided, however, the Company shall retain its rights to seek a restraining order or injunctive relief pursuant to Section 12.2 hereof. Any arbitration hereunder shall be conducted before a panel of three arbitrators unless the parties mutually agree that the arbitration shall be conducted before a single arbitrator. The arbitrators shall be selected (from lists provided by the AAA) through mutual agreement of 24 the parties, if possible. If the parties fail to reach agreement upon appointment of arbitrators within twenty (20) days following receipt by one party of the other party's notice of desire to arbitrate, then within five (5) days following the end of such 20-day period, each party shall select one arbitrator who, in turn, shall within five (5) days jointly select the third arbitrator to comprise the arbitration panel hereunder. The site for any arbitration hereunder shall be in Harris County, Texas, unless otherwise mutually agreed by the parties, and the parties hereby waive any objection that the forum is inconvenient. (b) The party submitting any matter to arbitration shall do so in accordance with the Rules. Notice to the other party shall state the question or questions to be submitted for decision or award by arbitration. Notwithstanding any provision of this Section 13.13, the Executive shall be entitled to seek specific performance of the Executive's right to be paid during the pendency of any dispute or controversy arising under this Agreement. In order to prevent irreparable harm, the arbitrator may grant temporary or permanent injunctive or other equitable relief for the protection of property rights. (c) The arbitrator shall set the date, time and place for each hearing, and shall give the parties advance written notice in accordance with the Rules. Any party may be represented by counsel or other authorized representative at any hearing. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 et. seq. (or its successor). The arbitrator shall apply the substantive law and the law of remedies, if applicable) of the State of Texas to the claims asserted to the extent that the arbitrator determines that federal law is not controlling. (d) (1) Any award of an arbitrator shall be final and binding upon the parties to such arbitration, and each party shall immediately make such changes in its conduct or provide such monetary payment or other relief as such award requires. The parties agree that the award of the arbitrator shall be final and binding and shall be subject only to the judicial review permitted by the Federal Arbitration Act. (2) The parties hereto agree that the arbitration award may he entered with any court having jurisdiction and the award may then be enforced as between the parties, without further evidentiary proceedings, the same as if entered by the court at the conclusion of a judicial proceeding in which no appeal was taken. The Company and the Executive hereby agree that a judgment upon any award rendered by an arbitrator may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (e) Each party shall pay any monetary amount required by the arbitrator's award, and the fees, costs and expenses for its own counsel, witnesses and exhibits, unless otherwise determined by the arbitrator in the award. The compensation and costs and expenses assessed by the arbitrator(s) and the AAA shall be split evenly between the parties unless otherwise determined by the arbitrator in the award. If court proceedings to stay litigation or compel arbitration are necessary, the party who opposes such proceedings to stay litigation or compel arbitration, if such party is 25 unsuccessful, shall pay all associated costs, expenses, and attorney's fees which are reasonably incurred by the other party as determined by the arbitrator. 13.14 Survival of Certain Provisions. Wherever appropriate to the intention of the parties hereto, the respective rights and obligations of said parties, including, but not limited to, the rights and obligations set forth in Sections 8 through 12 hereof and this Section 13, shall survive any termination or expiration of this Agreement. 13.15 No Strict Construction. The Executive represents to the Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read the Agreement and that he understands its terms and conditions. The parties hereto agree that the language used in this Agreement shall be deemed to be the language chosen by them to express their mutual intent, and no rule of strict construction shall be applied against either party hereto. The Executive acknowledges that he has had the opportunity to consult with counsel of his choice, independent of Employer's counsel, regarding the terms and conditions of this Agreement and has done so to the extent that he, in his discretion, deemed to be appropriate. [SIGNATURE PAGE FOLLOWS] 26 IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above. Texas Biotechnology Corporation By: /s/ James A. Thomson -------------------------------------- James A. Thomson Chairman of the Compensation Committee Executive: By: /s/ Bruce D. Given, M.D. -------------------------------------- Bruce D. Given, M.D. 27 EX-10.6 5 h03454exv10w6.txt TERMINATION AGREEMENT - RICHARD A. F. DIXON Exhibit 10.6 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (this "Agreement") is made and entered into this 17th day of March, 2003, by and between Texas Biotechnology Corporation, a Delaware corporation having its principal executive office at 7000 Fannin, Houston, Texas 77030 (hereinafter referred to as the "Company"), and Richard A. F. Dixon, Ph.D. (hereinafter referred to as the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Executive in an executive capacity and the Executive desires to enter the Company's employ; and WHEREAS, the Company and the Executive entered into an Amended and Restated Employment Agreement dated July 15, 1990, which the parties desire to replace with this Agreement. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms have the meanings prescribed below: AAA shall have the meaning assigned thereto in Section 13.13 hereof Affiliate is used in this Agreement to define a relationship to a person or entity and means a person or entity who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such person or entity. Agreement shall have the meaning assigned thereto in the preamble. Annual Bonus shall have the meaning assigned thereto in Section 4.2 hereof. Base Salary shall have the meaning assigned thereto in Section 4.1 hereof. Beneficial Owner shall have the meaning assigned thereto in Rule 13(d)-3 under the Exchange Act; provided, however, and without limitation, that any individual, corporation, partnership, group, association or other person or entity that has the right to acquire any Voting Stock at any time in the future, whether such right is (a) contingent or absolute or (b) exercisable presently or at any time in the future, pursuant to any agreement or understanding or upon the exercise or conversion of rights, options or warrants, or otherwise, shall be the Beneficial Owner of such Voting Stock. Board means the Board of Directors of the Company. Bonus Payment shall have the meaning assigned thereto in Section 11.2 hereof. Cause shall have the meaning assigned thereto in Section 5.3 hereof. Change in Control of the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: (a) any "person" (as defined in section 3(a)(9) of the Exchange Act, and as such term is modified in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this definition) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holder of securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which, in the judgment of the Compensation Committee of the Board, the holders of the Common Stock, immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of 2 the Company immediately prior to such transaction or series of transactions. Except during a Potential Change in Control of the Company, the Board may (i) deem any other corporate event affecting the Company (other than those described in clauses (a)-(d) of this definition) to be a "Change in Control," and (ii) may amend this definition of "Change in Control" in connection with an identical amendment being made to termination agreements entered into by the Company and all of its senior executive officers. Code means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated by the Internal Revenue Service thereunder, all as in effect from time to time during the Employment Period. Common Stock means the Company's common stock, par value $.05 per share. Company means Texas Biotechnology Corporation, a Delaware corporation, the principal executive office of which is located at 7000 Fannin, Houston, Texas 77030. Competing Business means any individual, business, firm, company, partnership, joint venture, organization, or other entity that markets or has entered clinical development of any product addressing the same disease target as a product discovered by, or licensed to, the Company which is either (i) in Phase III of clinical development, (ii) pending approval at U.S. Food & Drug Administration or (iii) marketed by the Company or its licensee. Confidential Information shall have the meaning assigned thereto in Section 8.2 hereof. Date of Termination means the earliest to occur of (i) the date of the Executive's death or (ii) the date of receipt of the Notice of Termination, or such later date as may be prescribed in the Notice of Termination in accordance with Section 5.6 hereof. Disability means an illness or other disability that prevents the Executive from discharging his responsibilities under this Agreement for a period of 180 consecutive calendar days, or an aggregate of 180 calendar days in any calendar year, during the Employment Period, all as determined in good faith by the Board (or a committee thereof). Effective Date means the date of execution hereof. Employment Period shall have the meaning assigned thereto in Section 3 hereof. Executive means Richard A. F. Dixon, Ph.D., an individual residing in Houston, Texas. Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder, all as in effect from time to time during the Employment Period. Excise Taxes shall have the meaning assigned thereto in Section 11.1 hereof. Good Reason shall have the meaning assigned thereto in Section 5.5 hereof. Initial Term shall have the meaning assigned thereto in Section 3 hereof. 3 Losses shall have the meaning assigned thereto in Section 11.8 hereof. Material Injury shall have the meaning assigned thereto in Section 5.3 hereof. Notice of Termination shall have the meaning assigned thereto in Section 5.6 hereof. Potential Change in Control of the Company shall be deemed to have occurred if (a) the Company enters into an agreement the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or consider taking action which if consummated would constitute a Change in Control or (c) the Board adopts a resolution to the effect that a potential Change in Control of the Company has occurred. Proprietary Agreement shall have the meaning assigned thereto in Section 10.4 hereof. Rules shall have the meaning assigned thereto in Section 13.13 hereof. Successor Provisions shall have the meaning assigned thereto in Section 11.5 hereof. Tax Consultant shall have the meaning assigned thereto in Section 11.6 hereof. Vacation Time shall have the meaning assigned thereto in Section 4.3 hereof. Voting Stock means all outstanding shares of capital stock of the Company entitled to vote generally in an election of directors; provided, however, that if the Company has shares of Voting Stock entitled to more or less than one vote per share, each reference to a proportion of the issued and outstanding shares of Voting Stock shall be deemed to refer to the proportion of the aggregate votes entitled to be cast by the issued and outstanding shares of Voting Stock. Without Cause shall have the meaning assigned thereto in Section 5.4 hereof. 2. General Duties of the Company and the Executive. 2.1 (a) The Company agrees to employ the Executive, and the Executive agrees to accept employment by the Company and to serve the Company as its Senior Vice President of Research and Chief Scientific Officer. The Executive shall report to and be subject to the direction of the Chief Executive Officer and the Board. The Executive shall have the authority, duties and responsibilities that are normally associated with and inherent in the executive capacity in which the Executive will be performing, and shall have such other or additional duties which are not inconsistent with the Executive's position, as may from time to time be reasonably assigned to the Executive by the Chief Executive Officer or the Board (or a committee thereof). While employed hereunder, the Executive shall devote full time and attention during normal business hours to the affairs of the Company and use his best efforts to perform faithfully and efficiently his duties and responsibilities. The Executive agrees to cooperate fully with the Chief Executive Officer and the Board, and other executive officers of the Company, and not to engage in any activity which conflicts with or interferes with the performance of his duties hereunder. During the Employment Period, the Executive shall devote his best efforts and skills to the business and 4 interests of the Company, do his utmost to further enhance and develop the Company's best interests and welfare, and endeavor to improve his ability and knowledge of the Company's business, in an effort to increase the value of his services for the mutual benefit of the parties hereto. During the Employment Period, it shall not be a violation of this Agreement for the Executive (i) serve on any corporate board or committee thereof with the approval of the Board, (ii) to serve on any civic, or charitable boards or committees (except for boards or committees of a Competing Business unless approved by the Board), (iii) deliver lectures, fulfill teaching or speaking engagements, (iv) testify as a witness in litigation involving a former employer or (v) manage personal investments; provided, however, any such activities must not materially interfere with performance of the Executive's responsibilities under this Agreement. (b) The Executive represents and covenants to the Company that he is not subject or a party to any employment agreement, noncompetition covenant, nondisclosure agreement, or any similar agreement or covenant that would prohibit the Executive from executing this Agreement and fully performing his duties and responsibilities hereunder, or would in any manner, directly or indirectly, limit or affect the duties and responsibilities that may now or in the future be assigned to the Executive hereunder. The Executive further represents and warrants that he is not presently subject to any legal actions, claims or administrative proceedings, including bankruptcy proceedings or IRS audits or proceedings, which would affect his ability to perform his responsibilities hereunder. 2.2 The Executive agrees and acknowledges that he owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to do no act and to make no statement, oral or written, which would injure the Company's business, its interests or its reputation. 2.3 The Executive agrees to execute and comply at all times during the Employment Period with all applicable policies, rules and regulations of the Company, including, without limitation, the Company's business ethics policy and the Company's policy regarding trading in the Common Stock, as each is in effect from time to time during the Employment Period. 3. Term. Unless sooner terminated pursuant to other provisions hereof, the Executive's period of employment under this Agreement shall be a period of one year beginning on the Effective Date (the "Initial Term"). The Executive's period of employment under this Agreement shall be automatically renewed for successive one-year terms on each anniversary of the Effective Date (the Initial Term and any and all renewals thereof are referred to herein collectively as the "Employment Period"), unless written notice of nonrenewal is delivered by one party to the other at least 60 days before the end of the Initial Term or any such one-year renewal term. 4. Compensation and Benefits. 4.1 Base Salary. As compensation for services to the Company, the Company shall pay to the Executive from the Effective Date until the Date of Termination an annual base salary of $289,000 (the "Base Salary"). The Board (or a committee thereof) will conduct an annual 5 review of the Executive's compensation and, in its discretion, may increase the Base Salary based upon relevant circumstances. The Base Salary shall be payable in equal semi-monthly installments or in accordance with the Company's established policy, subject only to such payroll and withholding deductions as may be required by law and other deductions (consistent with Company policy for all employees) relating to the Executive's election to participate in the Company's insurance and other employee benefit plans. 4.2 Bonus. In addition to the Base Salary, the Executive shall be awarded, for each fiscal year until the Date of Termination, an annual bonus to be determined by the Board (or a committee thereof), in its sole discretion (the "Annual Bonus"). Each such Annual Bonus shall be payable at a time to be determined by the Board (or a committee thereof) in its sole discretion. 4.3 Vacation. Until the Date of Termination, the Executive shall be entitled to four (4) weeks paid vacation during each one-year period commencing on the Effective Date (the "Vacation Time"). The use of any Vacation Time not taken during the applicable one-year period will be subject to the Company's vacation policy as in effect from time to time. 4.4 Incentive, Savings and Retirement Plans. Until the Date of Termination, the Executive shall be eligible to participate in and shall receive all benefits under all executive incentive, savings and retirement plans and programs currently maintained or hereinafter established by the Company for the benefit of its senior executive officers and/or employees. 4.5 Benefit Plans. Until the Date of Termination, the Executive and/or the Executive's family, as the case may be, shall be eligible to participate in and shall receive all benefits under each welfare benefit plan of the Company currently maintained or hereinafter established by the Company for the benefit of its employees. Such welfare benefit plans may include, without limitation, medical, dental, disability, group life, accidental death and travel accident insurance plans and programs. The Company shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any such employee benefit program or plan, so long as such actions are similarly applicable to covered employees generally. 4.6 Reimbursement of Expenses. The Executive may from time to time until the Date of Termination incur various business expenses customarily incurred by persons holding positions of like responsibility, including, without limitation, travel, entertainment and similar expenses incurred for the benefit of the Company. Subject to the Executive complying with the Company's policy regarding the reimbursement of such expenses as in effect from time to time during the Employment Period, which does not necessarily allow reimbursement of all such expenses, the Company shall reimburse the Executive for such expenses from time to time, at the Executive's request, and the Executive shall account to the Company for all such expenses. 4.7 Stock Options. The Compensation Committee of the Board, in its sole discretion, may grant to the Executive options to acquire shares of Common Stock with such terms and conditions as determined by the Compensation Committee of the Board in its sole discretion. 6 4.8 Indemnification Agreements. The Company has entered into an Indemnification Agreement regarding indemnification of the Executive. The Company will also cause the Executive to be covered by its director and officer insurance policies as they are in effect from time to time. 4.9 Place of Performance. The Company's principal place of business is located in, and Executive shall perform his day-to-day duties in, the Houston, Texas area, subject to such travel as may be necessary to perform his duties hereunder. Notwithstanding the foregoing, Executive shall not be obligated to travel more than twenty (20) percent of the time. 5. Termination. 5.1 Death. This Agreement shall terminate automatically upon the death of the Executive. 5.2 Disability. The Company may terminate this Agreement, upon written notice to the Executive delivered in accordance with Sections 5.6 and 13.1 hereof, upon the Disability of the Executive. 5.3 Cause. The Company may terminate this Agreement, upon written notice to the Executive delivered in accordance with Sections 5.6 and 13.1 hereof, for Cause. For purposes of this definition of "Cause," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, subject to the notice provisions set forth below, "Cause" means (i) the conviction (or plea of nolo contendere or equivalent plea) of the Executive of a felony (which, through lapse of time or otherwise, is not subject to appeal), (ii) the Executive having engaged in intentional misconduct causing a violation by the Company of any state or federal laws which results in a material injury to the business, condition (financial or otherwise), results of operations or prospects of the Company as determined in good faith by the Board or a committee thereof (a "Material Injury"), (iii) the Executive having engaged in a theft of corporate funds or corporate assets of the Company or in an act of fraud upon the Company, (iv) an act of personal dishonesty taken by the Executive that was intended to result in personal enrichment of the Executive at the expense of the Company, (v) the Executive's refusal, without proper legal cause, to perform his duties and responsibilities as contemplated in this Agreement or any other breach by the Executive of this Agreement, and (vi) the Executive's engaging in activities which would constitute a breach of the Company's business ethics policy, the Company's policies regarding trading in the Common Stock or any other applicable policies, rules or regulations of the Company which results in a Material Injury. If the Company desires to terminate the Executive for Cause pursuant to the provisions of this Section 5.3, the Executive will be given a written notice by the Board of the facts and circumstances providing the basis for termination for Cause, and the Executive will have 30 days from the date of such notice to remedy, cure or rectify the situation giving rise to termination for Cause to the reasonable satisfaction of the Board (except in the event of termination for Cause pursuant to subparagraph (i) above as to which no cure period will be permitted). 5.4 Without Cause. The Company may terminate this Agreement Without Cause, upon written notice to the Executive delivered in accordance with Sections 5.6 and 13.1 hereof. For purposes of this Agreement, the Executive will be deemed to have been 7 terminated "Without Cause" if the Executive is terminated by the Company for any reason other than Cause, Disability or death or if the Company delivers a notice of nonrenewal of this Agreement pursuant to Section 3 hereof. 5.5 Good Reason. The Executive may terminate this Agreement for Good Reason, upon written notice to the Company delivered in accordance with Sections 5.6 and 13.1 hereof. For purposes of this definition of "Good Reason," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, "Good Reason" means (i) the assignment to the Executive of any duties materially inconsistent in any respect with the Executive's duties or responsibilities as contemplated in this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (ii) any other action by the Company which results in a material diminishment in the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iii) any breach by the Company of any of the provisions of this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iv) requiring the Executive to relocate to any office or location other than Houston, Texas, without his consent; (v) a 5% or more reduction, or attempted reduction, at any time during the Employment Period, of the Base Salary of the Executive unless such reduction is also applied to all other senior executive officers of the Company; or (vi) the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits provided under Section 4.5 hereof, unless (A) there is substituted a comparable benefit that is at least economically equivalent (in terms of the benefit offered to the Executive) to the benefit in which the Executive's participation is being adversely affected or to the Executive's benefits that are being materially reduced, or (B) the taking of such action affects all other senior executive officers of the Company. Notwithstanding the preceding provisions of this Section 5.5, if the Executive desires to terminate his employment for Good Reason, he shall first give written notice of the facts and circumstances providing the basis for Good Reason to the Board or the Compensation Committee thereof, and allow the Company thirty (30) days from the date of such notice to remedy, cure or rectify the situation giving rise to Good Reason to the reasonable satisfaction of the Executive. 5.6 Notice of Termination. Any termination of this Agreement by the Company or the Executive, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, if such date is other than the date of receipt of such notice (which termination date shall not be more than 15 days after the giving of such notice, unless otherwise provided herein). Notwithstanding the foregoing, the Company may elect to consider the Executive as an employee after the Date of Termination for purposes of complying with the provisions of Section 6 hereof. 8 6. Obligations of the Company upon Termination. 6.1 Cause; Other Than Good Reason. If this Agreement shall be terminated either by the Company for Cause or by the Executive for any reason other than Good Reason (including delivery by the Executive of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof), the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Company. All other obligations of the Company and rights of the Executive hereunder shall terminate effective as of the Date of Termination, except as provided for in any benefit plans, incentive stock plans or other compensation plans and as otherwise provided in this Agreement. 6.2 Death or Disability. If this Agreement is terminated as a result of the Executive's death or Disability, the Company shall pay to the Executive or his estate, in a lump sum in cash within 30 days of the Date of Termination, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. The Executive or his estate shall also be entitled to receive those death and Disability benefits to which the Executive is entitled under the Company's benefit and insurance plans. All other obligations of the Company and rights of the Executive hereunder shall terminate effective as of the Date of Termination, except as provided for in any benefit plans, incentive stock plans or other compensation plans and as otherwise provided in this Agreement. 6.3 Good Reason; Without Cause; Nonrenewal. If this Agreement shall be terminated either by the Executive for Good Reason or by the Company Without Cause (which includes delivery by the Company of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof): (a) The Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination, if not theretofore paid, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, and in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. (b) The Company shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses paid or incurred by the Executive which would have been payable under Section 4.6 hereof if the Executive's employment had not terminated. (c) During the 12-month period commencing on the Date of Termination, the Company shall continue benefits (other than disability benefits), at the Company's expense, to the Executive and/or the Executive's family at least equal to those which would have been provided to them under Section 4.5 hereof if the Executive's 9 employment had not been terminated. Benefits otherwise receivable by the Executive pursuant to this Section shall be reduced to the extent substantially similar benefits are actually received by or made available to the Executive by any other employer during the same time period for which such benefits would be provided pursuant to this Section at a cost to the Executive that is commensurate with the cost incurred by the Executive immediately prior to the Date of Termination (without giving effect to any increase in costs paid by the Executive after the Change in Control which constitutes or may constitute Good Reason); provided, however, that if the Executive becomes employed by a new employer which maintains a medical plan that either (i) does not cover the Executive or a family member or dependent with respect to a preexisting condition which was covered under the applicable Company medical plan, or (ii) does not cover the Executive or a family member or dependent for a designated waiting period, the Executive's coverage under the applicable Company medical plan shall continue (but shall be limited in the event of noncoverage due to a preexisting condition, to such preexisting condition) until the earlier of the end of the applicable period of noncoverage under the new employer's plan or the first anniversary of the Date of Termination. The Executive agrees to report to the Company any coverage and benefits actually received by the Executive or made available to the Executive from such other employer(s). The Executive shall be entitled to elect to change his level of coverage and/or his choice of coverage options (such as Executive only or family medical coverage) with respect to the benefits to be provided by the Company to the Executive to the same extent that actively employed senior executive officers of the Company are permitted to make such changes; provided, however, that in the event of any such changes the Executive shall pay the amount of any cost increase that would actually be paid by an actively employed senior executive officer of the Company by reason of making the same change in his level of coverage or coverage options. (d) During the 12-month period following the Date of Termination, the Company shall pay to the Executive, in equal semi-monthly installments, the Executive's Base Salary (as in effect on the Date of Termination). (e) During the 12-month period after the Date of Termination, all stock options and restricted stock held by the Executive will continue to vest and be exercisable in accordance with their terms in effect on the Date of Termination. On the conclusion of said 12-month period, all unexpired, unexercised options will be fully vested and all restricted stock will be fully vested. Thereafter, all such fully vested stock options will be exercisable by the Executive until the earlier to occur of the expiration of the term of each stock option or 12 months after the date they become fully vested. Notwithstanding any of the above to the contrary, the Executive will not be entitled to any of the benefits or payments provided in Section 6.3 (c), (d) or (e) hereof if (i) the Executive breaches this Agreement including the provisions of Sections 8, 9, 10 or 12 hereof, or (ii) the Executive fails to execute a release from liability and waiver of right to sue the Company or its Affiliates in a form reasonably acceptable to the Company. 10 6.4 Termination of Employment Following a Change in Control. (a) If this Agreement shall be terminated within two years after a Change in Control which occurs during the term of this Agreement, provided such termination is by the Executive for Good Reason or by the Company Without Cause (which includes delivery by the Company of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof), in lieu of any obligation the Company may have pursuant to Section 6.3 hereof: (1) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Date of Termination, if not theretofore paid, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, and in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. (2) The Company shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses paid or incurred by the Executive which would have been payable under Section 4.6 hereof if the Executive's employment had not terminated. (3) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Date of Termination a severance payment equal to three (3) times the sum of (i) the Executive's Base Salary (as in effect on Date of Termination) and (ii) the Executive's most recent Annual Bonus. If the most recent Annual Bonus was a stock option or a stock grant, the value of the bonus will be deemed to be the number of option shares times the closing price of the Common Stock for the 20 trading days prior to the Date of Termination. (4) During the 36-month period commencing on the Date of Termination, the Company shall continue benefits (other than disability benefits), at the Company's expense to the Executive and/or the Executive's family at least equal to those which would have been provided to them under Section 4.5 hereof if the Executive's employment had not been terminated (without giving effect to any reduction in such benefits subsequent to the Change in Control which reduction constitutes or may constitute Good Reason). (b) The Company shall pay to the Executive all legal fees and expenses incurred by the Executive as a result of a termination which entitles the Executive to any payments under Section 6.4 hereof including all such fees and expenses, if any, incurred in contesting or disputing any Notice of Termination under Section 5.3 hereof or in seeking to obtain or enforce any right or benefit provided by Section 6.4 hereof. Such payments shall be made within five (5) days after delivery of the Executive's respective written requests for payment accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. 11 (c) Any determination by the Executive pursuant to this Section 6.4 that Good Reason exists for the Executive's termination of employment and that adequate remedy has not occurred shall be presumed correct and shall govern unless the party contesting the determination shows by a clear preponderance of the evidence that it was not a good faith reasonable determination. (d) Notwithstanding any dispute concerning whether Good Reason exists for termination of employment or whether adequate remedy has occurred, the Company shall immediately pay to the Executive any amounts otherwise due under this Section 6.4. The Executive may be required to repay such amounts to the Company if any such dispute is finally determined adversely to the Executive. (e) The Executive shall not be required to mitigate damages with respect to the amount of any payment provided under this Section 6.4 by seeking other employment or otherwise, nor shall the amount of any payment provided under this Section 6.4 be reduced by retirement benefits, deferred compensation or any compensation earned by the Executive as a result of employment by another employer. 7. Executive's Obligation to Avoid Conflicts of Interest. For purposes of this Section 7, all references to the Company shall mean and include its Affiliates. The Executive further agrees to comply with the Company's conflict of interest policy, including the Company's business ethics policy, as in effect from time to time. 8. Executive's Confidentiality Obligation. 8.1 For purposes of this Section 8, all references to the Company shall mean and include its Affiliates. The Executive hereby acknowledges, understands and agrees that all Confidential Information, as defined in Section 8.2 hereof, whether developed by the Executive or others employed by or in any way associated with the Executive or the Company, is the exclusive and confidential property of the Company and shall be regarded, treated and protected as such in accordance with this Agreement. The Executive acknowledges that all such Confidential Information is in the nature of a trade secret. Failure to mark any writing confidential shall not affect the confidential nature of such writing or the information contained therein. 8.2 For purposes of this Agreement, "Confidential Information" means information, which is used in the business of the Company and (i) is proprietary to, about or created by the Company, (ii) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company, (iii) is designated as Confidential Information by the Company, is known by the Executive to be considered confidential by the Company, or from all the relevant circumstances should reasonably be assumed by the Executive to be confidential and proprietary to the Company, or (iv) is not generally known by non-Company personnel. Confidential Information excludes, however, any information that is lawfully in the public domain or has been publicly disclosed by the Company. Such Confidential Information includes, without limitation, the following types of information and other information of a similar nature (whether or not reduced to writing or designated as confidential): 12 (a) Internal personnel and financial information of the Company, vendor information (including vendor characteristics, services, prices, lists and agreements), purchasing and internal cost information, internal service and operational manuals, and the manner and methods of conducting the business of the Company; (b) Marketing and development plans, price and cost data, price and fee amounts, pricing and billing policies, quoting procedures, marketing techniques, forecasts and forecast assumptions and volumes, and future plans and potential strategies (including, without limitation, all information relating to any acquisition prospect and the identity of any key contact within the organization of any acquisition prospect) of the Company which have been or are being discussed; (c) Names of customers and their representatives, contracts (including their contents and parties), customer services, and the type, quantity, specifications and content of products and services purchased, leased, licensed or received by customers of the Company; (d) Confidential and proprietary information provided to the Company by any actual or potential customer, government agency or other third party (including businesses, consultants and other entities and individuals); and (e) Work product resulting from or related to the research, development or production of the drug development programs of the Company. 8.3 As a consequence of the Executive's acquisition or anticipated acquisition of Confidential Information, the Executive shall occupy a position of trust and confidence with respect to the affairs and business of the Company. In view of the foregoing and of the consideration to be provided to the Executive, the Executive agrees that it is reasonable and necessary that the Executive make each of the following covenants: (a) At any time during the Employment Period and thereafter, the Executive shall not disclose Confidential Information to any person or entity, either inside or outside of the Company, other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent (unless such disclosure is compelled pursuant to court orders or subpoena, and at which time the Executive shall give prior written notice of such proceedings to the Company). (b) At any time during the Employment Period and thereafter, the Executive shall not use, copy or transfer Confidential Information other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent. (c) On the Date of Termination, the Executive shall promptly deliver to the Company (or its designee) all written materials, records and documents made by the Executive or which came into his possession prior to or during the Employment Period concerning the business or affairs of the Company, including, without limitation, all materials containing Confidential Information. 13 9. Disclosure of Information, Ideas, Concepts, Improvements, Discoveries and Inventions. As part of the Executive's fiduciary duties to the Company, the Executive agrees that during his employment by the Company and thereafter following the Date of Termination, the Executive shall promptly disclose in writing to the Company all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, and whether or not reduced to practice, which are conceived, developed, made or acquired by the Executive during the Employment Period, either individually or jointly with others, and which relate to the business, products or services of the Company or its Affiliates, irrespective of whether the Executive used the Company's time or facilities and irrespective of whether such information, idea, concept, improvement, discovery or invention was conceived, developed, discovered or acquired by the Executive on the job, at home, or elsewhere. This obligation extends to all types of information, ideas and concepts, including information, ideas and concepts relating to research and development of drugs, drug discovery and manufacturing processes, new types of services, corporate opportunities, acquisition prospects, prospective names or service marks for the Company's business activities, and the like. 10. Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship. 10.1 All references in this Section 10 to the Company shall mean and include its Affiliates. All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by the Executive or which are disclosed or made known to the Executive, individually or in conjunction with others, during the Executive's employment by the Company and which relate to the business, products or services of the Company or its Affiliates (including, without limitation, all such information relating to research and development of drugs, drug discovery and manufacturing processes, corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customers' organizations, marketing and merchandising techniques, and prospective names and service marks) are and shall be the sole and exclusive property of the Company. Furthermore, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of the Company. 10.2 In particular, the Executive hereby specifically sells, assigns, transfers and conveys to the Company all of his worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor's certificates or other industrial rights which may be filed in respect thereof, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and applications for registration of such names and service marks. The Executive shall assist the Company and its nominee at all times, during the Employment Period and thereafter, in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, which assistance shall include, but shall not be limited to, the execution of all lawful oaths and all 14 assignment documents requested by the Company or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and any application for the registration of such names and service marks. 10.3 In the event the Executive creates, during the Employment Period, any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as, videotapes, written presentations on acquisitions, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to the Company's business, products or services, whether such work is created solely by the Executive or jointly with others, the Company shall be deemed the author of such work if the work is prepared by the Executive in the scope of his employment; or, if the work is not prepared by the Executive within the scope of his employment but is specially ordered by the Company as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire, and the Company shall be the author of such work. If such work is neither prepared by the Executive within the scope of his employment nor a work specially ordered and deemed to be a work made for hire, then the Executive hereby agrees to sell, transfer, assign and convey, and by these presents, does sell, transfer, assign and convey, to the Company all of the Executive's worldwide right, title and interest in and to such work and all rights of copyright therein. The Executive agrees to assist the Company and its Affiliates, at all times, during the Employment Period and thereafter, in the protection of the Company's worldwide right, title and interest in and to such work and all rights of copyright therein, which assistance shall include, but shall not be limited to, the execution of all documents requested by the Company or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries. 10.4 The provisions of this Section 10 shall not supersede any proprietary information agreement (the "Proprietary Agreement") between the Executive and the Company which shall remain in full force and effect and, moreover, this Agreement, the Proprietary Agreement and any such other similar agreement between the parties shall be construed and applied as being mutually consistent to the fullest extent possible. 11. Certain Payments by the Company 11.1 In the event that the Executive is deemed to have received an "excess parachute payment" (as defined in Section 280G(b) of the Code) which is subject to the excise taxes (the "Excise Taxes") imposed by Section 4999 of the Code in respect of any payment pursuant to this Agreement or any other agreement, plan, instrument or obligation, in whatever form, the Company shall make the Bonus Payment (defined below) to the Executive notwithstanding any contrary provision in this Agreement or any other agreement, plan, instrument or obligation. 11.2 The term "Bonus Payment" means a cash payment in an amount equal to the sum of (i) all Excise Taxes payable by the Executive, plus (ii) all additional Excise Taxes and federal or state income taxes to the extent such taxes are imposed in respect of the Bonus Payment, such that the Executive shall be in the same after-tax position and shall have received the same 15 benefits that he would have received if the Excise Taxes had not been imposed. For purposes of calculating any income taxes attributable to the Bonus Payment, the Executive shall be deemed for all purposes to be paying income taxes at the highest marginal federal income tax rate, taking into account any applicable surtaxes and other generally applicable taxes which have the effect of increasing the marginal federal income tax rate and, if applicable, at the highest marginal state income tax rate, to which the Bonus Payment and the Executive are subject. An example of the calculation of the Bonus Payment is set forth below. Assume that the Excise Tax rate is 20%, the highest federal marginal income tax rate is 40% and the Executive is not subject to state income taxes. Further assume that the Executive has received an excess parachute payment in the amount of $200,000, on which $40,000 ($200,000 x 20%) in Excise Taxes are payable. The amount of the required Bonus Payment is thus computed to be $100,000, i.e., the Bonus Payment of $100,000, less additional Excise Taxes on the Bonus Payment of $20,000 (i.e., 20% x $100,000) and income taxes of $40,000 (i.e., 40% x $100,000), yields $40,000, the amount of the Excise Taxes payable in respect of the original excess parachute payment. 11.3 The Executive agrees to reasonably cooperate with the Company to minimize the amount of the excess parachute payments, including, without limitation, assisting the Company in establishing that some or all of the payments received by the Executive that are "contingent on a change," as described in Section 280G(b)(2)(A)(i) of the Code, are reasonable compensation for personal services actually rendered by the Executive before the date of such change or to be rendered by the Executive on or after the date of such change. In the event that the Company is able to establish that the amount of the excess parachute payments is less than originally anticipated by the Executive, the Executive shall refund to the Company any excess Bonus Payment to the extent not required to pay Excise Taxes or income taxes (including those incurred in respect of receipt of the Bonus Payment). Notwithstanding the foregoing, the Executive shall not be required to take any action which his attorney or tax advisor advises him in writing (i) is improper or (ii) exposes the Executive to personal liability. The Executive may require the Company to deliver to the Executive an indemnification agreement in form and substance reasonably satisfactory to the Executive as a condition to taking any action required by this Section 11.3. 11.4 The Company shall make any payment required to be made under Section 11 hereof in a cash lump sum after the date on which the Executive received or is deemed to have received any such excess parachute payment. Any payment required to be paid by the Company under Section 11 hereof which is not paid within 30 days of receipt by the Company of the Executive's written demand therefor, delivered in accordance with Section 13.1 hereof, shall thereafter be deemed delinquent, and the Company shall pay to the Executive immediately upon demand interest at the highest nonusurious rate per annum allowed by applicable law from the date such payment becomes delinquent to the date of payment of such delinquent sum with interest. 11.5 In the event that there is any change to the Code which results in the recodification of Section 280G or Section 4999 of the Code, or in the event that either such section of the Code is amended, replaced or supplemented by other provisions of the Code of similar import ("Successor Provisions"), then this Agreement shall be applied and enforced with respect to such new Code provisions in a manner consistent with the intent of the parties as expressed herein, which is to assure that the Executive is in the same after-tax position and has 16 received the same benefits that he would have been in and received if any taxes imposed by Section 4999 (or any Successor Provisions) had not been imposed. 11.6 All determinations required to be made under Section 11 hereof including, without limitation, whether and when a Bonus Payment is required, and the amount of such Bonus Payment and the assumptions to be utilized in arriving at such determinations, unless otherwise expressly set forth in this Agreement, shall be made within 30 days from the Date of Termination by the independent tax consultant(s) selected by the Company and reasonably acceptable to the Executive (the "Tax Consultant"). The Tax Consultant must be a qualified tax attorney or certified public accountant. All fees and expenses of the Tax Consultant shall be paid in full by the Company. Any Excise Taxes as determined pursuant to Section 11 hereof shall be paid by the Company to the Internal Revenue Service or any other appropriate taxing authority on the Executive's behalf within five (5) business days after receipt of the Tax Consultant's final determination by the Company and the Executive. 11.7 If the Tax Consultant determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Taxes are payable by the Executive, the Tax Consultant shall furnish the Executive with a written opinion that failure to disclose or report the Excise Taxes on the Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or any other penalty. 11.8 The Company shall indemnify and hold harmless the Executive, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by the Executive with respect to the exercise by the Company of any of its rights under Section 11 hereof, including, without limitation, any Losses related to the Company's decision to contest a claim of any imputed income to the Executive. The Company shall pay all fees and expenses incurred under Section 11 hereof, and shall promptly reimburse the Executive for the reasonable expenses incurred by the Executive in connection with any actions taken by the Company or required to be taken by the Executive hereunder. Any payments owing to the Executive and not made within 30 days of delivery, in accordance with Section 13.1 hereof, to the Company of evidence of the Executive's entitlement thereto shall be paid to the Executive together with interest at the maximum nonusurious rate permitted by law. 12. Executive's Non Competition Obligation. 12.1 (a) All references in this Section 12 to the Company shall mean and include its Affiliates. During the Employment Period and for the 12-month period following the Date of Termination hereof, the Executive shall not, acting alone or in conjunction with others, directly or indirectly, in the United States and any other business territories in which the Company is presently or from time to time during the Employment Period conducting business, invest or engage, directly or indirectly, in any Competing Business or accept employment with or render services to such a Competing Business as a director, officer, agent, executive or consultant or in any other capacity; provided, however, that this Section 12.1(a) shall not be deemed violated if the Executive is or becomes the Beneficial Owner of up to three percent of the Voting Stock of any corporation subject to the periodic reporting requirements of the Exchange Act. Notwithstanding the above, the Executive may serve as an officer, director, agent, employee or 17 consultant to a Competing Business whose business is diversified and which is, as to the part of its business to which the Executive is providing services, not a Competing Business; provided, that prior to accepting employment or providing services to such a Competing Business, the Executive and the Competing Business will provide written assurances satisfactory to the Company that the Executive will not render services directly or indirectly for a 12-month period to any portion of the Competing Business which competes directly or indirectly with the Company. (b) In addition to the other obligations agreed to by the Executive in this Agreement, the Executive agrees that for 12 months following the Date of Termination hereof, he shall not directly or indirectly, (i) hire or attempt to hire any employee of the Company, or induce, entice, encourage or solicit any employee of the Company to leave his or her employment, or (ii) contact, communicate or solicit any distributor, customer or acquisition or business prospect or business opportunity of the Company for the purpose of causing them to terminate or alter or amend their business relationship with the Company to the Company's detriment. Notwithstanding the foregoing, if the Company fails to make the payments to the Executive set forth in Section 6.3 or 6.4 hereof, then the terms of this Section 12.1 will not be effective from the date of such nonpayment; provided, that if the Company subsequently makes any such payments, this Section 12.1 will become effective in accordance with its terms for so long as the Company continues to make the payments required by Section 6.3 or 6.4 hereof. 12.2 (a) The Executive hereby specifically acknowledges and agrees that: (1) The Company expended and will continue to expend substantial time, money and effort in developing its business; (2) The Executive will, in the course of his employment, be personally entrusted with and exposed to Confidential Information; (3) The Company, during the Employment Period and thereafter, will be engaged in its highly competitive business in which many firms compete; (4) The Executive could, after having access to the Company's financial records, contracts, and other Confidential Information and know-how and, after receiving training by and experience with the Company, become a competitor; (5) The Company will suffer great loss and irreparable harm if the Executive terminates his employment and enters, directly or indirectly, into competition with the Company; (6) The temporal and other restrictions contained in this Section 12 are in all respects reasonable and necessary to protect the business goodwill, trade secrets, prospects and other reasonable business interests of the Company; 18 (7) The enforcement of this Agreement in general, and of this Section 12 in particular, will not work an undue or unfair hardship on the Executive or otherwise be oppressive to him; it being specifically acknowledged and agreed by the Executive that he has activities and other business interests and opportunities which will provide him adequate means of support if the provisions of this Section 12 are enforced after the Termination Date; and (8) The enforcement of this Agreement in general, and of this Section 12 in particular, will neither deprive the public of needed goods or services nor otherwise be injurious to the public. (b) The Executive agrees that if an arbitrator (pursuant to Section 13.13 hereof) or a court of competent jurisdiction determines that the length of time or any other restriction, or portion thereof, set forth in this Section 12 is overly restrictive and unenforceable, the arbitrator or court shall reduce or modify such restrictions to those which it deems reasonable and enforceable under the circumstances, and as so reduced or modified, the parties hereto agree that the restrictions of this Section 12 shall remain in full force and effect. The Executive further agrees that if an arbitrator or court of competent jurisdiction determines that any provision of this Section 12 is invalid or against public policy, the remaining provisions of this Section 12 and the remainder of this Agreement shall not be affected thereby, and shall remain in full force and effect. (c) In the event of any pending, threatened or actual breach of any of the covenants or provisions of Sections 8, 9, 10 or 12 hereof, as determined by a court of competent jurisdiction, it is understood and agreed by the Executive that the remedy at law for a breach of any of the covenants or provisions of these Sections may be inadequate and, therefore, the Company shall be entitled to a restraining order or injunctive relief in addition to any other remedies at law and in equity, as determined by a court of competent jurisdiction. Should a court of competent jurisdiction or an arbitrator (pursuant to Section 13.13 hereof) declare any provision of Sections 8, 9, 10 or 12 hereof to be unenforceable due to an unreasonable restriction of duration or geographical area, or for any other reason, such court or arbitrator is hereby granted the consent of each of the Executive and the Company to reform such provision and/or to grant the Company any relief, at law or in equity, reasonably necessary to protect the reasonable business interests of the Company or any of its Affiliates. The Executive hereby acknowledges and agrees that all of the covenants and other provisions of Sections 8, 9, 10 or 12 hereof are reasonable and necessary for the protection of the Company's reasonable business interests. The Executive hereby agrees that if the Company prevails in any action, suit or proceeding with respect to any matter arising out of or in connection with Sections 8, 9, 10 or 12 hereof, the Company shall be entitled to all equitable and legal remedies, including, but not limited to, injunctive relief and compensatory damages, as determined by a court of competent jurisdiction. (d) It is acknowledged, understood and agreed by and between the parties hereto that the covenants made by the Executive in this Section 12 are essential elements of this Agreement and that, but for the agreement of the Executive to comply with such covenants, the Company would not have entered into this Agreement. 19 13. Miscellaneous. 13.1 Notices. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when (i) delivered by hand or sent by facsimile, or (ii) on the third business day following deposit in the United States mail by registered or certified mail, return receipt requested, to the addresses as follows (provided that notice of change of address shall be deemed given only when received): If to the Company to: Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Attention: President and Chief Executive Officer Facsimile No.: (713) 782-8232 If to the Executive to: Richard A. F. Dixon, Ph.D. Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Facsimile No.: (713) 782-8232 or to such other names or addresses as the Company or the Executive, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section 13.1. 13.2 Waiver of Breach. The waiver by any party hereto of a breach of any provision of this Agreement shall neither operate nor be construed as a waiver of any subsequent breach by any party. Except as expressly provided for herein, the failure of either party hereto to take any action by reason of any breach will not deprive such party of the right to take action at any time while such breach occurs. 13.3 Assignment. This Agreement shall be binding upon and inure to the benefit of the Company, its successors, legal representatives and assigns, and upon the Executive, his heirs, executors, administrators, representatives and assigns; provided, however, the Executive agrees that his rights and obligations hereunder are personal to him and may not be assigned without the express written consent of the Company. Any reference to "Company" herein shall mean the Company as well as any successors thereto. 13.4 Entire Agreement; No Oral Amendments. This Agreement, together with any exhibit attached hereto and any document, policy, rule or regulation referred to herein, replaces all previous agreements and discussions relating to the same or similar subject matter between the Executive and the Company (including, but not limited to, that certain Restated and Amended Employment Agreement dated July 15, 1990, as amended, and Termination Agreement dated as of July 1, 1995, as amended which are hereby terminated), and constitutes the entire agreement between the Executive and the Company with respect to the subject matter 20 of this Agreement. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by any executive, officer, or representative of the Company or by any written agreement unless signed by an officer of the Company who is expressly authorized by the Company to execute such document. 13.5 Enforceability. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 13.6 Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. 13.7 Corporate Authority. The Company has all corporate power and authority necessary to enter into this Agreement and to perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by the Company. 13.8 Defense of Claims. The Executive agrees that, during the Employment Period and for a period of two (2) years after his Termination Date, upon request from the Company, he will reasonably cooperate with the Company and its Affiliates in the defense of any claims or actions that may be made by or against the Company or any of its Affiliates that affect his prior areas of responsibility, except if the Executive's reasonable interests are adverse to the Company or Affiliates in such claim or action. To the extent travel is required to comply with the requirements of this Section 13.8, the Company shall, to the extent possible, provide the Executive with notice at least 10 days prior to the date on which such travel would be required. The Company agrees to promptly pay or reimburse the Executive upon demand for all of his reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply, with his obligations under this Section 13.8. 13.9 Withholdings: Right of Offset. The Company may withhold and deduct from any benefits and payments made or to be made pursuant to this Agreement (a) all federal, state, local and other taxes as may be required pursuant to any law or governmental regulation or ruling, (b) all other employee deductions made with respect to the Company's employees generally, and (c) any advances made to the Executive and owed to the Company. 13.10 Nonalienation. The right to receive payments under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by the Executive, his dependents or beneficiaries, or to any other person who is or may become entitled to receive such payments hereunder. The right to receive payments hereunder shall not be subject to or liable for the debts, contracts, liabilities, engagements or torts of any person who is or may become entitled to receive such payments, nor may the same be subject to attachment or seizure by any creditor of such person under any circumstances, and any such attempted attachment or seizure shall be void and of no force and effect. 21 13.11 Incompetent or Minor Payees. Should the Board determine that any person to whom any payment is payable under this Agreement has been determined to be legally incompetent or is a minor, any payment due hereunder may, notwithstanding any other provision of this Agreement to the contrary, be made in any one or more of the following ways: (a) directly to such minor or person; (b) to the legal guardian or other duly appointed personal representative of the person or estate of such minor or person; or (c) to such adult or adults as have, in the good faith knowledge of the Board, assumed custody and support of such minor or person; and any payment so made shall constitute full and complete discharge of any liability under this Agreement in respect to the amount paid. 13.12 Title and Headings; Construction. Titles and headings to Sections hereof are for the purpose of reference only and shall in no way limit, define or otherwise affect the provisions hereof. Any and all Exhibits referred to in this Agreement are, by such reference, incorporated herein and made a part hereof for all purposes. The words "herein", "hereof", "hereunder" and other compounds of the word "here" shall refer to the entire Agreement and not to any particular provision hereof. 13.13 Arbitration. (a) If any dispute or controversy arises between the Executive and the Company relating to (1) this Agreement in any way or arising out of the parties' respective rights or obligations under this Agreement on (2) the employment of the Executive or the termination of such employment, then either party may submit the dispute or controversy to arbitration under the then-current Commercial Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA"); provided, however, the Company shall retain its rights to seek a restraining order or injunctive relief pursuant to Section 12.2 hereof. Any arbitration hereunder shall be conducted before a panel of three arbitrators unless the parties mutually agree that the arbitration shall be conducted before a single arbitrator. The arbitrators shall be selected (from lists provided by the AAA) through mutual agreement of the parties, if possible. If the parties fail to reach agreement upon appointment of arbitrators within twenty (20) days following receipt by one party of the other party's notice of desire to arbitrate, then within five (5) days following the end of such 20-day period, each party shall select one arbitrator who, in turn, shall within five (5) days jointly select the third arbitrator to comprise the arbitration panel hereunder. The site for any arbitration hereunder shall be in Harris County, Texas, unless otherwise mutually agreed by the parties, and the parties hereby waive any objection that the forum is inconvenient. (b) The party submitting any matter to arbitration shall do so in accordance with the Rules. Notice to the other party shall state the question or questions to be submitted for decision or award by arbitration. Notwithstanding any provision of this Section 13.13, the Executive shall be entitled to seek specific performance of the Executive's right to be paid during the pendency of any dispute or controversy arising under this Agreement. In order to prevent irreparable harm, the arbitrator may grant temporary or permanent injunctive or other equitable relief for the protection of property rights. 22 (c) The arbitrator shall set the date, time and place for each hearing, and shall give the parties advance written notice in accordance with the Rules. Any party may be represented by counsel or other authorized representative at any hearing. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 et. seq. (or its successor). The arbitrator shall apply the substantive law and the law of remedies, if applicable) of the State of Texas to the claims asserted to the extent that the arbitrator determines that federal law is not controlling. (d) (1) Any award of an arbitrator shall be final and binding upon the parties to such arbitration, and each party shall immediately make such changes in its conduct or provide such monetary payment or other relief as such award requires. The parties agree that the award of the arbitrator shall be final and binding and shall be subject only to the judicial review permitted by the Federal Arbitration Act. (2) The parties hereto agree that the arbitration award may he entered with any court having jurisdiction and the award may then be enforced as between the parties, without further evidentiary proceedings, the same as if entered by the court at the conclusion of a judicial proceeding in which no appeal was taken. The Company and the Executive hereby agree that a judgment upon any award rendered by an arbitrator may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (e) Each party shall pay any monetary amount required by the arbitrator's award, and the fees, costs and expenses for its own counsel, witnesses and exhibits, unless otherwise determined by the arbitrator in the award. The compensation and costs and expenses assessed by the arbitrator(s) and the AAA shall be split evenly between the parties unless otherwise determined by the arbitrator in the award. If court proceedings to stay litigation or compel arbitration are necessary, the party who opposes such proceedings to stay litigation or compel arbitration, if such party is unsuccessful, shall pay all associated costs, expenses, and attorney's fees which are reasonably incurred by the other party as determined by the arbitrator. 13.14 Survival of Certain Provisions. Wherever appropriate to the intention of the parties hereto, the respective rights and obligations of said parties, including, but not limited to, the rights and obligations set forth in Sections 8 through 12 hereof and this Section 13, shall survive any termination or expiration of this Agreement. 13.15 No Strict Construction. The Executive represents to the Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read the Agreement and that he understands its terms and conditions. The parties hereto agree that the language used in this Agreement shall be deemed to be the language chosen by them to express their mutual intent, and no rule of strict construction shall be applied against either party hereto. The Executive acknowledges that he has had the opportunity to consult with counsel of his choice, independent of Employer's counsel, regarding the terms and conditions of this Agreement and has done so to the extent that he, in his discretion, deemed to be appropriate. 23 IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above. Texas Biotechnology Corporation By: /s/ Bruce D. Given, M.D. ----------------------------------------- Bruce D. Given, M. D. President and Chief Executive Officer Executive: By: /s/ Richard A. F. Dixon, Ph.D. ----------------------------------------- Richard A. F. Dixon, Ph.D. 24 EX-10.7 6 h03454exv10w7.txt TERMINATION AGREEMENT - STEPHEN L. MUELLER Exhibit 10.7 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (this "Agreement") is made and entered into this 20th day of March, 2003, by and between Texas Biotechnology Corporation, a Delaware corporation having its principal executive office at 7000 Fannin, Houston, Texas 77030 (hereinafter referred to as the "Company"), and Stephen L. Mueller (hereinafter referred to as the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Executive in an executive capacity and the Executive desires to enter the Company's employ. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms have the meanings prescribed below: AAA shall have the meaning assigned thereto in Section 12.13 hereof Affiliate is used in this Agreement to define a relationship to a person or entity and means a person or entity who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such person or entity. Agreement shall have the meaning assigned thereto in the preamble. Annual Bonus shall have the meaning assigned thereto in Section 4.2 hereof. Base Salary shall have the meaning assigned thereto in Section 4.1 hereof. Board means the Board of Directors of the Company. Bonus Payment shall have the meaning assigned thereto in Section 11.2 hereof. Cause shall have the meaning assigned thereto in Section 5.3 hereof. Change in Control of the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: (a) any "person" (as defined in section 3(a)(9) of the Exchange Act, and as such term is modified in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this definition) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holder of securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which, in the judgment of the Compensation Committee of the Board, the holders of the Common Stock, immediately prior to such transaction or series of transactions continue to have the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. Except during a Potential Change in Control of the Company, the Board may (i) deem any other corporate event affecting the Company (other than those described in clauses (a)-(d) of this definition) to be a "Change in Control," and (ii) may amend this definition of "Change in Control" in connection with an identical amendment being made to termination agreements entered into by the Company and all of its senior executive officers. Code means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated by the Internal Revenue Service thereunder, all as in effect from time to time during the Employment Period. 2 Common Stock means the Company's common stock, par value $.05 per share. Company means Texas Biotechnology Corporation, a Delaware corporation, the principal executive office of which is located at 7000 Fannin, Houston, Texas 77030. Competing Business means any individual, business, firm, company, partnership, joint venture, organization, or other entity that markets or has entered clinical development of any product addressing the same disease target as a product discovered by, or licensed to, the Company which is either (i) in Phase III of clinical development, (ii) pending approval at U.S. Food & Drug Administration or (iii) marketed by the Company or its licensee. Confidential Information shall have the meaning assigned thereto in Section 8.2 hereof. Date of Termination means the earliest to occur of (i) the date of the Executive's death or (ii) the date of receipt of the Notice of Termination, or such later date as may be prescribed in the Notice of Termination in accordance with Section 5.6 hereof. Disability means an illness or other disability that prevents the Executive from discharging his responsibilities under this Agreement for a period of 180 consecutive calendar days, or an aggregate of 180 calendar days in any calendar year, during the Employment Period, all as determined in good faith by the Board (or a committee thereof). Effective Date means the date of execution hereof. Employment Period shall have the meaning assigned thereto in Section 3 hereof. Executive means Stephen L. Mueller, an individual residing in Houston, Texas. Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder, all as in effect from time to time during the Employment Period. Excise Taxes shall have the meaning assigned thereto in Section 11.1 hereof. Good Reason shall have the meaning assigned thereto in Section 5.5 hereof. Initial Term shall have the meaning assigned thereto in Section 3 hereof. Losses shall have the meaning assigned thereto in Section 11.8 hereof. Material Injury shall have the meaning assigned thereto in Section 5.3 hereof. Notice of Termination shall have the meaning assigned thereto in Section 5.6 hereof. Potential Change in Control of the Company shall be deemed to have occurred if (a) the Company enters into an agreement the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or consider taking action which if consummated would constitute a Change in Control or (c) 3 the Board adopts a resolution to the effect that a potential Change in Control of the Company has occurred. Proprietary Agreement shall have the meaning assigned thereto in Section 10.4 hereof. Rules shall have the meaning assigned thereto in Section 12.13 hereof. Successor Provisions shall have the meaning assigned thereto in Section 11.5 hereof. Tax Consultant shall have the meaning assigned thereto in Section 11.6 hereof. Vacation Time shall have the meaning assigned thereto in Section 4.3 hereof. Without Cause shall have the meaning assigned thereto in Section 5.4 hereof. 2. General Duties of the Company and the Executive. 2.1 (a) The Company agrees to employ the Executive, and the Executive agrees to accept employment by the Company and to serve the Company as its Vice President of Finance and Administration, Secretary and Treasurer. The Executive shall report to and be subject to the direction of the Chief Executive Officer and the Board. The Executive shall have the authority, duties and responsibilities that are normally associated with and inherent in the executive capacity in which the Executive will be performing, and shall have such other or additional duties which are not inconsistent with the Executive's position, as may from time to time be reasonably assigned to the Executive by the Chief Executive Officer or the Board (or a committee thereof). While employed hereunder, the Executive shall devote full time and attention during normal business hours to the affairs of the Company and use his best efforts to perform faithfully and efficiently his duties and responsibilities. The Executive agrees to cooperate fully with the Chief Executive Officer and the Board, and other executive officers of the Company, and not to engage in any activity which conflicts with or interferes with the performance of his duties hereunder. During the Employment Period, the Executive shall devote his best efforts and skills to the business and interests of the Company, do his utmost to further enhance and develop the Company's best interests and welfare, and endeavor to improve his ability and knowledge of the Company's business, in an effort to increase the value of his services for the mutual benefit of the parties hereto. During the Employment Period, it shall not be a violation of this Agreement for the Executive (i) serve on any corporate board or committee thereof with the approval of the Board, (ii) to serve on any civic, or charitable boards or committees (except for boards or committees of a Competing Business unless approved by the Board), (iii) deliver lectures, fulfill teaching or speaking engagements, (iv) testify as a witness in litigation involving a former employer or (v) manage personal investments; provided, however, any such activities must not materially interfere with performance of the Executive's responsibilities under this Agreement. (b) The Executive represents and covenants to the Company that he is not subject or a party to any employment agreement, noncompetition covenant, nondisclosure agreement, or any similar agreement or covenant that would prohibit the Executive from executing this Agreement and fully performing his duties and responsibilities hereunder, or would in any manner, directly or indirectly, limit or affect the duties and 4 responsibilities that may now or in the future be assigned to the Executive hereunder. The Executive further represents and warrants that he is not presently subject to any legal actions, claims or administrative proceedings, including bankruptcy proceedings or IRS audits or proceedings, which would affect his ability to perform his responsibilities hereunder. 2.2 The Executive agrees and acknowledges that he owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to do no act and to make no statement, oral or written, which would injure the Company's business, its interests or its reputation. 2.3 The Executive agrees to execute and comply at all times during the Employment Period with all applicable policies, rules and regulations of the Company, including, without limitation, the Company's business ethics policy and the Company's policy regarding trading in the Common Stock, as each is in effect from time to time during the Employment Period. 3. Term. Unless sooner terminated pursuant to other provisions hereof, the Executive's period of employment under this Agreement shall be a period of one year beginning on the Effective Date (the "Initial Term"). The Executive's period of employment under this Agreement shall be automatically renewed for successive one-year terms on each anniversary of the Effective Date (the Initial Term and any and all renewals thereof are referred to herein collectively as the "Employment Period"), unless written notice of nonrenewal is delivered by one party to the other at least 60 days before the end of the Initial Term or any such one-year renewal term. 4. Compensation and Benefits. 4.1 Base Salary. As compensation for services to the Company, the Company shall pay to the Executive from the Effective Date until the Date of Termination an annual base salary of $181,000 (the "Base Salary"). The Board (or a committee thereof) will conduct an annual review of the Executive's compensation and, in its discretion, may increase the Base Salary based upon relevant circumstances. The Base Salary shall be payable in equal semi-monthly installments or in accordance with the Company's established policy, subject only to such payroll and withholding deductions as may be required by law and other deductions (consistent with Company policy for all employees) relating to the Executive's election to participate in the Company's insurance and other employee benefit plans. 4.2 Bonus. In addition to the Base Salary, the Executive shall be awarded, for each fiscal year until the Date of Termination, an annual bonus to be determined by the Board (or a committee thereof), in its sole discretion (the "Annual Bonus"). Each such Annual Bonus shall be payable at a time to be determined by the Board (or a committee thereof) in its sole discretion. 4.3 Vacation. Until the Date of Termination, the Executive shall be entitled to four (4) weeks paid vacation during each one-year period commencing on the Effective Date (the "Vacation Time"). The use of any Vacation Time not taken during the applicable one-year period will be subject to the Company's vacation policy as in effect from time to time. 5 4.4 Incentive, Savings and Retirement Plans. Until the Date of Termination, the Executive shall be eligible to participate in and shall receive all benefits under all executive incentive, savings and retirement plans and programs currently maintained or hereinafter established by the Company for the benefit of its senior executive officers and/or employees. 4.5 Benefit Plans. Until the Date of Termination, the Executive and/or the Executive's family, as the case may be, shall be eligible to participate in and shall receive all benefits under each welfare benefit plan of the Company currently maintained or hereinafter established by the Company for the benefit of its employees. Such welfare benefit plans may include, without limitation, medical, dental, disability, group life, accidental death and travel accident insurance plans and programs. The Company shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any such employee benefit program or plan, so long as such actions are similarly applicable to covered employees generally. 4.6 Reimbursement of Expenses. The Executive may from time to time until the Date of Termination incur various business expenses customarily incurred by persons holding positions of like responsibility, including, without limitation, travel, entertainment and similar expenses incurred for the benefit of the Company. Subject to the Executive complying with the Company's policy regarding the reimbursement of such expenses as in effect from time to time during the Employment Period, which does not necessarily allow reimbursement of all such expenses, the Company shall reimburse the Executive for such expenses from time to time, at the Executive's request, and the Executive shall account to the Company for all such expenses. 4.7 Stock Options. The Compensation Committee of the Board, in its sole discretion, may grant to the Executive options to acquire shares of Common Stock with such terms and conditions as determined by the Compensation Committee of the Board in its sole discretion. 4.8 Indemnification Agreements. The Company has entered into an Indemnification Agreement regarding indemnification of the Executive. The Company will also cause the Executive to be covered by its director and officer insurance policies as they are in effect from time to time. 5. Termination. 5.1 Death. This Agreement shall terminate automatically upon the death of the Executive. 5.2 Disability. The Company may terminate this Agreement, upon written notice to the Executive delivered in accordance with Sections 5.6 and 12.1 hereof, upon the Disability of the Executive. 5.3 Cause. The Company may terminate this Agreement, upon written notice to the Executive delivered in accordance with Sections 5.6 and 12.1 hereof, for Cause. For purposes of this definition of "Cause," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, subject to the notice provisions set forth below, "Cause" means (i) the conviction (or plea of nolo contendere or equivalent plea) of the 6 Executive of a felony (which, through lapse of time or otherwise, is not subject to appeal), (ii) the Executive having engaged in intentional misconduct causing a violation by the Company of any state or federal laws which results in a material injury to the business, condition (financial or otherwise), results of operations or prospects of the Company as determined in good faith by the Board or a committee thereof (a "Material Injury"), (iii) the Executive having engaged in a theft of corporate funds or corporate assets of the Company or in an act of fraud upon the Company, (iv) an act of personal dishonesty taken by the Executive that was intended to result in personal enrichment of the Executive at the expense of the Company, (v) the Executive's refusal, without proper legal cause, to perform his duties and responsibilities as contemplated in this Agreement or any other breach by the Executive of this Agreement, and (vi) the Executive's engaging in activities which would constitute a breach of the Company's business ethics policy, the Company's policies regarding trading in the Common Stock or any other applicable policies, rules or regulations of the Company which results in a Material Injury. If the Company desires to terminate the Executive for Cause pursuant to the provisions of this Section 5.3, the Executive will be given a written notice by the Board of the facts and circumstances providing the basis for termination for Cause, and the Executive will have 30 days from the date of such notice to remedy, cure or rectify the situation giving rise to termination for Cause to the reasonable satisfaction of the Board (except in the event of termination for Cause pursuant to subparagraph (i) above as to which no cure period will be permitted). 5.4 Without Cause. The Company may terminate this Agreement Without Cause, upon written notice to the Executive delivered in accordance with Sections 5.6 and 12.1 hereof. For purposes of this Agreement, the Executive will be deemed to have been terminated "Without Cause" if the Executive is terminated by the Company for any reason other than Cause, Disability or death or if the Company delivers a notice of nonrenewal of this Agreement pursuant to Section 3 hereof. 5.5 Good Reason. The Executive may terminate this Agreement for Good Reason, upon written notice to the Company delivered in accordance with Sections 5.6 and 12.1 hereof. For purposes of this definition of "Good Reason," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, "Good Reason" means (i) the assignment to the Executive of any duties materially inconsistent in any respect with the Executive's duties or responsibilities as contemplated in this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (ii) any other action by the Company which results in a material diminishment in the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iii) any breach by the Company of any of the provisions of this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iv) requiring the Executive to relocate to any office or location other than Houston, Texas, without his consent; (v) a 5% or more reduction, or attempted reduction, at any time during the Employment Period, of the Base Salary of the Executive unless such reduction is also applied to all other senior executive officers of the Company; or (vi) the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits provided under Section 4.5 hereof, unless (A) 7 there is substituted a comparable benefit that is at least economically equivalent (in terms of the benefit offered to the Executive) to the benefit in which the Executive's participation is being adversely affected or to the Executive's benefits that are being materially reduced, or (B) the taking of such action affects all other senior executive officers of the Company. Notwithstanding the preceding provisions of this Section 5.5, if the Executive desires to terminate his employment for Good Reason, he shall first give written notice of the facts and circumstances providing the basis for Good Reason to the Board or the Compensation Committee thereof, and allow the Company thirty (30) days from the date of such notice to remedy, cure or rectify the situation giving rise to Good Reason to the reasonable satisfaction of the Executive. 5.6 Notice of Termination. Any termination of this Agreement by the Company or the Executive, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, if such date is other than the date of receipt of such notice (which termination date shall not be more than 15 days after the giving of such notice, unless otherwise provided herein). Notwithstanding the foregoing, the Company may elect to consider the Executive as an employee after the Date of Termination for purposes of complying with the provisions of Section 6 hereof. 6. Obligations of the Company upon Termination. 6.1 Cause; Other Than Good Reason. If this Agreement shall be terminated either by the Company for Cause or by the Executive for any reason other than Good Reason (including delivery by the Executive of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof), the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Company. All other obligations of the Company and rights of the Executive hereunder shall terminate effective as of the Date of Termination, except as provided for in any benefit plans, incentive stock plans or other compensation plans and as otherwise provided in this Agreement. 6.2 Death or Disability. If this Agreement is terminated as a result of the Executive's death or Disability, the Company shall pay to the Executive or his estate, in a lump sum in cash within 30 days of the Date of Termination, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. The Executive or his estate shall also be entitled to receive those death and Disability benefits to which the Executive is entitled under the Company's benefit and insurance plans. All other obligations of the Company and rights of the Executive hereunder shall terminate effective as of 8 the Date of Termination, except as provided for in any benefit plans, incentive stock plans or other compensation plans and as otherwise provided in this Agreement. 6.3 Good Reason; Without Cause; Nonrenewal. If this Agreement shall be terminated either by the Executive for Good Reason or by the Company Without Cause (which includes delivery by the Company of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof): (a) The Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination, if not theretofore paid, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, and in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. (b) The Company shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses paid or incurred by the Executive which would have been payable under Section 4.6 hereof if the Executive's employment had not terminated. (c) During the 12-month period commencing on the Date of Termination, the Company shall continue benefits (other than disability benefits), at the Company's expense, to the Executive and/or the Executive's family at least equal to those which would have been provided to them under Section 4.5 hereof if the Executive's employment had not been terminated. Benefits otherwise receivable by the Executive pursuant to this Section shall be reduced to the extent substantially similar benefits are actually received by or made available to the Executive by any other employer during the same time period for which such benefits would be provided pursuant to this Section at a cost to the Executive that is commensurate with the cost incurred by the Executive immediately prior to the Date of Termination (without giving effect to any increase in costs paid by the Executive after the Change in Control which constitutes or may constitute Good Reason); provided, however, that if the Executive becomes employed by a new employer which maintains a medical plan that either (i) does not cover the Executive or a family member or dependent with respect to a preexisting condition which was covered under the applicable Company medical plan, or (ii) does not cover the Executive or a family member or dependent for a designated waiting period, the Executive's coverage under the applicable Company medical plan shall continue (but shall be limited in the event of noncoverage due to a preexisting condition, to such preexisting condition) until the earlier of the end of the applicable period of noncoverage under the new employer's plan or the first anniversary of the Date of Termination. The Executive agrees to report to the Company any coverage and benefits actually received by the Executive or made available to the Executive from such other employer(s). The Executive shall be entitled to elect to change his level of coverage and/or his choice of coverage options (such as Executive only or family medical coverage) with respect to the benefits to be provided by the Company to the Executive to the same extent that actively employed senior executive officers of the Company are permitted to make such changes; provided, however, that in the event of any such changes the Executive shall pay the 9 amount of any cost increase that would actually be paid by an actively employed senior executive officer of the Company by reason of making the same change in his level of coverage or coverage options. (d) During the 12-month period following the Date of Termination, the Company shall pay to the Executive, in equal semi-monthly installments, the Executive's Base Salary (as in effect on the Date of Termination). (e) During the 12-month period after the Date of Termination, all stock options and restricted stock held by the Executive will continue to vest and be exercisable in accordance with their terms in effect on the Date of Termination. On the conclusion of said 12-month period, all unexpired, unexercised options will be fully vested and all restricted stock will be fully vested. Thereafter, all such fully vested stock options will be exercisable by the Executive until the earlier to occur of the expiration of the term of each stock option or 12 months after the date they become fully vested. Notwithstanding any of the above to the contrary, the Executive will not be entitled to any of the benefits or payments provided in Section 6.3 (c), (d) or (e) hereof if (i) the Executive breaches this Agreement including the provisions of Sections 8, 9 and 10 hereof, or (ii) the Executive fails to execute a release from liability and waiver of right to sue the Company or its Affiliates in a form reasonably acceptable to the Company. 6.4 Termination of Employment Following a Change in Control. (a) If this Agreement shall be terminated within two years after a Change in Control which occurs during the term of this Agreement, provided such termination is by the Executive for Good Reason or by the Company Without Cause (which includes delivery by the Company of a notice of nonrenewal of this Agreement pursuant to Section 3 hereof), in lieu of any obligation the Company may have pursuant to Section 6.3 hereof: (1) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Date of Termination, if not theretofore paid, the Executive's Base Salary (as in effect on the Date of Termination) through the Date of Termination, and in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. (2) The Company shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses paid or incurred by the Executive which would have been payable under Section 4.6 hereof if the Executive's employment had not terminated. (3) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the Date of Termination a severance payment equal to one and one-half (1.5) times the sum of (i) the Executive's Base Salary (as in effect on Date of Termination) and (ii) the Executive's most recent Annual Bonus. If the most recent Annual Bonus was a stock option or a stock grant, the 10 value of the bonus will be deemed to be the number of option shares times the closing price of the Common Stock for the 20 trading days prior to the Date of Termination. (4) During the 18-month period commencing on the Date of Termination, the Company shall continue benefits (other than disability benefits), at the Company's expense to the Executive and/or the Executive's family at least equal to those which would have been provided to them under Section 4.5 hereof if the Executive's employment had not been terminated (without giving effect to any reduction in such benefits subsequent to the Change in Control which reduction constitutes or may constitute Good Reason). (b) The Company shall pay to the Executive all legal fees and expenses incurred by the Executive as a result of a termination which entitles the Executive to any payments under Section 6.4 hereof including all such fees and expenses, if any, incurred in contesting or disputing any Notice of Termination under Section 5.3 hereof or in seeking to obtain or enforce any right or benefit provided by Section 6.4 hereof. Such payments shall be made within five (5) days after delivery of the Executive's respective written requests for payment accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. (c) Any determination by the Executive pursuant to this Section 6.4 that Good Reason exists for the Executive's termination of employment and that adequate remedy has not occurred shall be presumed correct and shall govern unless the party contesting the determination shows by a clear preponderance of the evidence that it was not a good faith reasonable determination. (d) Notwithstanding any dispute concerning whether Good Reason exists for termination of employment or whether adequate remedy has occurred, the Company shall immediately pay to the Executive any amounts otherwise due under this Section 6.4. The Executive may be required to repay such amounts to the Company if any such dispute is finally determined adversely to the Executive. (e) The Executive shall not be required to mitigate damages with respect to the amount of any payment provided under this Section 6.4 by seeking other employment or otherwise, nor shall the amount of any payment provided under this Section 6.4 be reduced by retirement benefits, deferred compensation or any compensation earned by the Executive as a result of employment by another employer. 7. Executive's Obligation to Avoid Conflicts of Interest. For purposes of this Section 7, all references to the Company shall mean and include its Affiliates. The Executive further agrees to comply with the Company's conflict of interest policy, including the Company's business ethics policy, as in effect from time to time. 8. Executive's Confidentiality Obligation. 8.1 For purposes of this Section 8, all references to the Company shall mean and include its Affiliates. The Executive hereby acknowledges, understands and agrees that all 11 Confidential Information, as defined in Section 8.2 hereof, whether developed by the Executive or others employed by or in any way associated with the Executive or the Company, is the exclusive and confidential property of the Company and shall be regarded, treated and protected as such in accordance with this Agreement. The Executive acknowledges that all such Confidential Information is in the nature of a trade secret. Failure to mark any writing confidential shall not affect the confidential nature of such writing or the information contained therein. 8.2 For purposes of this Agreement, "Confidential Information" means information, which is used in the business of the Company and (i) is proprietary to, about or created by the Company, (ii) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company, (iii) is designated as Confidential Information by the Company, is known by the Executive to be considered confidential by the Company, or from all the relevant circumstances should reasonably be assumed by the Executive to be confidential and proprietary to the Company, or (iv) is not generally known by non-Company personnel. Confidential Information excludes, however, any information that is lawfully in the public domain or has been publicly disclosed by the Company. Such Confidential Information includes, without limitation, the following types of information and other information of a similar nature (whether or not reduced to writing or designated as confidential): (a) Internal personnel and financial information of the Company, vendor information (including vendor characteristics, services, prices, lists and agreements), purchasing and internal cost information, internal service and operational manuals, and the manner and methods of conducting the business of the Company; (b) Marketing and development plans, price and cost data, price and fee amounts, pricing and billing policies, quoting procedures, marketing techniques, forecasts and forecast assumptions and volumes, and future plans and potential strategies (including, without limitation, all information relating to any acquisition prospect and the identity of any key contact within the organization of any acquisition prospect) of the Company which have been or are being discussed; (c) Names of customers and their representatives, contracts (including their contents and parties), customer services, and the type, quantity, specifications and content of products and services purchased, leased, licensed or received by customers of the Company; (d) Confidential and proprietary information provided to the Company by any actual or potential customer, government agency or other third party (including businesses, consultants and other entities and individuals); and (e) Work product resulting from or related to the research, development or production of the drug development programs of the Company. 8.3 As a consequence of the Executive's acquisition or anticipated acquisition of Confidential Information, the Executive shall occupy a position of trust and confidence with 12 respect to the affairs and business of the Company. In view of the foregoing and of the consideration to be provided to the Executive, the Executive agrees that it is reasonable and necessary that the Executive make each of the following covenants: (a) At any time during the Employment Period and thereafter, the Executive shall not disclose Confidential Information to any person or entity, either inside or outside of the Company, other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent (unless such disclosure is compelled pursuant to court orders or subpoena, and at which time the Executive shall give prior written notice of such proceedings to the Company). (b) At any time during the Employment Period and thereafter, the Executive shall not use, copy or transfer Confidential Information other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent. (c) On the Date of Termination, the Executive shall promptly deliver to the Company (or its designee) all written materials, records and documents made by the Executive or which came into his possession prior to or during the Employment Period concerning the business or affairs of the Company, including, without limitation, all materials containing Confidential Information. 9. Disclosure of Information, Ideas, Concepts, Improvements, Discoveries and Inventions. As part of the Executive's fiduciary duties to the Company, the Executive agrees that during his employment by the Company and thereafter following the Date of Termination, the Executive shall promptly disclose in writing to the Company all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, and whether or not reduced to practice, which are conceived, developed, made or acquired by the Executive during the Employment Period, either individually or jointly with others, and which relate to the business, products or services of the Company or its Affiliates, irrespective of whether the Executive used the Company's time or facilities and irrespective of whether such information, idea, concept, improvement, discovery or invention was conceived, developed, discovered or acquired by the Executive on the job, at home, or elsewhere. This obligation extends to all types of information, ideas and concepts, including information, ideas and concepts relating to research and development of drugs, drug discovery and manufacturing processes, new types of services, corporate opportunities, acquisition prospects, prospective names or service marks for the Company's business activities, and the like. 10. Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship. 10.1 All references in this Section 10 to the Company shall mean and include its Affiliates. All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by the Executive or which are disclosed or made known to the Executive, individually or in conjunction with 13 others, during the Executive's employment by the Company and which relate to the business, products or services of the Company or its Affiliates (including, without limitation, all such information relating to research and development of drugs, drug discovery and manufacturing processes, corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customers' organizations, marketing and merchandising techniques, and prospective names and service marks) are and shall be the sole and exclusive property of the Company. Furthermore, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of the Company. 10.2 In particular, the Executive hereby specifically sells, assigns, transfers and conveys to the Company all of his worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor's certificates or other industrial rights which may be filed in respect thereof, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and applications for registration of such names and service marks. The Executive shall assist the Company and its nominee at all times, during the Employment Period and thereafter, in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, which assistance shall include, but shall not be limited to, the execution of all lawful oaths and all assignment documents requested by the Company or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and any application for the registration of such names and service marks. 10.3 In the event the Executive creates, during the Employment Period, any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as, videotapes, written presentations on acquisitions, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to the Company's business, products or services, whether such work is created solely by the Executive or jointly with others, the Company shall be deemed the author of such work if the work is prepared by the Executive in the scope of his employment; or, if the work is not prepared by the Executive within the scope of his employment but is specially ordered by the Company as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire, and the Company shall be the author of such work. If such work is neither prepared by the Executive within the scope of his employment nor a work specially ordered and deemed to be a work made for hire, then the Executive hereby agrees to sell, transfer, assign and convey, and by these presents, does sell, transfer, assign and convey, to the Company all of the Executive's worldwide right, title and interest in and to such work and all rights of copyright therein. The Executive agrees to assist the Company and its Affiliates, at all times, during the Employment Period and thereafter, in the protection of the Company's worldwide right, title and interest in and to such work and all rights of copyright therein, which assistance shall include, but shall not be 14 limited to, the execution of all documents requested by the Company or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries. 10.4 The provisions of this Section 10 shall not supersede any proprietary information agreement (the "Proprietary Agreement") between the Executive and the Company which shall remain in full force and effect and, moreover, this Agreement, the Proprietary Agreement and any such other similar agreement between the parties shall be construed and applied as being mutually consistent to the fullest extent possible. 11. Certain Payments by the Company 11.1 In the event that the Executive is deemed to have received an "excess parachute payment" (as defined in Section 280G(b) of the Code) which is subject to the excise taxes (the "Excise Taxes") imposed by Section 4999 of the Code in respect of any payment pursuant to this Agreement or any other agreement, plan, instrument or obligation, in whatever form, the Company shall make the Bonus Payment (defined below) to the Executive notwithstanding any contrary provision in this Agreement or any other agreement, plan, instrument or obligation. 11.2 The term "Bonus Payment" means a cash payment in an amount equal to the sum of (i) all Excise Taxes payable by the Executive, plus (ii) all additional Excise Taxes and federal or state income taxes to the extent such taxes are imposed in respect of the Bonus Payment, such that the Executive shall be in the same after-tax position and shall have received the same benefits that he would have received if the Excise Taxes had not been imposed. For purposes of calculating any income taxes attributable to the Bonus Payment, the Executive shall be deemed for all purposes to be paying income taxes at the highest marginal federal income tax rate, taking into account any applicable surtaxes and other generally applicable taxes which have the effect of increasing the marginal federal income tax rate and, if applicable, at the highest marginal state income tax rate, to which the Bonus Payment and the Executive are subject. An example of the calculation of the Bonus Payment is set forth below. Assume that the Excise Tax rate is 20%, the highest federal marginal income tax rate is 40% and the Executive is not subject to state income taxes. Further assume that the Executive has received an excess parachute payment in the amount of $200,000, on which $40,000 ($200,000 x 20%) in Excise Taxes are payable. The amount of the required Bonus Payment is thus computed to be $100,000, i.e., the Bonus Payment of $100,000, less additional Excise Taxes on the Bonus Payment of $20,000 (i.e., 20% x $100,000) and income taxes of $40,000 (i.e., 40% x $100,000), yields $40,000, the amount of the Excise Taxes payable in respect of the original excess parachute payment. 11.3 The Executive agrees to reasonably cooperate with the Company to minimize the amount of the excess parachute payments, including, without limitation, assisting the Company in establishing that some or all of the payments received by the Executive that are "contingent on a change," as described in Section 280G(b)(2)(A)(i) of the Code, are reasonable compensation for personal services actually rendered by the Executive before the date of such change or to be rendered by the Executive on or after the date of such change. In the event that the Company is able to establish that the amount of the excess parachute payments is less than originally anticipated by the Executive, the Executive shall refund to the Company any excess Bonus Payment to the extent not required to pay Excise Taxes or income taxes (including those incurred 15 in respect of receipt of the Bonus Payment). Notwithstanding the foregoing, the Executive shall not be required to take any action which his attorney or tax advisor advises him in writing (i) is improper or (ii) exposes the Executive to personal liability. The Executive may require the Company to deliver to the Executive an indemnification agreement in form and substance reasonably satisfactory to the Executive as a condition to taking any action required by this Section 11.3. 11.4 The Company shall make any payment required to be made under Section 11 hereof in a cash lump sum after the date on which the Executive received or is deemed to have received any such excess parachute payment. Any payment required to be paid by the Company under Section 11 hereof which is not paid within 30 days of receipt by the Company of the Executive's written demand therefor, delivered in accordance with Section 12.1 hereof, shall thereafter be deemed delinquent, and the Company shall pay to the Executive immediately upon demand interest at the highest nonusurious rate per annum allowed by applicable law from the date such payment becomes delinquent to the date of payment of such delinquent sum with interest. 11.5 In the event that there is any change to the Code which results in the recodification of Section 280G or Section 4999 of the Code, or in the event that either such section of the Code is amended, replaced or supplemented by other provisions of the Code of similar import ("Successor Provisions"), then this Agreement shall be applied and enforced with respect to such new Code provisions in a manner consistent with the intent of the parties as expressed herein, which is to assure that the Executive is in the same after-tax position and has received the same benefits that he would have been in and received if any taxes imposed by Section 4999 (or any Successor Provisions) had not been imposed. 11.6 All determinations required to be made under Section 11 hereof including, without limitation, whether and when a Bonus Payment is required, and the amount of such Bonus Payment and the assumptions to be utilized in arriving at such determinations, unless otherwise expressly set forth in this Agreement, shall be made within 30 days from the Date of Termination by the independent tax consultant(s) selected by the Company and reasonably acceptable to the Executive (the "Tax Consultant"). The Tax Consultant must be a qualified tax attorney or certified public accountant. All fees and expenses of the Tax Consultant shall be paid in full by the Company. Any Excise Taxes as determined pursuant to Section 11 hereof shall be paid by the Company to the Internal Revenue Service or any other appropriate taxing authority on the Executive's behalf within five (5) business days after receipt of the Tax Consultant's final determination by the Company and the Executive. 11.7 If the Tax Consultant determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Taxes are payable by the Executive, the Tax Consultant shall furnish the Executive with a written opinion that failure to disclose or report the Excise Taxes on the Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or any other penalty. 11.8 The Company shall indemnify and hold harmless the Executive, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred 16 by the Executive with respect to the exercise by the Company of any of its rights under Section 11 hereof, including, without limitation, any Losses related to the Company's decision to contest a claim of any imputed income to the Executive. The Company shall pay all fees and expenses incurred under Section 11 hereof, and shall promptly reimburse the Executive for the reasonable expenses incurred by the Executive in connection with any actions taken by the Company or required to be taken by the Executive hereunder. Any payments owing to the Executive and not made within 30 days of delivery, in accordance with Section 12.1 hereof, to the Company of evidence of the Executive's entitlement thereto shall be paid to the Executive together with interest at the maximum nonusurious rate permitted by law. 12. Miscellaneous. 12.1 Notices. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when (i) delivered by hand or sent by facsimile, or (ii) on the third business day following deposit in the United States mail by registered or certified mail, return receipt requested, to the addresses as follows (provided that notice of change of address shall be deemed given only when received): If to the Company to: Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Attention: President and Chairman of the Board Facsimile No.: (713) 782-8232 If to the Executive to: Stephen L. Mueller Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Facsimile No.: (713) 782-8232 or to such other names or addresses as the Company or the Executive, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section 12.1. 12.2 Waiver of Breach. The waiver by any party hereto of a breach of any provision of this Agreement shall neither operate nor be construed as a waiver of any subsequent breach by any party. Except as expressly provided for herein, the failure of either party hereto to take any action by reason of any breach will not deprive such party of the right to take action at any time while such breach occurs. 12.3 Assignment. This Agreement shall be binding upon and inure to the benefit of the Company, its successors, legal representatives and assigns, and upon the Executive, his heirs, executors, administrators, representatives and assigns; provided, however, the Executive agrees that his rights and obligations hereunder are personal to him and may not be 17 assigned without the express written consent of the Company. Any reference to "Company" herein shall mean the Company as well as any successors thereto. 12.4 Entire Agreement; No Oral Amendments. This Agreement, together with any exhibit attached hereto and any document, policy, rule or regulation referred to herein, replaces all previous agreements and discussions relating to the same or similar subject matter between the Executive and the Company (including, but not limited to, that certain Termination Agreement dated July 1, 1995, as amended which is hereby terminated), and constitutes the entire agreement between the Executive and the Company with respect to the subject matter of this Agreement. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by any executive, officer, or representative of the Company or by any written agreement unless signed by an officer of the Company who is expressly authorized by the Company to execute such document. 12.5 Enforceability. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12.6 Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. 12.7 Corporate Authority. The Company has all corporate power and authority necessary to enter into this Agreement and to perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by the Company. 12.8 Defense of Claims. The Executive agrees that, during the Employment Period and for a period of two (2) years after his Termination Date, upon request from the Company, he will reasonably cooperate with the Company and its Affiliates in the defense of any claims or actions that may be made by or against the Company or any of its Affiliates that affect his prior areas of responsibility, except if the Executive's reasonable interests are adverse to the Company or Affiliates in such claim or action. To the extent travel is required to comply with the requirements of this Section 12.8, the Company shall, to the extent possible, provide the Executive with notice at least 10 days prior to the date on which such travel would be required. The Company agrees to promptly pay or reimburse the Executive upon demand for all of his reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply, with his obligations under this Section 12.8. 12.9 Withholdings: Right of Offset. The Company may withhold and deduct from any benefits and payments made or to be made pursuant to this Agreement (a) all federal, state, local and other taxes as may be required pursuant to any law or governmental regulation or ruling, (b) all other employee deductions made with respect to the Company's employees generally, and (c) any advances made to the Executive and owed to the Company. 18 12.10 Nonalienation. The right to receive payments under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by the Executive, his dependents or beneficiaries, or to any other person who is or may become entitled to receive such payments hereunder. The right to receive payments hereunder shall not be subject to or liable for the debts, contracts, liabilities, engagements or torts of any person who is or may become entitled to receive such payments, nor may the same be subject to attachment or seizure by any creditor of such person under any circumstances, and any such attempted attachment or seizure shall be void and of no force and effect. 12.11 Incompetent or Minor Payees. Should the Board determine that any person to whom any payment is payable under this Agreement has been determined to be legally incompetent or is a minor, any payment due hereunder may, notwithstanding any other provision of this Agreement to the contrary, be made in any one or more of the following ways: (a) directly to such minor or person; (b) to the legal guardian or other duly appointed personal representative of the person or estate of such minor or person; or (c) to such adult or adults as have, in the good faith knowledge of the Board, assumed custody and support of such minor or person; and any payment so made shall constitute full and complete discharge of any liability under this Agreement in respect to the amount paid. 12.12 Title and Headings; Construction. Titles and headings to Sections hereof are for the purpose of reference only and shall in no way limit, define or otherwise affect the provisions hereof. Any and all Exhibits referred to in this Agreement are, by such reference, incorporated herein and made a part hereof for all purposes. The words "herein", "hereof", "hereunder" and other compounds of the word "here" shall refer to the entire Agreement and not to any particular provision hereof. 12.13 Arbitration. (a) If any dispute or controversy arises between the Executive and the Company relating to (1) this Agreement in any way or arising out of the parties' respective rights or obligations under this Agreement on (2) the employment of the Executive or the termination of such employment, then either party may submit the dispute or controversy to arbitration under the then-current Commercial Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA"). Any arbitration hereunder shall be conducted before a panel of three arbitrators unless the parties mutually agree that the arbitration shall be conducted before a single arbitrator. The arbitrators shall be selected (from lists provided by the AAA) through mutual agreement of the parties, if possible. If the parties fail to reach agreement upon appointment of arbitrators within twenty (20) days following receipt by one party of the other party's notice of desire to arbitrate, then within five (5) days following the end of such 20-day period, each party shall select one arbitrator who, in turn, shall within five (5) days jointly select the third arbitrator to comprise the arbitration panel hereunder. The site for any arbitration hereunder shall be in Harris County, Texas, unless otherwise mutually agreed by the parties, and the parties hereby waive any objection that the forum is inconvenient. 19 (b) The party submitting any matter to arbitration shall do so in accordance with the Rules. Notice to the other party shall state the question or questions to be submitted for decision or award by arbitration. Notwithstanding any provision of this Section 12.13, the Executive shall be entitled to seek specific performance of the Executive's right to be paid during the pendency of any dispute or controversy arising under this Agreement. In order to prevent irreparable harm, the arbitrator may grant temporary or permanent injunctive or other equitable relief for the protection of property rights. (c) The arbitrator shall set the date, time and place for each hearing, and shall give the parties advance written notice in accordance with the Rules. Any party may be represented by counsel or other authorized representative at any hearing. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 et. seq. (or its successor). The arbitrator shall apply the substantive law and the law of remedies, if applicable) of the State of Texas to the claims asserted to the extent that the arbitrator determines that federal law is not controlling. (d) (1) Any award of an arbitrator shall be final and binding upon the parties to such arbitration, and each party shall immediately make such changes in its conduct or provide such monetary payment or other relief as such award requires. The parties agree that the award of the arbitrator shall be final and binding and shall be subject only to the judicial review permitted by the Federal Arbitration Act. (2) The parties hereto agree that the arbitration award may he entered with any court having jurisdiction and the award may then be enforced as between the parties, without further evidentiary proceedings, the same as if entered by the court at the conclusion of a judicial proceeding in which no appeal was taken. The Company and the Executive hereby agree that a judgment upon any award rendered by an arbitrator may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (e) Each party shall pay any monetary amount required by the arbitrator's award, and the fees, costs and expenses for its own counsel, witnesses and exhibits, unless otherwise determined by the arbitrator in the award. The compensation and costs and expenses assessed by the arbitrator(s) and the AAA shall be split evenly between the parties unless otherwise determined by the arbitrator in the award. If court proceedings to stay litigation or compel arbitration are necessary, the party who opposes such proceedings to stay litigation or compel arbitration, if such party is unsuccessful, shall pay all associated costs, expenses, and attorney's fees which are reasonably incurred by the other party as determined by the arbitrator. 12.14 Survival of Certain Provisions. Wherever appropriate to the intention of the parties hereto, the respective rights and obligations of said parties, including, but not limited to, the rights and obligations set forth in Sections 8 through 11 hereof and this Section 12, shall survive any termination or expiration of this Agreement. 20 12.15 No Strict Construction. The Executive represents to the Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read the Agreement and that he understands its terms and conditions. The parties hereto agree that the language used in this Agreement shall be deemed to be the language chosen by them to express their mutual intent, and no rule of strict construction shall be applied against either party hereto. The Executive acknowledges that he has had the opportunity to consult with counsel of his choice, independent of Employer's counsel, regarding the terms and conditions of this Agreement and has done so to the extent that he, in his discretion, deemed to be appropriate. [SIGNATURE PAGE FOLLOWS] 21 IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above. Texas Biotechnology Corporation By: /s/ Bruce D. Given, M.D. ------------------------------------- Bruce D. Given, M.D., President and Chief Executive Officer Executive: By: /s/ Stephen L. Mueller ------------------------------------- Stephen L. Mueller 22 EX-10.8 7 h03454exv10w8.txt FORM OF TERMINATION AGREEMENT Exhibit 10.8 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (this "Agreement") is made and entered into this ___ day of _____ by and between Texas Biotechnology Corporation, a Delaware corporation with its principal office at 7000 Fannin, Houston, Texas 77030 (the "Company"), and ______________ (the "Executive"). R E C I T A L S A. The Company desires to enter into an agreement with the Executive whereby severance benefits will be paid to the Executive on a change in control of the Company and consequent actual or constructive termination of the Executive's employment. B. This Agreement sets forth the severance benefits that the Company agrees that it will pay to the Executive if the Executive's employment with the Company terminates under one of the circumstances described herein following a change in control of the Company. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall be effective immediately on the date hereof and shall continue in effect through _____; provided, however, that commencing on _____ and each _____ thereafter, the term of this Agreement shall automatically be extended for one additional year unless not later than _____ of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, that notwithstanding any such notice by the Company not to extend, this Agreement shall automatically be extended for 24 months beyond the term provided herein if a Change in Control (as defined in Section 3 hereof) has occurred during the term of this Agreement. 2. Effect on Employment Rights. This Agreement is not part of any employment agreement that the Company and the Executive may have entered. Nothing in this Agreement shall confer upon the Executive any right to continue in the employ of the Company or interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to terminate the Executive for any reason, with or without cause. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a potential Change in Control of the Company (as defined below), the Executive will remain in the employ of the Company during the pendency of any such potential Change in Control and for a period of one year after the occurrence of an actual Change in Control. For this purpose, a "potential Change in Control of the Company" shall be deemed to have occurred if (a) the Company enters into an agreement the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or consider taking action which if consummated would constitute a Change in Control or (c) the Board of Directors of the Company (the "Board") adopts a resolution to the effect that a potential Change in Control of the Company has occurred. 3. Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall occur: (a) any "person" (as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such term is modified in sections 13(d) and 14(d) of the Exchange Act), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company of any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this Section 3) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holder of securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which, in the judgment of the Compensation Committee of the Board, the holders of the Company's common stock, par value $.05 per share (the "Common Stock"), immediately prior to such transaction or series of transactions continue to have 2 the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately prior to such transaction or series of transactions. Except during a potential Change in Control of the Company, the Board may (i) deem any other corporate event affecting the Company (other than those described in clauses (a)-(d) of Section 3 above) to be a "Change in Control," and (ii) may amend this provision and the definition of "Change in Control" in connection with an identical amendment being made to the Termination Agreements entered into by the Company and certain of its executives. 4. Termination of Employment Following a Change in Control. The Executive shall be entitled to the benefits provided in Section 5 hereof upon the subsequent termination of the Executive's employment by the Company within two years after a Change in Control which occurs during the term of this Agreement, provided such termination is (a) by the Company other than for Cause (as defined below) or (b) by the Executive for Good Reason (as defined below). The Executive shall not be entitled to the benefits of Section 5 hereof, any other provision hereof to the contrary notwithstanding, if the Executive's employment terminates: (i) pursuant to the Executive retiring at age 65, (ii) by reason of the Executive's total and permanent disability (as defined below), or (iii) by reason of the Executive's death. As used herein, "total and permanent disability" means an illness or other disability that prevents the Executive from discharging his responsibilities for a period of 180 consecutive calendar days, or an aggregate of 180 calendar days in any calendar year, during his employment with the Company, all as determined in good faith by the Board (or a committee thereof). (a) Cause. The Company may terminate the Executive's employment with the Company, upon written notice to the Executive delivered in accordance with Sections 4(c) and 12 hereof, for Cause. For purposes of this definition of "Cause," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, subject to the notice provisions set forth below, "Cause" means (i) the conviction (or plea of nolo contendere or equivalent plea) of the Executive of a felony (which, through lapse of time or otherwise, is not subject to appeal), (ii) the Executive having engaged in intentional misconduct causing a violation by the Company of any state or federal laws which results in a material injury to the business, condition (financial or otherwise), results of operations or prospects of the Company as determined in good faith by the Board or a committee thereof (a "Material Injury"), (iii) the Executive having engaged in a theft of corporate funds or corporate assets of the Company or in an act of fraud upon the Company, (iv) an act of personal dishonesty taken by the Executive that was intended to result in personal enrichment of the Executive at the expense of the Company, (v) the Executive's refusal, without proper legal cause, to perform his duties and responsibilities as contemplated in this Agreement or any other breach by the Executive of this Agreement, and (vi) the Executive's engaging in activities which would constitute a breach of the Company's business ethics policy, the Company's policies regarding trading in the Common Stock or any other applicable policies, rules or regulations of the Company which results in a Material Injury. If the Company desires to terminate the Executive for Cause pursuant to the provisions of this Section 4(a), the Executive will be given a written notice by the Board of the facts and circumstances providing the basis for termination for Cause, and the Executive will have 30 days from the date of such notice to remedy, cure or rectify the situation giving rise to 3 termination for Cause to the reasonable satisfaction of the Board (except in the event of termination for Cause pursuant to subparagraph (i) above as to which no cure period will be permitted). (b) Good Reason. After a Change in Control, the Executive may terminate employment with the Company at any time during the term of this Agreement for Good Reason, upon written notice to the Company delivered in accordance with Sections 4(c) and 12 hereof. (i) Definition. For purposes of this definition of "Good Reason," the term "Company" shall mean the Company and/or its Affiliates. For purposes of this Agreement, "Good Reason" means (i) the assignment to the Executive of any duties materially inconsistent in any respect with the Executive's duties or responsibilities as contemplated in this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (ii) any other action by the Company which results in a material diminishment in the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iii) any breach by the Company of any of the provisions of this Agreement, provided that the Executive specifically terminates his employment for Good Reason hereunder within 120 days from the date that he has actual notice of such material breach; (iv) requiring the Executive to relocate to any office or location other than Houston, Texas, without his consent; (v) a 5% or more reduction, or attempted reduction, at any time during the Executive's employment with the Company, of the base salary of the Executive unless such reduction is also applied to all other executives of the Company; or (vi) the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits provided under the Company's welfare benefit plans, unless (A) there is substituted a comparable benefit that is at least economically equivalent (in terms of the benefit offered to the Executive) to the benefit in which the Executive's participation is being adversely affected or to the Executive's benefits that are being materially reduced, or (B) the taking of such action affects all other executives of the Company. Notwithstanding the preceding provisions of this Section 4(b), if the Executive desires to terminate his employment for Good Reason, he shall first give written notice of the facts and circumstances providing the basis for Good Reason to the Board or the Compensation Committee thereof, and allow the Company thirty (30) days from the date of such notice to remedy, cure or rectify the situation giving rise to Good Reason to the reasonable satisfaction of the Executive. (ii) Determination by the Executive Presumed Correct. Any determination by the Executive pursuant to this Section 4(b) that Good Reason exists for the Executive's termination of employment and that adequate remedy has not occurred shall be presumed correct and shall govern unless the party 4 contesting the determination shows by a clear preponderance of the evidence that it was not a good faith reasonable determination. (iii) Severance Payment Made Notwithstanding Dispute. Notwithstanding any dispute concerning whether Good Reason exists for termination of employment or whether adequate remedy has occurred, the Company shall immediately pay to the Executive, as specified in Section 5 hereof, any amounts otherwise due under this Agreement. The Executive may be required to repay such amounts to the Company if any such dispute is finally determined adversely to the Executive. (c) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive hereunder, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, if such date is other than the date of receipt of such notice (which termination date shall not be more than 15 days after the giving of such notice, unless otherwise provided herein). Notwithstanding the foregoing, the Company may elect to consider the Executive as an employee after the date of termination for purposes of complying with the provisions of Section 5 hereof. 5. Severance Payment Upon Termination of Employment. If the Executive's employment with the Company is terminated during the term of this Agreement and after a Change in Control (a) by the Company other than for Cause, or (b) by the Executive for Good Reason, then the Executive shall be entitled to the following: (a) The Company shall pay to the Executive in a lump sum in cash within five (5) days after date of termination, if not theretofore paid, the Executive's base salary (as in effect on the date of termination) through the date of termination, and in the case of compensation previously deferred and bonuses previously earned by the Executive, all amounts of such compensation previously deferred and earned and not yet paid by the Company. (b) The Company shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses paid or incurred by the Executive which would have been payable pursuant to the Company's policy regarding the reimbursement of such costs or expenses as in effect from time to time during the Executive's employment with the Company if the Executive's employment had not terminated. (c) The Company shall pay to the Executive in a lump sum in cash within five (5) days after the date of termination a severance payment equal to one and one-half (1.5) times the sum of (i) the Executive's base salary (as in effect on date of termination) and (ii) the Executive's most recent annual bonus. If the most recent annual bonus was a 5 stock option or a stock grant, the value of the bonus will be deemed to be the number of option shares times the closing price of the Common Stock for the 20 trading days prior to the date of termination. (d) During the 18-month period commencing on the date of termination, the Company shall continue benefits (other than disability benefits), at the Company's expense to the Executive and/or the Executive's family at least equal to those which would have been provided to them under the Company's welfare benefit plans if the Executive's employment had not been terminated (without giving effect to any reduction in such benefits subsequent to the Change in Control which reduction constitutes or may constitute Good Reason). 6. Certain Payments by the Company (a) In the event that the Executive is deemed to have received an "excess parachute payment" (as defined in Section 280G(b) of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated by the Internal Revenue Service thereunder (the "Code")) which is subject to the excise taxes (the "Excise Taxes") imposed by Section 4999 of the Code in respect of any payment pursuant to this Agreement or any other agreement, plan, instrument or obligation, in whatever form, the Company shall make the Bonus Payment (defined below) to the Executive notwithstanding any contrary provision in this Agreement or any other agreement, plan, instrument or obligation. (b) The term "Bonus Payment" means a cash payment in an amount equal to the sum of (i) all Excise Taxes payable by the Executive, plus (ii) all additional Excise Taxes and federal or state income taxes to the extent such taxes are imposed in respect of the Bonus Payment, such that the Executive shall be in the same after-tax position and shall have received the same benefits that he would have received if the Excise Taxes had not been imposed. For purposes of calculating any income taxes attributable to the Bonus Payment, the Executive shall be deemed for all purposes to be paying income taxes at the highest marginal federal income tax rate, taking into account any applicable surtaxes and other generally applicable taxes which have the effect of increasing the marginal federal income tax rate and, if applicable, at the highest marginal state income tax rate, to which the Bonus Payment and the Executive are subject. An example of the calculation of the Bonus Payment is set forth below. Assume that the Excise Tax rate is 20%, the highest federal marginal income tax rate is 40% and the Executive is not subject to state income taxes. Further assume that the Executive has received an excess parachute payment in the amount of $200,000, on which $40,000 ($200,000 x 20%) in Excise Taxes are payable. The amount of the required Bonus Payment is thus computed to be $100,000, i.e., the Bonus Payment of $100,000, less additional Excise Taxes on the Bonus Payment of $20,000 (i.e., 20% x $100,000) and income taxes of $40,000 (i.e., 40% x $100,000), yields $40,000, the amount of the Excise Taxes payable in respect of the original excess parachute payment. (c) The Executive agrees to reasonably cooperate with the Company to minimize the amount of the excess parachute payments, including, without limitation, 6 assisting the Company in establishing that some or all of the payments received by the Executive that are "contingent on a change," as described in Section 280G(b)(2)(A)(i) of the Code, are reasonable compensation for personal services actually rendered by the Executive before the date of such change or to be rendered by the Executive on or after the date of such change. In the event that the Company is able to establish that the amount of the excess parachute payments is less than originally anticipated by the Executive, the Executive shall refund to the Company any excess Bonus Payment to the extent not required to pay Excise Taxes or income taxes (including those incurred in respect of receipt of the Bonus Payment). Notwithstanding the foregoing, the Executive shall not be required to take any action which his attorney or tax advisor advises him in writing (i) is improper or (ii) exposes the Executive to personal liability. The Executive may require the Company to deliver to the Executive an indemnification agreement in form and substance reasonably satisfactory to the Executive as a condition to taking any action required by this Section 6(c). (d) The Company shall make any payment required to be made under Section 6 hereof in a cash lump sum after the date on which the Executive received or is deemed to have received any such excess parachute payment. Any payment required to be paid by the Company under Section 6 hereof which is not paid within 30 days of receipt by the Company of the Executive's written demand therefor, delivered in accordance with Section 12 hereof, shall thereafter be deemed delinquent, and the Company shall pay to the Executive immediately upon demand interest at the highest nonusurious rate per annum allowed by applicable law from the date such payment becomes delinquent to the date of payment of such delinquent sum with interest. (e) In the event that there is any change to the Code which results in the recodification of Section 280G or Section 4999 of the Code, or in the event that either such section of the Code is amended, replaced or supplemented by other provisions of the Code of similar import ("Successor Provisions"), then this Agreement shall be applied and enforced with respect to such new Code provisions in a manner consistent with the intent of the parties as expressed herein, which is to assure that the Executive is in the same after-tax position and has received the same benefits that he would have been in and received if any taxes imposed by Section 4999 (or any Successor Provisions) had not been imposed. (f) All determinations required to be made under Section 6 hereof including, without limitation, whether and when a Bonus Payment is required, and the amount of such Bonus Payment and the assumptions to be utilized in arriving at such determinations, unless otherwise expressly set forth in this Agreement, shall be made within 30 days from the date of termination by the independent tax consultant(s) selected by the Company and reasonably acceptable to the Executive (the "Tax Consultant"). The Tax Consultant must be a qualified tax attorney or certified public accountant. All fees and expenses of the Tax Consultant shall be paid in full by the Company. Any Excise Taxes as determined pursuant to Section 6 hereof shall be paid by the Company to the Internal Revenue Service or any other appropriate taxing authority on the Executive's behalf within five (5) business days after receipt of the Tax Consultant's final determination by the Company and the Executive. 7 (g) If the Tax Consultant determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Taxes are payable by the Executive, the Tax Consultant shall furnish the Executive with a written opinion that failure to disclose or report the Excise Taxes on the Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or any other penalty. (h) The Company shall indemnify and hold harmless the Executive, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by the Executive with respect to the exercise by the Company of any of its rights under Section 6 hereof, including, without limitation, any Losses related to the Company's decision to contest a claim of any imputed income to the Executive. The Company shall pay all fees and expenses incurred under Section 6 hereof, and shall promptly reimburse the Executive for the reasonable expenses incurred by the Executive in connection with any actions taken by the Company or required to be taken by the Executive hereunder. Any payments owing to the Executive and not made within 30 days of delivery, in accordance with Section 12 hereof, to the Company of evidence of the Executive's entitlement thereto shall be paid to the Executive together with interest at the maximum nonusurious rate permitted by law. 7. Reimbursement of Legal Costs. The Company shall pay to the Executive all legal fees and expenses incurred by the Executive as a result of a termination which entitles the Executive to any payments under this Agreement including all such fees and expenses, if any, incurred in contesting or disputing any notice of termination under Section 4(a) hereof or in seeking to obtain or enforce any right or benefit provided by this Agreement. Such payments shall be made within five (5) days after delivery of the Executive's respective written requests for payment accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. 8. Damages. The Executive shall not be required to mitigate damages with respect to the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided under this Agreement be reduced by retirement benefits, deferred compensation or any compensation earned by the Executive as a result of employment by another employer. 9. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. A used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this section or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 8 10. Heirs of the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to the Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be so much designee, to the Executive's estate. 11. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach thereof, shall be settled exclusively by arbitration in accordance with the Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction. Any arbitration held pursuant to this section in connection with the Executive's termination of employment shall take place in Houston, Texas at the earliest possible date. If any proceeding is necessary to enforce or interpret the terms of this Agreement, or to recover damages for breach thereof, the prevailing party shall be entitled to reasonable attorneys' fees and necessary costs and disbursements, not to exceed in the aggregate one percent (1%) of the net worth of the other party, in addition to any other relief to which he or it may be entitled. 12. Notice. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when (i) delivered by hand or sent by facsimile, or (ii) on the third business day following deposit in the United States mail by registered or certified mail, return receipt requested, to the addresses as follows (provided that notice of change of address shall be deemed given only when received): If to the Company to: Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Attention: President and Chief Executive Officer Facsimile No.: (713) 782-8232 If to the Executive to: Name: _____________________ Texas Biotechnology Corporation 7000 Fannin Houston, Texas 77030 Facsimile No.: (713) 782-8232 or to such other names or addresses as the Company or the Executive, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section 12. 13. General Provisions. (a) The Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, nor shall the Executive's rights be subject to 9 encumbrance or subject to the claims of the Company's creditors. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets; and this Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor surviving or resulting corporation, or other entity to which such assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement and any employment agreement with the Executive plus terms of any stock option plans or grants constitutes the entire agreement between the parties hereto in respect to the rights and obligations of the parties following a Change in Control. This Agreement supersedes and replaces all prior oral and written agreements, understandings, commitments, and practices between the parties (whether or not fully performed by the Executive prior to the date hereof), which shall be of no further force or effect. (c) The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part thereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts thereof and the applicability thereof shall not be affected thereby. (d) This Agreement may not be amended or modified except by a written instrument executed by the Company and the Executive. (e) This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above. Texas Biotechnology Corporation By: ------------------------------------- Bruce D. Given, M.D. President and Chief Executive Officer Executive: By: ------------------------------------- Name: ------------------------------------ 10 EX-10.21 8 h03454exv10w21.txt 3RD AMENDMENT TO LEASE AGREEMENT Exhibit 10.21 THIRD AMENDMENT TO LEASE AGREEMENT THIS THIRD AMENDMENT TO LEASE AGREEMENT ("Amendment") is entered into by and between the BOARD OF REGENTS OF THE UNIVERSITY OF TEXAS SYSTEM ("Landlord"), and TEXAS BIOTECHNOLOGY CORPORATION ("Tenant"), to be effective as of January 1, 2003. RECITALS A. Doctors Center Inc. ("DC") and Tenant entered into a Lease Agreement ("Lease") dated February 24, 1995, by which DC leased to Tenant approximately 28,909 square feet of net rentable area in the building then known as Doctors Center Office Building and located at 7000 Fannin Street in Houston, Harris County, Texas (the "Building"). B. Landlord acquired the Building on May 31, 1996, including DC's interest in the Lease. C. Landlord and Tenant have subsequently entered into Amendments to the Lease dated April 1, 1999 and January 1, 2001, and a renewal option, which was exercised June 30, 2000 covering approximately 37,500 square feet of net rentable area in the Building. The original Lease Agreement, as amended by the previous amendments, is hereinafter referred to as the "Lease." D. Landlord and Tenant wish to amend the Lease to (1) modify the description of the leased Premises to delete certain administrative space on the 20th floor of the Building, which will be surrendered by Tenant; (2) add a renewal option for Tenant to extend the Term for one additional two-year period; (3) specify a Base Rent rate for the extension period; and (4) provide for leasing certain storage space in the Building to Tenant. E. Landlord and Tenant wish to enter into this Amendment to evidence the modification of the Lease on the terms and conditions stated below. TERMS AND CONDITIONS NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged by the parties, Landlord and Tenant hereby agree as follows: 1. Defined Terms. Capitalized terms that are not otherwise defined in this Amendment have the respective meanings assigned to them in the Lease. 2. Reduction of Lease Space. Tenant shall vacate and surrender to Landlord approximately 6,141 square feet of net rentable area on the 20th floor of Building (the "Contraction Space") no later than January 31, 2003 (the "Surrender Date"). The Contraction Space is more particularly described in EXHIBIT B-1 attached to this Amendment, and hereby made a part of the Lease. On or before the Surrender Date, Tenant shall, at its sole expense, (a) remove from the Contraction Space all of Tenant`s personal property, (b) surrender possession of the Contraction Space to Landlord in good order and condition, and (c) make repairs as necessitated by removal of Tenant's property, all in accordance with the provisions in Section 9.1 of the Lease. 3. Renewal of Lease Term. As long as Tenant is not in default under the Lease, Tenant shall have the option to renew this Lease upon the terms and conditions herein stated for one renewal period of two years commencing on January 1, 2006, and expiring on December 31, 2007 (the "Extended Term"), unless further extended or sooner terminated as provided in this Lease. To renew this Lease, Tenant must give written notice to Landlord no later than December 31, 2003. 4. Payment of Rental. The Base Rent during the Extended Term shall be calculated at a rate of $28 per net rentable square foot per year, payable in advance as provided in the Lease. Adjustments to Base Rent will be calculated using 2005 as the base year. 5. Storage Space. Sections 2 and 3 of the Amendment to Office Lease Agreement between Landlord and Tenant dated effective January 1, 2001, are hereby deleted and replaced with the following paragraph, which shall become a part of the Lease: Landlord leases to Tenant and Tenant leases from Landlord that certain storage space in those areas in the Building identified in the attached EXHIBIT B-2 (the "Storage Space"). The term of the lease for the Storage Space shall be month-to-month, and may be terminated by either Landlord or Tenant on thirty (30) days notice to the other party. Tenant's leasehold in the Storage Space shall automatically terminate upon expiration of the Term of the Lease, or upon an earlier termination of the Lease for any reason. In addition to the Rent payable for the leased Premises, Tenant shall pay rent for the Storage Space in advance as provided in the Lease, and at the rates stated in EXHIBIT B-2. Tenant shall use the Storage Space only for the purpose of storing goods, in accordance with the terms and conditions of the Lease and the additional terms and conditions for the Storage Space specified in the attached EXHIBIT B-3. The EXHIBIT B-2 and EXHIBIT B-3 attached to this Amendment are hereby incorporated as parts of the Lease, and are designated as EXHIBIT B-2 and EXHIBIT B-3 to the Lease, respectively. 6. Performance of and Compliance with the Terms and Conditions of the Lease. Landlord and Tenant each promise and agree to perform and comply with the terms, provisions, and conditions of and the agreements in the Lease, as modified by this Amendment. 7. Ratification and Reaffirmation of Lease. Landlord and Tenant each hereby ratify, affirm, and agree that the Lease, as herein modified, represents the valid, binding and enforceable obligations of Landlord and Tenant, respectively. 8. Continuation of Lease. Except as expressly stated in this Amendment, the terms of the Lease shall remain unchanged and in full force and effect as originally provided. 9. Applicable Law. Landlord and Tenant hereby agree that this Amendment and the Lease shall be governed and construed according to the laws of the State of Texas from time to time in effect. 10. Inurement. This Amendment shall be binding on and inure to the benefit of Landlord and Tenant and their respective heirs, executors, administrators, legal representatives, successors and assigns. 11. No Commission. Landlord and Tenant each warrant and represent to the other that no commission or fee is due or will be paid in connection with this Amendment. 12. Entirety and Amendments. The Lease, as expressly modified by this Amendment, constitutes the sole and only agreement of the parties to the Lease and supersedes any prior understandings or written or oral agreements between the parties concerning the lease of the Premises. The Lease may be amended or supplemented only by an instrument in writing executed by the party against whom enforcement is sought. 13. Construction. Each party acknowledges that it and its counsel have reviewed this Amendment and that the normal rule of construction shall not be applicable and there shall be no presumption that any ambiguities will be resolved against the drafting party in interpretation of this Amendment. 14. Authority. Tenant warrants and represents that (a) Tenant has the full right, power and authority to enter into this Amendment, (b) all requisite action to authorize Tenant to enter into this Amendment and to carry out Tenant's obligations hereunder has been taken, and (c) the person signing on behalf of Tenant has been duly authorized by Tenant to sign this Amendment on its behalf. 15. Paragraph Headings. The paragraph headings used herein are intended for reference purposes only and shall not be considered in the interpretation of the terms and conditions hereof. 16. Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties to this Amendment may execute the Amendment by signing any of the counterparts. In witness whereof, this Amendment is executed to be effective as of the date first set forth above. LANDLORD: TENANT: BOARD OF REGENTS OF TEXAS BIOTECHNOLOGY THE UNIVERSITY OF TEXAS SYSTEM CORPORATION By: /s/ James S. Wilson By: /s/ Bruce D. Given, M.D. ------------------------------------- ------------------------- James S. Wilson Executive Director of Real Estate Name: Bruce D. Given, M.D. The University of Texas System ----------------------- Title: President and CEO ---------------------- EXHIBIT B-2 TO LEASE AGREEMENT Description of Storage Space leased by Lessee in the Building:
Room No. Square Footage Rate -------- -------------- ---- Additional Space #1 P2-8 approx. 450 $531/month Additional Space #2 P5-6 approx. 77 $38.50/month Additional Space #3 P5-12 approx. 114 $65.50/month
EXHIBIT B-1 TO LEASE AGREEMENT Depiction or Description of Contraction Space in leased Premises EXHIBIT B-3 TO LEASE AGREEMENT Additional Terms and Conditions applicable to use of Storage Space: Tenant warrants and represents to Landlord that the Storage Space shall be used and occupied only for the purpose of STORAGE OF GOODS. Tenant and Landlord understand that Additional Space #1 and Additional Space #2 are to be utilized for the decay of radioactive waste materials. Tenant warrants and represents that such materials are handled in accordance with all laws, ordinances, rules and regulations of any governmental authorities having jurisdication with respect to hazardous materials and with the provisions of the Lease related to hazardous materials. Tenant further warrants that the handling of such materials is in compliance with the requirements of Tenant's Radioactive Materials License. Tenant shall use and occupy the Storage Space, conduct its business, and control its agents and employees in such a way as is lawful, reputable, and will not create any nuisance or otherwise interfere with, annoy, or disturb any other tenant in its normal business operations. Tenant shall not commit, or suffer to be committed, any waste in the Storage Space, nor shall Tenant permit the Storage Space to be used in any way which would, in the opinion of the Landlord, create a hazardous or unsightly environment. Tenant shall (1) place any waste items that are not equipment or non-goods that can be recycled in a recycling bin provided by the management of the Building and (2) remove from the Building all items that are waste and not considered items for recycling. EX-10.22 9 h03454exv10w22.txt LEASE AGREEMENT - FRM WEST LOOP ASSOCIATES #6, LTD Exhibit 10.22 LEASE AGREEMENT OFFICE BUILDING This Lease Agreement is made and entered into as of the 20th day of February, 2002 between FRM WEST LOOP ASSOCIATES #6, LTD., a Texas limited partnership, hereinafter referred to as "Lessor" and TEXAS BIOTECHNOLOGY CORPORATION, a Delaware corporation, hereinafter referred to as "Lessee": WITNESSETH: SEC. 1 LEASED PREMISES: In consideration of the mutual covenants as set forth herein, Lessor and Lessee hereby agree as follows: A. Lessor hereby leases to Lessee and Lessee hereby leases from Lessor for the rental and on the terms and conditions hereinafter set forth approximately Fifteen Thousand Two Hundred Five (15,205) square feet of rentable area on the fourth (4th) floor as indicated on the plan attached hereto as Exhibit "A" and known as Suite 400 (the "Leased Premises") in the office building located at 6700 West Loop South (the "Building"), Bellaire, Harris County, Texas. Facilities and areas of the Building that are intended and designated by Lessor from time to time for the common, general and nonexclusive use of all tenants of the Building are defined as the "Common Areas". Lessor has the exclusive control over and right to manage the Common Areas. Lessor shall have the exclusive use and control over all other areas of the Building and the property including, but not limited to, risers, horizontal and vertical shafts and telephone closets. B. Lessor also leases to Lessee eight (8) reserved parking spaces and up to fifty-two (52) unreserved parking spaces in the garage as provided in Exhibit "B" attached hereto. SEC. 2 TERM: Subject to and upon the conditions set forth herein, or any exhibit or addendum hereto, the Term of this Lease Agreement shall be for a period of forty (40) months, beginning April 1, 2002 ("Commencement Date") and shall end at midnight on July 31, 2005; provided, however, that Lessee shall have the right to extend the Term of this Lease Agreement under the same terms and conditions contained herein to December 31, 2005 by giving Lessor ninety (90) days prior written notice. SEC. 3 USE: The Leased Premises shall be used and occupied by Lessee solely as general office use and for no other purpose. SEC. 4 SECURITY DEPOSIT: INTENTIONALLY DELETED. SEC. 5 BASE RENT: As part of the consideration for the execution of this Lease Agreement, Lessee covenants and agrees and promises to pay as Base Rent an annual sum of Two Hundred Eighty-One Thousand Two Hundred Ninety-Two and 48/100 Dollars ($281,292.48) payable at the Building management office or to a location designated by Lessor in monthly installments of Twenty-Three Thousand Four Hundred Forty-one and 04/100 Dollars ($23,441.04) in legal tender of the United States of America, in advance, without demand and without deduction, on the first day of each calendar month during the term hereof. Lessee shall not have to pay Base Rent for the first four (4) months of the Term hereof, and Lessee shall be allowed to occupy the Leased Premises free of any Base Rent for said four (4) month period. Such Base Rent shall be subject to adjustments as hereinafter provided. In addition to the foregoing rent, Lessee agrees to pay to Lessor as additional rent all charges for any services, goods or materials furnished by Lessor at Lessee's request which are not required to be furnished by Lessor under this Lease Agreement, as well as other sums payable by Lessee hereunder, within ten (10) days after Lessor renders a statement therefor to Lessee. All past due installments shall bear interest at the rate of eighteen percent (18%) per annum or the highest lawful rate, whichever is less, from date due until paid. SEC. 6 ADJUSTMENT OF BASE RENT: The Base Rent provided for herein includes a component applicable to Basic Cost (as hereinafter defined) equal, on a per annum basis to Base Year 2002 per square foot of rentable area of office space in the Building, such amount being hereinafter referred to as "Base Operating Expense". A. "Basic Cost" as said term is used herein shall consist of the operating expenses of the Building, which shall be computed on the accrual basis. For the purpose of calculating the Basic Cost for the Base Year, Lessor shall increase Basic Cost to the amount which would have been incurred had the Building been occupied to the extent of ninety-five percent (95%) of rentable area thereof and building standard services had been provided through the entire Building. All operating expenses shall be determined in accordance with generally accepted accounting principles, consistently applied in accordance with the accounting practices of a majority of the other comparable office buildings in the West Loop/Galleria market area. Subject to Section 6.C below, the term "Operating Expenses" as used herein shall mean all expenses, costs and disbursements (but not replacement of capital investment items nor general office expense nor specific costs especially billed to and paid by specific tenants) in connection with the ownership and operation of the Building and parking facility appurtenant thereto, including but not limited to the following: (1) Wages, salaries and fees of any management company engaged to manage the Building and parking facility and all employees in operation and maintenance of the Building and parking facility, including taxes, insurance and benefits relating thereto. Notwithstanding the foregoing, Lessor shall not assign in excess of 21.381% of the Operating Cost associated with the parking facility to the Building. (2) All supplies and materials used in operation and maintenance of the Building and parking facility. (3) Cost of water and power, heating, lighting, air conditioning and ventilating the Building and parking facility. (4) Cost of all janitorial service, maintenance and service agreements on equipment, including alarm service, Musak, window cleaning and elevator maintenance. (5) Cost of casualty and liability insurance applicable to the Building and parking facility and Lessor's personal property used in connection therewith. (6) All taxes and assessments and other governmental charges whether Federal, State, county or municipal and whether they be by taxing districts or authorities presently taxing the Leased Premises or by others subsequently created or otherwise, and any other taxes and improvements assessments attributable to the Building and parking facility or its operation excluding, however, Federal and State taxes on income. It is agreed that Lessee will be responsible for ad valorem taxes on its personal property and on the value of leasehold improvements to the extent that the same exceed standard building allowance. (7) Cost of repairs and general maintenance. B. In the event that Basic Cost of Lessor's operation of the Building during any calendar year of the term of this Lease Agreement shall exceed the Base Operating Expense set out in Section 6.A above, Lessee shall pay to Lessor as additional rent its pro rata share of the increase in such Basic Cost for such year over the Base Operating Expense. Lessee's pro rata share shall be a fraction of the total of such increase, the numerator of which shall be the rentable area contained in the Leased Premises then leased by Lessee in the Building and the denominator of which shall be 70,416 square feet which is ninety-five percent (95%) of the total rentable area contained in the Building. All amounts which may be due under this paragraph shall be due within ten (10) days after Lessor submits to Lessee a bill or invoice therefor. Lessor shall monitor Basic Cost for the Building throughout the term hereof and prepare projections of the anticipated Basic Cost for the Building for each calendar year during the term hereof. At any time that such projection shall indicate that Basic Cost shall exceed Base Operating Expense, Lessor may commence monthly billings for the collection of the amount of the anticipated excess. Lessor may submit to Lessee a bill or invoice each month for one-twelfth (1/12) of the amount of the excess of projected or actual Basic Cost over Base Operating Expense for the calendar year in question, as same may be ascertained by Lessor to be due by Lessee under this paragraph. The amount of the first such bill or invoice shall be determined by multiplying the monthly amount due by the number of calendar months of the calendar year in question which have commenced as of the date of the bill or invoice. In the event of such billing or invoicing procedure by Lessor, then Lessee shall be bound and obligated to pay such indicated amount contemporaneously with required payment of rent hereunder on the first day of each calendar month, monthly in advance, for each month in the Term of this Lease Agreement, in lawful money of the United States. Notwithstanding any other provision herein to the contrary, it is agreed that in the event the Building is not fully occupied during any year of the Term, an adjustment shall be made in computing the Operating Expenses for such year as though the Building had been 95% occupied during such year. Once each calendar year, Lessor shall perform such computations as are necessary to determine the amount properly payable by Lessee under this Section 6.B for the preceding calendar year, whereupon if Lessee shall have overpaid, Lessor shall refund to Lessee the amount of the excess; but if Lessee shall have underpaid, Lessor shall invoice Lessee for the amount of the underpayment and such underpayment shall be due within thirty (30) days after delivery of such invoice to Lessee. C. The following shall be excluded from the definition of Operating Expenses as set forth in Section 6.1 above: (1) Depreciation and amortization. (2) Financing and refinancing costs, interest on debt or amortization payment on any mortgage or mortgages, and rental under any ground or underlying leases or lease together with all costs incidental to the items mentioned in this subparagraph. (3) Any costs required by or incurred in connection with any federal, state or local law enacted before the date of this Lease Agreement, including, without limitation, the American's with Disabilities Act, other laws relating to accessibility or life safety, and the Clean Air Act and any other laws relating to the removal of chlorofluorocarbons (freon) from the Building's HVAC systems. (4) Any costs relating to the presence of asbestos-containing materials located in the Building prior to the date of this Lease Agreement, including, without limitation, costs of any encapsulation or removal thereof required by any laws or regulations, whether currently existing or hereafter enacted. (5) Costs of correcting material defects in the original design or any subsequent construction of the Building or the material used in the construction of the Building (including latent defects in the original or any subsequent construction of the Building or defects in the design of the Building) or in the Building equipment or appurtenances thereto. (6) The cost of any repair to remedy damage caused by or resulting from the negligence of any other tenant(s) in the Building, including their agents, servants, employees or invitees, together with the costs and expenses incurred by Lessor in attempting to recover such costs. (7) Legal and other fees, leasing commissions, advertising or marketing expenses and other similar costs incurred in connection with the leasing of the Building. (8) Costs incurred in renovating or otherwise improving or decorating or redecorating space for new tenants or other existing tenants or occupants in the Building or vacant space in the Building or costs related thereto (including architectural and engineering fees); and costs incurred by Lessor that are specifically reimbursed to Lessor by other tenants (other than as part of Operating Expenses) in connection with maintenance or repair of above building standard condition improvements. (9) Any items not otherwise excluded to the extent Lessor is specifically reimbursed by insurance or otherwise compensated (other than as part of Operating Expenses), including direct reimbursement by any tenant. (10) A bad debt loss, rent loss or reserves for bad debts or rent loss. (11) The cost (or any amortization thereof) of any alteration, addition, change, replacement, improvement, repair or other item which is properly capitalized under generally accepted accounting principles other than cost saving capital improvements (which will be amortized over the useful life of such improvements, but only to the extent of the savings achieved). Upon Lessee's request, Lessor will provide Lessee a cost justification of any such capital improvements. (12) Any item of cost which is includable in Operating Expenses, but which represents an amount paid to an affiliate of Lessor or an affiliate of any partner or shareholder of Lessor, or to the property management company or an affiliate of the property management company, to the extent the same is in excess of the reasonable cost of said item or service in an arms-length transaction. (13) Any interest or penalties incurred as a result of Lessor's failure to pay any financial obligation when due or within any applicable grace period. (14) An amount equal to any costs which represent any payments received by Lessor or the Building manager, or the employees or officers of either, from suppliers of goods or services as kick-backs, finders' fees, expediting fees or other similar dishonest fees. (15) Any and all costs associated with the operation of the business of the entity which constitutes Lessor: excluded items shall specifically include, but shall not be limited to, formation of the entity; internal accounting and legal matters, including but not limited to, preparation of tax returns and financial statements and gathering of data therefor; costs of defending any lawsuits with any mortgagee (except as the actions of a tenant may be in issue); costs of selling, syndication, financing, mortgaging or hypothecating any of Lessor's interest in the Building; costs of any disputes between Lessor and its employees (if any) not engaged in the operation of the Building; disputes between Lessor and the property management company managing the Building; and, Lessor's headquarters office costs and general overhead. (16) Any cost or expense for services or amenities that are specifically for the benefit of a particular tenant and that are of a nature not generally provided to all tenants in the Building or for services or amenities generally provided to all tenants in the Building but which are provided to any particular tenant without additional charge or at a reduced charge (on a net effective basis) than the charge imposed upon other tenants. (17) Lessor's cost of electricity, incremental air conditioning and other services provided to other tenants at times or in amounts for which Lessee would be billed under this Lease Agreement as an additional charge. (18) Any expense incurred as a direct result of the negligence of Lessor, its agents, servants or employees or arising out of Lessor's negligent failure to manage the Building consistently with the standard required by this Lease Agreement to the extent that such expense would not have been incurred in the absence of such negligence. (19) Costs incurred for the production and distribution of any tenant newsletters, tenant perception surveys or the creation and implementation of tenant retention programs. (20) Charitable donations. (21) Costs that would duplicate costs theretofore included in Operating Expenses. D. Lessor agrees that it will maintain complete and accurate records of all costs, expenses and disbursements which are incurred by Lessor, its employees, agents and/or contractors, with respect to Operating Expenses and the constituent components thereof. Lessee and/or its employees or a nationally recognized certified public accounting firm, at Lessee's sole cost and expense, shall have the right to inspect and/or audit not more often than once per calendar year Lessor's books and records relating to this Lease Agreement for any year or years during the Term hereof. Any such inspection and/or audit shall be conducted at Lessor's office during normal business hours. Lessee must give Lessor advance written notice of Lessee's intent to audit within two (2) years after Lessee has received a statement setting forth the prior lease year's Operating Expenses chargeable to Lessee, and if such notice is not sent by Lessee within such two (2) year period, then Lessee waives its right to an audit for that lease year. Such audit will be at Lessee's sole cost and expense, provided that Lessor agrees to reimburse Lessee for the reasonable professional or accounting costs and expenses incurred by Lessee in connection with any inspection and/or audit that results in a determination that Operating Expenses were overstated by five percent (5%) or more for the subject lease year. The right of Lessee to audit and any audit by Lessee of Lessor's books and records shall not affect the obligation of Lessee to pay, in accordance with the terms hereof, Base Rent, additional rent or estimated additional rent subject, however, to Lessor's reimbursement and/or reconciliation obligations set forth herein. Lessor's and Lessee's obligations to reconcile estimated additional rent with additional rent shall survive the expiration or termination of this Lease Agreement by one (1) year. E. Notwithstanding anything contained in the Lease Agreement to the contrary, Lessor shall limit increases in controllable expenses to six percent (6%) per year, compounded annually. Controllable expenses shall include all Operating Expenses except taxes, insurance, utilities and governmentally mandated changes (ie, minimum wage). SEC. 7 SERVICE AND UTILITIES: Lessor will provide water at those common points of supply provided for drinking, toilet and lavatory purposes and with electricity for ordinary office uses (not to include, however, data processing machines other than personal computers and related equipment that consumes less than .25 kilowatts per hour at rated capacity or requires a voltage of 120 volts single phase, including air conditioning costs therefor, large business machines and similar equipment of high electrical consumption characteristics); ballast and lamp replacement for the Building's standard fluorescent lighting fixtures located in the Leased Premises; elevator service; janitorial service on a five (5) day per week basis, in the manner and to the extent deemed standard by Lessor during the periods and hours as such services are normally furnished to all tenants. Lessee will pay all telephone charges. Lessor agrees to furnish Lessee with refrigerated water at those points of supply provided for general use of other tenants in the Building; heated and refrigerated air conditioning in season to be provided during the hours of 7:00 a.m. to 6:00 p.m. on weekdays and 8:00 a.m. to 1:00 p.m. on Saturday, at temperatures and in amounts which Lessor considers standard. Lessor shall not be liable in damages or otherwise for failure, stoppage or interruption of any such service, nor shall the same be construed as an eviction of Lessee, work an abatement of rent, or relieve Lessee from the operation of any covenant or agreement; but in the event of any failure, stoppage or interruption thereof, Lessor shall use reasonable diligence to restore service promptly. The work 3 of the building janitor shall not be hindered by Lessee. In the event Lessee desires heating and air conditioning at times other than herein specified, Lessee agrees to pay the entire cost thereof. SEC. 8 MAINTENANCE, REPAIRS AND USE: Lessor shall provide for the cleaning and maintenance of the public portions of the Building including painting and landscaping surrounding the Building. Unless otherwise expressly stipulated herein, Lessor shall not be required to make any improvements or repairs of any kind or character on the Leased Premises during the Term of this Lease Agreement, except such repairs as may be required by normal maintenance operations which shall include repairs to the exterior walls, corridors, windows, roof and other structural elements and equipment of the Building, and such additional maintenance as may be necessary because of damages by persons other than Lessee, its agents, employees, invitees or visitors. Lessor shall have sole control over the parking of automobiles and other vehicles and shall designate parking areas and building service areas. Lessor, its officers, agents and representatives, subject to any security regulations imposed by any governmental authority, after reasonable notice to Lessee, shall have the right to enter all parts of the Leased Premises at all reasonable hours to inspect, clean, make repairs, alterations and additions to the Building or Leased Premises which it may deem necessary or desirable, or to provide any service which it is obligated to furnish to Lessee, and Lessee shall not be entitled to any abatement or reduction of rent by reason thereof. Lessor may, at its option and at the cost and expense of Lessee, repair or replace any damage or injury done to the Building or any part thereof, caused by Lessee, Lessee's agents, employees, licensees, invitees or visitors; Lessee shall pay the cost thereof to Lessor on demand. Lessee further agrees to maintain and keep the interior of the Leased Premises in good repair and condition at Lessee's expense. Lessee agrees not to commit or allow any waste or damage to be committed on any portion of the Leased Premises, and at the termination of this Lease Agreement, by lapse of time or otherwise, to deliver up the Leased Premises to Lessor in as good condition as on date of possession by Lessee, ordinary wear and tear alone excepted, and upon such termination of this Lease, Lessor shall have the right to re-enter and resume possession of the Leased Premises. Lessee will not use, occupy or permit the use or occupancy of the Leased Premises for any purpose which is directly or indirectly forbidden by law, ordinance or governmental or municipal regulation or order, or which may be dangerous to life, limb or property; or permit the maintenance of any public or private nuisance; or do or permit any other thing which may disturb the quiet enjoyment of any other tenant of the Building; or keep any substance or carry on or permit any operation which might emit offensive odors or conditions into other portions of the Building; or use any apparatus which might make undue noise or set up vibrations in the Building; or permit anything to be done which would increase the fire and extended coverage insurance rate on the Building or contents and if there is any increase in such rates by reason of acts of Lessee, then Lessee agrees to pay such increase promptly upon demand therefor by Lessor. SEC. 9 QUIET ENJOYMENT: Lessee, on paying the said rent and performing the covenants herein agreed to be by it performed, shall and may peaceably and quietly have, hold and enjoy the Leased Premises for the said term. SEC. 10 ALTERATIONS: Lessee covenants and agrees to keep the Leased Premises free of all liens for improvements or otherwise and that it will make no structural change or major alteration without Lessor's written consent in advance, and without first furnishing Lessor fifteen (15) days advance written notice outlining in detail the proposed changes or alterations. SEC. 11 FURNITURE, FIXTURES AND PERSONAL PROPERTY: Lessee may remove its trade fixtures, office supplies and movable office furniture and equipment not attached to the Building provided: (a) such removal is made prior to the termination of the term of this Lease Agreement; (b) Lessee is not in default of any obligation or covenant under this Lease Agreement at the time of such removal; and (c) Lessee promptly repairs all damage caused by such removal. All other property at the Leased Premises and any alterations or additions to the Leased Premises (including wall-to-wall carpeting, paneling or other wall covering) and any other article attached or affixed to the floor, wall or ceiling of the Leased Premises shall become the property of Lessor and shall remain upon and be surrendered with the Leased Premises as a part thereof at the termination of the Lease Agreement by lapse of time or otherwise, Lessee hereby waiving all rights to any payment or compensation therefor. SEC. 12 SUBLETTING AND ASSIGNMENT: A. In the event Lessee should desire to assign this Lease Agreement or sublet the Leased Premises or any part thereof or allow same to be used or occupied by others, Lessee shall give Lessor written notice (which shall specify the duration of said desired sublease or assignment, the date same is to occur, the exact location of the space affected thereby, the proposed rentals on a square foot basis chargeable thereunder and sufficient information of the proposed sublessee or assignee regarding its financial condition and business operations) of such desire at least ninety (90) days in advance of the date on which Lessee desires to make such assignment or sublease or allow such a use or occupancy. Lessor shall then have a period of sixty (60) days following receipt of such notice within which to notify Lessee in writing that Lessor elects: (1) IN THE EVENT SUCH ASSIGNEE OR SUBLESSEE FAILS TO MEET THE CONDITIONS SET FORTH IN SUBPARAGRAPH (III) BELOW, to refuse to permit Lessee to assign this Lease Agreement or sublet such space, and in such case this Lease Agreement shall continue in full force and effect in accordance with the terms and conditions hereof; or (2) To terminate this Lease Agreement as to the space so affected as of the date so specified by Lessee in which event Lessee shall be relieved of all obligations hereunder as to such space arising from and after such date; or (3) To permit Lessee to assign this Lease Agreement or sublet such space for the duration specified in such notice, subject to Lessor's subsequent written approval of the proposed assignee or sublessee, which approval shall not be unreasonably withheld or delayed if (a) the nature and character of the proposed assignee or sublessee, its business and activities and intended use of the Leased Premises are in Lessor's reasonable judgment consistent with the current standards of the Building and the floor or floors on which the Leased Premises are located, (b) neither the proposed assignee or sublessee (nor any party which, directly or indirectly, controls or is controlled by or is under common control with the proposed assignee or sublessee) is a department, representative or agency of any governmental body or currently an occupant of any part of the Building or a party with whom Lessor is then negotiating to lease space in the Building or in any adjacent Building owned by Lessor, (c) the form and substance of the proposed sublease or instrument of assignment is acceptable to Lessor (which acceptance by Lessor shall not be unreasonably withheld) and is expressly subject to all of the terms and provisions of this Lease Agreement and to any matters to which this Lease Agreement is subject, (d) the proposed occupancy would not (1) increase the office cleaning requirements, (2) impose an extra burden upon the services to be supplied by Lessor to Lessee hereunder, (3) violate the current rules and regulations of the Building, (4) violate the provisions of any other leases of tenants in the Building or (5) cause alterations or additions to be made to the Building (excluding the Leased Premises), (e) Lessee enters into a written agreement with Lessor whereby it is agreed that fifty percent (50%) of any profit realized by 4 Lessee as a result of said sublease or assignment and any and all sums and other considerations of whatsoever nature paid to Lessee by the assignee or sublessee for or by reason of such assignment or sublease, including, but not limited to, sums paid for the sale of Lessee's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property (that is, after deducting and giving Lessee credit for Lessee's reasonable costs directly associated therewith, including reasonable brokerage fees and the reasonable cost of remodeling or otherwise improving the Leased Premises for said assignee or sublessee but excluding any free rentals or the like offered to any such sublessee or assignee) shall be payable to Lessor as it accrues as additional rent hereunder, and (f) the granting of such consent will not constitute a default under any other agreement to which Lessor is a party or by which Lessor is bound. B. No assignment or subletting by Lessee shall be effective unless Lessee shall execute, have acknowledged and deliver to Lessor, and cause each sublessee or assignee to execute, have acknowledged and deliver to Lessor, an instrument in form and substance acceptable to Lessor in which (i) such sublessee or assignee adopts this Lease Agreement and assumes and agrees to perform jointly and severally with Lessee, all of the obligations of Lessee under this Lease Agreement, as to the space transferred to it, (ii) Lessee and such sublessee or assignee agree to provide to Lessor, at their expense, direct access from a public corridor in the Building to the transferred space, (iii) such sublessee or assignee agrees to use and occupy the transferred space solely for the purpose specified in Section 3 and otherwise in strict accordance with this Lease Agreement and (iv) Lessee acknowledges and agrees that, notwithstanding such subletting or assignment, Lessee remains directly and primarily liable for the performance of all the obligations of Lessee hereunder (including, without limitation, the obligation to pay rent), and Lessor shall be permitted to enforce this Lease Agreement against Lessee or such sublessee or assignee, or both, without prior demand upon or proceeding in any way against any other persons. C. Any consent by Lessor to a particular assignment or sublease shall not constitute Lessor's consent to any other or subsequent assignment or sublease, and any proposed sublease or assignment by any assignee or sublessee shall be subject to the provisions of this Section 12 as if it were a proposed sublease or assignment by Lessee. The prohibition against an assignment or sublease described in this Section 12 shall be deemed to include a prohibition against Lessee's mortgaging or otherwise encumbering its leasehold estate, as well as against an assignment or sublease which may occur by operation of law, each of which shall be ineffective and void and shall constitute an event of default under this Lease Agreement unless consented to by Lessor in writing in advance. SEC. 13 FIRE AND CASUALTY: The parties hereto mutually agree that if the Leased Premises are partially or totally destroyed by fire or other casualty covered by the fire and extended coverage insurance carried by Lessor, then Lessor may after thirty (30) days written notice to Lessee, at Lessor's option, repair and restore the Leased Premises as soon as it is reasonably practicable, to substantially the same condition in which the Leased Premises were before such damage, or Lessor may terminate the Lease Agreement, provided, however, that in the event the Leased Premises are completely destroyed or so badly damaged that repairs cannot be commenced within thirty (30) days and completed within six (6) months thereafter, then this Lease Agreement shall be terminable as of the date of the occurrence of the damage or destruction, by either party hereto by serving written notice to the other; and provided further, that, in any event, if repairs have not been commenced within thirty (30) days from the date of said damage and thereafter completed within a reasonable time, in no case to exceed six (6) months, this Lease Agreement may be immediately terminated by Lessee as of the date of occurrence of the damage or destruction, by serving written notice upon Lessor. In the event the Leased Premises are completely destroyed or so badly damaged by fire or other casualty covered by the fire and extended coverage insurance to be carried by Lessor that it cannot reasonably be used by Lessee for the purposes herein provided and this Lease Agreement is not terminated as above provided, then there shall be a total abatement of rent until the Leased Premises are made usable. In the event the Leased Premises are partially destroyed or damaged by fire or other hazard so that the Leased Premises can be only partially used by Lessee for the purpose herein provided, then there shall be a partial abatement in the rent corresponding to the time and extent which the Leased Premises cannot be used by Lessee. If the Leased Premises are damaged by fire or other casualty resulting from the fault or negligence of Lessee, or the agents, employees, licensees or invitees of Lessee, such damage shall be repaired by and at the expense of Lessee under the direction and supervision of Lessor, and rent shall continue without abatement. SEC. 14 CONDEMNATION: In the event the Building, Leased Premises or any portion thereof shall be taken or condemned in whole or in part for public purposes, then the term of this Lease Agreement shall, at the option of Lessor, forthwith cease and terminate, and Lessor shall receive the entire award for land and buildings. Lessee shall have the right to recover from such condemning authority, but not from Lessor, any compensation as may be awarded to Lessee on account of the difference between the actual rental rate of the Leased Premises and the fair market value thereof, to the extent the fair market value exceeds such actual rental, moving and relocation expenses, and depreciation to and removal of Lessee's personal property. In the event Lessor does not terminate as herein provided, there shall be a proportionate reduction in rent. 5 SEC. 15 DEFAULT BY LESSEE: If Lessee should default in any covenant or agreement to be performed by it or abandon or vacate the Leased Premises and, if after written notice is given by Lessor to Lessee (except for a default caused by the nonpayment of rent as set forth in Section 5 hereof, for which no notice is required), such default shall continue for a period of ten (10) days or if the leasehold interest of Lessee shall be taken on execution or other process of law, then and in any of said cases, Lessor may immediately or at any time thereafter, without further notice or demand, enter upon and into the Leased Premises or any part thereof and take absolute possession of the same fully and absolutely without such re-entry automatically working a forfeiture of the rents to be paid and the covenants to be performed by Lessee for the full term of this Lease Agreement and at Lessor's election, Lessor may either lease or sublet the Leased Premises or any part thereof on such terms and conditions and for such rents and for such times as Lessor may reasonably elect and after crediting the proceeds of any rent collected by Lessor from such reletting on the rentals stipulated to be paid under this Lease Agreement by Lessee, collect from Lessee any balance remaining due on the rent reserved under this Lease Agreement, or Lessor may declare this Lease Agreement forfeited and may take full and absolute possession of the Leased Premises free from any subsequent rights or obligations of Lessee or at the option of Lessor, the present value of the entire rent for the balance of the Term, computed using a discount rate of eight percent (8%), but allowing for a reasonable period fo vacancy as determined by the market conditions at that time (during which reasonable period of vacancy no discount rate shall be applied) shall at once become due and payable, as if by the terms of this Lease Agreement it were all payable in advance. In the event of such default and reletting by Lessor, Lessee agrees to pay all costs of refurbishing and all costs of reletting the Leased Premises. All remedies herein given Lessor, including all those not set forth but provided by law, shall be cumulative, and the exercise of one or more of such remedies by Lessor shall not exclude the exercise of any other consistent remedy, nor shall any waiver by Lessor, express or implied, or any breach of any term, covenant or condition hereof be deemed a waiver of such term, condition or covenant, or of any subsequent breach of the same or any other term, covenant or condition hereof. Acceptance of rent by Lessor from Lessee or any assignee, sublessee or other successor in interest to Lessee, with or without notice, shall never be construed as a waiver of any breach of any term, condition or covenant of this Lease Agreement. Failure of Lessor to declare any default upon occurrence thereof, or delay in taking action with respect thereto, shall not waive such default, but Lessor shall have the right to declare such default at any time and take such action as may be authorized hereunder, in law or equity, or otherwise. In addition to the payment of the rents and the late payment charge as provided herein, Lessee agrees to reimburse Lessor for all expenses incurred by Lessor in effecting enforcement of these Lease Agreement provisions, lease termination, right of re-entry and in securing possession of the Leased Premises, including attorneys' fees, (whether suit is filed or not) and court costs. In the event of a money judgment, attorneys' fees shall be reasonable. SEC. 16 HOLD HARMLESS: Lessee will indemnify Lessor for, and hold Lessor harmless from and against all fines, suits, claims, demands, liabilities, and actions (including costs and expenses of defending against such claims) resulting or alleged to result from any breach, violation or non-performance of any covenant or condition hereof or from the use or occupancy of the Leased Premises, by Lessee or Lessee's agents, employees, licensees or invitees. Lessor shall not be liable to Lessee or Lessee's agents for any damage to person or property resulting from any act or omission or negligence of any co-tenant, visitor or other occupant of the Building. SEC. 17 LIEN WAIVER: Lessor expressly waives any and all liens, express or implied, statutory or contractual, that would otherwise serve to secure Lessee's obligation hereunder. SEC. 18 NON-WAIVER: Neither acceptance of rent by Lessor nor failure by Lessor to exercise available rights and remedies, whether singular or repetitive, shall constitute a waiver of any of Lessor's rights hereunder. Waiver by Lessor of any right for any default of Lessee shall not constitute a waiver of any right for either a subsequent default of the same obligation or any other default. No act or thing done by Lessor or its agent shall be deemed to be an acceptance or surrender of the Leased Premises and no agreement to accept a surrender of the Leased Premises shall be valid unless it is in writing and signed by a duly authorized officer or agent of Lessor. SEC. 19 RULES AND REGULATIONS: Such reasonable rules and regulations applying to all tenants in the Building as may be hereafter adopted by Lessor for the safety, care and cleanliness of the premises and the preservation of good order thereon, are hereby made a part hereof and Lessee agrees to comply with all such rules and regulations. Lessor shall have the right at all times to change such rules and regulations or to amend them in any reasonable manner as may be deemed advisable by Lessor, all of which changes and amendments will be sent by Lessor to Lessee in writing and shall be thereafter carried out and observed by Lessee. (See Exhibit "C" attached.) SEC. 20 ASSIGNMENT BY LESSOR: Lessor shall have the right to assign or transfer, in whole or in part, every feature of its rights and obligations hereunder and in the Building and Leased Premises. Such assignments or transfers may be made to a corporation, trust, trust company, individual or group of individuals, and howsoever made shall be in all things respected and recognized by Lessee. Lessee specifically agrees to look solely to Lessor's interest in the Building for the recovery of any judgment from Lessor, it being agreed that Lessor shall never be personally liable for any such judgment. 6 SEC. 21 SEVERABILITY: This Lease Agreement shall be construed in accordance with the laws of the State of Texas. If any clause or provision of this Lease Agreement is illegal, invalid or unenforceable, under present or future laws effective during the term hereof, then it is the intention of the parties hereto that the remainder of this Lease Agreement shall not be affected thereby, and it is also the intention of both parties that in lieu of each clause or provision that is illegal, invalid or unenforceable, there be added as part of this Lease Agreement a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. SEC. 22 SIGNS: No signs of any kind or nature, symbol or identifying mark shall be put on the Building, in the halls, elevators, staircases, entrances, parking areas or upon the doors or walls, whether plate glass or otherwise, of the Leased Premises or within the Leased Premises so as to be visible from the public areas or exterior of the Building without prior written approval of Lessor. All signs or lettering shall conform in all respects to the sign and/or lettering criteria established by Lessor. SEC. 23 SUCCESSORS AND ASSIGNS: Lessor and Lessee agree that all provisions hereof are to be construed as covenants and agreements as though the words imparting such covenants were used in each separate paragraph hereof, and that, except as restricted by the provisions of the section entitled "Subletting and Assigning" hereof, this Lease Agreement and all the covenants herein contained shall be binding upon the parties hereto, their respective heirs, legal representatives, successors and assigns. SEC. 24 SUBORDINATION: Lessor shall obtain and deliver to Lessee within thirty (30) days after the date of this Lease Agreement a Subordination, Non-Disturbance and Attornment Agreement (the "SNDA") from Lessor's mortgagee providing, as a condition to Lessee's subordination or attornment to such mortgagee, that Lessee shall not be disturbed in its possession of the Leased Premises during the Term hereof, nor will Lessee's rights under this Lease Agreement be terminated, so long as Lessee is not under default under this Lease Agreement beyond any applicable cure period. In the event Lessor does not deliver the SNDA within such thirty (30) day period, Lessee shall have the right to terminate this Lease Agreement. Lessee shall, in the event of any proceedings brought for the foreclosure of, or in the event of the exercise of the power of sale under, any mortgage or deed of trust covering the Leased Premises, attorn to and recognize such purchaser or assignee or mortgagee as Lessor under this Lease Agreement. SEC. 25 ACCESS BY LESSOR: After reasonable notice to Lessee, except in the case of an emergency, Lessor, its agents and employees shall have access to and the right to enter upon the Leased Premises at any reasonable time to examine the condition thereof, to make any repairs or alterations required to be made by Lessor hereunder, to show the Leased Premises to prospective purchasers or tenants and for any other purpose deemed reasonable by Lessor. SEC. 26 DELAY IN POSSESSION: In the event the Leased Premises should not be ready for occupancy by the Commencement Date stated in Section 2 hereinabove by reason of acts of God, strikes, walkouts or other industrial disturbance, explosions, unavailability of materials, acts of governments or for any reason whatsoever, Lessor shall not be liable or responsible for any claims, damages or liabilities in connection therewith or by reason thereof, and the term of this Lease Agreement shall commence at the time the Leased Premises are ready for occupancy by Lessee. Should the term of this Lease Agreement commence on a date other than that specified in Section 2 hereinabove for any reason, Lessor and Lessee will, at the request of either, execute a revised commencement date and the stated term in this Lease Agreement shall thereupon commence and the expiration date shall be extended so as to give effect to the full stated term. SEC. 27 HOLDING OVER: In the event of holding over by Lessee after the expiration or termination of the Lease Agreement, such hold over shall be as a tenant at will and all of the terms and provisions of this Lease Agreement shall be applicable during such period, except that Lessee shall pay Lessor as rental for the period of such hold over an amount equal to one hundred fifty percent (150%) the rent payable by Lessee for the month immediately preceding the holdover period, and Lessee will vacate the Leased Premises and deliver the same to Lessor upon Lessee's receipt of notice from Lessor to vacate the Leased Premises. The rental payable during such hold over period shall be payable to Lessor on demand. No holding over by Lessee, whether with or without consent of Lessor, shall operate to extend this Lease Agreement except as herein provided. SEC. 28 INDEPENDENT OBLIGATION TO PAY RENT: It is the intention of the parties hereto that the obligations of Lessor and Lessee hereunder shall be separate and independent covenants and agreements, that the rent and all other sums payable by Lessee hereunder shall continue to be payable in all events and that the obligations of Lessee hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to an express provision of this Lease Agreement. Lessee agrees that it will remain obligated under this Lease Agreement in accordance with its terms, and that it will not take any action to terminate, rescind or void this Lease Agreement, notwithstanding (a) the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceeding affecting Lessor or any assignee of Lessor in any such proceeding and (b) any action with respect to this Lease Agreement which may be taken by any trustee or receiver of Lessor or of any assignee of Lessor in any such proceeding or by any court in any such proceeding. 7 Except as otherwise expressly provided herein, Lessee waives the right (a) to quit, terminate or surrender this Lease Agreement or the Leased Premises or any part thereof, or (b) to any abatement, suspension, deferment or reduction of the rent or any other sums payable under this Lease Agreement. SEC. 29 INDEMNITY OF LESSOR-INSURANCE: A. Except for Lessor's gross negligence or willful misconduct not waived by Lessee, Lessee covenants that Lessor shall not be liable for any damage or liability of any kind or for any injury to or death of persons or damage to property of Lessee or any other person, including consequential loss or damage from any cause whatsoever by reason of the construction, use, occupancy or enjoyment of the Leased Premises by Lessee or any person therein or holding under Lessee or by or through the acts or omissions of other tenants of the Building. Lessee hereby agrees, as part of the material consideration for this Lease Agreement, to indemnify and save Lessor harmless from all claims, action, demands, costs and expenses and liability whatsoever, including reasonable attorneys' fees, on account of any such real or claimed damage or liability, and from all liens, claims and demands occurring in, on or at any portion of the Leased Premises and its facilities, or any repairs or alterations which Lessee may make upon the Leased Premises. B. Lessee shall carry insurance during the entire Term insuring Lessee and Lessor, as their interests may appear, with provisions, coverages and in companies reasonably acceptable to Lessor, and with such increases in limits as Lessor may from time to time request; initially, Lessee shall maintain coverages as follows: (1) LIABILITY COVERAGE. In case of personal injury to or death of any person, $1,000,000 for each occurrence and, in case of property damage, not less than $500,000 for any one occurrence. (2) FIRE AND EXTENDED COVERAGE. In case of fire, sprinkler leakage, malicious mischief, vandalism and other extended coverage perils, for the full insurable replacement value of all additions, and of all office furniture, office equipment, merchandise and all other items of Lessee's property in the Leased Premises. (3) WORKER'S COMPENSATION COVERAGE. Throughout the Term of this Lease Agreement, Lessee shall maintain in full force and effect a policy or policies of statutory worker's compensation insurance, in the amount required by law, issued by an insurance company acceptable to Lessor. (4) CERTIFICATE OF INSURANCE. Upon the earlier of fifteen (15) days after the execution hereof or fifteen (15) days prior to the Commencement Date, Lessee shall furnish to Lessor policies or certificates evidencing such coverage, which certificates shall state that such insurance coverage may not be changed or cancelled without at least thirty (30) days prior written notice to Lessor and Lessee. In the event Lessee shall fail to procure such insurance, Lessor may, at its option, procure the same for the account of Lessee and the cost thereof shall be paid to Lessor as additional rent upon receipt by Lessee of bills therefor. C. Lessor shall at all times during this Term of this Lease Agreement maintain in effect a policy or policies of insurance covering the Building (excluding property required to be insured by Lessee) in an amount equal to one hundred percent (100%) of replacement cost for the Building providing protection against perils included within the standard Texas form of fire and extended coverage insurance policy, together with insurance against sprinkler damage, vandalism and malicious mischief, and such other risks as Lessor may from time to time determine. Lessor shall at all times during the Term hereof maintain in effect a policy of commercial general liability insurance with limits of at least One Million and 00/100 Dollars ($1,000,000.00) per occurrence and Two Million and 00/100 Dollars ($2,000,000.00) in the aggregate. SEC. 30 WAIVER OF SUBROGATION: Lessor and Lessee hereby waive any rights each may have against the other, on account of any loss or damage occasioned to Lessor or Lessee, as the case may be, their respective property, the Leased Premises, its contents or to the other portion of the property arising from any risk covered by valid and enforceable fire and extended coverage insurance, to the extent of such coverage. Lessor and Lessee each agree to cause an endorsement to be furnished to their respective insurance policies recognizing this waiver of subrogation. SEC. 31 ENTIRE AGREEMENT: This instrument and any attached addenda or exhibits signed by the parties constitute the entire agreement between Lessor and Lessee; no prior written or prior or contemporaneous oral promises or representations shall be binding. This Lease Agreement shall not be amended, changed or extended except by written instrument signed by both parties hereto. Paragraph captions herein are for Lessor's and Lessee's convenience only, and neither limit nor amplify the provisions of this instrument. Lessee agrees, at Lessor's request, to execute a recordable Memorandum of this Lease Agreement. SEC. 32 NOTICES: Whenever in this Lease Agreement it shall be required or permitted that notice or demand be given or served by either party to this Lease Agreement to or on the other, such notice or demand shall be given or served and shall not be 8 deemed to have been given or served unless in writing and delivered personally or forwarded by Certified or Registered Mail, postage prepaid or other reputable common carrier guaranteeing next-day delivery, addressed as follows: To the Lessor: FRM West Loop Associates #6, Ltd. 1021 Main, Suite 1400 Houston, TX 77002 To the Lessee: At the Address noted for Lessee on the signature page hereof until the Commencement Date, at which time it shall become the Address of the Leased Premises. Such addresses may be changed from time to time by either party by serving notice as above provided. SEC. 33 COMMENCEMENT DATE: As of date hereof, Lessor and Lessee acknowledge that the Leased Premises has not been completed. Lessor shall use its best efforts to accomplish the completion of the Leased Premises in accordance with the construction agreement attached hereto as Exhibit "F" and deliver possession thereof to Lessee by April 1, 2002. Any delay in delivering possession of the Leased Premises shall result in a change in the Commencement Date unless the delay is caused solely by Lessee. In the event that said Leased Premises have not in fact then been completed as aforesaid, Lessee shall notify Lessor in writing of its objections. Lessor shall have a reasonable time after delivery of such notice in which to take such corrective action as may be necessary, and shall notify Lessee in writing as soon as it deems such corrective action has been taken and the Leased Premises are completed and ready for occupancy by Lessee. Taking of possession by Lessee shall be conclusively deemed to establish that said Leased Premises are in good and satisfactory condition as of the date possession was so taken by Lessee, except for latent defects, if any. Lessee shall, if requested by Lessor, execute and deliver to Lessor an Acceptance of Premises Memorandum of the Leased Premises, which shall be attached as Exhibit "D" hereto. The date the Leased Premises have been completed in accordance herewith shall be the first day of the term hereof and said Acceptance of Premises Memorandum, if requested by Lessor, shall bear such date, and the rent herein imposed shall accrue from and after such date which is hereby designated "Commencement Date". In the event that the Commencement Date is a date after the first day of the Term as stated in Section 2 of this Lease Agreement, then the expiration date shall be extended by the same number of days. In the event that the Commencement Date is a date prior to the first day of the Term as stated in Section 2 of this Lease Agreement, then the expiration date shall not change. SEC. 34 RELOCATION OF LESSEE: INTENTIONALLY DELETED. SEC. 35 BROKERS: Lessee warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease Agreement, excepting only the broker(s) named on the signature page of this Lease Agreement and that it knows of no other real estate broker(s) or agent(s) who is(are) or might be entitled to a commission in connection with this Lease Agreement. Lessor shall agree to pay all real estate commissions due in connection with this Lease Agreement only to the broker(s) named herein and Lessee agrees to indemnify and hold harmless Lessor from and against any liability from all other claims for commission arising from the negotiation of this Lease Agreement. SEC. 36 ESTOPPEL CERTIFICATES: From time to time after Lessee accepts the Leased Premises, within ten (10) days after request in writing therefor from Lessor, Lessee agrees to execute and deliver to Lessor, or to such other addressee or addresses as Lessor may designate (and Lessor and any such addressee may rely thereon), a statement in writing in the form of Exhibit "E" or in such other form and substance reasonably satisfactory to Lessor (herein called "Lessee's Estoppel Certificate"), certifying to all or any part of the information provided for in Exhibit "E" as is requested by Lessor. In the event that Lessee fails to provide Lessee's Estoppel Certificate within ten (10) days after Lessor's written request therefor, Lessee does hereby irrevocably appoint Lessor as attorney-in-fact of Lessee, coupled with an interest, in Lessee's name, place and stead to sign and deliver Lessee's Estoppel Certificate as if the same had been signed and delivered by Lessee. SEC. 37 EXHIBITS: Exhibits A through F are attached hereto and made a part of this Lease Agreement. IN WITNESS WHEREOF, Lessor and Lessee, acting herein by duly authorized individuals, have caused these presents to be executed in multiple counterparts, each of which shall have the force and effect of an original on this 20th day of February, 2002. 9 LESSOR: FRM WEST LOOP ASSOCIATES #6, LTD., a Texas limited partnership By: FRM 1603, Inc., General Partner By: /s/ Frederick R. McCord ----------------------- Frederick R. McCord, President LESSEE: TEXAS BIOTECHNOLOGY CORPORATION, a Delaware corporation By: /s/ David B. McWilliams ----------------------- Name: David B. McWilliams ----------------------- Title: President & CEO ----------------------- ADDRESS: 7000 Fannin, 20th Floor Houston, TX 77030 10 EXHIBIT B PARKING AGREEMENT Building: 6700 West Loop South Suite No.: 400 Lessor: FRM West Loop Associates #6, Ltd. Lessee: Texas Biotechnology Corporation, Date of Lease: 2/20/02 a Delaware corporation So long as the Lease Agreement of which this agreement is a part shall remain in effect, Lessee or persons designated by Lessee shall rent on a non-exclusive basis up to eight (8) reserved parking spaces and up to fifty-two (52) unreserved parking spaces on Level 2 or above of the garage. Lessee shall pay as rent for each parking space, at the same times and in the same manner as Base Rent is due under the Lease Agreement; the rate for such parking spaces from time to time designated by Lessor as standard for the Building. Lessee shall pay initially for each space rented a sum of Sixty and 00/100 Dollars ($60.00) per space, per month (plus applicable sales tax) for reserved parking spaces and Forty-Five and 00/100 Dollars ($45.00) per space, per month (plus applicable sales tax) for unreserved parking spaces; provided, however, that Lessee shall pay only for those spaces actually being utilized by Lessee up to eight (8) reserved and twenty-six (26) unreserved parking spaces. Lessee shall have the right to use the balance of up to twenty-six (26) unreserved parking spaces at no cost throughout the Term hereof. Lessor shall provide Lessee at least sixty (60) days notice of any change in the standard parking rates and the giving of such notice shall be deemed an amendment to this Agreement and Lessee shall thereafter pay the adjusted rent. Lessee may validate visitor parking by such method or methods as Lessor may approve, at the validation rate from time to time generally applicable to visitor parking. Lessor expressly reserves the right to designate and redesignate parking areas for Lessee and/or Lessee's visitors, and to modify the parking structure for other uses or to any extent. A condition of any parking shall be compliance by the parker with garage rules and regulations, including any sticker or other identification system established by Lessor. The following rules and regulations are in effect until notice is given to Lessee of any change. Lessor reserves the right to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the garage as it deems necessary for the operation of the garage. Lessor may refuse to permit any person who violates the rules to park in the garage, and any violation of the rules shall subject the car to removal. PARKING RULES AND REGULATIONS 1. Cars must be parked entirely within the stall lines painted on the floor. 2. All directional signs and arrows must be observed. 3. The speed limit shall be five (5) miles per hour. 4. Parking prohibited: (a) in areas not striped for parking (b) in aisles (c) where "no parking" signs are posted (d) on ramps (e) in cross-hatched areas (f) in spaces reserved for exclusive use by designated tenants (g) in such other areas as may be designated by Lessor or Lessor's agent(s). 5. Parking stickers or any other device or form of identification supplied by Lessor shall remain the property of Lessor and shall not be transferable. There will be a replacement charge payable by Lessee equal to the amount posted from time to time by Lessor for loss of any magnetic parking card or parking sticker. 6. Garage managers or attendants are not authorized to make or allow any exceptions to these Rules and Regulations. 7. Every parker is required to park and lock his own car. All responsibility for damage to cars or persons is assumed by the parker. 11 8. Lessee is required to give Lessor, on a quarterly basis, a list of employees parking in the garage which shall include year, make and model of car and license number. Failure to promptly pay the rent required hereunder or persistent failure on the part of Lessee or Lessee's designated parkers to observe the Rules and Regulations above shall give Lessor the right to terminate Lessee's right to use the parking structure. No such termination shall create any liability on Lessor or be deemed to interfere with Lessee's right to quiet possession of its Premises. 12 EXHIBIT C RULES AND REGULATIONS The following standards shall be observed by Lessee for the mutual safety, cleanliness and convenience of all occupants of the Building. These rules are subject to change from time to time, as specified in the Lease Agreement. 1. All tenants will refer all contractors' representatives and installation technicians who are to perform any work within the Building to Lessor for Lessor's supervision, approval and control before the performance of any such work. This provision shall apply to all work performed in the Building including, but not limited to, installations of telephones, computer equipment, electrical devices and attachments, and any and all installations of every nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment and any other physical portion of the Building. Lessee shall not mark, paint, drill into, or in any way deface any part of the Building or the Leased Premises, except with the prior written consent of the Lessor, and as the Lessor may direct. 2. The work of the janitorial or cleaning personnel shall not be hindered by Lessee after 5:30 p.m., and such work may be done at any time when the offices are vacant. The windows, doors and fixtures may be cleaned at any time. Lessee shall provide adequate waste and rubbish receptacles, cabinets, book cases, map cases, etc., necessary to prevent unreasonable hardship to Lessor in discharging its obligations regarding cleaning service. 3. Movement of furniture or office equipment in or out of the Building, or dispatch or receipt by Lessee of any heavy equipment, bulky material or merchandise which requires use of elevators or stairways, or movement through the Building's service dock or lobby entrance shall be restricted to such hours as Lessor shall designate. All such movement shall be in a manner to be agreed upon between Lessee and Lessor in advance. Such prior arrangements shall be initiated by Lessee. The time, method and routing of movement and limitations for safety or other concern which may prohibit any article, equipment or other item from being brought into the Building shall be subject to Lessor's discretion and control. Any hand trucks, carryalls or similar appliances used for the delivery or receipt of merchandise or equipment shall be equipped with rubber tires, side guards and such other safeguards as the Building shall require. Although Lessor or its personnel may participate in or assist in the supervision of such movement, Lessee assumes final responsibility for all risks as to damage to articles moved and injury to persons or property engaged in such movement, including equipment, property and personnel of Lessor if damaged or injured as a result of acts in connection with carrying out this service for Lessee, from the time of entering the property to completion of work. Lessor shall not be liable for the acts of any person engaged in, or any damage or loss to any of said property or persons resulting from any act in connection with such service performed for Lessee. 4. No sign, advertisement or notice shall be displayed, painted or affixed by Lessee, its agents, servants or employees, in or on any part of the outside or inside of the Building or Leased Premises without prior written consent of Lessor, and then only of such color, size, character, style and material and in such places as shall be approved and designated by Lessor. Signs on doors and entrances to the Leased Premises shall be placed thereon by Lessor. 5. Lessee shall not place, install or operate on the Leased Premises or in any part of the Building any engine, refrigerating, heating or air conditioning apparatus, stove or machinery, or conduct mechanical operations, or place or use in or about the Leased Premises any inflammable, explosive, hazardous or odorous solvents or materials without the prior written consent of Lessor. No portion of the Leased Premises shall at any time be used for cooking, sleeping or lodging quarters. Lessee may use coffee pots, refrigerators or microwaves in Leased Premises. 6. Lessee shall not make or permit any loud or improper noises in the Building or otherwise interfere in any way with other tenants. 7. Lessor will not be responsible for any lost or stolen personal property or equipment from the Leased Premises or public areas, regardless of whether such loss occurs when the area is locked against entry or not. 8. Lessee, or the employees, agents, servants, visitors or licensees of Lessee, shall not, at any time or place, leave or discard rubbish, paper, articles or objects of any kind whatsoever outside the doors of the Leased Premises or in the corridors or passageways of the Building or attached garage. No animals, bicycles or vehicles of any description shall be brought into or kept in or about the Building. 9. No additional lock or locks shall be placed by Lessee on any door in the Building unless written consent of Lessor shall have first been obtained. Two (2) keys will be furnished by Lessor for the Leased Premises, and any additional key required must be obtained from Lessor. A charge will be made for each additional key furnished. All keys shall be surrendered to Lessor upon termination of tenancy. 10. None of the entries, passages, doors, hallways or stairways in the Building shall be blocked or obstructed. 13 11. Lessor shall have the right to determine and prescribe the weight and proper position of any unusually heavy equipment, including computers, safes, large files, etc., that are to be placed in the Building, and only those which in the exclusive judgement of the Lessor will not do damage to the floors, structure and/or elevators may be moved into the Building. Any damage caused by installing, moving or removing such aforementioned articles in the Building shall be paid for by Lessee. 12. All Christmas and other decorations must be constructed of flame retardant materials. Live Christmas trees are not permitted in the Leased Premises. 13. Lessee shall provide Lessor with a list of all personnel authorized to enter the Building after hours (6:00 p.m. to 7:00 a.m. Monday through Friday, 1:00 p.m. to 12:00 midnight Saturdays, and 24 hours a day on Sundays and holidays). 14. After hours air conditioning/heating (6:00 p.m. to 7:00 a.m. Monday through Friday; 1:00 p.m. to 12:00 midnight Saturday; and 24 hours a day Sunday and holidays) must be requested in writing by noon of a regular work day prior to the day for which additional air conditioning is requested. Lessee shall be charged the prevailing hourly rate. 15. The following dates shall constitute "holidays" as said term is used in this Lease Agreement: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and the Friday following Thanksgiving Day, Christmas and any other holiday recognized and taken by tenants cumulatively occupying at least one-half of the net rentable area of office space of the Building. 16. Lessee shall notify Lessor of furniture or equipment to be removed from the Building after hours. Description and serial numbers shall be provided if requested by Lessor. 17. Lessor shall designate one elevator to be the freight elevator to be used to handle packages and shipments of all kinds. The freight elevator shall be available to handle such deliveries from 9:00 a.m. to 11:00 a.m. and 2:00 p.m. to 3:30 p.m. weekdays. Parcel Post, express, freight or merchants' deliveries can be made anytime within these hours. No furniture or freight shall be handled outside the above hours, except by previous arrangement. 18. Names to be placed on or removed from the directory board in the lobby of the Building should be furnished to the Building Manager in writing on Lessee's letterhead. Lessee is allocated one (1) directory strip. At Lessor's option, additional strips may be provided to Lessee at Lessor's cost plus fifteen percent (15%). 19. Any additional services as are routinely provided to tenants, not required by the Lease Agreement to be performed by Lessor, which Lessee requests Lessor to perform, and which are performed by Lessor, shall be billed to Lessee at Lessor's cost plus fifteen percent (15%). 20. All doors leading from public corridors to the Leased Premises are to be kept closed when not in use. 21. Canvassing, soliciting or peddling in the Building is prohibited and Lessee shall cooperate to prevent same. 22. Lessee shall give immediate notice to the Building Manager in case of accidents in the Leased Premises or in the Building or of defects therein or in any fixtures or equipment, or of any known emergency in the Building. 23. Lessee shall not use the Leased Premises or permit the Leased Premises to be used for photographic, multilith or multigraph reproductions, except in connection with its own business. 24. The requirements of Lessee will be attended to only upon application to the Building Manager. Employees of Lessor shall not perform any work or do anything outside of their regular duties, unless under special instructions from the Building Manager. 25. Lessee shall place or have placed solid pads under all rolling chairs such as may be used at desks or tables. Any damages caused to carpet by not having same shall be repaired or replaced at the expense of Lessee. 26. Lessee, or the employees, agents, servants, visitors or licensees of Lessee shall abide by the rules and regulations for the garage included in the Parking Agreement attached hereto as Exhibit B. 27. Lessor reserves the right to rescind any of these Rules and Regulations of the Building, and to make such other and further rules and regulations as in its judgement shall from time to time be needful for the safety, protection, care and cleanliness of the Building, the Leased Premises and the attached garage, the operation thereof, the preservation of good order therein and the protection and comfort of the other tenants in the Building and their agents, employees and invitees, which rules and regulations, when made and written notice thereof is given to Lessee, shall be binding upon Lessee in like manner as if originally herein prescribed. 14 28. Lessor will provide sixty (60) cardkeys to Lessee. All others will be furnished to Lessee at a cost of Ten and 00/100 Dollars ($10.00) per card. Any future increase in the cost of cardkeys will be passed on to Lessee for any additional cardkeys required. 29. Lessee, or its employees, agents, servants, visitors, invitees or licensees of Lessee, shall not smoke or permit to be smoked cigarettes, cigars or pipes within the Leased Premises or Building. Smoking shall be confined to area(s) designated by Lessor. Lessor shall have no obligation to Lessee for failure of another tenant, its employees, agents, servants, visitors, invitees or licensees to comply with this paragraph. 15 EXHIBIT D ACCEPTANCE OF PREMISES MEMORANDUM This Memorandum is an amendment to the Lease Agreement for space in 6700 West Loop South, Bellaire, Harris County, Texas, executed on the _______________ day of _________________________, 20_____ between FRM WEST LOOP ASSOCIATES #6, LTD. as Lessor and TEXAS BIOTECHNOLOGY CORPORATION, a Delaware corporation as Lessee. Lessor and Lessee hereby agree that: 1. Except for those items shown on the attached "punch list", if any, which Lessor will remedy within ___________ days hereof, Lessor has fully completed the construction work required under the terms of the Lease Agreement. 2. The Leased Premises are tenantable, the Lessor has no further obligation for construction (except as specified above), and Lessee acknowledges that both the Building and the Leased Premises are satisfactory in all respects. 3. The Commencement Date of the Lease Agreement is hereby agreed to be the ________________________ day of _____________________________, 20_____. 4. The Expiration Date of the Lease Agreement is hereby agreed to be the ______________________ day of __________________________, 20______. All other terms and conditions of the Lease Agreement are hereby ratified and acknowledged to be unchanged. Agreed and Executed this _______________ day of _________________________, 20__________. Lessor: FRM WEST LOOP ASSOCIATES #6, LTD., a Texas limited partnership By: FRM 1603, Inc., General Partner By: ________________________________________ Frederick R. McCord, President Lessee: TEXAS BIOTECHNOLOGY CORPORATION, a Delaware corporation By: ________________________________________ Name: ________________________________________ Title: ________________________________________ 16 EXHIBIT E LESSEE'S ESTOPPEL CERTIFICATE (Addressee) RE: 6700 West Loop South - Bellaire, Texas Gentlemen: The undersigned ("Lessee") has executed and entered into that certain lease agreement ("Lease Agreement") attached hereto as Exhibit A and made a part hereof for all purposes with respect to those certain premises ("Leased Premises") which are located in the above-referenced project ("Project") and are more fully described in the Lease Agreement. Lessee understands that the entity to whom this letter is addressed ("Addressee") has committed to loan or invest a substantial sum of money in reliance upon this certification by the undersigned, which certification is a condition precedent to making such loan or investment, or that Addressee intends to take some other action in reliance upon this certification. With respect to the Lease Agreement, Lessee certifies to you the following, with the intention that you may rely fully thereon: 1. A true and correct copy of the Lease Agreement, including any and all amendments and modifications thereto, is attached hereto as Exhibit A; 2. The original Lease Agreement is dated ______________________________, 20_____, and has been assigned, modified, supplemented or amended only in the following respects: (Please write "None" above or, on a separate sheet of paper, state the effective date of and describe any oral or written modifications, supplements or amendments to the Lease Agreement and attach a copy of such modifications, supplements or amendments, with the Lease Agreement as Exhibit A); 3. Lessee is in actual occupancy of the Leased Premises under the Lease Agreement; the Leased Premises are known as Suite _________, of the Project; and the Leased Premises contain approximately ______________ square feet; 4. The initial term of the Lease Agreement commenced on ______________________________, 20____, and ends at midnight on __________________________________, 20_____, at a monthly base rent of $_______________________________, and no rentals or other payments in advance of the current calendar month have been paid by Lessee, except as follows: (Please write "None" above or describe such payments on a separate sheet of paper); 5. Base Rent with respect to the Lease Agreement has been paid by Lessee through ______________, 20______; all additional rents and other charges have been paid for the current periods; 6. There are no unpaid concessions, bonuses, free months' rent, rebates or other matters affecting the rent for Lessee, except as follows: (Please write "None" above or describe such matters on a separate sheet of paper); 7. No security or other deposit has been paid by Lessee with respect to the Lease Agreement, except as follows: (Please write "None" above or describe such deposits on a separate sheet of paper); 8. The Lease Agreement is in full force and effect and there are no events or conditions existing which, with notice or the lapse of time or both, could constitute a monetary or other default of the Lessor under the Lease Agreement, or entitle Lessee to any offset or defense against the prompt current payment of rent or constitute a default by Lessee under the Lease Agreement, except as follows: (Please write "None" above or describe such default on a separate sheet of paper); 9. All improvements required to be made by Lessor under the terms of the Lease Agreement have been satisfactorily completed and accepted by Lessee as being in conformity with the Lease Agreement, except as follows: (Please write "None" above or describe such improvements on a separate sheet of paper); 17 Lessee's Estoppel Certificate Page 2 10. Lessee has no option to expand or rent additional space within the Project or any right of first refusal with regard to any additional space within the Project, other than the Leased Premises, except as follows: (Please write "None" above or describe such right or option on a separate sheet of paper); 11. Lessee has no right or option to renew the Lease Agreement for any period of time after the expiration of the initial term of the Lease Agreement, except as follows: (Please write "None" above or describe such right on a separate sheet of paper); 12. To the best of Lessee's knowledge, any and all broker's leasing and other commissions relating to and/or resulting from Lessee's execution of the Lease Agreement and occupancy of the Leased Premises have been paid in full and no broker's leasing or other commissions will be or become due or payable in connection with or as a result of either Lessee's execution of a new Lease Agreement covering all or any portion of the Leased Premises or any other space within the Project or Lessee's renewal of the Lease Agreement, except as follows: (Please write "None" above or describe such right on a separate sheet of paper); 13. To the best of Lessee's knowledge, the use, maintenance or operation of the Leased Premises complies with, and will at all times comply with, all applicable federal, state, county or local statutes, laws, rules and regulations of any governmental authorities relating to environmental, health or safety matters (being hereinafter collectively referred to as the Environmental Laws); 14. The Leased Premises have not been used and Lessee does not plan to use the Leased Premises for any activities which, directly or indirectly, involve the use, generation, treatment, storage, transportation or disposal of any petroleum product or any toxic or hazardous chemical, material, substance, pollutant or waste; 15. Lessee has not received any notices, written or oral, of violation of any Environmental Law or of any allegation which, if true, would contradict anything contained herein and there are not writs, injunctions, decrees, orders or judgments outstanding, no lawsuits, claims, proceedings or investigations pending or threatened, relating to the use, maintenance or operation of the Leased Premises, nor is Lessee aware of a basis for any such proceeding; 16. There are no actions, whether voluntary or otherwise, pending against Lessee under the bankruptcy or insolvency laws of the United States or of any state. 17. Lessee understands that the Lease Agreement may be assigned to Addressee and Lessee agrees to attorn to Addressee in all respects in accordance with the Lease Agreement. Dated: ____________________________________, 20__________. Very truly yours, TEXAS BIOTECHNOLOGY CORPORATION, a Delaware corporation By: ____________________________________ Name: ____________________________________ Title: ____________________________________ 18 EXHIBIT F TENANT IMPROVEMENTS Building: 6700 West Loop South Suite No.: 400 Lessor: FRM West Loop Associates #6, Ltd. Lessee: Texas Biotechnology Corporation, Date of Lease: 2/20/02 a Delaware corporation Cost of Tenant Improvements. Lessor shall provide a construction allowance not to exceed Seventy-Six Thousand Twenty-Five and 00/100 Dollars ($76,025.00) for improvements within the Leased Premises (the "Construction Allowance"). Lessee shall reimburse Lessor for any such costs and expenses in excess of the Construction Allowance within thirty (30) days following delivery to Lessee of an itemized statement thereof. The foregoing notwithstanding, Lessee shall have the right to utilize any unused portion of the Construction Allowance to help offset costs incurred with Lessee's relocation to the Leased Premises. Work by Lessor. Subject to Lessee's approval, Lessor shall cause to be constructed and/or installed in the Leased Premises the permanent Tenant Improvements and tenant finish desired by Lessee and approved by Lessor as shown on the attached Exhibit F-1 which supercedes the original Exhibit F-1 of the Lease Agreement (the "TENANT IMPROVEMENTS"). Planning and Construction. Lessor and Lessee shall cooperate in good faith in the planning and construction of the Tenant Improvements, and Lessee shall respond promptly to any request from Lessor or Lessor's architect or contractor for Lessee's approval of any particular aspect thereof, it being agreed and understood that it is the intent and desire of the parties that the Leased Premises be ready for Lessee's occupancy on or before the first (1st) day of April, 2002 (the "ESTIMATED LEASED PREMISES DELIVERY DATE"). Completion of Construction. The "TENANT IMPROVEMENTS COMPLETION DATE" shall mean the date upon which the Tenant Improvements are substantially complete. The phrase "substantially complete" shall mean that the Leased Premises may reasonably be used and occupied for the purposes intended under this Lease Agreement, and the progress of the construction of the Tenant Improvements to date is such that final completion of the Tenant Improvements can occur within a reasonable period of time and without undue interference to the Lessee's use of the Leased Premises. If the Leased Premises are not ready for occupancy by the Estimated Leased Premises Delivery Date for any reason, Lessor shall not be liable or responsible for any claims, damages or liabilities in connection therewith or by reason thereof. Disclaimer of Warranty. LESSEE ACKNOWLEDGES THAT THE CONSTRUCTION AND INSTALLATION OF THE TENANT IMPROVEMENTS WILL BE PERFORMED BY AN UNAFFILIATED CONTRACTOR OR CONTRACTORS AND THAT ACCORDINGLY LESSOR HAS MADE AND WILL MAKE NO WARRANTIES TO LESSEE WITH RESPECT TO THE QUALITY OF CONSTRUCTION THEREOF OR AS TO THE CONDITION OF THE LEASED PREMISES, EITHER EXPRESS OR IMPLIED, AND THAT LESSOR EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY THAT THE LEASED PREMISES ARE OR WILL BE SUITABLE FOR LESSEE'S INTENDED COMMERCIAL PURPOSE. LESSEE'S OBLIGATION TO PAY BASE AND ADDITIONAL RENTAL HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE LEASED PREMISES OR THE BUILDING OR THE PERFORMANCE BY LESSOR OF ITS OBLIGATIONS HEREUNDER, AND LESSEE SHALL CONTINUE TO PAY THE BASE AND ADDITIONAL RENTAL WITHOUT ABATEMENT, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LESSOR OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED. However, Lessor agrees that in the event that any defect in the construction of the Tenant Improvements is discovered, Lessor will diligently pursue and seek to enforce any warranties of the contractor(s) and/or the manufacturer of any defective materials incorporated therein. 19 EX-10.28 10 h03454exv10w28.txt AMENDED LICENSE & RESEARCH DEVELOPMENT AGREEMENT Exhibit 10.28 AMENDED AND RESTATED LICENSE AND RESEARCH AND DEVELOPMENT AGREEMENT BETWEEN REVOTAR BIOPHARMACEUTICALS AG, registered in the commercial register of the local court of Neuruppin HRB 5951 represented by its CEO, Dr. Gunter Rosskamp - referred to as "Revotar" - and TEXAS BIOTECHNOLOGY CORPORATION, represented by its President and C.E.O. Dr. Bruce D. Given, 7000 Fannin, USA TX 77030 Houston, referred to as "TBC" - TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS .......................................................................... 1 1.1 "AFFILIATE" ................................................................. 1 1.2 "CASH EQUIVALENTS" .......................................................... 2 1.3 "COMPOUND" .................................................................. 2 1.4 "CONFIDENTIAL INFORMATION" .................................................. 2 1.5 "COPD" ...................................................................... 2 1.6 "COST OF GOODS SOLD" OR "COGS" .............................................. 2 1.7 "DEVELOPMENT COSTS" ......................................................... 2 1.8 "DEVELOPMENT PROGRAM" ....................................................... 3 1.9 "DISTRIBUTION COSTS" ........................................................ 3 1.10 "EFFECTIVE DATE" ............................................................ 3 1.11 "EUROPEAN MARKET" ........................................................... 4 1.12 "FDA" ....................................................................... 4 1.13 "FIELD OF USE" .............................................................. 4 1.14 "FIRST COMMERCIAL SALE" ..................................................... 4 1.15 "GROSS RECEIPTS" ............................................................ 4 1.16 "IND" ....................................................................... 4 1.17 "IMPROVEMENTS" .............................................................. 4 1.18 "LICENSING TRANSACTION" ..................................................... 4 1.19 "MANUFACTURING COSTS" ....................................................... 5 1.20 "NDA ........................................................................ 5 1.21 "NET INCOME ................................................................. 6 1.22 "NET SALES" ................................................................. 6 1.23 "NEW INDICATIONS" ........................................................... 6 1.24 "NORTH AMERICA .............................................................. 6 1.25 "PRA" ....................................................................... 6 1.26 "PARTICIPATION AGREEMENT" ................................................... 6 1.27 "PATENTS" ................................................................... 6 1.28 "PHASE I CLINICAL TRIALS" ................................................... 7 1.29 "PHASE II CLINICAL TRIALS" .................................................. 7 1.30 "PHASE III CLINICAL TRIALS" ................................................. 7 1.31 "PRODUCT" ................................................................... 7 1.32 "PRODUCT EBITDA" ............................................................ 7 1.33 "PROJECT REPRESENTATIVE" .................................................... 7 1.34 "SUBJECT TECHNOLOGY" ........................................................ 8 1.35 "TBC1269 PROGRAM" ........................................................... 8 1.36 "TECHNOLOGY" ................................................................ 8 1.37 "TERRITORY" ................................................................. 8 1.38 "THIRD PARTY" ............................................................... 8 1.39 "WORK PLAN" ................................................................. 8 1.40 "WORLDWIDE LICENSE" ......................................................... 9 2. LICENSE TO REVOTAR ................................................................... 9
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PAGE ---- 2.1 EXCLUSIVE LICENSE FOR THE TERRITORY ......................................... 9 2.2 RIGHT OF REVOTAR AND TBC TO GRANT SUBLICENSES ............................... 9 2.4 RIGHTS AND DUTIES IN CONNECTION WITH A LICENSING TRANSACTION TO A THIRD PARTY 10 3. DEVELOPMENT PROGRAM .................................................................. 10 3.1 GOALS ....................................................................... 10 3.2 PROGRAM ADMINISTRATION ...................................................... 13 3.3 PERFORMANCE OF SERVICES ..................................................... 16 3.4 RECORDS AND DATA ............................................................ 16 3.5 VISIT OF FACILITIES ......................................................... 17 4. PAYMENTS AND REPORTS ................................................................. 17 4.1 Development Funding ......................................................... 17 4.2 ROYALTIES ................................................................... 18 4.3 AUDIT RIGHTS ................................................................ 21 4.4 PAYMENT CURRENCY ............................................................ 22 4.5 PAYMENT MECHANICS ........................................................... 23 5. COMMERCIALIZATION .................................................................... 24 5.1 TBC TO MANUFACTURE .......................................................... 24 5.2 REVOTAR AND TBC TO SELL IN TERRITORY AND NORTH AMERICA, RESPECTIVELY ........ 24 5.3 SUBLICENSING ................................................................ 25 6. TBC REPRESENTATIONS AND WARRANTIES ................................................... 25 6.1 NO THIRD PARTY AGREEMENTS ................................................... 25 6.2 NO THIRD PARTY RIGHTS ....................................................... 25 7. PROPRIETARY RIGHTS ................................................................... 27 7.1 IMPROVEMENTS ................................................................ 27 7.2 PATENT PROSECUTION AND MAINTENANCE .......................................... 27 7.3 THIRD PARTY CLAIM OF INFRINGEMENT ........................................... 29 7.4 INFRINGEMENT BY THIRD PARTIES ............................................... 30 8. CONFIDENTIALITY ...................................................................... 31 8.1 GENERAL ..................................................................... 31 8.2 DISCLOSURE OF AGREEMENT ..................................................... 32 9. INDEMNIFICATION ...................................................................... 33 9.1 MUTUAL RIGHT TO INDEMNIFICATION ............................................. 33 9.2 PROCEDURE ................................................................... 34 9.3 PRODUCT LIABILITY INSURANCE ................................................. 35 10. TERM AND TERMINATION ................................................................. 35 10.1 LICENSE TERM ................................................................ 35 10.2 TERMINATION FOR BREACH ...................................................... 36 10.3 TERMINATION FOR FAILURE TO PROCEED .......................................... 36 10.4 SURVIVAL OF OBLIGATIONS ..................................................... 38
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PAGE 11. MISCELLANEOUS ........................................................................ 38 11.1 FORCE MAJEURE ............................................................... 38 11.2 RELATIONSHIP OF THE PARTIES ................................................. 39 11.3 NOTICES.: ................................................................... 39 11.4 SUCCESSORS AND ASSIGNS ...................................................... 39 11.5 AMENDMENTS AND WAIVERS ...................................................... 40 11.6 GOVERNING LAW ............................................................... 40 11.7 DISPUTE RESOLUTION .......................................................... 40 11.8 SEVERABILITY ................................................................ 42 11.9 HEADINGS .................................................................... 42 11.10 EXECUTION IN COUNTERPARTS ................................................... 42 11.11 ENTIRE AGREEMENT ............................................................ 42
iii AMENDED AND RESTATED LICENSE AND RESEARCH AND DEVELOPMENT AGREEMENT This Amended and Restated License and Research and Development Agreement is entered into on this day of January 24, 2003, between Texas Biotechnology Corporation, a Delaware corporation ("TBC"), and Revotar Biopharmaceuticals AG, a German stock company. R E C I T A L S A. TBC and Revotar entered into a License and Research and Development Agreement dated July 21, 2000 (the "License Agreement"). B. TBC and Revotar wish to amend and restate the License Agreement pursuant to this Amended and Restated License and Research and Development Agreement (the "Agreement"). In consideration of the foregoing and the mutual promises and covenants contained in this Agreement, the parties hereto agree to amend and restate the License Agreement in its entirety effective as of the date hereof as follows: 1. DEFINITIONS. The following capitalized terms used herein shall have the respective meanings set forth below. The accounting terms used but not defined herein shall have the meanings ascribed to them under U.S. Generally Accepted Accounting Principles. Certain other capitalized terms are defined elsewhere in this Agreement. 1.1 "AFFILIATE" means a person or entity that directly or indirectly controls, is controlled by or is under common control with, a party to this Agreement. "Control" (and, with correlative meanings, the terms "controlled by" and "under common control with") means, in the case of a corporation, the ownership of more than 50% of the outstanding voting securities thereof or the right to acquire such securities within 60 days and, in the case of any other type of entity (including without limitation joint ventures), an interest that results in the ability to direct or have a significant impact on the direction of the management and policies of such entity or a significant ownership position of no less than 25%. 1.2 "CASH EQUIVALENTS" means cash or other instrument which is convertible into cash including equity in a Third Party valued as follows: the value of securities that are freely tradable in an established market will be determined by taking the average of the closing market price for the 10 trading days prior to the execution of an agreement, and the value of securities that are not freely tradable shall be the fair market value thereof as determined by Revotar and TBC. 1.3 "COMPOUND" means the compound owned by TBC and known as TBC1269, and any salt forms thereof, and any Improvements thereon. 1.4 "CONFIDENTIAL INFORMATION" means all proprietary information communicated to, learned of, developed or otherwise acquired by either party separately or jointly under this Agreement. 1.5 "COPD" means chronic obstructive pulmonary disease. 1.6 "COST OF GOODS SOLD" OR "COGS" means TBC's total Manufacturing Costs plus 10% of the Manufacturing Costs. 1.7 "DEVELOPMENT COSTS" means (a) the direct costs, fees and out-of-pocket or other expenses incurred in the course of performing the work under the Development Program (b) overhead allocable to development and (c) the amount paid to Third Parties to acquire goods and services for the development work, whether or not completed. Overhead allocated to development shall be limited to (i) a reasonable 2 allocation of the cost of employees who have a direct relationship with the Development Program, but who are not classified as direct labor, which allocation shall be based on each such employee's time spent in the Development Program as compared to time spent on all such employee's work, and (ii) a reasonable allocation of facilities' costs allocable to development works. Development Costs shall be determined on a reasonable and typical basis consistent with the developing party's internal cost accounting system or on actual charges from Third Parties. 1.8 "DEVELOPMENT PROGRAM" means development and other work conducted by the parties hereunder on a Product or Compound for use in the Field of Use, including clinical testing, regulatory submissions and ongoing Product and Compound development. 1.9 "DISTRIBUTION COSTS" means all freight and other transportation costs actually incurred by a party hereto in delivering a Product to its final distribution point before delivery to an invoiced customer, including transportation costs to a storage facility, storage charges, Third Party handling fees, insurance during transport and taxes payable for such transportation or storage services. Distribution Costs shall exclude any transportation or other charges deducted in calculating Net Sales. Distribution Costs incurred by a party hereto shall be determined on a reasonable basis consistent with such party's internal cost accounting system. 1.10 "EFFECTIVE DATE" means the day of the signing of this Agreement. 3 1.11 "EUROPEAN MARKET" means countries which are party of the European Patent Treaty ("Europaisches Patentrechtsubereinkommen"). 1.12 "FDA" means the United States Food and Drug Administration. 1.13 "FIELD OF USE" means the development, manufacture, use or sale of the Compound, Products or Subject Technology for any indication except: a) organ transplantation, b) organ reperfusion injury, or c) immunologic tissue rejection. 1.14 "FIRST COMMERCIAL SALE" means the first arms-length sale in the Territory pursuant to this Agreement to one or more Third Parties of any Product following receipt of approval to commence manufacturing and selling such Product from any one PRA. 1.15 "GROSS RECEIPTS" means all cash or Cash Equivalents received by Revotar or TBC from a Third Party pursuant to a Licensing Transaction, including without limitation, up front payments, royalties, milestones, and profit or cash flow payments. 1.16 "IND" means an investigational new drug application filed with the FDA, or the similar filing made with any PRA, prior to beginning clinical trials in humans. 1.17 "IMPROVEMENTS" means any Technology that is discovered, developed or otherwise acquired in the course of the Development Program hereunder that may be applied to the discovery, development, manufacture, sale or use of the Compound or Products, excluding any new chemical entities that are developed by Revotar under this Agreement using the Subject Technology. 1.18 "LICENSING TRANSACTION" means any agreement or arrangement of any type pursuant to which Revotar licenses or transfers to a Third Party any interest or 4 rights of any kind to any Subject Technology, Compound or Product which is the subject of this Agreement including without limitation the rights to use and sell any Compound or Product in the Field of Use. 1.19 "MANUFACTURING COSTS" means (a) the direct material and labor costs associated with manufacturing the Products, (b) overhead allocable to manufacture of the Products and (c) the amount paid to Third Parties to acquire manufactured Products, whether or not completed, and (d) Distribution Costs. Direct material costs include the costs of purchasing raw materials and packaging components. Direct labor includes the costs of employees directly employed in Product manufacturing, quality control or packaging. Overhead allocated to manufacture of the Products shall be limited to (i) a reasonable allocation of the cost of employees who have a direct relationship with Product manufacturing, quality control or packaging, but who are not classified as direct labor, which allocation shall be based on each such employee's time spent in Product manufacturing, quality control or packaging as compared to time spent on all such employee's work, and (ii) a reasonable allocation of facilities' costs allocable to Product manufacturing, quality control and packaging. Manufacturing Costs shall be determined on a reasonable and typical basis consistent with the manufacturing party's internal cost accounting system or on actual charges from Third Parties. 1.20 "NDA" means a new drug application filed with the FDA, or a similar application filed with any PRA to obtain marketing approval for a Product. 5 1.21 "NET INCOME" means Gross Receipts and Net Sales minus Cost of Goods Sold, promotional and selling expenses, payments to Third Parties, general and administrative overhead expenses that can all be attributed to the sales of Product. 1.22 "NET SALES" means the gross amount billed for Products sold pursuant to this Agreement to a Third Party, less discounts, rebates, returns, credits, allowances, uncollectible sales, shipping, distribution and insurance charges, sales taxes, and other governmental charges measured by the amount billed. 1.23 "NEW INDICATIONS" means any topical indication for the Compound, Products or Subject Technology being proposed for addition to the Work Plan. 1.24 "NORTH AMERICA": countries and regions which are subject to the patent legislation of the USA and Canada. 1.25 "PRA" means any applicable regulatory authority in any jurisdiction included within the Territory which regulates the development, approval and marketing of pharmaceuticals. 1.26 "PARTICIPATION AGREEMENT" means that certain agreement entered into on July 21, 2000 by and between TBC and Revotar and certain German venture capital investors known as bmp Life Science AG Venture Capital, bmp Venture Tech and Mediport Venture Fonds GmbH. 1.27 "PATENTS" means (a) the patent applications listed on APPENDIX 1 attached hereto and all patent applications hereafter filed in the Territory that are owned by or licensed to or otherwise acquired by TBC in the Territory and which have one or more claims covering the Compound, Subject Technology or Improvements, (b) any patent application in the Territory constituting an equivalent, reissue, 6 extension, continuation-in-part or a division of any of the foregoing, and (c) any patents issued upon any of the foregoing applications or any other patents acquired by TBC relating to the Compound, Subject Technology or Improvements. 1.28 "PHASE I CLINICAL TRIALS" means the first phase of human clinical trials of a Compound required by the FDA or a PRA in which the Compound is tested to determine early safety profile, drug distribution patterns, and metabolism. 1.29 "PHASE II CLINICAL TRIALS" means the second phase of human clinical trials of a Compound required by the FDA or a PRA in which the Compound is tested in patients afflicted with a particular disease in order to gain preliminary evidence of efficacy, optimal dosage and expanded evidence of safety. 1.30 "PHASE III CLINICAL TRIALS" means the third phase of human clinical trials of a Compound required by the FDA or a PRA in which the Compound is tested in patients afflicted with a particular disease in order to gain statistical proof of efficacy and safety. 1.31 "PRODUCT" means any pharmaceutical composition incorporating the Compound which is to be used in the Field of Use. 1.32 "PRODUCT EBITDA" means the Net Income before interest expense, taxes, depreciation expense and amortization expense that can be attributed to the development and commercialization of a Product. 1.33 "PROJECT REPRESENTATIVE" means an individual designated by a party pursuant to Section 3.2(a). A Project Representative of a party may be changed at any time by written notice to the other party. 7 1.34 "SUBJECT TECHNOLOGY" means (i) all Technology owned or controlled by TBC as of the date hereof or owned or controlled by TBC hereafter during the term of this Agreement, but only to the extent that such Technology relates to the use, manufacture or sale of the Compound or Products. Technology "owned or controlled" includes Technology as to which TBC has the right to grant or cause to be granted sublicenses and/or immunity from suit. 1.35 "TBC1269 PROGRAM" means the development of TBC1269 pursuant to this Agreement for the development of Products for use in the Field of Use. 1.36 "TECHNOLOGY" means all ideas, methods, formulations, inventions, techniques, processes, know-how, trade secrets and other information. 1.37 "TERRITORY" shall mean all countries of the World excluding the use and sale of the Compound, Products or Subject Technology for topical indications in North America. 1.38 "THIRD PARTY" means any entity other than TBC, Revotar or their Affiliates. 1.39 "WORK PLAN" means a written summary of the tasks to be undertaken by each party during a particular calendar year in connection with the development of the Compound or Products in the Territory only for topical indications, together with a budget of the anticipated Development Costs associated therewith, adopted by the parties. Each Work Plan will include reasonably detailed descriptions of the tasks and work to be performed, the resources required to accomplish the work, the costs associated with the planned work, the party that will be responsible for accomplishing each task, and the reimbursement or payment of costs by Revotar incurred by each party. 8 1.40 "WORLDWIDE LICENSE" means a Licensing Transaction, which may include multiple agreements with the same Third Party or Third Party Affiliate(s), in at least - but not necessarily only - all countries within North America and the European Market. 2. LICENSE TO REVOTAR. 2.1 EXCLUSIVE LICENSE FOR THE TERRITORY. Subject to the terms and conditions of this Agreement, TBC hereby grants to Revotar an exclusive right and license in the Territory, including the exclusive right to grant sublicenses in the Territory, to develop, use and sell the Compound, Products or Subject Technology in the Field of Use. TBC retains the exclusive rights to develop, make, have made, use and sell the Compound or Products for a) topical indications in North America, and b) all indications excluded from Field of Use. The right of manufacturing remains with TBC pursuant to section 5.1 hereof unless (a) Revotar grants a sublicense to a Third Party which includes the manufacturing rights within the scope of the sublicense agreement, (b) Revotar is able to produce the goods at lesser Manufacturing Costs than TBC or (c) TBC determines that it does not want to commence manufacturing of the Compound or any Products, or with one year's notice to Revotar, determines that it will cease its manufacturing of the Compound or any Products. 2.2 RIGHT OF REVOTAR AND TBC TO GRANT SUBLICENSES. TBC hereby grants to Revotar an exclusive right and license to enter into a sublicense agreement in the Territory of the same scope as defined in sec. 2.1 above in the Field of Use . TBC 9 has the right to enter into a sublicense agreement for topical indications in North America and a worldwide right for a) organ transplantation, b) organ reperfusion injury, or c) immunologic tissue rejection. Revotar and TBC shall be obligated to perform in full all of the obligations and agreements of any sublicenses, including payment of royalties. 2.3 2.4 RIGHTS AND DUTIES IN CONNECTION WITH A LICENSING TRANSACTION TO A THIRD PARTY. Revotar will inform TBC if it enters into negotiations with a Third Party concerning any Licensing Transaction. Revotar will furthermore inform TBC about the course of such negotiations and provide TBC the opportunity for review and comment under the terms contained in 4.2.3(f) prior to the conclusion of a License Transaction with a Third Party. 3. DEVELOPMENT PROGRAM. 3.1 GOALS. 3.1.1 WORK PLANS FOR TOPICAL INDICATIONS. TBC and Revotar agree that they will conduct the development on the Compound and it's Products according to the Work Plans, with the goal of developing commercially marketable Products for topical indications in the shortest feasible period of time. The parties also agree that Revotar shall be responsible under the Work Plans for the development program defined therein, conduct any non-clinical work necessary for development of topical applications of the Compound, conduct the clinical trials regarding the Compound and it's Products in the Territory, and Patent filing, 10 maintenance and prosecution regarding the Products in the Territory. The obligations of the Work Plans for topical indications are considered to be completed when the conditions described in paragraph 3.2.2 (ii) or (iii) apply. 3.1.2 DEVELOPMENT PROGRAM FOR OTHER INDICATIONS. Revotar will be responsible for conducting all the Development Programs regarding the Compound and the Products for all indications in the Field of Use other than the topical indications, and will be responsible for all costs associated therewith. TBC will have no responsibilities under and bear none of the expense for such efforts. 3.1.3 PARTICIPATION BY TBC IN DEVELOPMENT PROGRAMS. Except where TBC and Revotar agree that it is necessary for obtaining regulatory approval, TBC does not intend to develop the Compound or it's Products in the Territory and in the Field of Use pursuant to the Development Program or the Work Plans. TBC, at its own expense, may undertake development work on the Compound or it's Products for use in topical indications in North America, or organ transplantation, organ reperfusion injury or immunologic tissue rejection throughout the world. 3.1.4 LIMITATION ON CLINICAL TRIAL SPENDING BY REVOTAR. Notwithstanding the foregoing to the contrary, the parties contemplate that Revotar will not be required under the Development Program and the Work Plans to conduct and pay for any Phase III Clinical Trials involving the Compound or it's Products. The parties instead contemplate that Revotar will enter into a Licensing Transaction whereby a Third Party will conduct such trials. 3.1.5 SHARING OF INFORMATION. Any safety data or information generated by TBC or Revotar (the "Parties") regarding the Compound will be shared with the 11 other party in English without cost for use as safety data and for the maintenance of the worldwide safety database. Any non-safety information generated by Revotar in topical indications will be shared with TBC in English without cost. Any information which is relevant for registration purposes generated by the Parties for non-topical indications will be shared in English upon reimbursement of 50% of the Development Costs associated with such work. Once information is paid for by a Party, its uses will be limited in the following manner; (i) for internal evaluation, (ii) non-confidential summary information may be shared with Third Parties without prior consent from either Party, (iii) detailed data can be used by the Parties or their licensees for registration or regulatory purposes necessary to obtain approvals from governmental agencies, (iv) detailed data may also be shared with a Third Party pursuant to a separate confidentiality agreement subject to the limitations contained in paragraph 8.2 and (v) any publication or public presentation of information will require prior approval of the originating party; such approval not to be unreasonably withheld. Revotar and TBC will endeavor to oblige any of its sublicensees, at their option, to pass on information concerning the Compound and Products relating to non-topical indications and to assent to passing on such information to Revotar and TBC on the same basis as provided above. Regarding topical indications, Revotar and TBC will endeavor to oblige any sublicensee to provide information regarding Compound or it's Products to Revotar or TBC in English without cost. TBC and Revotar will treat information in a manner consistent with (i) through (v) above. 12 3.1.6 BEST EFFORTS. While the parties agree to use best efforts to achieve the goals of the Development Program, neither TBC nor Revotar warrants or guarantees that their efforts will result in a marketable or approvable Product or that the goals specified in the Work Plan will be achieved within the periods set forth therein. 3.2 PROGRAM ADMINISTRATION. 3.2.1 PROJECT REPRESENTATIVE. The parties have each designated one Project Representative to facilitate liaison between it and the other party, oversee and review the progress of the Work Plans. In addition, the Project Representatives will agree on the Work Plans, will select which topical indications to pursue, determine the development program of the Work Plans for topical indications, develop clinical trial protocols, manage the clinical/regulatory process and discuss potential competition and other relevant matters to assure rapid development and commercialization of the Compound and the Products for topical indications within the Work Plans. 3.2.2 DISAGREEMENTS. All decisions made hereunder relating to the Work Plans for topical indications shall require the approval of the Project Representatives. The Project Representatives shall attempt in good faith to reach consensus on all matters regarding such Work Plans. As long as (i) at least 30% of clinical spending in any calendar year by Revotar is related to topical indications, or as long as (ii) the Phase II clinical development for psoriasis and/or atopic dermatitis is completed, or as long as (iii) Revotar completes a Licensing Transaction for psoriasis and/or atopic dermatitis involving the European Union, then the final 13 decision making regarding any disagreements with the Work Plan will reside with the CEO of Revotar. In any year where none of (i) through (iii) above do occur, then the Project Representatives shall promptly present the disagreement to the chief executive officers of the Parties or their designees, who shall attempt resolution of the matter. If the chief executives or designees cannot promptly resolve such disagreement within thirty (30) days, then the dispute shall be resolved under the arbitration provisions of Section 11.7. 3.2.3 WORK PLANS. The parties hereto will agree on the initial Work Plan for 2003 within 90 days of the Effective Date. If the Project Representatives agree to pursue New Indications, then a new Work Plan for those indications will be developed. The Work Plan for topical indications shall be the plan and budget as approved by both parties in writing. Prior to November 1 of each year, the Project Representatives shall prepare and recommend to each party a proposed Work Plan for the next calendar year. Each Work Plan adopted shall be agreed upon and signed by an officer of both parties no later than January 10 of the year covered by the Work Plan. The Project Representatives shall actively consult with one another throughout the term of the Development Program so as to adjust the specific work performed under each Work Plan to conform to evolving developments in technology and the results of the development work performed. While minor adjustments to a Work Plan may be made from time to time upon approval by the Project Representatives, significant changes to the scope or direction of the work in a Work Plan shall be agreed to in writing by each party, 14 in the absence of which the most recently approved Work Plan shall remain in effect. 3.2.4 TOPICAL WORK OUTSIDE OF WORK PLAN BY TBC. TBC may conduct development work with the Product in topical indications outside of the Work Plan at TBC's expense. Revotar or its sublicensee will gain access to this information by reimbursing TBC 100% of its costs to generate such information and use of this information is limited to the terms of 3.1.5 (i) through 3.1.5 (v). 3.2.5 PROGRESS REPORTS. Within 10 business days following the end of each six-month period, (a) the Project Representatives shall jointly produce a summary written report which shall describe the work performed by the respective party during the six month period on the Work Plans for topical indications and if appropriate, recommend any revisions to such Work Plan that would improve the progress of such Development Program, and (b) Revotar will provide TBC via the Revotar Supervisory Board with a progress report of the development program for all indications. 3.2.6 MEETINGS. The Project Representatives and other employees or consultants of the parties responsible for management of the Work Plans for topical indications shall consult each other and meet as needed during the term of the Work Plans for review. Such meetings shall be at such times as may be agreed to by the Project Representatives, and may be conducted telephonically or in person as necessary at a time and location to be agreed upon by the Project Representatives. Revotar shall be responsible for the organization of such meetings, including payment for transportation and hotel accommodations. The 15 Project Representatives shall jointly produce minutes summarizing the matters reviewed and any actions taken at such meetings within 10 business days following each meeting. Each party may invite additional colleagues to participate at meetings as appropriate and acceptable to the other party. Revotar shall be responsible for the preparation and communication to TBC of the specific agenda of each meeting in advance of each meeting and either party may place items for consideration on the agenda. 3.3 PERFORMANCE OF SERVICES. Each party shall perform the work assigned to it in a prudent and skillful manner in accordance, in all material respects, with the Work Plan then in effect and applicable laws. Revotar shall reimburse TBC its Development Costs, and its out of pocket costs, including travel, lodging, salaries and benefits for all labor, supervision, facilities, supplies and materials necessary to perform the work assigned to TBC in accordance with the Work Plan. All cost allocations for developmental work to be performed by either party will be defined in detail in the Work Plan and are binding to both parties. Revotar and TBC agree that all development activities performed by either party will be conducted according to accepted guidelines of the International Conference on Harmonisation. 3.4 RECORDS AND DATA. Each party shall maintain records in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes and so as to properly reflect all work done by TBC and Revotar, and results achieved in the performance of the Work Plans. Such records shall include books, records, reports, research notes, charts, graphs, comments, computations, analyses, 16 recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with the Work Plans, including any data required to be maintained pursuant to applicable governmental regulations. Each party shall provide the other the right to inspect all such records, and shall provide copies in the English language of all such requested records. 3.5 VISIT OF FACILITIES. Representatives of each party may, upon reasonable notice and at times reasonably acceptable to the other party, (a) visit the facilities at their own expense where the Work Plans are being conducted and/or the facilities where the other party manufactures any Product or Compound contained therein (or has a Product or such a Compound manufactured by a Third Party), (b) consult informally, during such visits and by telephone, with personnel of the other party performing work on the Work Plans and (c) with the other party's prior approval, which approval shall not be unreasonably withheld, visit the sites of any clinical trials or other experiments being conducted by such other party in connection with the Work Plans, but only to the extent in each case as such trials or other experiments relate to the Work Plans. 4. PAYMENTS AND REPORTS. 4.1 Development Funding. All Development Costs relating to the Compound and Products in the Field of Use in the Territory, whether incurred before or after marketing approval of any Product, shall be borne by Revotar. Except as provided in Section 3.1.5 and 3.2.4 above, TBC will bear its Development Costs regarding the Compound and Products for use in topical indications in North 17 America and for organ transplantation, organ reperfusion injury and immunologic tissue rejection. 4.2 ROYALTIES. 4.2.1 PAYMENTS TO TBC WHEN NO LICENSING TRANSACTION. In the event that Revotar commences sales of Products without having entered into any Licensing Transaction, Revotar or its Affiliates shall pay TBC the following amounts: (a) [*] of Net Sales relating to sales of Products in the Territory for use in topical indications, asthma or COPD. (b) [*] of Product EBITDA relating to sales of Products in the Territory for use in all indications other than asthma, topical indications or COPD. 4.2.2 PAYMENTS BY TBC TO REVOTAR. In the event that TBC or its licensees commences sales of any products incorporating a Compound relating to any organ transplantation, organ reperfusion injury or immunologic tissue rejection, TBC or its Affiliates shall pay Revotar [*] of TBC's Product EBITDA for sales of such products by TBC, its licensees and its Affiliates. In the event TBC, its licensees and its Affiliates commence sales of Products for topical indications in North America, TBC or its Affiliates shall pay Revotar [*] of TBC's Product EBITDA for such Product sales by TBC, its licensees and its Affiliates; provided, that if Revotar is successful in obligating a licensee to share data with TBC as desired in 3.1.5, then TBC or its Affiliates shall pay Revotar [*] (instead of [*]) of TBC's Product EBITDA for such Product sales by TBC, its licensees and its Affiliates. 4.2.3 ROYALTY RATES PAID TO TBC AFTER LICENSING TRANSACTION BY REVOTAR. - ---------- [*] This information has been omitted in reliance on Rule 24B-2 under the Securities Exchange Act of 1934, and has been filed separately with the Securities and Exchange Commission. 18 (a) If Revotar enters into a Worldwide License pursuant to Sec. 2.4 with a Third Party covering the asthma indication alone or covering the asthma indication and COPD, then all royalties, license fees, milestone payments and other payments or revenues of any kind received by Revotar and its Affiliates pursuant to such Worldwide License relating to the asthma indication and COPD shall be shared equally with TBC. For purposes of this Section 4.2.3(a), in the event that Revotar enters into any Worldwide License with a Third Party covering Products for the treatment of asthma and then enters into a Licensing Transaction with the same Third Party covering COPD within nine (9) months before or after the Worldwide License involving asthma, then Revotar shall be considered for purposes of this Section 4.2.3 to have entered into a Worldwide License covered by the provisions of this subparagraph (a) as to asthma and COPD. (b) In the event Revotar enters into any Licensing Transaction involving Products covering (i) any topical indication, or (ii) the asthma indication alone or the asthma and COPD indications together (which will include the series of Licensing Transactions described in the second sentence of Section 4.2.3(a)), that includes only countries within the European Market, and TBC is not required to fund a Phase III Clinical Trial to obtain FDA approval regarding the Product, then Revotar shall pay to TBC [*] of Revotar's royalty revenues relating to such Products by Revotar and its Affiliates. This applies to Revotar only to the royalty revenues generated out of the European Market as defined above . - ---------- [*] This information has been omitted in reliance on Rule 24B-2 under the Securities Exchange Act of 1934, and has been filed separately with the Securities and Exchange Commission. 19 (c) In the event Revotar enters into any Licensing Transaction involving Products covering topical indications that includes only countries within the European Market, and TBC is required to fund a Phase III Clinical Trial to obtain FDA approval regarding the Product, then Revotar shall pay to TBC [*] of Revotar's royalty revenues relating to such Products by Revotar and its Affiliates. This applies to Revotar only to the royalty revenues generated out of the European Market as defined above. (d) In the event Revotar enters into any Licensing Transaction involving Products covering (i) topical indications, or (ii) the asthma indication alone or the asthma and COPD indications together (which will include the series of License Transactions described in the second sentence of Section 4.2.3(a)), which includes the European Market and any other countries in the Territory (i) all royalties and other revenues received by Revotar for sales generated outside the European Market which are in excess of Development Costs incurred by Revotar in the development of the Product in question shall be shared equally by Revotar and TBC, and (ii) Revotar shall make payments to TBC according to subparagraphs (b) or (c) above for Product sales within the European Market. (e) In the event Revotar enters into any Licensing Transaction (including a Worldwide License) not covered or described in Sections 4.2.3(a) through (d) above, then Revotar will pay TBC [*] of Revotar's Product EBITDA for sales of such Products by Revotar and its Affiliates. - ---------- [*] This information has been omitted in reliance on Rule 24B-2 under the Securities Exchange Act of 1934, and has been filed separately with the Securities and Exchange Commission. 20 (f) TBC is entitled to review and provide comments to, for a period not to exceed 14 days prior to execution by Revotar, any Licensing Transaction entered into by Revotar and a Third Party. Revotar may not enter into any Licensing Transaction, the terms of which cause TBC to incur liabilities or obligations with a Third Party, or agreements to indemnify or hold harmless a Third Party, of any type. (g) Revotar and TBC shall impose on their third party licensees the duty to report on their Net Sales classified to the regions defined for TBC and Revotar. 4.2.4 [NOT USED] 4.2.5 REPORTS AND PAYMENT. Each party shall keep, and shall require all Affiliates and sublicensees to keep, accurate records in sufficient detail to enable the amounts due to the other party to be determined. Each party shall deliver to the other party within 60 days after the end of each calendar quarter a written accounting in the English language, including quantities and monetary amounts of sales of each Product by such party and its Affiliates and sublicensees, on a country-by-country basis, and the amount of the payments, if any, due to the other party for such quarter. Each party or its Affiliates, simultaneously with the delivery of each such accounting, shall tender payment of all amounts due hereunder. In the event the Parties are being compensated by securities, the Parties may choose to compensate each other either by cash or securities. 4.3 AUDIT RIGHTS. Each party shall permit the other party or its representatives to have access, at its own expense, no more than once in each calendar year during 21 the term of this Agreement and twice during the three (3) calendar years following the termination hereof, during regular business hours and upon reasonable notice, to its records and books for the sole purpose of determining the appropriateness of all amounts payable hereunder or verifying the royalties and profit sharing amounts payable hereunder. If such examination reveals that such amounts have been overstated or such royalties have been understated for any calendar year, such overpayment shall be promptly refunded or in the case of any underpayment, such party shall promptly pay the amount of any underpayment; provided that if such examination was not conducted by an independent accountant, the party whose records were examined shall have the right to engage an independent accountant reasonably acceptable to examining party to verify the results of such examination. Any sublicense granted by Revotar hereunder shall contain audit provisions as set forth in this Section 4.4, mutatis mutandis. 4.4 PAYMENT CURRENCY. All payments to be made under this Agreement shall be made (a) if to TBC, in United States dollars and (b) if to Revotar, in Euros. In the case of sales in foreign currencies, the rate of exchange to be used in computing the amount of currency equivalent in United States dollars due to TBC for the calendar quarter just ended shall be made at the rate of exchange prevailing on the last day of such calendar quarter published by a New York money center bank designated by Revotar which Revotar uses for currency conversion in the preparation of Revotar financial reports. 22 4.5 PAYMENT MECHANICS. All payments under this Agreement shall be made by wire transfer of immediately available funds to such account as the receiving party shall specify or by other payment method acceptable to the parties. 23 5. COMMERCIALIZATION. 5.1 TBC TO MANUFACTURE. TBC has the right, but not the obligation, subject to the provisions of Section 2.1 above, to manufacture all Revotar's requirements for the Compound and/or Products, subject to customary forecast and order procedures. If TBC or its subcontractor is manufacturing the Compound and/or Products, TBC's (or its subcontractor's) responsibilities shall include all aspects of the manufacturing process, including maintenance of manufacturing inventory, quality control and shipment of Compound and/or Products in accordance with orders placed by Revotar. TBC and Revotar will also agree to negotiate in good faith a manufacturing agreement which will include provisions on forecasts, delivery time, quality control, quality assurance, delivery location, insurance, packaging, inventories, term and time of payment and such other provisions as are customarily included in agreements of this type. As compensation for such manufacturing services, TBC shall be entitled to receive payment of its COGS. Revotar shall have the right to audit at its expense the manufacturer or submanufacturer of the Compound or Products. 5.2 REVOTAR AND TBC TO SELL IN TERRITORY AND NORTH AMERICA, RESPECTIVELY. Following regulatory approval in any country in the Territory or in North America, Revotar and TBC shall use commercially reasonable efforts to market and sell the Products in such country. Revotar and TBC will use all resources in such marketing and sales efforts that it would use regarding any of its other products with similar commercial potential. All terms of sale, including pricing policies, credit terms, cash discounts and returns and allowances, shall be set by 24 Revotar or TBC in their respective regions. Revotar and TBC shall be responsible for invoicing the customers in their respective regions for Products and collecting payment therefore. The Parties will consult each other regarding the selection of the trademarks to be used for the sale of Products in the Territory, which selection will take into account the desirability for worldwide trademarks. Such trademarks regarding sales of Products in the Territory will be owned by Revotar. In the event TBC is marketing and selling Products, TBC will have the right to use such trademarks outside the Territory at no cost to TBC. 5.3 SUBLICENSING. If Revotar or TBC will grant a sublicense to Third Parties then Revotar and TBC will impose to the sublicensee to assume the obligations entered into by Revotar and TBC in section 5.2, sentences 1 and 2. 6. TBC REPRESENTATIONS AND WARRANTIES. TBC represents and warrants to Revotar as follows: 6.1 NO THIRD PARTY AGREEMENTS. Except for the Participation Agreement and the Side Letter to the Participation Agreement dated July 21, 2000, there are no agreements with third parties relating to the Products. 6.2 NO THIRD PARTY RIGHTS. TBC owns or possesses adequate licenses or other rights to use all patents, patent rights, inventions and know-how necessary for the manufacture, use and sale of the Compound and Products and to grant the licenses granted herein. To the best knowledge of TBC, the manufacture, use or sale of the Products and Compound pursuant to this Agreement will not infringe or conflict with any Third Party right or patent and TBC is not aware of any pending patent 25 application that if issued would be infringed by the manufacture, use or sale of the Products pursuant to this Agreement. TBC has not received any notice from a third party that any manufacture, use or sale of the Products and Compound pursuant to this Agreement infringes or conflicts with any Third party right or patent. 26 7. PROPRIETARY RIGHTS. 7.1 IMPROVEMENTS. Improvements conceived or made solely by the employees of either party during the term of this Agreement shall be the sole property of such party. Improvements made jointly by employees of both parties during the term of this Agreement shall be owned by Revotar. All Improvements no matter if conceived solely by one party to this Agreement or jointly shall be automatically included in the license granted to Revotar under Section 2; provided, that the parties agree to negotiate in good faith appropriate modifications to the terms of this Agreement which reflect the fact that an Improvement has been jointly developed or developed only by TBC. Each party shall promptly disclose to the other any Improvements developed by its employees or agents acting on its behalf. Each party agrees that all employees and other persons acting on its behalf under this Agreement shall be obligated under a binding written agreement to assign (or exclusively license in the case of academics) to such party or as such party shall direct all Improvements made or conceived by such employee or other person. New Chemical Entities, including Compound follow-up molecules discovered by Revotar will be the exclusive intellectual property of Revotar. TBC agrees to waive patent infringement litigation against Revotar related to such discoveries. 7.2 PATENT PROSECUTION AND MAINTENANCE. The parties agree that they will coordinate with each other in all reasonable respects the worldwide prosecution of the Patents, subject to the provisions of this Section 7. TBC shall be responsible, 27 at its expense, for prosecuting and maintaining any patents and patent applications relating to the Patents in existence on the date of the License Agreement. Revotar shall be responsible, at its expense, for filing, prosecuting and maintaining the Patents to the extent they are not in existence on the date of the License Agreement (including Improvements owned by Revotar or jointly developed by Revotar and TBC, but excluding Improvements owned exclusively by TBC). Each party shall furnish the other party with copies of any patent application concerning Subject Technology or Improvements sufficiently in advance of the anticipated filing date (but in no event less than 5 working days before filing) so as to give the other party a reasonable opportunity to review and comment. Each party shall also furnish copies to the other party of all communications to and from United States and foreign patent offices regarding patents or patent applications relating to this Agreement within a reasonable time prior to filing such communication or promptly following the receipt thereof. Each party shall reasonably consider any comments the other party may have related to such patent applications or communications. Each party shall have the right at its expense to file, prosecute and maintain patents in the United States and all foreign countries on Improvements owned solely by it. Notwithstanding the foregoing, beyond best efforts, neither party assumes liability to the other for the successful prosecution of any patent application. However, if either party shall fail to pay an annuity, tax or other maintenance fee with respect to a Patent or Patent application or otherwise decide not to pursue a Patent relating to Improvements owned solely by 28 it, it shall give the other party timely notice and the opportunity to take such action and assume all ownership rights to such Patent or Patent application. 7.3 THIRD PARTY CLAIM OF INFRINGEMENT. Each party shall give the other prompt notice of each claim or allegation that the exercise of rights hereunder constitutes an infringement of one or more patents or other rights of a Third Party. Revotar shall use all commercially reasonable efforts to defend the parties against any such claim or allegation with counsel of its own choice reasonably acceptable to Revotar. The costs of such defense and any costs of settling or otherwise satisfying such claim (including damage awards, if any) shall be borne as follows: 7.3.1 TBC COSTS. TBC shall bear all costs associated with claims based on any patent issued or patent application published as of the date of the License Agreement. If Revotar continues to sell the Products following notice of such claim against explicit requests to the contrary by TBC, then Revotar shall have the obligation to satisfy all claims in connection with such continued sales activity. At all times, Revotar shall have the right to defend itself at its cost against this with counsel of its own choice reasonably acceptable to TBC. 7.3.2 REVOTAR COSTS. Revotar shall bear all costs associated with claims based on any patent or patent application that was not issued or published as of the date of the License Agreement. 7.3.3 COOPERATION. Each party agrees to cooperate with the other in the defense of any such claim or allegation, including, to the extent able, furnishing testimony by its employees and providing technical support and information as requested. Neither party shall settle or discontinue defense of any such case without the 29 other's prior written consent, which shall not be unreasonably withheld. In the case of any proposed settlement involving a cross-license with a Third Party, neither party may unreasonably refuse to enter into such a cross-license. The provisions of this Section 7.3 shall also apply to actions for declaratory relief which raise or are in response to an issue of infringement of a Third Party patent. 7.4 INFRINGEMENT BY THIRD PARTIES. Each party shall give the other party prompt written notice of any incident of infringement of Patents that comes to its attention. The parties shall thereupon confer as to what steps are to be taken to stop or prevent such infringement. Revotar agrees to use reasonable efforts to stop any such infringement, but shall not be obligated to commence proceedings against the infringer. If Revotar decides to commence proceedings, however, Revotar shall be responsible for any legal costs incurred and will be entitled to retain any settlement or damage award received, and TBC agrees to cooperate with Revotar in such proceeding. TBC shall have the right at its expense to engage its own counsel in connection with such proceedings. Should Revotar decide not to commence proceedings, and should the infringement represent a substantial threat to the commercial value of any Products, TBC shall be entitled (but not obligated) to do so in its own name and/or in Revotar's name against the infringer, in which event TBC shall be responsible for all legal costs incurred, and will be entitled to retain any settlement or damage award received, and Revotar agrees to cooperate with TBC in such proceedings and Revotar shall have the right at its expense to engage its own counsel in connection with such proceedings. 30 8. CONFIDENTIALITY. 8.1 GENERAL. Any party receiving Confidential Information pursuant to this Agreement shall maintain the confidential and proprietary status of such Confidential Information, keep such Confidential Information and each part thereof within its possession or under its control sufficient to prevent any activity with respect to the Confidential Information that is not specifically authorized by this Agreement and prevent the disclosure of any Confidential Information to any Third Party using the same degree of care it would use with respect to its own information of like importance; provided, however, that such restrictions shall not apply to any Confidential Information that is (a) independently developed outside the scope of this Agreement by employees of the receiving party having no access to or knowledge of the Confidential Information disclosed hereunder, (b) in the public domain at the time of its receipt or thereafter becomes part of the public domain through no fault of the receiving party, (c) lawfully received without an obligation of confidentiality from a Third Party having the right to disclose such information, (d) released from the restrictions of this Section 8 by the express written consent of the disclosing party, (e) disclosed to any permitted assignee, sublicensee or subcontractor or customer of Revotar or TBC, provided that such assignee, sublicensee, subcontractor or customer is subject to the provisions of this Section 8 or substantially similar provisions or (f) required by law, statute, rule or court order to be disclosed, including requirements of the Securities and Exchange Commission, the FDA, any PRA, and other regulatory authorities, provided that the disclosing party uses commercially reasonable efforts to obtain 31 confidential treatment of any such disclosure. Without limiting the generality of the foregoing, Revotar and TBC each shall use all commercially reasonable efforts to obtain, if not already in place, confidentiality agreements from its respective relevant employees and agents, to protect the Confidential Information as herein provided. 8.2 DISCLOSURE OF AGREEMENT. Neither party shall make a public announcement or otherwise disclose the terms of this Agreement to any Third Party without the prior written consent of the other except that the parties may without such consent disclose (a) the existence of this Agreement, (b) the identity of the other party and (c) the general subject matter of this Agreement. Notwithstanding the foregoing statement, both parties may disclose details of this agreement to third parties, pursuant to a confidentiality agreement, for the purpose of business negotiations with potential licensees, financial investors, financial advisors, patent attorneys and governmental agencies. Each party shall also be permitted to make such disclosure of the terms of this Agreement as its counsel reasonably determines is necessary to comply with law, provided that such party shall use commercially reasonable efforts to obtain confidential treatment of any such disclosure. 32 9. INDEMNIFICATION. 9.1 MUTUAL RIGHT TO INDEMNIFICATION. Each party shall defend, indemnify and hold harmless the other and its directors, officers, employees and agents from and against any and all claims, liabilities, losses and expenses, including attorneys' fees, incurred by or asserted against it or any of the foregoing arising out of the development, testing, manufacture, handling or storage of any Product by such party, including without limitation (i) any actual or alleged bodily injury, death or property damage resulting from the use of any Product manufactured by such party, (ii) any actual or alleged violation of law applicable to the development, testing, manufacture, handling or storage of the Products by such party and (iii) any Product recall of Product manufactured by such party that is ordered by a governmental agency or required by a confirmed Product failure as reasonably determined by the parties, except as otherwise provided herein and except to the extent that such liabilities, losses and expenses result from the negligence or willful misconduct of a party, in which case the party who engaged in such negligence or willful misconduct shall indemnify and hold harmless the other party and its directors, officers, employees and agents. Each party shall defend, indemnify and hold harmless the other party and its directors, officers, employees and agents from and against any and all claims, liabilities, losses and expenses, including attorneys' fees, incurred by or asserted against the other party or any of the foregoing arising out of a misrepresentation regarding any sales of Products by such party, it Affiliates or sublicensees which is not in accordance with 33 approved Product claims. 9.2 PROCEDURE. Any person that intends to claim indemnification under this Section 9 (an "Indemnitee") shall promptly notify the other party (the "Indemnitor") of any claim, in respect of which the Indemnitee intends to claim such indemnification, and the Indemnitor shall assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. The indemnity agreement in this Section 9 shall not apply to amounts paid in settlement of any loss, claim, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Section 9, but not any liability that it may have to any Indemnitee otherwise than under this Section 9. The Indemnitee and its employees and agents shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. In the event that each party claims indemnity from the other and one party is finally held liable to indemnify the other, the Indemnitor shall additionally be liable to pay the reasonable legal costs 34 and attorneys' fees incurred by the Indemnitee in establishing its claim for indemnity. 9.3 PRODUCT LIABILITY INSURANCE. Each party shall use all commercially reasonable efforts to maintain product liability insurance with respect to its manufacture and sale of the Products hereunder. Such insurance shall be in such amounts and subject to such deductibles as the parties may agree based upon standards prevailing in the industry at the time such manufacturing commences. At such time as a Product is being launched by a party for commercial sale, the parties shall attempt to maximize the product liability insurance coverage for both parties. TBC shall maintain such insurance for so long as Revotar continues to sell any Product manufactured by TBC, and thereafter for so long as TBC maintains insurance for itself covering such manufacture or sales. Revotar shall maintain such insurance for as long as Revotar continues to sell any Product pursuant to this Agreement manufactured by it, and thereafter for so long as Revotar maintains insurance for itself covering such manufacture or sales. 10. TERM AND TERMINATION. 10.1 LICENSE TERM. The obligations of Revotar under the license granted in section 2 shall terminate on a country by country and Product formulation by Product formulation basis upon the legal sale by a Third Party of a generic version of TBC1269 for that particular formulation in that particular country. Thereafter, Revotar shall have a license to and perpetual rights in such Patents and Subject Technology in such country as to the Product or Compound in question. 35 10.2 TERMINATION FOR BREACH. Either party may terminate this Agreement by written notice to the other in the event that (i) the other party fails to perform any material obligation hereunder and such failure is not cured within 60 days following prompt notice thereof from the non-defaulting party, or (ii) any bankruptcy, receivership, insolvency or bankruptcy reorganization proceedings are instituted by the other party or any such proceedings are instituted against the other party and not dismissed within 120 days. The bankruptcy of a party shall not give rise to the right of the bankrupt party to terminate any license granted herein. 10.3 TERMINATION FOR FAILURE TO PROCEED. Regarding the asthma indication, if more than 18 months lapse between the last patient completing treatment in a clinical trial for asthma conducted by Revotar and (i) enrollment of the next patient in a new clinical trial for asthma conducted by Revotar, or (ii) the submission of a marketing application for asthma to the EMEA or any country within the European Union by Revotar or (iii) entering into a license(s) agreement(s) between Revotar and a Third Party covering the asthma indication in at least the European Market, Japan and/or North America market, then the license will terminate for asthma. In the event that Revotar has entered into a license agreement for Japan, an additional 6 months will be added to the 18 month lapse period. Revotar must assure that adequate due diligence provisions obligate its licensee(s) to timely conduct clinical development and regulatory submissions. In case of breach of contract by the licensee(s), the license will revert to Revotar and Revotar will reassume the obligations as the licensee of TBC as stated in this Agreement. 36 Regarding the topical indications, if more than 18 months lapse between the last patient completing treatment in a clinical trial for a topical indication conducted by Revotar and (i) enrollment of the next patient in a new clinical trial for a topical indication conducted by Revotar, or (ii) the submission of a marketing application for a topical indication to the EMEA or any country within the European Union by Revotar or (iii) entering into a license(s) agreement(s) between Revotar and a Third Party covering the topical indications in at least the European Market and/or Japan, then the license will terminate for the topical indications. Revotar must assure that adequate due diligence provisions obligate its licensee(s) to timely conduct clinical development and regulatory submissions. In case of breach of contract by the licensee(s), the license will revert to Revotar and Revotar will reassume the obligations as the licensee of TBC as stated in this Agreement Regarding TBC's obligations for developing the topical indications, following provision by Revotar to TBC of a Phase II package, as defined in APPENDIX 2, TBC's rights in North America with respect to the topical indications shall revert to Revotar upon the occurrence of any of the following: (i) more than 36 months lapses between the receipt of the Phase II package and the initiation of a Phase III clinical trial for a topical indication in North America by TBC and TBC has not entered into a license(s) covering a topical indication within North America within 36 months of receipt of the Phase II package, or (ii) more than 36 months lapses between the last patient completing treatment in a clinical trial for a topical 37 indication conducted by TBC and the enrollment of the next patient in a new clinical trial for a topical indication (except where TBC has submitted a regulatory approval dossier in any country within North America) and TBC has not entered into a license(s) covering a topical indication within North America. TBC must assure that adequate due diligence provisions obligate its licensee(s) to timely conduct clinical development and regulatory submissions. 10.4 SURVIVAL OF OBLIGATIONS. No termination of this Agreement shall eliminate any rights and obligations accrued prior to such termination. Promptly following any termination of this Agreement, each party shall return all written materials containing Confidential Information, except one copy that may be retained by counsel for each of the parties for record keeping purposes only. The provisions of Sections 7.3, 9, 10.4, 11.6 and 11.7 shall survive any termination of this Agreement. The provisions of Section 8 shall survive until five years after the expiration of the license as to all of the Products. 11. MISCELLANEOUS. 11.1 FORCE MAJEURE. Each Party shall be excused for any failure or delay in performing any of its obligations under this Agreement, if such failure or delay is caused by Force Majeure. For purposes of this Agreement, "Force Majeure" shall mean any act of God, accident, explosion, fire, storm, earthquake, flood, drought, riot, embargo, civil commotion, war, act of war or any other circumstances or event beyond the reasonable control of the party relying upon such circumstance or event. 38 11.2 RELATIONSHIP OF THE PARTIES. The parties agree that each is acting as an independent contractor with respect to the other and nothing contained in this Agreement is intended, or is to be construed, to constitute Revotar and TBC as partners or joint venturers or TBC an agent of Revotar. Neither party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking. 11.3 NOTICES. Any notice or other communication hereunder shall be in writing and shall be deemed given when so delivered in person, by overnight courier (with receipt confirmed) or by facsimile transmission (with receipt confirmed by telephone or by automatic transmission report) or on the tenth business day after being sent by registered or certified mail (postage prepaid, return receipt requested), as follows (or to such other person's address as may be specified in writing to the other party hereto): Texas Biotechnology Corporation 7000 Fannin, 20th Floor Houston, Texas 77030 Attention: President Facsimile: (713) 796-8232 Revotar Biopharmaceuticals AG Attention: President Neuendorfstrasse 24a 16761 Hennigsdorf Germany Facsimile: +49 3302 202 5011 11.4 SUCCESSORS AND ASSIGNS. The terms and provisions of this Agreement shall inure to the benefit of, and be binding upon, Revotar, TBC, and their respective 39 successors (including a successor pursuant to a merger of a party hereto) and assigns. This Agreement, or any of the rights granted hereunder, may be assigned by Revotar or TBC to any of their respective Affiliates; provided, that such assignment expressly provides that the assignor remains liable for its obligations hereunder and the performance of its Affiliate under this Agreement. 11.5 AMENDMENTS AND WAIVERS. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure by Revotar or TBC therefrom, shall in any event be effective unless the same shall be in writing specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by the party against whom enforcement of such amendment is sought, and each amendment, modification, waiver, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the party against whom enforcement of such variance, contradiction or explanation is sought. 11.6 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Federal Republic of Germany. 11.7 DISPUTE RESOLUTION 11.7.1 The parties agree to effect all reasonable efforts to resolve any and all disputes between them in connection with this Agreement in an amicable manner. The parties agree that any dispute that arises in connection with this Agreement 40 and which cannot be amicably resolved by the parties shall be resolved by binding Alternative Dispute Resolution (ADR) in the manner set forth in the following Section 11.7.2 11.7.2 All disputes arising in connection with this Agreement or its validity which cannot be amicably resolved by the parties shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration e.V. (DIS) without recourse to the ordinary courts of law if not agreed otherwise in this section 11.7.2. The place of arbitration shall be Berlin. The language of the arbitral proceedings shall be English. The arbitral tribunal shall consist of a single neutral individual selected according to the following subsection. If a party intends to begin ADR to resolve a dispute, such party shall provide written notice to the other party informing the other party of such intention and the issues to be resolved. Within ten (10) business days after its receipt of such notice, the other party may, by written notice to the party initiating ADR, add additional issues to be resolved. If the parties cannot agree upon the selection of a neutral within twenty (20) business days following receipt of the original ADR notice, a neutral shall be selected by the then President ("Vorstandsvorsitzender") of the German Institution of Arbitration (D.I.S.), Bonn. The neutral shall be a single individual having relevant experience in the pharmaceutical industry. The neutral selected shall not be an employee, director or shareholder of either party or of an Affiliate. Each party shall have ten (10) 41 business days from the date the neutral is selected to object in good faith to the selection of that person. If either party makes such an objection, the then President of the DIS shall, as soon as possible thereafter, select another neutral under the same conditions as set forth above. 11.8 SEVERABILITY. If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the fullest extent permitted by law, (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. 11.9 HEADINGS. Headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement. 11.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. 11.11 ENTIRE AGREEMENT. This Agreement and the Research Agreement, as amended and attached hereto, contains the entire agreement and understanding of the parties hereto, and supersedes any prior agreements or understandings between the parties with respect to the subject matter hereof. 42 IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly executed on this 24th day of January, 2003. TEXAS BIOTECHNOLOGY CORPORATION By: /s/ Dr. Bruce D. Given ------------------------------------------------ Title: President and CEO --------------------------------------------- REVOTAR BIOPHARMACEUTICALS AG By: /s/ Dr. Gunter Rosskamp ------------------------------------------------ Title: CEO --------------------------------------------- 43 EX-21.1 11 h03454exv21w1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT 1. ImmunoPharmaceutics, Inc. 100% Owned Subsidiary Incorporated in the State of California 2. TBC-ET, Inc. 100% Owned Subsidary Incorporated in the State of Delaware 3. Revotar Biopharmaceuticals, AG 55.2% Owned Subsidiary Incorporated in Germany EX-23.1 12 h03454exv23w1.txt CONSENT OF KPMG LLP - SEATTLE, WASHINGTON Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors ICOS-Texas Biotechnology L.P.: We consent to the incorporation by reference in the registration statements (Nos. 33-79656, 33-79658, 33-79670, 33-93282, 33-93368, 333-27423, 333-27425, 333-79477, 333-72468 and 333-41864) on Form S-8 and (Nos. 333-03433 and 333-25043) on Form S-3 of Texas Biotechnology Corporation of our report dated January 30, 2003, with respect to the balance sheets of ICOS-Texas Biotechnology L.P. (a development stage limited partnership) as of December 31, 2002 and 2001, and the related statements of operations, partners' deficit and cash flows for each of the years in the two-year period ended December 31, 2002, the period from June 6, 2000 (inception) to December 31, 2000, and the period from June 6, 2000 (inception) to December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of Texas Biotechnology Corporation. Our report on the aforementioned financial statements of ICOS-Texas Biotechnology L.P. dated January 30, 2003, contains an explanatory paragraph that states that ICOS-Texas Biotechnology L.P. has experienced recurring losses from operations and has a partners' deficit which raise substantial doubt about its ability to continue as a going concern. The ICOS-Texas Biotechnology L.P. financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG LLP Seattle, Washington March 24, 2003 EX-23.2 13 h03454exv23w2.txt CONSENT OF KPMG LLP - HOUSTON, TEXAS Exhibit 23.2 Consent of Independent Auditors The Board of Directors Texas Biotechnology Corporation: We consent to incorporation by reference in the registration statements (Nos. 33-79656, 33-79658, 33-79670, 33-93282, 33-93368, 333-27423, 333-27425, 333-79477, 333-72468 and 333-41864) on Forms S-8 and (Nos. 333-03433, and 333-25043) on Forms S-3 of Texas Biotechnology Corporation of our report dated March 5, 2003, relating to the consolidated balance sheets of Texas Biotechnology Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002, annual report on Form 10-K of Texas Biotechnology Corporation. /s/ KPMG LLP Houston, Texas March 25, 2003 EX-99.1 14 h03454exv99w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Texas Biotechnology Corporation (the "Company") on Form 10-K for the period ending December 31, 2002 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Bruce D. Given, M.D., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ BRUCE D. GIVEN, M.D. - -------------------------------------- Bruce D. Given, M.D. President and Chief Executive Officer March 27, 2003 A signed original of this written statement required by Section 906 has been provided to Texas Biotechnology Corporation and will be retained by Texas Biotechnology Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 15 h03454exv99w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Texas Biotechnology Corporation (the "Company") on Form 10-K for the period ending December 31, 2002 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Stephen L. Mueller, Vice President, Finance & Administration of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ STEPHEN L. MUELLER - ----------------------------------------- Stephen L. Mueller Vice President, Finance & Administration March 27, 2003 A signed original of this written statement required by Section 906 has been provided to Texas Biotechnology Corporation and will be retained by Texas Biotechnology Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----